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Steven (00:53):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, financial Professionals edition. I’m your host, Steven Jarvis, CPA, and this weekend a special episode for our listeners. I have Julia Carlson joining me to talk about tax planning for entrepreneurs, whether that’s your clients or you as a business owner yourself. So Julia, welcome to the show.

Julia (01:13):

Thanks for having me. I’m excited to talk about this.

Steven (01:15):

a Yeah, absolutely. I think this is such a great topic because like I mentioned, this applies to a lot of clients of financial advisors, but it also applies to a lot of financial advisors themselves as business owners. And I think we’re all guilty at times of giving really great advice that we don’t necessarily follow for ourselves. So it’s a good reminder to take a step back and make sure we’re following our own advice and then learn from other people who are doing great work in this space. So before we get too far into the details, just give my audience just a little bit of background about what it is you do and why you’re here talking about this topic.

Julia (01:49):

So the money business has been my only business. I was licensed as a financial advisor when I was 20 years old inside of a bank, and I left the bank when I was 23 and started what is now Financial Freedom Wealth Management group. So we have a big team, we have about 20 employees, we serve clients across the states, and we are now led by me really leaning into serving entrepreneurs. And it’s because I’m an entrepreneur, so I love, my favorite client to help is other entrepreneurs. So we’re really helping ’em think through all different aspects of being a business owner and building a great business and saving as much as they can in taxes.

Steven (02:35):

Yeah, I’ve been doing a lot of intro calls with new clients as we’re recording this. It’s in January, getting ready to kick off the tax filing season. It doesn’t really matter where someone’s at on the political spectrum or how they feel about how much other somebody else should pay in taxes. Everybody wants to pay as little as they can personally, and so this becomes such a great way to deliver value. For me, it’s more than just, Hey, we might be able to help with tax savings. It’s also taking some of the pain and surprise out of taxes in general. We all have to pay them, and especially for new entrepreneurs, taxes can be a bit of a nasty surprise when you go from being a W2 employee to now you’re responsible for all of it.

Julia (03:11):

Yes, and specifically I think for entrepreneurs when they have really monster growth maybe in a year where then they’re like, oh, I haven’t looked at my estimated quarterly tax payments or even know how to do that. And so they’re not learning this information until the year is over and there’s only so much we can do after the year is closed to reduce those taxes.

Steven (03:36):

Probably about the worst way to throw a wet blanket on a really good year is you get to December, January and you’re popping champagne and you’re celebrating all of this growth, and then you get to February or March and your CPA says, oh, hey Julia, I need you to cut a hundred thousand dollars checks to the IRS, but plus the state. And now that year you were celebrating feels like it just is soul crushing a little bit.

Julia (03:57):

Yeah, yeah. You throw it forward, right? You’re always then trying to play catch up. So that happened to me early on and I was like, oh man, we got to get proactive. I created my own little spreadsheet. My husband has a business, I have a business. We own investment real estate. So it’s like I had to crack this code because my CPA as good as he is, it was still feeling like I needed to be the one that was equipped with this information to stay on top of it.

Steven (04:25):

Yeah, A recent guest on the show was Bob Keebler, longtime CPA. He talks a lot. He shared a lot of great context about how the CPA industry has evolved and where it’s at right now. And it’s not about who should be responsible for the tax planning, it’s just acknowledging the reality that most CPAs are not proactively helping their clients with this. And so it sounds like maybe you had a couple of painful bumps and then just said, Hey, you know what? I’m going to own this for myself and then I’m going to own it for clients as well.

Julia (04:52):

Absolutely, yes, exactly. And I think it is no fault to the CPAs. I don’t think they have the service model that financial advisors do where we really do want to be proactive and really do want to partner with our clients CPAs to save them money. And so the way that I have always looked at it is, I’m going to partner with your CPA, I’m going to help give great ideas. I’m going to be proactive where they may be looking at it at the end of the year. We’re going to be looking at during the year.

