Episode Transcript
[00:00:00] Speaker A: Welcome to Business Forward. I'm Joe Reyes and today we're talking about how smart decisions and clear numbers can drive real business growth. You're watching NOW Media Television.
Welcome to Business Forward where we help entrepreneurs, leaders and professionals stay ahead of the curve in today's fast changing business world. I'm your host, Joseph Reyes. Today I'm joined by Tenby Malazi, a seasoned business partner in accounting and tax whose passion lies in helping clients stay ahead of the game. She blends deep expertise with modern technology to help create customized tax solutions for both businesses and individuals, ensuring that not just tax savings, but time savings are streamlined. And with processes like digital document transfers and virtual consultations, she's here to help us tackle some of the most common tax pitfalls that trip people up, starting with year end tax panic that can wreck your holidays.
Today we're going to talk about the stress and cost of last minute tax preparation and how proactive habits can prevent chaos at year end. So Temby, welcome, good to have you.
[00:01:15] Speaker B: Thank you so much, Jo. It's a pleasure to be here.
[00:01:17] Speaker A: Good. Thank you. And yeah, so we're talking about a very timely topic because it's already mid August and the year end is not too far away. Right.
So let me ask you, so in your opinion, why is last minute tax work so costly and stressful?
[00:01:36] Speaker B: Yeah. So I think the main thing is that you're already running against the clock. We already said it last minute. Right. So that often leads to you missing out on tax deductions. Right. That you could have gotten because you're already working under pressure.
You probably don't have the receipts to prove your expenses, your records are not ready.
So you are running the risk of missing out on valid tax deductions. Right. The other issue is that you end up having to pay higher preparation fees, tax preparation fees, because if you do things last minute, your CPA or your tax preparer is part of the probably most probably going to charge you higher fees because you're putting them under pressure. Also, maybe they have to work overtime. Right. And the other thing is that the errors that result from your lack of planning, if I may say that may be costly because you have inaccurate data. I'm trying to think right now if in February you are now trying to recreate a travel log of all the travel you did in the prior year. Imagine that, like how stressful is that? So you obviously want to end up with an incomplete travel log and you're just denying yourself valid deductions you would have gotten and also lack of sleep. Like you are just putting yourself under stress. Who is able to sleep when they're stressed?
Not many of us. So proactive planning, like you said, right now, it's August is the best time, if you haven't already started to prepare for the coming tax season.
[00:03:08] Speaker A: Yeah. Business owners don't see much to begin with and they just pile it on with this problem and this fear that they have with taxes and whatnot.
[00:03:16] Speaker B: Right, right. But hopefully such educational content is going to help them also get there.
[00:03:21] Speaker A: We hope, we hope, we try.
So, so what can business owners do to get, you know, on a monthly basis to be tax ready throughout the year?
[00:03:33] Speaker B: Right. So when I was still working in corporate, my former boss used to say, year end should just be another month end.
Right. So if you develop that discipline every month of reconciling your books, that's one thing that business owners can do every month, make sure your books are closed, reconcile and make sure you know what the numbers look like. Right. So that's one thing, reconciliation is a small, easy control that most business users can actually put in their ama. And the second thing is file your receipts, your invoices, all your source documents.
Actually, the best way to do it, if you can file them digitally. That is actually one of the best things that I would advise. If, let's say you're using a Software, whether using QuickBooks or any other accounting software like Xero, you actually have the option of attaching your source document to the transaction.
That way you know when the audit comes, if it comes, you're going to have all your stuff ready in one place. And the other thing that business owners can do is track the expenses and the mileage every month. Don't wait until end of the year. You want to know how your business is doing every month, look at your expenses, look at your budget, look at your cash, track your numbers. Right.
And one other important thing that I would want to advise business owners, put money aside every month towards your tax liability.
That is important. And most business owners forget about that.
[00:05:02] Speaker A: That's gold. That's golden advice right there.
So you just take your net profit for the month and say 20%, let's say, or if you're 37%, depending on your tax rate, and just sock that aside.
You brought up mileage.
Any recommendations on how to track mileage? Because a lot of people, they think they've got it and they can write it down at year end. And what are your thoughts about that and advice?
[00:05:29] Speaker B: We actually live in a world that has made so many of these things, so much easier than when we were growing up where you had to keep a logbook in your vehicle and manually write down numbers. There's so much out there that you can use in terms of apps to track your mileage. If I go back to the accounting software, if you are making use of QuickBooks, QuickBooks has an app that you can actually set up and use to track your mileage. So before your trip starts, you log in your trip and you say, I'm going for this business meeting.
So the app tracks the mileage for you, tracks the business purpose of that meeting, because the IRS needs to know that detail.
And all that information that is tracked on the app is automatically sent to the accounting Software, which is QuickBooks. And from QuickBooks, whoever is then going to do the text return, there is seamless transfer of that information. And that's one way that business users can use to track mileage.
