236: How to Work with a Tax Strategist
Michele 00:00
Hello, my name is Michele, and you're listening to Profit is a Choice. On the podcast today is Shauna Wekherlien, CPA lovingly known as the tax goddess. She is in the top 1% of tax strategists in the United States. Her clients, after using recommended tax strategies, pay on average 6.9% in taxes. I know many of you that are probably already getting your attention. Today, we're going to talk about tax strategy, we're going to talk about the difference between a CPA and a strategist and we're also going to hear about the IRS Dirty Dozen, so you don't want to miss it.
Every day, empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity. With my background as a financial software developer, owner of multiple businesses, and the interior design, industry, educator, and speaker, I coach women in the interior design industry, to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to profit as a choice. Shauna, welcome to the podcast.
Shauna 1:23
Hi, I'm so happy to be here. Thank you so much for inviting me.
Michele 1:27
You are so welcome. Shauna, you have a designation that many people don't have with being in the top 1% of tax strategists in the United States. That's exciting to be able to have a conversation around that. Before we jump into tax strategy, which is where we are going today, I'd love for you to just take a few minutes and share a little bit of your business journey, so that the listeners can get to know you, your history, how you got to where you are since you have such a love for tech strategy.
Shauna 2:03
I love telling the story. Thank you for asking. I'm super excited about that. I actually started in astrophysics, not anywhere near tax, not even close but there is a lot of math, let's go with that. A very long story short is that in college, astrophysics is the path I chose, and I was going to work for JPL Jet Propulsion Labs. That was my dream ever since I was little it. I went home for breakfast, as it was summertime, and I was having breakfast with my mom sitting across the table. Normally, she is a very stoic, centered kind of person. We were just talking and she's opening the mail and then she throws down this piece of paper and pushes back from her desk saying this is ridiculous. I wondered what was going on, are you okay? What's happening? She said I got another letter from the IRS and I've paid these people and they're looking for more money and this is just ridiculous. Why do I have CPAs and attorneys and all these people advising me if all they ever do is pay taxes? Lots and lots of taxes. She was just so upset.
For me, my mother is my goddess. Everybody calls me the tax goddess but she's my goddess and it was very upsetting to see that. Over the next three or four years, I started switching to more accounting classes, finance classes, and tax classes, because this interaction was in my head. The words she said about why am I paying professional advisors if they can't help me. Every time I go to them and ask for strategy, they say we're doing the best we can do. Obviously not, there's got to be something else if you're getting notices. If you get notices from the IRS, something isn't right, something's not going right. I switched from astrophysics to accounting finance, got my CPA, and my master's in tax, and specialized all the way through CTC, certified tax coach, and CTS, certified tax strategist. It has now been 24 years that I've been doing taxes and now rank in the top 1% in the country. I'm thrilled because the average for our clients is about 6.92% in tax and that includes my mother. I am very happy but that was really the push. I'm a big proponent and believer in small business and my mom is a small businesswoman, general contractor. Small businesses are the backbone of our country and if they are paying tax, they can't create jobs, they can't help us invest, and they can't build the strength of the US. I love my job because my job is to keep their money in their pocket and not in the government's pocket.
Michele 5:04
Yes, and it is so hard, but what a fun story! Isn't it interesting how watching and seeing our family impacts us even in ways that we don't recognize until years later? Seeing the pain that your mom was in that moment, not just monetary and financial pain but an emotional pain and a distress. We want to be able to trust the advisors that we're working with. I just had a conversation on a podcast earlier about how to choose a coach, and how do you really trust these people. What have they done and have they done what they say they're going to do so you can build this trust and vulnerability? so that you can share. It is the same, but with our CPAs, with our tax strategists, or financial advisors. As a coach that coaches financials, money is a really difficult thing to talk about. But I know from working with a lot of people over the years, they might be having companies that make great money, and they may have great money at the end of the day in their net profit, but we're taking 28 and 30% of that, in many cases, and handing it off between state and federal taxes. In some cases, 40 and 50%, based on the state that they live in.
Shauna 6:29
63% is the highest rate in the country and that's in California.
Michele 6:34
It is hard and then the conversations that we have are similar to why would I make X amount of money if, for every $100, I must give somewhere between $40 and $63 away. From the 37% that's left from $63, I've got to find a way to run the company and pay massively, it's ridiculous. For some they even hit that moment thinking, I don't even want to grow anymore and when I grow it is going to cost me more, so why would I work harder? It's going to cost me more to be more successful. I am a Profit First coach certified in 2015 and one of the things that we talk about is we do have to pay some amount of taxes when we're profitable. I am not the coach that would ever tell people, the goal is for you to always get down to a zero-sum, meaning a zero net profit so that you don't pay taxes. That's not a tax strategy. That's not the best tax strategy to have no profit so everything's a breakeven, I don't care what somebody tells you, that just doesn't even make sense. We know that there are some tax implications to success. The difference is we want to minimize it so that we can reinvest and build wealth. I don't know a lot of small business owners that are just raking in the dough and rolling in it. Most people are going back and asking how can I rehire; how can I build? They're certainly making a healthy living, yet I'm not talking about that.