Steven (05:21):

So Julia, let’s start with maybe thinking back to those kind of first painful memories of taxes and being an entrepreneur. Let’s start with talking about how we can help people who are new entrepreneurs and how they think about taxes as they’re starting up a business. And then we’ll switch to people maybe who’ve been entrepreneurs for a long time and could still use some tax planning.

Julia (05:38):

Okay, that sounds good. So I would say if you’re brand new, I just had a conversation, a client’s retiring, they’re starting a business. Should I set up an LLC? Yes. I think the biggest thing is separating your finances. I see many, well on their way to seven figures that still have their finances co-mingled with their personal business and personal. So we want to separate those. And I also think that does something with your mindset. If you’re setting up a separate entity like this is a business, you’re going to approach it differently as opposed to maybe a hobby business. So definitely set up your own account, spend some money like investing into operating agreement an LLC, protect your other assets, and then depending on the amount of income that’s coming in, you want to create the right tax election for that LLC.

Steven (06:30):

Well, Julie, I know we’re going to get along and be great friends because I asked you a tax question and you started with something that really isn’t a tax first consideration, but I love that you did that because so many people get it wrong. They say, oh, let me start with trying to figure out whether I should have an S corp or a C Corp or any of these other things. But it’s to have that separation, it’s to have the liability protection. We have to start with the legal and then operating piece of that because people will fight all day about the pluses or minuses of S-corp election. But what doesn’t get talked about enough is, hey, if you have business partners from an operating standpoint, you might be better off with a partnership even if an S-corp would save you money. And so we’ve got to figure out the business, the liability protection, those kinds of things. And then to your point, and this is a really important thing for listeners to remember, is that the tax status is an election after you’ve created the LLC. Those are distinct events. We can go ahead and create the LLC and then later years later, if we need to go back and say, wait, now we want to elect that S-corp treatment.

Julia (07:31):

Exactly, exactly.

Steven (07:33):

Love that recommendation out of the gate that, Hey, let’s have separate accounts. Let’s make sure we treat this as a business. Especially if we’re talking about getting close to seven figures, we probably don’t have as much concern about, Hey, is this a hobby or is this a real business?

Julia (07:46):

Right.

Steven (07:46):

I mean, there are a lot of other considerations. Liability protection is certainly one of ’em. But also if you just constantly co-mingle everything, if the IRS ever asks questions about your business and you’ve commingled everything they tear and through all your personal stuff too, there are a lot of benefits to separating these things out.

Julia (08:02):

Absolutely. And I think if you have that entity, there’s stats out there of you’re less likely to get audited if it’s off your personal return. You’re just protecting yourself, but you’re also, you should keep good records. I think that’s next. And if you have a separate entity, a separate account that you’re putting everything through, even maybe a credit card that’s devoted to that, it’s like you’re able to track your expenses, your deductions so much easier than if you commingle.

Steven (08:31):

Yeah, absolutely. So we need to get those administrative and legal steps out of the way. What about some things that do actually impact our taxes? You mentioned good record keeping and keeping track expenses. What else out of the gate should entrepreneurs be thinking about from a tax buying perspective?

Julia (08:47):

I think too, paying yourself first, you didn’t go into business to go broke or to pay everyone else. So I think it’s really important. What I have found is startups, even people approaching that seven figure mark, they still don’t have a salary. They’re still not paying themselves first. They’re trying to figure out how to pay everyone else to grow the company, but forgetting about themselves. So as business owners, we get paid twice. We get paid as the artists like the craft, whether you’re the president, the CEO, the financial advisor, we get paid for that. And then we also get paid for taking on the risk of creating the business as the business owner or profits. So I always say pay yourself first and then have a formula for your profits and how you take those out of the business because it’s just so important. Again, when you put these priorities into place, then all the other things will fall into place after that.