[00:06:25] Speaker A: So the app is on your iPhone, on your smartphone, and it tracks when you're driving, Correct. Walking, maybe when you're running, and it registers the beginning and ending corrections. And then you swipe left for personal and swipe right for business or something like that.
[00:06:40] Speaker B: It's that easy.
[00:06:41] Speaker A: It's like a dating app, right? So, I mean, it's, it's simple. So there's. People should not wait. So, yeah, so, so then how does working with a CPA early throughout the year make tax season easier?
[00:06:57] Speaker B: So the advantage of working with a cpa, of involving them earlier in the year, is that, first of all, they can catch any mistakes early while they're still easy to fix.
I'm thinking of one mistake that I've come across quite a bit. Single member LLC owners. If you are the only owner of an llc, you find somebody taking payroll, they're on payroll, and that is not correct. That's not the right way to pay yourself as a business owner if you're a single member llc. So if you work with a cpa, get them involved early in the year, they're able to identify those errors and fix them early in the year instead of waiting until tax time in March or April, then you have to call the payroll company or please reverse this whole payroll for the whole year. Just.
[00:07:46] Speaker A: Yeah, it's a mess.
[00:07:47] Speaker B: It's a mess. It's a mess. Because by that time, they've already done their filings for the whole year as a payroll company. Right.
And the other advantage of involving a CPA le is that they are able to spot any tech saving opportunities that are in your business. That you can make use of during the year.
And they already have an understanding of your business because you're working with them from one month to the next. They're able to then help you identify those opportunities that you then use to your advantage. They are working with you to help you to keep more of what you have worked hard for.
So it's to your advantage. The other thing is that SAP will also help you to be compliant. I'm thinking quarterly taxes. Now, there are a lot of small businesses out there who are not yet compliant with that requirement, who should be. So if you work with the cpa, they'll help you track the deadlines and help you to be compliant.
[00:08:43] Speaker A: Yeah, a CPA is valuable. It's not, it's not.
He or she is not an expense. You know, they add value to the business. Right. So, absolutely. So, so, so, so what's one habit that you can recommend that potentially can save a business owner hours and hours of extra work and crazy work at the end of the year?
[00:09:07] Speaker B: I would advise them to automatically track everything that they do financially. And I'm saying this, I'm thinking of the, the software or the resources that we already have available out there. If, for example, you get an accounting software instead of using Excel or instead of writing down on paper and stuff, if you get an accounting software, you're able to link that with your bank accounts. All your transactions from the bank accounts then automatically get pulled through to the software. And the software then helps you to categorize and get your, your profit and loss in your balance sheet in the shortest possible time. All you then do when you get to your end is just review those numbers and tweak here and there. Maybe categorizations that didn't happen correct.
Like I indicated earlier, your mileage also gets posted to that accounting software. By the end of the year, you have a full picture of all your financial reporting all in one place. So I would advise business owners automate your financial transactions.
[00:10:10] Speaker A: Excellent. I totally agree with that.
[00:10:13] Speaker B: Yeah.
[00:10:14] Speaker A: So then everything's done, everything's ready. You know, they're keeping the numbers and they're hopefully talking to their CPA regularly.
A good CPA is going to make tax planning recommendations as they go along. We like to call it in the industry proactive tax planning. We've got about a minute left to go quickly tell us and give us advice about proactive planning and how can it reduce, you know, chance issues with the IRS and also, of course, save money.
[00:10:44] Speaker B: So proactive planning helps you because you're working with the cpa and they're helping you with the planning. Right. They know what triggers the audits from the irs. Right. They help you to manage that tax bill at the end of the year because they are looking at tech strategies that are applicable to you and they're saying, okay, if you do xyz, then you're going to save so much taxes and reduce your tax liability at the end of the year because they're all intentional about working with you to keep as much of your dollars that you have earned as much as possible and they make audits less likely for you.
[00:11:16] Speaker A: Excellent. Well, great. Good conversation. One of my favorites.
Are we going to take a break? We'll be right back after the break to talk about why get this one mixing business and personal money is so dangerous and how to protect yourself before it is too late. I'll be right back.
We'll be right back with more insights, tools and real talk to help you grow your business.
This is Business Forward on NAM Media Television.
And we're back. I'm Joe Reyes and you're watching Business Forward on NOW Media Television. Let's get back into it.
Okay, welcome back to Business Forward.
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I'm here with Temby Malalazi, an experienced CPA and tax strategist known for creating tailored solutions that save her clients both time and money.
In this segment, we'll be talking about why mixing business and personal money might seem harmless at first, but could lead to serious tax and legal trouble later on.
So, temby again, thank you for being here.
Let's talk about why mixing business accounts with business accounts and transactions is just terrible for taxes and legal issues.
