No entrepreneur is an island all to his or her own. Those savvy business owners who choose to surround themselves with a team of competent resource partners gain a clear competitive advantage in today’s increasingly competitive marketplace. On this week’s episode of The Playbook, host Mark Collier, business consultant for the UGA Small Business Development Center, is joined by CPA J.D. Longino, who is also the founder of Accolade Accounting. Longino is a true financial partner for the clients he serves, and he takes a refreshingly collaborative approach to the oftentimes mundane world of financial accounting.
Transcription:
Mark Collier:
Welcome into The Playbook, JD.
J.D. Longino:
Thank you for having me Mark.
Mark Collier:
All right. As I said, in my lead in, most business owners look forward to going to the accountant, like they do go into the dentist. It’s just not a pleasurable experience for them. But you take an entirely new approach to accounting and it’s more of a teaming collaborative approach. So walk me through the genesis of when you engage with the client, as you say, from them becoming [wantrepreneurs 00:01:27] to entrepreneurs.
J.D. Longino:
That’s exactly it. We help people go from being a wantrepreneur to an entrepreneur by providing them a guide and a framework into launching and starting their own business. What that is going to mean is that for some people, it’s making sure they’re registered in the appropriate jurisdictions, and making sure that they are appropriately filing into getting set up for taxes. We’ll also partner with them and just listen. Right? We want to listen to their needs, and what they want and their long-term goals, to make sure that we’re delivering for them, in every stage of that. And that the business will deliver as they build it into the future.
Mark Collier:
All right. So I know most businesses, one of the first choices they have to make, or decisions they have to make, is what type of entity they’re going to choose to operate as. So how do you go about determining what type of entity is best for them and how do you help them choose?
J.D. Longino:
Well, as any good CPA will tell you, it depends. With proprietorships, right? Those are very easy to set up. The downside of those is that you do have to pay self-employment tax on any of the net profits that you have out there. We typically see home-based businesses or smaller businesses falling into those kinds of areas. There’s also partnerships. And the great thing about partnerships is that they offer flexibility on allocating the profit, loss, and distributions coming out of it. However, it can have taxable distributions to the owners, and it can cause other complications with an additional tax form to be filed, but they are still very attractive.
Mark Collier:
Good, I just want to say that from my understanding proprietorships and partnerships, there’s a legal liability issue with those that other entities don’t run into. Can you talk to me a little bit about that as well?
J.D. Longino:
Absolutely. So we’re proprietorships. They are typically fully liable for what happens in their business. When people go to partnerships, that’s when they start [inaudible 00:03:37] limiting their liability in these businesses. And it’s attractive for those kinds of reasons. Right? Because you’ll typically set up an LLC, to separate yourself from that business. And then depending on whether you’re a general partner or a limited partner, your liability can be limited to your investment in that partnership. So it makes it a lot safer to engage.
Mark Collier:
That makes perfect sense. Now I do know most of the clients that I serve, they elect the LLC. What I also understand that the S corporation has become very popular. So share with me the advantages and disadvantages of both.
J.D. Longino:
Absolutely. So in LLC, you can elect to be treated as a partnership or as an S corporation by the IRS, right? And when the IRS chooses to treat you as an S corporation, you get some tax favored areas. Right? You’re able to walk the line between being a corporation and being a disregarded entity. And be both the owner and employee. You get to take part of tax-free distributions coming out from the partnership and you get some really interesting play with some deductions on fringe benefits for coming from that S corporation.
Mark Collier:
All right. So you touched on a very important subject. One that I often hear from my clients as well, about paying themselves. So I know there’s a couple of different ways you can set that up, but how do business owners…. how would they best position to pay themselves from the activities of that business?
J.D. Longino:
Absolutely. And to connect it with that, S corporation, that’s where the fun really happens on the S corporation. Right? Whenever we’re combining the wages with those tax-free distributions and those fringe benefits that I mentioned earlier, you’re able to get a double deduction. For example, if you took an S-corporation shareholder, and you paid into their 401(k) or traditional 401(k) for them, you can potentially get a deduction on the corporation. And then again, for the individual. Double dip.
Mark Collier:
Duoble dip. All right, I like that. All those types of tax advantages and tax strategies are what makes coming to an accountant… pay dividends for the business owners. Let’s say I’m a business owner starting out, what’s some of the most important advise you’d give folks who are ready to start the new business and take that dive into entrepreneurship?
J.D. Longino:
It’s to get started on the right foot and stay on the right foot. What I tell people is, again, make sure you’re registered in the appropriate jurisdictions, get a business bank account and do not intermingle those funds. That is a big no-no. And then make sure that you invest in a good general ledger system or some kind of accounting system, to keep track of all that coming in. And then that makes it a lot easier to work with somebody like me, and so we can do our magic and save you a lot on taxes.