Steven (09:41):

Yeah, so many good recommendations there. There’s got to be an order of operations to this, and hopefully what I’m going to say next is more a reminder for advisors to remind their clients of, but I’m sure there’s some people listening who need this reminder as well. But we have to remember that from a tax perspective, the IRS doesn’t care how much money you took out of the business. They just care how much money the business made. And so I’ll run into entrepreneurs, including financial advisors at times, who get this wrong. They’ll say, well, I didn’t take that much out of the business. IRS doesn’t care how much money did the business make because most of the entrepreneurs I work with, LLC partnership, S corp, they’re all passed through entities, correct. So whether you took the money out or not, you are still going to get taxed on it. So I love that recommendation to make sure you are in fact paying yourself that you’re tracking these things or you’re treating it like a business.

Julia (10:27):

I would also say that you’re looking at your books. I always recommend looking at them monthly. So how much profit are you making every month? And then on a quarterly basis, if you are making a profit, you’re going to owe taxes on that profit. So you want to know, benchmark yourself against where you were at last year, what’s going on this year? And if your profit is much bigger, then you have to go back and figure out, okay, I’m going to owe more in taxes. Do I need to start a retirement plan? What else do I need to hire and reinvest in the company to grow it. Thinking about your goals, thinking about what you want to accomplish, then you want to make those decisions along the way. Not on December 27th, right?

Steven (11:14):

Yes, absolutely. December tends to be a bad time to implement tax planning. We start running up against a deadline because there is a lot of tax planning that has to be done within the calendar year. And the last thing we want to do is try to force it into the last week of December and have something inadvertently cross a calendar year because the custodian wasn’t open all the business days you thought they might be or something silly like that.

Julia (11:34):

Exactly, yes.

Steven (11:36):

So Julia, what else comes to mind as you think through maybe having had to learn this a little bit painfully, what else do you wish you could have told yourself out of the gate?

Julia (11:44):

Yeah, so something we’ve done along the way is we own the office buildings that our offices are located in. And so my husband has a business, so we own his office building. We own three of my office location buildings. And so that has actually been proven to be a great investment of building wealth outside of my business because for most financial advisors, their largest asset is their business. And so how do we use that business then to generate outside wealth? And so investment real estate, commercial real estate has been really great. Essentially the entity pays our investment real estate, LLC, the rent for it. We use market based rents. And then my husband and I personally have built wealth that way. And so instead of paying rent to someone else, Hey, I’m going to be in this business for a long time. And so I think that’s just been as you grow and mature in your business, I think that’s something that I encourage my peers to do. And then I also encourage that if it’s a brick and mortar client to consider that as well.

Steven (12:52):

So Julie, I want to draw a couple of things out of what you said there. I think this is what you were implying, and you tell me if I’m wrong,

(12:57):

But you talked about the buildings. I think you mentioned them being in separate LLCs. And so this goes back to your original comment of treat things like a business. So if you’re going to own the building that your business operates out of, owning real estate is a separate business activity from being a financial planner or whatever it is the business you’re running. So you want a separate legal entity. You also talked about charging market rents. I see people try to play all these silly games that they think are going to get them ahead. At the end of the day, the IRS is still going to tax all that income, and you’re actually just creating potential rather large problems for yourself. If you do try to play those silly games, not only again, can the IRS then combine all these things and say, Hey, they weren’t really separate entities to begin with, but if you ever go to sell any of these businesses, you want them to have been accounted for as distinct and separate businesses so that each business gets the appropriate valuation. So the potential buyer doesn’t think that you’ve got shenanigans going on, you’re just better off treating these things for what they are.

Julia (13:56):

Yeah, exactly Right. Yeah. Our last purchase, we actually upgraded to a bigger office building, and now the whole upstairs is other tenants. So now we have a lot other income coming in and still we have the down floor, we have space to expand. But in the meantime, it’s been a really good investment for us.

Commercial (14:16):

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Steven (14:56):

So Julia, I’m always curious just because real estate online can get this aura of it’s always perfect and everyone should always do it. So the reminder I like to give people, and it sounds like this is the perspective you’re coming from, is you see this as an investment, something you’re involved in. And so if you’re going to go down that road, you really got to go in eyes wide open of, hey, me buying this office building and then renting into my own business, I still own the building. I still have to, things are going to go wrong, the springers are going to break. I’ve got to go in knowing I’m committed to both of these things.