So what are your thoughts about that topic?
Hey.
[00:13:18] Speaker B: Hi, Joe. Thank you. You mentioned it. Tax and legal trouble, those are the two main reasons. So if you're, if you're mixing personal and business expenses and they're all tangled into one, you are actually running the risk of missing out on legitimate deductions or even getting deductions or giving yourself Deductions that you actually cannot prove that they happen. Right.
So that on its own is a red flag for the irs. There's a high probability that the IRS is going to scrutinize your tax return.
Right. So the second reason is that legal trouble that you're risking. When I was in law school, they taught us about piercing the corporate veil, right?
[00:14:01] Speaker A: Right.
[00:14:02] Speaker B: In short, that means that if you have created, let's say you've registered an llc, the reason for restarting an LLC is to make sure that the llc, the business, is separate from you as the entity. Right. As the individual. Sorry, but if now you are mixing your business and your personal expenses in one bank account, for example, you are running the risk that that difference or delineating factor between the individual and business gets blurry, that line becomes blurry. And in the event that the business is sued by somebody, you are risking having your individual assets also getting involved in that. So legal and tax trouble are the main risk areas. There's a third one that I'm thinking of, cash flow confusion. If there is no boundary to say, this is my business income, this is my personal income, how do you even know that your business is doing well?
Because maybe what you're even looking at is business income is actually personal income.
[00:15:01] Speaker A: Exactly. Yeah, yeah, good point. And so the piercing the corporate veil, you've gone to law school, so talk about that.
What are people not understanding? What do they not know about it? It's a blind side that often get caught up in court. If they wind up getting dragged into court for whatever reason, they may find out too late if their lawyer didn't tell them about it. Talk to us about what piercing the culprit veil looks like, what causes it, what is that veil?
[00:15:31] Speaker B: So, sure, piercing the corporate veil means that, like I said in my example, if your company, your entity that you registered gets a lawsuit, right?
Let's say worst case scenario, they end up taking or finding you a big lump sum penalty. Or they attach your assets. Maybe your company owns a house and vehicles, they attach all of that. If you were mixing your business and your personal income or transactions, right.
That lawsuit is also going to creep into your personal assets. If you have your home and an office and the company, let's say, owns the office building and the lawsuit is against you and they have to take your office building, then the chances are if that office building is not enough to cover what the lawsuit final penalty is, they will come and take your personal house also, or your vehicle or any other assets you may have. So you are risking exposing your own individual personal assets for the debts that are owed by the business. That's what corporate piercing the corporate veil means.
Whereas if you have a business and you have separate bank accounts for the business and separate accounts for your individual personal transactions, in the, in the event that you end up with a lawsuit, the risk of your personal assets being involved or being taken over by the business is very low. Because these two are separate legal Persona, if I may use that. You're an individual as an individual and the business is a separate legal person also on its own. So whatever happens, if the lawsuit says they must take over the office building and the office building is not enough to cover the debts, that's where it ends. Right. So there's, there might be a chance, there's very little chance of them coming or encroaching into your personal space and taking your personal assistance. I think in short and in layman's terms, that's, that's how I can explain it.
[00:17:30] Speaker A: Yeah. So. So having the mindset, well, I've got an llc, I'm covered from, I'm limit, I have limited protections. You know, they can take only so much and I can be reckless and not worry about it.
Not such a great idea. They don't know that in court. They may be determined to have been.
Not have a business, not have a, rather have a hobby or.
[00:17:55] Speaker B: Right.
[00:17:56] Speaker A: Like you're not really running a business. So you can, a good lawyer is going to, can shatter that LLC protection.
And you know, even with a corporation, I'm guessing they can do that.
[00:18:07] Speaker B: Right?
[00:18:07] Speaker A: You have a corporation, so. Yeah, that, that's a great topic.
We've seen that all the time and we see people even going further than that and they, they will pay, you know, some personal expenses out of the business and make it look like it's a real business expense, which is what called tax fraud, is it? You know, so we like not to see people do that.
So.
[00:18:30] Speaker B: Yeah. And just to come in, the. The thing is, you've already, if you're a business person and you've registered, whether it's an LLC or any other business entity, you've already taken the first step. Why not just complete the step and be disciplined enough to have separate transactions for the business and separate transactions for you as an individual. I mean, you've already taken the first step.
So.
[00:18:51] Speaker A: Yeah, and it's so easy nowadays because it's not paper and pen, you know.
[00:18:55] Speaker B: Right, right.
[00:18:56] Speaker A: So easy. So, so what is the easiest way, do you think, to set up and clean up, you know, somebody who's not been separating their stuff, and they're listening to us, they're becoming concerned that they don't have, you know, LLC protection that they think they have. They may not know that Schedule C's have one of the highest audit risk, you know, tax audit risk that there are. And so we're going to help them not sleep tonight.