Mark Collier:
Well that makes sense. And I’ve heard that term called, “Mingling.” A lot. When I work with some of my clients, in terms of the PPP funding, that’s one of the first pieces of advice I give them. “Set up a separate bank account. You don’t want to start commingling those funds, because if you’re audited, that creates a nightmare for the business owner, but it probably creates big fees for you, right? No.
J.D. Longino:
Absolutely. Yeah.
Mark Collier:
All right. All right, so let’s talk about this new year of 2021. I know each year the tax code changes, some deductions are done away with some are added. So what are some of the new deductions in 2021 that business owners should be looking out for and they can take advantage of?
J.D. Longino:
So business owners should definitely be aware of the increased meals deduction. It’s up to a 100% from 50%. Right?
Mark Collier:
That’s huge.
J.D. Longino:
Yeah, yeah. As if we need another reason to use Uber Eats, right? Then also we have the net operating loss carrybacks. You can carryback a loss up to five years at this point, and you can use that to generate additional refunds from prior years that you have filed already. And there’s the qualified business income deduction, which is an additional 20% deduction that business owners are entitled to right… qualified business owners, that they can take right off the top of their business income that’s flowing down to them. So that’s incredibly helpful.
Mark Collier:
Well, if you don’t engage the services of a competent accountant, you may miss some of those deductions. So I can see absolutely why you’re adding value there.
J.D. Longino:
Absolutely.
Mark Collier:
All right. Now that the PPP has ended, what’s the next round for business owners in terms of looking forward on those types of loans?
J.D. Longino:
Yeah so now that the PPP has ended, business owners are going to start looking towards forgiveness and applying for that. This is very key to understand how forgiveness is going to affect the deductability of those associated expenses on your tax return, right? And where you’re at in that forgiveness process. In addition to that, other people have received the targeted, Economic Injury Disaster Loan advances, those have gone out recently. And the deductability on those have changed as well. The key thing to also remember is that using those funds, can also affect the use or application of other programs and credits available to business owners.
Mark Collier:
Give me an example of that. Because that could be detrimental. Or it could be advantageous.
J.D. Longino:
And that’s why it’s very important to pay attention to that. So for example, the Employee Retention Credit, that’s a credit that was put out to help employers through these hard times to keep employees on their payroll. The key there is that you’re not allowed to double dip. If you’ve used the PPP funds to pay employees, you cannot use those same expenses to apply for the Employee Retention Credit. So you’ve really got to make sure that you’re not layering those on top of each other.
Mark Collier:
Okay. Well, that makes perfect sense. So what other ways are you helping businesses to uncover additional funds, deductions during this time?
J.D. Longino:
Yep. So just like I mentioned that Employee Retention Tax Credit, it’s we take a look back over 2020 and throughout 2021 to see if they qualify. The special thing about that credit is that you can qualify for up to 50% of the wages paid per employee up to 14,000 in wages paid per employee to have that credited back to you in payroll taxes. There’s also other payroll tax credits, payroll tax deferrals that people are able to take advantage of. And then there’s paid family leave and sick leave credits, that people are able to take advantage of as well, if you’re affected by Corona virus, or your care provider, your child’s care provider is affected by coronavirus. That’s schools, daycares, being shut down or temporarily unavailable, due to COVID-19.
Mark Collier:
Now clarifying question there, is there a cap on the number of employees under those deductions, or is it as many employees as you have, that’s the number deductions you can take?
J.D. Longino:
Well that’s a great question. So those credits, the family leave credits, and the sick leave credits, are available to employers with 500 or fewer employees. Now that’s going to qualify for most small businesses out there. So it is definitely something that is worth taking a look.
Mark Collier:
Okay. So are there any other useful tools that you can recommend to business owners to help reduce the tax liability and take advantage of some of the other tax breaks that are out here?
J.D. Longino:
Absolutely. Now that everybody’s getting back on the road, I know you could see that In the Atlanta traffic. Right? Everybody’s driving now.
Mark Collier:
Yes you can.
J.D. Longino:
Mile IQ is very, very good to have on your phone or in your [inaudible 00:11:24]. What that does is it tracks your mileage as you’re going from place to place, and it’s going to generate that deduction for you so at the end of the year, you can just hand that over to an accountant and we can take that and add that into your tax return. Mileage is one of the largest non-cash deductions that are available to small business owners today. QuickBooks Online is quickly becoming the gold standard in accounting for small businesses. So having that and being able to track your expenses through there, connecting that with your bank account, makes it a million times easier to work with an accountant like me at the end of the year. And then finally the IRS tax estimator tool. Yeah, it’s very, very handy for taking information from multiple sources, your multiple sources of income, and helping you to understand what tax may be due at the end of the year, so that you can better prepare for it and pay your estimated taxes on time.
Mark Collier:
All right. So where do small business owners go to learn more? Do they contact you? And what can they do to best take advantage of tax breaks and advantages going forward?
J.D. Longino:
Absolutely. Well, one great resource is the Small Business Development Center at UDA. They’re top-notch.
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