Julia (15:26):

Yes, I still have to fix the elevator. Okay, so I’ll tell you my secret. My husband is a custom home builder, so he is in

(15:35):

The building space, so I am lucky he can say, Hey, is this a solid building? He can do minor repairs and improvement. And so I am lucky that I have that, although we have, as our situation has grown more complex, we have property managers, we have a business manager that helps us with all of these things because yes, I say new levels, new devils, right? It’s like I’ve spent a lot of time to create a life that I love with freedom, and you have more responsibilities. You have to have the right people in place to help you with that.

Steven (16:13):

Absolutely. Yeah. There’s answers to all of these things. We just got to go in making sure we know what problems we should be trying to solve. So Julia, let’s shift gears a little bit and talk about as you bring on a client who’s an entrepreneur, whether it’s a financial advisor or someone else that’s 10, 15, 20 years into being an entrepreneur, how does that tax planning conversation shift? Because now we’re not talking about what do you do out of the gate? What do we come in and identify midstream?

Julia (16:36):

Yeah, so it’s a great question, and that’s a lot of what we help. Our mission is to help seven figure entrepreneurs become eight figure revenue entrepreneurs and really scale. And what we’ve discovered, what I’ve discovered is it’s actually a lot easier to go from a seven to eight than zero to one

(16:54):

Because you’re trying to figure out as a business owner, but once you’re at that seven figure mark and you’re well into those seven figures, it’s like you understand what it takes running a business. You have good people and a team around you, and so do you want to grow the business and reinvest? Is it really important that you keep your profit margin and then you can take money out of your business to do other ventures? So it’s really understanding what that entrepreneur wants. But then you also can then layer on a 401k retirement plans. You can talk about, I mean, we do this for smaller entrepreneurs as well, but it’s like I have three kids making sure we’re paying them and getting them to invest in Roth IRAs. Now they have to do work for us, but that’s usually not hard to find.

Steven (17:42):

Julia, talk a little bit more about employing kids, because I’ve definitely talked about in the podcast before. For me, this is one of those areas that can get gimmicky in how people talk about it, but I’m a huge supporter of it when it’s done. So talk about making sure how to do this right?

Julia (17:57):

Yeah. So again, it’s not something you do on December 27th.

Steven (18:01):

Yeah,

Julia (18:02):

The kids are involved in sending out the newsletters. The kids are involved in helping at the company picnic and playing with the kids.

(18:10):

We do take over the aquarium events, so they’re in our marketing and our events as they get older, helping with social media. Those are all things that I’ve had my kids do. So they should have a regular payroll or at least a quarterly payroll based on what they’re actually doing for the company. And if you want this to be a win-win for them, my kids get their paycheck, they see that money that they earned. We talk about what we’re going to do. My daughter wanted to get a new truck, so not a new one, a used one, and then invest some. So we’re actually helping them understand how are we then allocating this money into their investments, into their future. And so it is something to do as you involve your kids, treat it as much as an employee and employer situation so that learning goes really well. And I think for my kids, they’ve been around it so much, and now as teenagers and going young adults, they respect the investment. You think, okay, my oldest daughter’s over 21, we got to get the money out of the custodian account into her account. Like, oh, what’s she going to do? No concerns. She just understands she’s been a part of this all her life.

Steven (19:31):

Well, it reminds me of one of my favorite things to say, which is we need to make good life decisions and then figure out the tax efficient way to go about them. Taxes are never the full answer. And so it’s such a great example of sure there are tax savings that can come from hiring your kids as long as you’ve got it set up correctly, you’ve got it on payroll, you’re dotting your i’s and crossing your T’s, but what a great added benefit to use that as a learning opportunity, a teaching opportunity for them instead of just cramming a Roth IRA full. So you can brag about it on social media. Let’s make sure we’re teaching our kids something here.

Julia (20:01):

Absolutely. Choosing the investments, it’s fun. You can have a lot of fun with them.

Steven (20:06):

Absolutely. Julia, talk a little bit more tactically about how this works in practice for you as you work with a new client. Is this a checklist that you go through, you’re getting their tax return and customizing recommendations for that client? What’s this look like day to day?