Shauna 8:17
They're trying to expand you're trying to grow.
Michele 8:19
I don't see the excesses that cause some to be fearful that we will have if we make money. I'd love to talk about why it's okay to be profitable, first and foremost in the company.
Shauna 8:36
Absolutely. I'm giving you heart signs and smiles! I love it because I also follow Profit First, I love Profit First and we teach all of our clients Profit First. Why is it okay to be profitable in the company, you have to make a living, correct? I truly believe that there's a difference in the world between entrepreneurs and W-2 folks, they're just two different animals. W-2 folks want to go to work 8-5 or 9-5, do their job, leave the job at work, go home, and go hang out with the kids. Entrepreneurs are a completely different breed. We will work 24 hours a day, not because it's our choice, but because we have to. There's something driven inside an entrepreneur that you have to building and growing and changing and modifying and improving. It's just a drive. Whether you're a W-2 higher earner and you're making great money, or you're an entrepreneur, one of my favorite things about the US tax code is that when the laws are written, they are written for all of us. It's not just this set of laws for the senators and congress people and this set of laws are for the entrepreneurs and this set for others. The laws or the laws are the laws, period.
I am all about making a profit, but I'm also all about you keeping it, for whatever reason you want to use it. For buying a yacht, for you and your family, or if you want to hire 30 more jobs. It doesn't matter why you want it, but it's your choice, it's your money, and you work really hard for it. Being able to implement the laws that are available in your situation, rather than saying, "Oh, I guess I made a profit, I'm going to just pay 40% of it", use the laws that exist, all aboveboard, all legally. Red and orange do not look good together, nobody's going to jail, and we're not doing it. But use the laws that are there and use the laws that are available to you to keep your profit to do whatever it is you want to do with your profit. I'm with you 100%.
Michele 10:45
Yes, and I usually tell my clients, my goal is to take you as close to the edge of what the tax laws say, without pushing you over. We don't want to invite an audit. We don't want to do anything sketchy; we want to be on the right side of it, but if it's there, we should be able to take advantage of it. But I see more taking advantage of things they shouldn't be taking advantage of.
Shauna 11:08
You have the IRS Dirty Dozen list that gets published every single year. We use something called the aggression scale and it is very similar to what you're saying, zero to 10. Zero, meaning the IRS is never going to call you never ever except for random audits, because that happens. Ten meaning we're all going to jail. So myself, the Tax Goddess our company, will go to a level of eight, which the IRS might call you, but you have all the backup, t's crossed, and i's dotted, you have it all. Yes, they may come to talk to you, you show them the documents, they go okay, and they stamp, and they leave. We'll go to an eight. A nine in my mind is Al Capone, you're doing bad things and hoping you're not going to get caught. We try to stay away from the nines and the tens. It always cracks me up when you are talking to somebody and they're like, "Oh, I'm a 20" and I tell them I'm an eight, we're pulling you back. If you want to work, then here's what we're doing. I don't think that a lot of people have ever been asked about their aggression scale.
You ask that as a professional and I ask that as a professional, but when we ask new people that we're talking to what is your aggression scale, they reply that no one has ever asked me that. I respond let's work through that. If I don't know where you want to be, I'm an eight, but you might be a two, you might be a five, or you might be a 20 and I have to pull you back. We have to know this answer. I think it's one of the places where CPAs may not ask this question. Financial advisors are better about it because they're regulated by the SEC, they must ask that question. But a lot of CPAs will get into a relationship with a client and the client never asked, and the CPA never asked, and if you're an eight as a client, but your CPA is a two, they won't even bring you strategies that are level eight, because they are level two. They're automatically putting a filter on what you're even going to hear about as far as strategies.
Michele 13:05
It's so funny that you say that Shauna because I've seen it both ways. I've worked with companies that were a $250,000 net profit company and they're not an S Corp or filing as an S Corp, and I'm asking them, why are you not doing that? How much do you take out of that in the year? Well, I take $175,000. I ask do you understand that we can run half of that through payroll and half of that through draws so you're only paying self-employment taxes on this piece. They respond with my CPA says that that's too much work. I tell them it is very easy; we just need to do this; you can go to the.gov site and here's what you do. In some states, it's less than $100. One page, do it yourself. Make sure that you sign up that you're an agent in your own state and then go. Some states require a little more or a little less, do some research. They realize it's not that big of a deal. Then I've got others where their whole net profit is $30,000 and their CPA is super aggressive.