So what recommendations would you make to somebody like that?
[00:19:23] Speaker B: Okay, so the first advice, very simple. Open a dedicated business checking account and maybe a savings account. Remember we spoke earlier about putting aside some of the money per month for tax purposes. That's money that you can put in a savings account. So open checking a savings account and then use a business debit or credit card for business purchases only.
And discipline yourself to have separate cards for the business and separate cards for personal. When it's time to buy something, discipline yourself to open your purse and pick the right card and say, this is for business. I'm buying this from Amazon. It's stationary for the office. So I'm going to use this card. And if you're buying from Amazon, buying a personal item, then use a separate card. It's. It's really not so difficult, not hard.
[00:20:18] Speaker A: And sometimes you make a mistake, you pick the wrong card. Right. Sleep over that. I mean, it's just a draw, really, if you wanted to call it a draw. And having the cards and the bank accounts in the same bank where you can transfer money back and forth as often as you need to, also simplifies the process.
[00:20:39] Speaker B: Right? Right. We are human. We make mistakes. That's understandable.
[00:20:42] Speaker A: Right.
And what you, in your, your business, have you ever come across a situation where somebody had that kind of a mess and, and did you help them out? Did you divert them from their misgivings, so to speak, and get them to do the right thing?
[00:21:01] Speaker B: Absolutely, absolutely. I actually come across that more often than you would expect. Right.
Because business owners think, oh, I'm saving time by just using one card. But goes back to that discipline at the point of making the transaction, just pick the right card and make sure the transaction goes to the. To the right is processed to the right card. So I had a business owner who is running a home jewelry business. They sell jewelry online and they're like, no, I just need one account. I don't want to have too many accounts. But. And they have an LLC that is taxed as an escort.
So it takes a lot of mental adjustment to get taxpayers to really agree to say, okay, I need to open another bank account. Okay, Now I need to make time to go to the bank and. But yeah, we eventually got there and I helped them clean out three years worth of transactions. Right.
Having to sort through each one and identify. This was for business, this was for personal, this was for business. Because there's no other way of doing it. You have to take the bank statement and go through each transaction line by line, unfortunately. And it's costs a lot of money because that's a lot of money.
[00:22:13] Speaker A: Have a bookkeeper do it. I mean, don't do it yourself. Have somebody else do it. And you run your business, you know, so if you have that going on day to day, month to month, what tools do you recommend or systems you recommend that business, business owners use to keep themselves organized year round?
[00:22:31] Speaker B: Right, right. I'm gonna go back to automated software like having accounting software. Something as basic as QuickBooks will work and have a, a receipt management system. If you have lots of expenses or travels and you're using something like expensifying, that works magic. Right. Have your, your monthly processes like routine bank reconciliations, make sure those are being done and then schedule reviews every month.
Sit down and look at your numbers, look at the reconciliations, look at QuickBooks. Everything needs to be reviewed at least once every month. Then you know that your business is on track.
[00:23:13] Speaker A: Right?
[00:23:14] Speaker B: Right.
[00:23:15] Speaker A: Well then be that for viewers, viewers who want to start separating their accounts today and they need help.
How can they contact you and, and find out information about you, your services, how you can work together?
[00:23:29] Speaker B: Sure. So they can reach me on LinkedIn is Tembi.
They can see us on Instagram, arctics advisor CPAs. That's where you can find us. Our website also architects, advisors, CPAs. They can certainly reach out to us and we can assist them.
So for me, separating accounts is not just about bookkeeping like we discussed earlier. It's legal armor. It saves you a lot of stresses and it gives you peace of mind. So we can certainly assist anybody that needs that help.
[00:24:02] Speaker A: Super. Okay, next segment, we'll be coming up with the taking the fear out of IRS audits and tax notices and why they're not as scary as you might think. We'll be right back.
We'll be right back with more insights, tools and real talk to help you grow your business.
This is Business Forward on Non Media Television.
And we're back. I'm Joe Reyes and you're watching Business Forward on NOW Media Television. Let's get back into it.
Welcome back to Business Forward. I'm speaking with Temby Nalazi A CPA who believes in making, in meeting clients where they are and giving them the tools to feel confident about their finances.
And this segment will address one of the biggest fears for business owners, and that's the IRS audit or that dreaded tax notice that comes in the mail and how to face it head on. We're going to talk about why audits happen, what documentation is essential, and how the right guidance can turn a stressful situation into a manageable one. So, Temby again, welcome back.
Enjoying our conversation.
And one question I have for you that I'm sure many people have for you is why do what has really happened and are they as scary as people think?
[00:25:24] Speaker B: Hi, Jo, thank you for having me again.
Why do audits happen? Well, so audits aren't always triggered because the IRS thinks you're a criminal, right? No, not at all.
Actually, most of the audits are just routine or they happen because there are some numbers that don't agree with what the IRS already has in their records.