Julia (20:21):

So when we onboard a new client, we are looking at their tax return. If it’s a business, we’re looking at their business tax return. What I have found is a lot of business owners don’t have a lot of assets outside of their business. And so we actually have more of a monthly retainer model of how we serve our business owner clients, so that way they don’t feel like they have to have all this wealth to start, whether we’re acting maybe as a CFO for them or just helping them put all these pieces together. And business owners are busy, so they can’t a lot of times do it all at once. So we do have a lot of services that we offer them and then we can drip that out over time. So it’s making sure that their estimate payments are the correct amount. It’s making sure that their coverages, liability wise, their entities, we look through all of that and then also help them, Hey, when you have money coming in, how does that financially flow?

(21:20):

Are you paying yourself first? What should be your profit margin in your industry benchmarked to your industry? So for financial advisors, we want to make sure at least 30%, if not a lot more than that, I know there’s a lot of, it just depends on how you’re structured and what your goals are. So we want to benchmark their profits. How are they taking their profits? We don’t want any surprises with estimated payments, taxes, how are they saving for their future and building wealth? And so again, it’s a lot of things that we offer, but we really walk with them and want that relationship over the long term.

Steven (21:59):

Well, and Julie, as you described that, I mean no disrespect by this, but you’re describing a lot of the relatively simple things. And to me, that’s fantastic news because I think people will get hung up too often trying to look for the exotic shiny objects of, oh, I have a new client, so I have to tell them about something that no one’s ever heard of that’s going to make their tax bill magically go to zero. And that’s just not the reality for most clients. What we want to do is make sure we take these things that we know work over and over and over again and help them identify and execute and consistently improve what they’re doing

Julia (22:31):

And make sure that they do it right. Yes.

Steven (22:33):

And make sure they follow through.

Julia (22:35):

I have clients that are other financial advisor firms because I can help them. I may be a couple steps ahead of them. I can be that accountability because yes, we all know what we should be doing, but are we actually doing it? And so if you can hire someone and deduct that cost in your business for that business help, it’s like, I’m going to make sure you’re doing this. I’m going to hold you accountable. And oh, by the way, what we take care of, what we’re responsible for is only going to grow. So if we ignore it, if it’s chaos, it’s going to breed more chaos.

Steven (23:12):

Absolutely. I like to tell my kids that should as my least favorite sh word, because it really doesn’t matter what we know. It matters what we do, and there’s no shame in needing an accountability partner. There’s no shame in hiring professionals to help us do those things we know we should do. Discipline is what counts. Self-motivation. Sometimes it’s an illusion. We need resources.

Julia (23:32):

I wrote a book called Money Loves You, but in that, I have a thing around discipline because everyone wants freedom. Everyone wants to feel free, especially entrepreneurs. That’s really important to us. But you will find that freedom is found in the discipline in having everything figured out, having a plan and following the plan, having that intentionality, you will find the freedom in that.

Steven (23:59):

Well, I completely agree with that. I’ll ask you just a second where we can find your book, but one of the things I’ve noticed is that having a plan you execute and then can reflect on totally changes the outcome even if the numbers are the same. You mentioned estimated payments. That’s a great example. Even if you still paid $200,000 in total taxes, there’s a big difference between having a plan where you paid those estimated payments on time throughout the year as opposed to having to pay it all at once. At tax time, same dollar amount, we will ignore underpayment penalties for a second same dollar amount. It’s a totally different experience for how the client feels.

Julia (24:31):

Yeah. One is I’m in charge, I know what’s happening. The other is, I have no control. I just have to do this, and it completely sucks.

Steven (24:40):

Yeah. Julia, tell me a little bit more about your book. Where can people find it and what inspires you to write a book?