I tell them "You need to be an S Corp". Then they're hit with all the fees, fines, all the filing of tax returns, filing tax translates, and filing out everything else right including Schedule Ks and payroll. They're not having those conversations in a lot of cases. If the CPA would say to them, I think it's time to go to S Corp filing let me show you this is what it looks like with, this is what it looks like without, here's where I believe the savings will be, here are the additional costs. Here's the tipping point for your business, for you, for the financial understanding of you and your partner. This is where it's right. Because it can be a different tipping point. I love that you bring that up, I'm even having that conversation with our financial guy. How risk averse are you? How risky do we want to be? We're having those conversations, but they need to be heavier. I've seen people that when we look at their financials respond my accountants are recommending this, I'm very uncomfortable with it. Then you need to tell them that you are uncomfortable, it does it make it wrong, it just makes it different, and you need to voice that.
Shauna 15:28
Yes, yeah. Because guess who signed that tax return your CPA and you. If you are not happy, there needs to be a discussion.
Michele 15:35
You can correct me if I'm wrong, but back in the day, I remember, the reason I went to an accountant or a CPA to file my taxes is because they signed that they were verifying everything on that document these days, I have to sign that everything on that document is verified, and they only use the numbers I gave them. A lot of the weight shifted to the owner over the last few seasons of tax, where it used to sit squarely on the shoulders of the accountant or the tax preparer, not that there's not some responsibility for them, but you sign that you are the one. That means we need to know what we're doing and what we're signing. We can't claim ignorance because we put our signature on it, you better know what you're signing. You said something a minute ago that was interesting to me. It is something I've not heard before, but I don't doubt it. You talked about the IRS' Dirty Dozen. Can you tell us what that is?
Shauna 16:40
Oh, absolutely. I'll even give you an example. Every single year, the IRS looks at all of the tax scams that they have been focusing on. You get some common ones, for example, one of the big ones right now is something called a Captive Insurance Company. This is what I love and hate about the Dirty Dozen list. Every strategy has a good version of a strategy and a bad version of the strategy. Captive Insurance is a really good example of that. I'm going to use COVID as an example. So here we are, all of us, the whole world, going along and doing our thing making our money. COVID had businesses stop, shut down, can't operate, no cash flow, lots of expenses, and everything just exploded. A Captive Insurance Company, remember there's a bad version and a good version. The purpose of a Captive Insurance Company is to insure against valid risks. Now before COVID, a pandemic is not something anybody really thought of, the last one was in 1918. Nobody honestly believed that this would have been a valid risk, but we were obviously wrong.
An example is one of my clients that does catering for Major League Baseball teams. They had just bought all of this food for $600,000 to start the baseball season, in February 2020. Shutdown. He was hit with $600,000 worth of food spoilage because obviously can't return the food he bought; it's done. He went to his main insurance company, Farmers or State Farm, whoever it was, and said, pay me, this is why I've given been getting you premiums for 20 years. They said no act of God was covered. He also had his own Captive Insurance Company that covered him. He got his money out of his Captive, had a valid claim, and it was clearly a valid risk, correct? However, you will notice that Captive Insurance Companies are listed on the IRS Dirty Dozen. I'll give you the IRS' famous case for the Dirty Dozen side. There was a rancher with 5000 head of cattle who had gotten insurance through a Captive Insurance Company but had gotten flood insurance. He was up on top of a mesa like on top of a mountain. Now there hasn't been a flood there in all of recorded history. So, unless we start getting biblical-level rains, that is not going to be a thing. He lost the case for Captive Insurance. His was considered invalid IRS Dirty Dozen level because he got insurance for something that would never ever happen.
On the other side, COVID was the perfect example of an act of God. Now an act of God to be anything, that could be a pandemic, a typhoon, and a hurricane A lot of the insurance companies will not cover acts of God. The Captive will. When you look at the IRS' Dirty Dozen list, you've got a strategist, you've got somebody telling you about this strategy or that strategy.
It goes back to your need to know what this is, why is it valid, does this feel right to you. That aggression-level thing. You need to understand which strategy is it, how is it going to apply, and is it really valid for you. You do have to have some level of trust with the professional team you're working with.? And are they signing the tax return or are you the only name on the bottom of that thing? What is the backup and proof and help that they're going to provide?