And so, no, not all of them, well, not.
Well, not all of them should be scary. They shouldn't be scary at all. Actually, we do acknowledge that they do feel intimidating, that's for sure. But then if you just, if you have the right records and you take a deep breath and have a calm mind, you'll be able to get through it.
[00:26:08] Speaker A: Yeah, that's.
So we, we like to tell people, you know, when you get a letter from the IRS or even the state, open it, you know, let's not ignore that letter, which, because people are scared, they, they tend to write that and they think that the, the problem is going to go away. And it's usually just like, hey, we need this piece of documentation from you.
So it, keeping the audit scenario in mind, so what records do you think people should, businesses should have at the ready, so to speak, so that if a letter does come in, they can respond to it or have somebody take care of it rather easily instead of making it a big deal.
[00:26:52] Speaker B: Right, right. So for business owners, most of the audits usually will require lots of documentation. Right. Because the IRS is, they're trying to prove XYZ or they're missing some information or that's why they're doing an audit. That's why it's an audit. So it's sort of investigation. Right. So for income, the, the business owner needs to make sure they have all their, their receipts, all the invoices that they send out to clients, all your deposit slips, all of that documentation you need to have. If you have expenses that you have claimed in the tax return, you need to have the receipts, you need to have the bills that you got from the vendors or the proof of the payment that you actually made the payments to those vendors. So you'll need to have all of that. If you are running payroll, you're paying employees, you'll need to have payroll records. That is your payroll records. You need to have your forms, your 941s and W2s, all of that stuff that relates to payroll. If you claimed mileage on your tax return, you'll need to have a mileage lock that we spoke of earlier.
If you have contracts and agreements, let's say you're a government contractor, you'll need to have those contracts. So those are what I can think of now is the main documents that you need to have tax returns. Also, tax returns are part of the documentation that you, you may need to have prior tax returns and supporting schedules for that.
[00:28:18] Speaker A: Yeah, yeah, I, I've heard.
I, I mean, I haven't seen many audits. You know, fortunately, I've seen thousands of letters that come in.
[00:28:28] Speaker B: Right, right.
[00:28:29] Speaker A: But, you know, one of the places that I think I've heard that the IRS likes to look at is your bank statements. And they added the deposits in your bank statements. Yeah. They compare that number to your income line and your tax return, and they, they wonder, you know, why the tax return might show, you know, a hundred thousand dollars less of income than, let's say, the deposits in your bank statement.
[00:28:53] Speaker B: Right, right, right.
[00:28:55] Speaker A: So just, you know, and can they, can they go into a current year's. Let's say a client gets, a business owner gets a letter, hey, we're going to order you for 2024.
[00:29:06] Speaker B: Right.
[00:29:07] Speaker A: And you're currently in 2025 while the IRS is there physically in the office, which hopefully doesn't happen too often, can they start peeking around at your 25 documentation?
[00:29:21] Speaker B: So in 25 is the current year that you are in the IRS.
I'm going to talk from a practical experience that I went through. So there was a taxpayer that reached out to me because they'd received a notice of an audit. Right. So the IRS wanted to meet at the client's office, so we had to go over there to the dentist. So they were looking at 21 and 22, and they already told us that because of the issues they were seeing in 21 and 22, they were definitely going to keep that taxpayer, like, in their books. They would look at 23, and they told us they would even look at 24. So sometimes they are auditing. When they're auditing, they realize that maybe there's an incorrect accounting method that the taxpayer is using or an accounting process or some other process that taxpayer is not following correctly. So they will then want to. I don't. Well, not necessarily audit. Maybe audit the future years until you get that corrected. So. And to their comfort level.
So I remember they told us that, yes, we'll definitely look at 23, and we'll definitely look at 24.
[00:30:31] Speaker A: Yeah. So if they. They come looking around and there's an audit and you get notified and they start looking at your paperwork and they start seeing, you know, personal expenses running through the business.
[00:30:42] Speaker B: Right.
[00:30:42] Speaker A: All these little red flags start to pop up, and that might incline them to start looking around in the current year and nip it in the bud or steer somebody in the right direction, maybe, if they wanted to be so kind.
[00:30:56] Speaker B: Absolutely. And one other process, coming to your point, one other process that I remember from that audit is large cash transactions. Right. So if the IRS is at. This taxpayer is a lot of cash, they do that test that you spoke about. They look at your bank deposits, and they look at your income that you've disclosed on the tax return, and they want to watch that for a few years to see that you're actually disclosing the correct number of income you've received.
And, yeah, I do remember that that taxpayer was in trouble because she actually wasn't depositing all the cash she was getting.
And that's another red flag. That's why working with a. With a CPA is so important, because they know some of these red flags that the IRS is looking at, and they'll already advise you that maybe instead of using cash, you want to convert these payment methods to this type of payment method, because the moment you have lots of cash, that already is an automatic red flag to the irs.
