How to save your business money with better tax planning

This article is part of a series featuring black entrepreneurs whose businesses are focused on helping black business owners.

Cindy McGhee, 43, learned the enormous power of tax planning while working as an accountant out of college at Ernst & Young in Memphis, Tennessee. Seeing how businesses were using the tax law to legally save significant amounts of money, she began to envision a company that would provide the same options to underrepresented entrepreneurs. With $16,000 of her savings, McGhee started the CPA company NextGen in Tulsa, Oklahoma, in 2017. An all-female business in a male-dominated industry, NextGen grew rapidly, reaching $1.5 million in revenue in 2021 and expanded its client list to 1,100 that year from 86 in 2018. McGhee sat down with Inc. to share her professional journey and tips for businesses looking to reduce their tax burden.

What do business owners need to know about their financial performance that they often aren’t aware of?
We found a problem in the industry: accounting reports that are typically produced for a business owner are meaningless to the business owner. Although the existing format produces accurate and complete information with historical review, it does not extract meaningful data. It does not talk about the company’s performance in the industry compared to its competitors. So we can’t use an analytics tool without the ability to customize it to what’s meaningful to that business. And that’s where we come in to support them. Currently, we rely heavily on what we call “benchmarking,” where we compare our clients to similarly sized organizations in their industry.

What misunderstandings do business owners have about tax planning?
First, I think tax planning as a concept is something that people have deemed optional. This is an oversight and a mistake for business owners. Tax planning is a necessity. If you don’t strategically minimize your tax burden, you are paying too much. In fact, statistics show that 93% of business owners pay too much tax. This means that you are not able to reinvest in your business or reward yourself as a business owner because you are giving money to the IRS that you really shouldn’t.

Second, I think a lot of times business owners don’t realize how much authority they have when it comes to taxes. If you sit back and let the IRS do its thing, you’re going to pay a lot of taxes, but if you step into a position of power and acknowledge tax planning, you’ll benefit a lot.

What are some simple steps small business owners can take to reduce their taxes?
Usually, business owners do not realize that there is a difference between legal entity classification and taxable classification. These two are completely separate. Most small business owners choose Limited Liability Company (LLC) as their legal classification, but Subchapter S corporation tax status – a special tax status granted by the IRS that allows corporations to pass on income, credits and deductions to their shareholders – is the most tax-efficient classification for small businesses. So a big step is to complete IRS Form 2553 to have your LLC taxed as an S Corporation. The form is easy to complete and gives you access to many tax benefits that large organizations have used for decades.

Other than changing the tax classification of your business, what else can you do?
Apply Augusta’s rule. It allows owners to rent their accommodation for up to 14 days a year without having to declare this rental income on their individual tax return. This rule applies to any taxpayer who owns a home in the United States as long as your home is not your principal place of business. In short, this means that you can rent your house to your company for business meetings, business dinners or any commercial activity. Rental costs are paid by your company as the owner. These charges represent a valid deduction for the business, but are not considered income for you personally when you stay under the 14-day limit. So if a nice meeting room costs $1,000 a day, Augusta’s rule allows your company to pay you $14,000 personally – $1,000 times 14 days – as non-taxable income and creates a $14,000 tax deduction for your business.

How does NextGen help minority founders?
I don’t use the word “minority founders”. I like to call them “underrated founders” because we really aim to help them become the majority of founders. It’s part of our vision to create and educate the next generation of ultra-successful entrepreneurs. Underrated founders are often overlooked. Even when working with a CPA firm, they often lack confidence because they don’t feel like they’ve shared their experience. We bring this fresh look, this feminine energy, and this attention to the little ones who will one day become adults with our help.

About Charles D. Goolsby

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