Michele 20:29
Let me ask this, the Dirty Dozen list, let's say the latest one, either 2022 or 2023, whatever is out for right now, is there anything else on it, Shauna, that you think would be applicable to the interior design industry or to small businesses like what we have that we need to be aware of. What else is on that list that we need a deep breath about?
Shauna 20:52
Absolutely, I really do like the Captive because the Captive applies to anyone making gross revenue of $750,000 or more. So that's always one of the big ones that we see.
Michele 21:04
I have never heard of Captive Insurance.
Shauna 21:06
Sometimes it's going to be called an 831-B. Captive Insurance tends to be the bigger picture name for it. The other one that we see quite a lot and this goes to the high-income filers who get a charitable remainder or annuity trust, a lot of charity stuff, let's phrase it as charity. We see people trying to set up private foundations that don't ever donate to anything, they're just running everything. One of the most popular ones right now is trust. You hear this phrase, owe nothing but control everything. That can happen, but you are literally giving up control, you're giving up assets, you're giving up income. Where we see these scams come out is people that say, Oh, yay, we're going to put everything into a trust, but you still get all the money, you still get everything, but you don't have to pay any tax. This is where it becomes this fine line between tax strategy and a scam. Our tax average is 6.92%, but that is a combination of over 400 tax strategies that we apply to any specific case. Where I tell people really to watch out with these Dirty Dozens, is when you get somebody that says you need one strategy, and you'll never pay tax ever again.
It doesn't work that way.
Michele 22:36
That's a good point. This is really about layering, if you will attack strategies, the thought that came to my mind, when you were describing that, Shauna, was if it sounds too good to be true, it's probably too good to be true and probably illegal. There's a scam involved.
Shauna 22:57
It probably is. I think one of the biggest things is if you're paying $100,000 in tax a good tax strategist can help you wipe that out. No problem, that's very easy for us, but you will do a lot of work. There's a lot of effort that has to go in, you have to set up this structure, that structure, you have to move money, you have to pay attention. That in my mind is the valid side of it, you're going to get a benefit, but you got to put in the work. Those two things in my mind always go together. When you hear somebody say that magic bullet, oh, all you have to do is sign this one piece of paper. All, really, that's it? You were talking about, it's not one piece of paper. It's one piece of paper plus tax trends and payroll and digital. You can get the good version of any strategy and the bad version of any strategy.
Michele 23:55
It's funny that you say that because I've looked at a couple of different things and listened to a couple of different conversations and it's always there's work to be done on the part of the business owner. So, you need to set this up, and you need this document, and you need this or that. Sometimes we can actually look at all that and think, oh, my gosh, I'd rather just pay the money. I don't want to have to do all that. Is it worth it? Is it worth all that? Let me back up and say it this way. Whenever somebody listening today is talking to their tax strategist, their CPA, or whoever they're listening to when a strategy is presented to you, I think a really great thing to do would be to say, what does it require of me? Because if you don't know the other side it is the same as moving to an S Corp too early and not understanding you're paying 1000s of dollars more for all the tax stuff so that you're actually not saving the money that you thought. Yes, you're saving it in taxes, but you're paying it and a bunch of other fees. And so really knowing both sides of the equation, even putting things into a trust, what am I putting in? And what am I not getting over here? I know we took advantage of conservation easements one year. The thing about those is, that's great until it's not and the government decides they don't want to do those anymore, or they don't.
Shauna 25:21
They're on the Dirty Dozen list now.
Michele 25:22
I know. But you know one year they are and one year they're not, you don't know. A lot of this, I'm just going to say from my own perspective, a lot of it changes based on who's in the White House and who's controlling Congress because the tax laws change all the time so what's on the Dirty Dozen list at one point may not be later. Again, just saying, there's work that comes out for all of this.
Shauna 25:47
And that's why you want a specialist. So yes, I am a CPA, but I don't do tax returns. I mean, we'll do them if your CPA is a level one and your level eight, like fine, we'll do your tax return for a couple of years to just get everything sorted and get everything settled, and then we'll get you to a CPA. But we specialize in tax strategy and we do that because the IRS changes the rules three times a day, three times a day. So if you're a regular CPA and we love regular CPAs they file tax returns, they protect you that's their job, and they give you day-to-day guidance. But if your regular CPA calls themselves a tax strategist, where are they finding the time to read the three times a day federal changes, let alone all 50 states which normally depending on the state is either once a day or once a week? You have to be up to date. Talking about that conservation easement and the difference between a conservation easement and a syndicated conservation easement. If you've got a syndicated one, you better go back to your CPA right now and fight and ask what are we going to do? Because it hit the dozen Dirty Dozen list again, this is now the third year in a row syndicated conservation easements I've hit and the IRS is out hunting. That 87,000 agents, they're looking, they're for looking at that Dirty Dozen. Sorry, you got me a little bit of a rant there. Sorry.