[00:31:55] Speaker A: Yeah, cash, cash is king. But nowadays, you know, it's suspect. You know, when it's a lot of cash, I mean, you can't help it if you're. You own a pizzeria, you know, cash flowing constantly, Right.
We tell people just, you know, deposit the whole thing along with. And have the receipt for the day from your point of service, you know, register and run the report, and then the deposit SIP should match.
[00:32:23] Speaker B: Right.
[00:32:24] Speaker A: Those reconciliations, we're talking about little things like that, right?
[00:32:28] Speaker B: Yep. Do the cash reconciliation. So you cash to your cash register, to the deposit, to the bank, all of that.
[00:32:34] Speaker A: And then the IRS agent is. I mean, they're just doing their job. I mean, right. For the most part. Right. And they see that they. They're going to get a little uncomfortable with that. And also, you know, with payroll, what do you recommend people do when it comes to payroll employees versus 1099ers?
That's a gray area that a lot of people are getting sucked into that they seem to take the wrong route, if you ask me.
[00:33:01] Speaker B: Right. And that's another red flag for the irs. So that's why it's important to work with the cpa. I was going to give you all the guidance you. The IRS has a distinction, obviously, between the 1099 contractor and what they define as an employee.
And it's most of the times different to what the business owner defines as an employee. The business. And I'll think, oh, okay, if I just call this person a contractor, then they're a contractor. It doesn't work that way.
So you need a CPA who's going to guide you. And look at the IRS guidelines of what an employee is and what a 1099 contractor is.
Because if you get that distinction wrong, if you classify somebody who's working for you, let's say 40 hours or even less than 40 hours, and you're controlling their time and all of that stuff, classify them as a contractor and you pay them as a contractor. If you are audited by the IRS and the IRS determines that, in their view, this is not a contractor, it's an employee, then you're liable for additional payroll taxes and penalties and interest on that simply because you didn't classify correctly your employee.
So that's very important. If you have people working for you, make sure the classification is correct, and the CPA can help you get that correct.
[00:34:18] Speaker A: And then there's the issue of somebody thinks that they're an employee, they get a 1099, or you fire them and they go apply for unemployment, the state send you a little letter saying, hey, we want to talk about this person. You know, so also hearing you talk, you know, a CPA can help or tax professional can help businesses stay out of trouble and avoid audits if they're doing everything right and reduce the number of red flags that can pop out the tax return. You know, little things like the tax code, the business code on the tax return. You know, if that's a law firm, but they have, like, huge amounts of food and, you know, drink purchases, you know, more likable to a restaurant's business.
[00:35:03] Speaker B: Right.
[00:35:04] Speaker A: That can get you audited, but that
[00:35:06] Speaker B: can get you audited.
[00:35:08] Speaker A: Get that Right, right.
[00:35:10] Speaker B: And you know what? Something that I'm thinking of right now is we're talking of the employee categorization.
If they audit an employer. Right. And they see there's an issue, there are chances that they might, the IRS might also then audit the employee or the contractor because they want to see that this contractor is also disclosing all the money that they received is income in their tax return.
So then the audit spreads to another taxpayer.
[00:35:39] Speaker A: Right.
[00:35:39] Speaker B: So you, you can impact other people from one taxpayer. So that's another reason why you could be audited. So audits can be random or they could be. Maybe something was triggered by something. A transaction you did with another taxpayer.
[00:35:52] Speaker A: Right, yeah, sure. So, so you go home, you get, you get the mail, you get a letter from the irs, you open it. What's the first thing you recommend a business owner or any individual do when they get a letter from the irs? What's the first thing they should do?
[00:36:05] Speaker B: Take a deep breath.
Take a deep breath. Open the letter. Like you said earlier on, open the letter and maybe call your CPA before you call the irs.
But the main thing is not to panic. Sometimes letters are just letters. The IRS wants clarification of something. They need additional information.
It's not all letters that are scary. Right? So the important thing, open the letter, read. If you don't want to read kohscpa, they'll help you handle that letter. And the other important thing is to notice that letters usually have deadlines by which you need to action.
So like you said earlier, ignoring it is not an option. So you want to make sure that whatever action is required is done within the whether it's 30 days or 45 days that you've been given by the IRS.
[00:36:55] Speaker A: Good advice. Excellent. Okay, that closes out this segment. Our next segment we'll be talking about how to plan for taxes year round. So you never get around to. Never get to a situation, you get blindsided, which we touched upon a little while ago.
Why the right mindset, a simple mindset and a shift in your thinking can make you actually look forward to tax season knowing that you've got it together. We'll be right back.
We'll be right back with more insights, tools and real talk to help you grow your business.
This is Business Forward on NOW Media Television.