Julia (24:44):

So it’s on Amazon, so the name again is Money Loves You, kind of a funky name, but it is all about how do you transform your relationship with money to grow your wealth. So it’s all about our inner thoughts. I have worked with so many clients over the years and the people that have a great mindset around money have that success and build that abundance and great future where others that have a not so great relationship with money or money is hard or money is overwhelming, or I think for a lot of entrepreneurs, they just avoid it. It’s never a good time to pay attention to it. And so they just kind of put it off for tomorrow. So it’s like, no, how do we dig in, have that great relationship with money, so it’s an ally, and then how that transforms and can build your outer wealth.

Steven (25:33):

Just out of curiosity, I hear a lot of people talk about the idea of writing a book. I’ve published a book as well, and so I’m always just curious, where did the motivation come from? Is this something you always wanted to do? Is this a prospecting tool? How do you use your book?

Julia (25:47):

Yeah, I mean, it’s definitely mean. My passion is authentically to help people get this. And I feel like I grew up in a very healthy money mindset, family. My parents taught me about money, and I realized after years that I was very lucky. I really did want to share these mindsets and these thoughts with others. But then of course, it has been a good attraction for new clients coming into us. And I also think it does something for me as the author of the Authority, you’ve written the book to speak on stages, it’s just opened more doors for me.

Steven (26:22):

Yeah, absolutely. There’s a huge credibility play to having your name on the cover of a book, but I dunno what your experience was. It definitely, it’s a lot of work. It’s a commitment to do it right and to do a well, but it’s exciting when it gets done.

Julia (26:34):

So I actually wrote the book in five days.

Steven (26:37):

Well, that is not the answer I expected. Wow.

Julia (26:40):

So yeah, my publisher who just a little independent publisher, she has this process where she actually goes to an Airbnb with you. She calls it channeling. It’s like you just basically download this book. And I wrote, I want to say about 30,000 words in five days. I had the whole outline.

Speaker 1 (26:56):

Wow.

Julia (26:57):

That’s all I was focused on. No kids. That’s wild. Nothing. And then it took about three months of me to add stories and add the details and the editing, and it was, so basically I did that in August, and the book was done by December. It didn’t come out until end of March, 1st of April.

Steven (27:17):

Wow. We could have a whole other conversation on that. That is fascinating. Great example of time blocking and getting focused and just knocking things out.

Julia (27:24):

Yeah, it was an epic experience. I loved it.

Steven (27:27):

I believe it.

Julia (27:28):

I thought it was really fun how she uniquely put these, you just put the whole packages together to make it happen for busy people.

Steven (27:37):

Yeah. No kidding. Well, Julia, I could nerd out about this stuff for hours. I always try to make sure I’m respectful of our listeners’ time. Circling back to the tax conversation for entrepreneurs, any other kind of partying thoughts on things that advisors for themselves or for their entrepreneur clients should be thinking about when it comes to taxes?

Julia (27:55):

For me, I have four locations and I work from home. So it’s making sure you’re using that home office. I know in my husband’s business, we take advantage of the, I think they call it the master’s rule, the Augusta rule.

Speaker 1 (28:08):

Yeah.

Julia (28:09):

Yeah. So it’s like renting your own properties for business purposes up to 14. So it’s like, use all of that. Use all the deductions that are available to you, keep good records, all the things we know we should be doing. Yeah,

Steven (28:25):

I think having a checklist for it is so key. And then for advisors, especially for advisors who do this for clients, making sure you take the time to go back and do it for yourself as well. To me, it’s an integrity play. Some of it though, is just you being able to authentically walk your clients through it if you’ve been through it yourself. So I think there’s tremendous value, both from a tax saving standpoint and then just a client service standpoint of going through these things yourself.

Julia (28:48):

Yeah, absolutely.

Steven (28:49):

Well, Julie, I so very much appreciate your time. Thanks so much for coming on the show.

Julia (28:52):

Yeah, thanks for having me.

Steven (28:53):

And how can people follow up with you if they’re curious about what you’re doing or interested in working with you?

Julia (28:58):

Yeah, so I am a personal website, julia m carlson.com, and then my company is financial freedom wmg.com.

Steven (29:07):

Julia, thank you again so much and to everyone listening, until next time, good luck out there. And remember to tip your server, not the IRS.