Michele 27:12
It's good, because here's the thing that I'll say to you, again, and provide insight if I don't express this properly, but when we make some of these decisions with our tax strategist, we also need to realize that some of these decisions are not one-year decisions, they are decisions that have a longer-term implication. So, if we are at an eight now, but we believe in two years, we're going to be at a six, we need to think about that eight decision because it could outlast us in getting to the sixth of comfortability, does that make sense?
Shauna 27:48
100%. When we build tax strategy, we talked about the aggression scale but the next thing is what do you want in the next five to 10 years? Are you building the business? Are you selling the business? Are you buying rental properties? Are you putting kids through college? What are you doing? What is the life you want? Because yes, I can absolutely plan for today, however, if next year, you're selling the business, well, that knocks out this business. I can but I shouldn't do this, this, and this because it's going to impact negatively now the following year, or three years from now, or five years from now. So yes, I really, honestly deep down I feel as if one of the biggest pieces that a traditional CPA misses right is a lot of people walk in and say great here, here are my documents, here's my stuff, file my tax return. There's no conversation. There's no aggression level, there's nowhere are you go on over the next five years. You know, not a lot of people are lucky enough to have a CPA who actually knows their situation, knows their family, and knows where they're going. And even if they have that CPA, that CPA may and I don't want to say only be a CPA, but only a tax prep. I was looking at it as a three-legged stool.
You have your day-to-day bookkeeper who's doing the books payables, and all the day-to-day stuff. You have your CPA whose job it is to file the tax and make sure you're not going to jail, and then you have the strategist. Without one of those three legs of the stool, the stool falls over. You've got to have all.
Michele 29:24
I would say a fourth leg of that stool is your financial advisor. Then they're taking all that savings that we got from the strategist and investing it to go forward. Let me ask you this because I think some people listening may be thinking to themselves, I'm just starting out in business, I'm just earning my first six figures, or my first few six figures in revenue, or my profits aren't huge right now, when is the right time to reach out to a tax strategist?
Some people are thinking I don't even need to talk to a coach yet, but sometimes that's when you need to talk to them when you don't know what you're doing or when you don't have a lot, but when is the right time to reach out to a strategist?
Shauna 30:13
I'm going to come at it from we're little, we're a baby, and we're growing. I'm a big fan of just knowledge period. Always ask questions. Now, I love Tik Tok, I spend at least half an hour a night flipping marketing, tax, finance, whatever. Tic Tok, YouTube, I don't care where you get your education from, but educating yourself, at least in general, so that you know what kind of questions to ask. I would always start there, whether you're already making a million dollars or whether you're just making made your first $6,000 sale, whatever it is. Always the more education you can have, the better. Now, each tax strategist, there are only 607 people in the entire country that do what I do, is going to have a very different specificity and what they're looking for. In general, I think across the board, most tax strategists are not really going to be cost-effective for you until you're paying about $100,000 a year in tax.
We talked prior to the podcast about the basic strategies that are low-hanging fruit. Basic strategies such as paying your kids, converting to an S Corp, writing off your dog, and doing the Masters exemption, these basic low-hanging fruit kind of strategies will handle up to about that $100,000 of the tax limit. $100,000 tax if we're in a 30% bracket, is really about $300,000 of profit, $350,000, somewhere in that range. Once you get above that, now you're looking at what I call the Big Boy strategies, we're looking at things that are going to wipe out in a single move $100,000 tax or $80,000 tax. I will say there are some people who say, "I don't want to mess around, I want to know from day one, how do I do it? How do I structure what am I doing?" Those people when you think you are, when you want that, reach out to a strategist. But for a good basic solid CPA, I would ask questions about aggression, and make sure you're on the same page about aggression. I always use the four that I just mentioned as tester questions. When somebody says, well, I don't know if my CPA knows the low-hanging fruit, I use those as tester questions. I saw on tick tock that I can write off my dog, how do I do that? See what the answer is.
Michele 32:45
How do you write off your dog? I've never heard of that in my whole life. I am shaking my head, like oh my gosh.
Shauna 32:48
Oh, sister, it's my favorite thing. Let's back up. I have four German Shepherds. They're big, they're big German Shepherds. Let me give you the rules here, that's my favorite deduction ever.
Michele 33:07
I do have little 4- pound dogs.