And we're back. I'm Joe Reyes and you're watching Business Forward on NOW Media Television.
Let's get back into it.
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Okay. Welcome back to Business Forward where we're talking with Temby Malat Malalazi, whose approach to accounting blends technical expertise with a genuine commitment to her clients long term success.
In this final segment we'll talk about year round tax planning and how it can prevent how to prevent nasty surprises and even put you in control of your financial future.
I was pleased to hear that she also went to law school. So that's something that I think is very interesting for a CPA that brings value to their clients. And so Temby, welcome back.
[00:39:03] Speaker B: Thank you, Joel.
[00:39:04] Speaker A: So we want to talk about proactive tax planning and how to spread out the tax responsibilities and how building a positive mindset towards tax management is something that is a good thing. Actually, it should not be a stressful thing and it's something that business owners really do need to strive for.
So my question to you is how is tax planning different from simply filing at the end of the year?
[00:39:31] Speaker B: Okay, here's the question.
So filing is like looking in the rear view mirror. If you're in a vehicle looking in the rearview mirror, you're looking at the past, Right. And you are reporting about something that has already happened. So that is filing. That's why we file taxes in April or well, later if you have an extension. But the taxes you file in April are for the prior year. Right. So we're looking back and then planning. Planning is like looking through the windshield. You're looking ahead, you're looking into the future. Right. And you are making intentional decisions about how to reduce what you are going to owe later when you get to the filing stage. So that's how I would separate filing and planning.
[00:40:20] Speaker A: So what do you think about the folks who don't talk to the tax preparer or the tax person throughout the year, brings their paperwork to the, to the CPA or the tax professional gets the tax return done and then they get the bill, you know, the tax bill and they have to, they have a payment to make and they complain that their tax person doesn't do any, doesn't show any, do any planning for them or doesn't provide any tax saving strategies.
[00:40:49] Speaker B: Right, Right. So I guess that's an example of somebody who doesn't understand the difference between filing and planning. I think that's why it was important for you to start off with that. There's a big difference between filing and planning. If you're going to meet your tax preparer in April or after April, you're going to see them and engaging them for tax preparation.
Right.
I think us as tax preparers also, we need to educate our clients.
I always say to my clients, if you come and see me in April or after April. Right.
There's very little that I can do to influence the outcome of the, the tax return.
But if you see me now in August, before the end of the year, I can help you with some strategies that will help you then control what the result is going to be when we get to April.
So if a taxpayer comes to me in April and they complain about the tax result, that also shows to me that they were not committed to their tax situation. Because if you were, then you'd start managing proactively right through the year. Because tax planning affords you that opportunity to, to control what the result is going to be in April, but it helps you manage it right through the year.
[00:42:08] Speaker A: Yeah. So, you know, I, I always like to tell tax preparers, you know, you should always bring it up when you're doing a tax return to somebody, hey, you know, we did your tax return, right? Ugly.
Let's talk throughout the year, at least bring it up. So this way, when the client has a huge tax bill, they can't say, well, my CPA never tells me how to save money on taxes. And so what you're saying is that the right time to start planning for next year is
[00:42:38] Speaker B: yesterday.
[00:42:41] Speaker A: Yesterday. Right. Because half the years, more than half the year is already over.
[00:42:45] Speaker B: It's yesterday. So as soon as you file the tax return, my view is that you should start planning for the next one. Because by the time you file in April, you already have enough insight to start making plans for the coming year. If you have an extension and you're filing now in September and October, you already have lots of months to give you a proper insight of your business or your personal taxes to be able to make proper decisions and implement strategies. You still have a few months to implement strategies that can benefit you when tax time comes.
[00:43:15] Speaker A: Right. So it's a standard in the industry, in the accounting and tax industry to deal with quarterly tax payments. Right. Or for individuals also. Right. So, but I, I don't think a lot of people understand what the benefit is of doing quarterly planning to help spread the tax tax load evenly throughout the year.
So can you speak to the wisdom of doing quarterly planning, spreading out the load, so to speak, so that tax season comes. You're not stressing out.
[00:43:51] Speaker B: Okay. So yeah, the quarterly payments obviously help prevent that big dreaded April lump sum payment that we all don't want to get.
So the quarterly payments help ease that and they're also going to help you manage your cash flows because you're doing it quarterly instead of one big cash outflow at the end of April.
I think the other reason that I want to mention is that each quarter then affords you that opportunity to look at your numbers and cost. Correct. In case the income has changed or the deductions have changed. So it's really an opportunity to review your business.
And as you review your business results, you're reviewing your tax results also.
[00:44:37] Speaker A: So, so if you over save one quarter and then the next quarter you, you realize, oh, we're not, we, we have too much in savings. You can just take that and put the rest of the money into Bitcoin or an AI stock or something like that.
[00:44:51] Speaker B: Correct.