Shauna 33:09
You did tell me that you have little four-pound dogs. So, we're going to have little four-pound dogs. This will be a good difference in the description here so, the technical rule for writing off your dog, there are different versions of writing off your dog. You can have medical dogs, you've heard of PTSD dogs or glucose dogs, these kinds of things. Those are specially trained, they're medical deductions, and that's normally that's pretty clear. For the rest of us that don't have a medical dog, you're looking at three qualifications. The first one is the dog's shoulder must be taller than the height of your knee. So, unfortunately, your little four-pounders are not going to qualify, but my German Shepherds certainly do. Big, big puppies. The second one is that they must be trained. Now this was very vague in the court case with the IRS, they just said train. So trained means sit, stay, calm. I mean, trained for what? It's just very vague, it just says trained. The third one is the dog has to be used for some sort of business purpose. Now, this is where we see a lot of Tik Tok dogs, we see a lot of YouTube dog stars, but you also see security dogs.
So, in my case, as I said, four German Shepherds, I invite a lot of clients to my home for dinners, for business meetings, for brainstorming sessions, whatever it is, well, those dogs are my security. If anything were ever to happen, they have a business purpose there with me in business meetings. I actually had to lock them out, so they weren't with me here for today's filming, but they have a business purpose. Most of my clients will write off their dog if they meet those three qualifications. Shoulder and knee height requirements, they have a business purpose, and of course, they're somehow trained and you can write them off as either security dogs, could be advertising if you can prove that you've got a client because of the dog through advertising or marketing. There are lots of different ways to write off the dog and it's really going to be very specific to your situation. Part of the reason why as strategists we want all the details, everything. I want to know how cute those four-pound dogs are.
Michele 35:23
That's crazy. What for the designers listening, work rooms, we have builders and architects, businesses that are listening today. What are some of the tax strategies that they might even just want to be aware of that maybe aren't so common or even some that maybe are common yet maybe that's common, but I've never had a conversation about writing off a dog in my life. Now, I'm not a tax strategist. I'm not a CPA. So that's not a rule I've kept up with. I've heard of things like the Augusta rule. Tell us what is that.
Shauna 35:53
I was about to say that the Masters exemption or the Augusta rule, kind of goes by both names and I'm smiling. I was about to say you would know exactly what this is about when I explain it. Obviously, the Masters tournament held in Augusta, Georgia, is why you get both names, Masters or Augusta. Effectively what this is, if you own your house, you're allowed to have a mortgage, but you own it versus renting it. It does not work for renters; you have to own the property and a mortgage is fine. You are allowed to rent your home to anyone else, asterisks right there, to anyone else, for any reason, and whatever amount of rental income that you receive up to and including 14 days a year, all of that rental income is 100%, tax-free period. Now, I put that little asterisk there, because a lot of people are, oh, no, I've heard horror stories about Airbnb and they trashed your home and they pulled the copper out of the walls and I don't want to rent my home. You just have to rent it to someone else. Your business, LLC, S Corp, partnership, C Corp, whatever, is somebody else in the eyes of the tax code. Okay, so what you can do, as I mentioned, I invite clients over, and we do masterminds, I am renting my home to my business, instead of going out and renting a conference room. And my business pays me rent for the use of this space. Now, the coolest part about this in my mind, 14 days a year came, the rental rate for your space is based on where you are. Okay. We deal with clients all over the US and we deal with clients outside the US, as long as you're a US citizen paying US taxes, they look at where is this conference space. I've got clients that live in the dead center and their conference space is expensive, super expensive, for about a 300-square-foot space rental rate it is $17,600 per day. $17,600 times 14 days is $246,400, a tax deduction, tax-free income to you, cash you can just take out of the business every year, for 14 days. Now, not everybody lives in Manhattan. The smallest rate that I've ever seen is about $500 per event, that's still $7,000 that you can take completely tax-free cash for you out of your business every single year. It's one of my favorite deductions.
Michele 38:43
If we were an LLC, and we were home based LLC, would you qualify?
Shauna 38:45
Now, there are a couple of little qualifications, and this is why you make sure you always follow the rules. LLCs are the legal setup and I always this is talking about the taxation types. An LLC can be taxed as an S Corp or taxed as a partnership. An S Corp or partnership, a C Corp, that is separate taxation from you, you can just do this. You don't have to do a 1099, there's nothing else you have to do. It's just 14 days, you pay rent, make sure you pay the rent. Transfer the money. I'm so sorry, side tangent, because everybody always asked this question, well, what if I don't have the money? What if I'm just starting and I need the money in my business, you can pay rent and then put the money back in as a loan, that's fine, but the money has to move. If it doesn't move, you've got a problem. Escrow partnerships, C Corp, you're totally fine. With an LLC or with anything that is taxed as a Schedule C, you have to be a separate legal entity. If it's just you and you don't have an LLC, that's not going to work because you are you, complete sole proprietor, no LLC, no nothing, it's not going to work for you. There's this middle category, which is an LLC taxed as a Schedule C. Now this is where it gets a little gray. This is probably a seven, or eight, if that's your category. If you're in this category, it's a zero. S Corp, C Corp, partnership, it's a zero, you should be doing it. If you were an LLC taxed as a sole proprietorship, you can still do this, but the business has to give a 1099 to you, as an individual on your personal tax return. You have to report it as income on Schedule E and on Schedule E, you can then report it as nontaxable under the Masters exemption. There's a very particular process and if you don't know how to do this, find a strategist because if it's not done right, the IRS will take it away.
Michele 40:54
That's really good to know. I've had a client out in California, that somebody wanted to come in and film, she's an interior designer, and her home is beautiful, they wanted to come in and film. They brought some people in for a couple of weeks, her family went on vacation, they rented the home, they did what they did, and they walked away. I love that. What are some other just things that maybe we haven't thought about that would be some of those types of things for people to look at?
Shauna 41:21
Absolutely. The next one is paying kids and I never want to cover something that's already been covered.
Michele 41:28
I would love for you to go deeper. We've had on the podcast, people mentioned covering their kids. The kids actually need to do something, they don't need to just be breathing. It's kind of like the dog, there has to be a purpose. I'm not saying people's kids are dogs, please don't write in.
Shauna 41:47
They do need to do something, it's absolutely like the dog.
Michele 41:52
That's not what I'm saying, I'm saying it's further than just being your child. Share what the rules are and honestly, what I'd like to hear is even what age is appropriate to start because I hear so many different things about that.
Shauna 42:08
Yes, I was just about to say. Let's start with that one because that is one of the biggest key factors here. There's a general rule and there's a specific rule. The general rule is that you cannot pay your children until they hit the age of seven. Seven, the day they turned seven. If that's June 1st and they turn seven, you can start paying them on June 1st of that year. It's the day they turn seven. That's the general rule. Now my favorite of one of the specific rules, you can pay children that are less than seven, and I want you to physically watch my hands here because this is actually very important. But they have to be very, very, very, very, very, five verys, cute. Very, very, very, very, very cute. Now, this language actually came from a court case where you had parents who were using the baby, a brand newborn baby. They were paying the baby wages for being a model for being on the flyers and the brochures. Obviously, we have the Gerber Baby. You can do this, but the court state literally five varies very, very, very, very, very cute.
Now my favorite question from clients is well, how do I think my baby is five levels of very cute, But how do I determine if anybody else thinks the baby's five levels are very cute, you would literally have to go to a modeling agency and get them to approve the baby to be that level of cute, to be a baby model and to be able to do that. With most of my parents, I'm like, I know you think your baby's cute, and if you really want to go ahead. Otherwise, no, seven, just start at seven, that's the baseline, it's much easier. They turn seven today and this is what we're going to do, they do have to have a job. Now the cool thing about the way that this rule is written, you are allowed to pay a child the same rate that you would pay a professional for that industry. For example, if your child was sweeping the floors, shredding papers, or putting away the coffee mugs, that's an admin or a janitor, so we might be talking $20 or $25 an hour. Now when your kids get a little older, so now they're 12, 13, 14, or whatever, they can now run your social media, because kids at that age know a lot more than we do about how to run it. Here's the Tik Tok video Mom! Social media managers run about $120 an hour. Depending on the job, depending on what you're having to kid do, the rates can change the dollars can change job description can change all these things. The other side of this is they do need a job and they need to track their hours. You can pay them by project. You could absolutely pay a seven-year-old to model on a brochure, they don't have to meet the five very few cute levels, because now they're seven. This is fine. You might be able to pay $2,500 per photo shoot. If you're doing photo shoots of locations where you've done the interior design or built, put the kid in the photo, great $2,500 per photo shoot, or something along those lines, whatever that is.
The other thing to note here is that and of course, these rates change every single year, so right now it's 2023, the maximum that you can pay a child and have them have no tax, and you have no tax at the moment is $19,850. That's really made up of two different numbers. $6,000 going into a traditional IRA, and the other $13,850, which is just nontaxable at all for anything. A lot of our parents will say, well, okay, I've got three kids, they all need it, I don't have $60,000 to just hand over to children. The one thing I love about the money that you give to kids and depending on how you feel as a parent, you can either give that money to the financial advisor, say invest, grow it, because the compounding for a seven-year-old, I mean, amazing. You can handle it to the financial advisor or the children are allowed to use it because it's now their money. You were allowed to use their money to pay for anything that is not a parental duty, not parental duty. Not food, clothing, or shelter, but they have music camp, band camp, and a new iPad, at 16 they got a car, they have insurance, a cellphone, not food, clothing, and shelter. Those are the only three things that you as a parent cannot pay. You're not allowed to charge your kid rent for living in their bedroom, I wish, but that's not going to work.