[00:44:51] Speaker A: Some get some money out of it, but not to spend the money. And to also make sure where we see a lot of people, I'm dealing with a few people right now who, they do payroll.
[00:45:02] Speaker B: Right.
[00:45:02] Speaker A: They withhold payroll taxes. They.
And it doesn't get impounded and they use those payroll taxes which are not theirs to pay rent, you know, and then the hole just gets deeper and deeper. So would you recommend that people use payroll companies that impound the payroll tax to force the, the issue?
[00:45:25] Speaker B: Definitely not.
So I know that the pay peril taxes a big issue for the irs.
[00:45:33] Speaker A: Right.
[00:45:33] Speaker B: Iris is very aggressive when it comes to payroll taxes.
[00:45:37] Speaker A: Right.
[00:45:37] Speaker B: Or if an employer or company does not find, does not hand over those taxes because like you say, they're not yours. If you withhold taxes, your role is to hand them over. Right. If you don't do that timely, the penalties are huge. They're significant, not just on the entity, but on the individuals that are in charge of the company.
So. No. No. That's a big no.
[00:46:03] Speaker A: Yeah. So. So you do advise people to make sure that the, they use payroll companies that impound, take the taxes out or if they don't, that they turn it around quickly.
[00:46:12] Speaker B: Correct? Yeah, that's exactly what I'm saying. You want to use a payroll company that will do, will withhold and hand over the payroll taxes in time.
[00:46:21] Speaker A: Yeah. Because all you need is a Covid situation to not catch up. Right. And you're thinking, I'll catch up next month and then, oh my, something happens, right?
What benefits come from reviewing tax strategies regularly, do you think?
[00:46:37] Speaker B: So reviewing regularly helps you identify whatever tax strategies are now applicable to your situation. You're looking at new deductions that you may now be eligible for. Let's say you buy a big piece of equipment and you're like, oh, now I can write off part of this. And it also helps you to, to include the new changes in life. If you're a taxpayer, there's so many changes that we go through life. Maybe there's a marriage that has happened, maybe there's a new baby, maybe there is property that you've purchased.
So reviewing the numbers regularly helps you to fit all of those things in the new changes in the situations. And it helps you monitor your compliance. It also reduces your audit risk because you are up to date with what is happening in your business. And you know, what are the high risk areas? If I know this is a high risk area, I know I need to get all my documentation in order and have it filed away so that if the IRS ask questions, I have all the documents ready for them.
[00:47:37] Speaker A: So in other words, make your CPA or tax person your partner in the business, so to speak, where you're talking regularly, you know what they know what you're doing and you know the tax impact. You know, you know, CEOs of large corporations, they're going to make a major deal. They want to know what the tax impact is going to be.
[00:47:56] Speaker B: Right. Right.
[00:47:56] Speaker A: So small businesses do the same. So, so what's one mindset change that makes tax planning a positive thing and not a chore? So what, what can you tell people to how to think and shift their mindset tax wise?
[00:48:13] Speaker B: I think the first thing is, I like the way the words, your choice of words, mindset. The first thing is thinking of taxes as a tool and not a penalty. Like, let's just change our attitude to taxes. Right. It's a, it's a tool. And because it's a tool, you can actually work with this tool. Right. It can help you keep more of what you've earned.
So if you involve, if you get involved with proactive planning, you're using this text tool, you can reap the benefits and you are the one that's going to be smiling at the end of the day and just changing your attitude towards taxes will go a long way, I think.
[00:48:53] Speaker A: And slow and steady wins the race sometimes, you know.
[00:48:56] Speaker B: Absolutely.
[00:48:58] Speaker A: Yeah. This has been so insightful.
Where can people go to connect with you and learn more about your services and, and, and get put on the straight and narrow path, so to speak.
[00:49:09] Speaker B: Okay, so LinkedIn tambielazi our website, architectsadvisors.c the phone number 571-577-8448. I'll even give out the email address.
Hello@arctics advisors.cpa.cpa at the end. I know people always make a mistake and do.com so it's.cpa and I'm also
[00:49:35] Speaker A: on Instagram that, that you're using the dot CPA domain. It's very interesting. Well, thank you Temby.
[00:49:41] Speaker B: Yeah.
[00:49:41] Speaker A: For sharing your expertise and for making tax and accounting not just understandable, but listeners with some kind of knowledge about the whole tax world.
From avoiding year end panic to protecting themselves legally and facing audits and being proactive and saving money.
You've been very helpful. It's a pleasure having you on the, on the show talking about these issues and you keep doing the good work that you're doing. It's absolutely needed for our viewers. I encourage you to take at least one step from today's Conversation and 10B's recommendations and put into action. The sooner you start, the sooner the smoother your journey will be. Until next time, I'm Joe Reyes and this has been business Forward, helping you move your business and your future in the right, the right direction. Have a great day. Bye.