Michele 46:47
Wow, that's so amazing. That gives even more detail than then, you know, just the broad idea, that's really great. Shauna, is there anything as we are wrapping up? I felt like we could talk for about six more hours. Is there anything, as we're getting close to wrapping up that you think people really either need to know, understand, steer clear of, or look further into with regard to tax strategy? Or is there just something that you want to share because you're like, this is super cool, and you all need to know this?
Shauna 47:15
I'm so glad we were able to cover the aggression scale. That is the key, that's the cornerstone of all of this, in my opinion. You have to be surrounded by a team that matches who you are because you are you, you are the client, you are the center of the focus of the world, from that standpoint of the team that is focused on you. My suggestion would be to think through that. Where do I really sit, zero to ten? Ten meaning we're all going to jail. Nine is Al Capone, we're just hoping we're not going to get caught. Eight, I'm okay getting an audit, but I'm legal, everything's totally legal. Seven, I really don't want to talk to the IRS, but I still want to push the envelope. Or am I somewhere below that? You've got to make that decision and then you need to be asking your team, CPA, where are you? Because if your CPA says two, and you're an eight, even if you worked with a tax strategist, and you and the tax strategist were level eight, if you take it back to a level two CPA, well, I'm not signing off on that. Your team has to be in line with wherever you are. So out of everything that we talked about today. I mean, lots of strategies and lots of options. And guys, these are low-hanging fruit, lots of things to do. But that aggression scale, if you're not clear, and your team isn't clear, you're leaving money on the table.
Michele 48:38
One last thing, how do tax strategists get paid in general? Is it a by-the-hour, by-the-project, or a percentage of savings? I know everybody is a little different, but what would you say people can expect if they've never worked with a strategist or talked to a strategist to know how this is going to play out?
Shauna 48:57
I'm going to answer two different questions that you asked but didn't ask. The first one is as a CPA, it's actually illegal for a CPA to charge a percentage of savings. I want that to be really clear so if you're working with somebody that says they are a CPA and they charge a percentage of savings, that's illegal because it incenses people to do bad things. It incenses me to put you into the Dirty Dozen and I always sent you all this money and then I'm gone fly by night. I would absolutely recommend that you're looking for the CPA combination with the strategist, those two things, but if anybody's trying to charge you a percentage of savings, think twice just run. Some people charge hourly, some people charge a flat fee. With us, we prefer to charge a flat fee so you know what it is, we know what it is. We have a minimum return on investment. Most of the strategists do. For example, our minimum ROI guaranteed in writing is three times whatever your investment is. The smallest tax plan that we've ever written was, I think it was about $14,400. The largest tax plan we ever wrote was $187,000, but we save those people $112 million. It's really just who are you. How complex are you? Do you need one strategy? Five strategies? 30 strategies? There are 400 plus, just at the federal level, forget state and local on top of that.
Michele 50:39
Awesome. Shauna, this has been super helpful, lots to think about, and exciting. Tell everybody where they can follow you and where they can find you online and on social.
Shauna 50:47
You're a sweetheart. I'm so glad to hear that it was so valuable. That makes me happy. We are super easy to find Tax Goddess anywhere Facebook, Instagram, website, and YouTube. That free education was where I was telling you to make sure you watch the education, we film a video at least once a week, and our YouTube has hundreds if not 1000s of videos on pretty much any topic you could want. I would start with that education, but yes, Tax Goddess, we're super easy to find.
Michele 51:13
That's amazing. Thank you so much and thank you for sharing and for making it approachable and relatable. I think that's so important because sometimes when we're talking finances and taxes, it feels hairy and scary and nasty and there are parts of it that really are not going to diminish that, but it also is something that we can get our arms around if we have the right people in our team. So, thank you so much for being the right person on the team today.
Shauna 51:39
You do not have to be a super genius., I was going to say you do not have to be a super genius to save money. So, it's okay. Thank you so much for having me.
Michele 51:53
Shauna, thank you so much for joining us today and talking about tax strategies, how to get started, and even the Dirty Dozen. I know I learned a lot on the call today and I hope that others did as well. If you want to know more about working with a tax strategist, or Shauna in particular, check her out at TaxGoddess.com. You can also check out working with us over here at Scarlet Thread Consulting where we can help you build a strategy for your business, and we would love to do that. You can sign up for a call with us by going to ScarletThreadConsulting.com and going to the Work with Me page. I'm going to suggest that we are being very intentional about our profitability and about our tax payments because profit doesn't happen by accident.
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