How This Seven Figure S-Corp Still Overpaid $30,000 in Taxes

Most S Corp owners follow the right steps, but still pay more tax than they should. A business earning over 300K can lose thousands simply by underusing core strategies.

In this live case study, Mike Jesowshek, CPA, reviews a seven-figure business with an S Corp structure, a salary in place, and a record year of profit. You will see why this owner paid 30K in taxes and how that number can be reduced.

Learn how even a well-run business can miss core deductions, weak reimbursement percentages, and outdated salary calculations. If you feel like your tax plan has stopped working, this breakdown gives you a clear blueprint for moving from basic strategies into advanced tax planning.

 

 

The Problem With “Basic” S Corp Planning

Matt had already implemented many common strategies:

• Home office
• Mileage
• An accountable plan
• Quarterly board meetings
• Partial Augusta Rule reimbursements
• Capitalization policy

He felt he had “tapped out” everything he could do inside an S Corp.
But his tax bill proved otherwise.

Here’s the key: 

Basic strategies work in the early stages. They are not enough once profit grows.

As income increases, the tax plan must evolve. Percentages must be recalculated. Salary must be reassessed. Deductions must be expanded. Documentation must tighten.

Matt’s core strategies were set up correctly, but they were not optimized.

After-Tax vs Pre-Tax Spending

One of the biggest leaks in Matt’s plan came from everyday spending.

Many business owners forget that tax savings are not only about adding new strategies. Savings often come from taking spending they already do and shifting it from after tax to pre-tax.

 

The biggest leaks usually come from simple categories:
• Meals
• Travel
• Internet
• Cell phone
• Home office
• Board meetings

Recalculate business-use percentages and expand deductions to match how your business actually operates today.

Salary Must Be Revisited Regularly

A reasonable salary is not a one-time decision.

As your business changes, your salary must be recalculated to avoid both overpaying taxes and triggering IRS scrutiny.

The transcript showed salary was too high in earlier years and too low now, which affected tax savings and compliance risk .

Review your salary every year using either the simplified method or the time-based method.

Retirement and Passive Losses Are Underused

A Solo 401(k) offers high contribution limits, yet many owners leave it unused even in their best years. In the transcript, the owner did not contribute to having the ability to contribute more than $40,000 based on salary level.

Matt’s audit also showed more than $60,000 in passive loss carryforwards from real estate, which will offset future passive income or capital gains on syndication exits.

Use retirement plans and passive losses strategically to reduce taxable income.

Advanced Planning Begins When Core Strategies Are Maxed Out

Once the fundamentals are optimized, larger strategies become relevant. These include advanced retirement structures, asset purchase planning, asset donation strategies, oil and gas investments, and captive insurance. 

When each category becomes appropriate as revenue approaches the higher range of seven figures.

If your core deductions are optimized but your tax bill is still high, it may be time to evaluate advanced planning.

When Is a Business Ready for Advanced Planning?

Once core strategies are maximized, it is time to evaluate advanced planning:

1. Advanced retirement planning
2. Asset purchase strategies
3. Asset donation strategies
4. Oil and gas investments
5. Captive insurance models
   

These strategies become relevant when revenue approaches the $1.5 to $2 million range, or when core strategies can no longer reduce the tax bill further.

The Takeaway

A profitable S Corp can still overpay if its strategy does not keep up with the growth of the business.

If your profit has increased but your tax savings have not, you are likely in the same position Matt was in.

 

Transcript

[00:00:00] Mike J: Matt Parrish runs a booming seven-figure business. He's got the S Corp set up. He pays himself a salary and just had his best year yet. So why did the IRS still walk away with so much of his money? Today we're pulling back the curtain on a real unscripted live tax saving session and showing you what's possible when strategy goes beyond the basics.

[00:00:20] And so if you own a business and feel like you've been hit with a tax planning wall, this episode might be the blueprint that you've been waiting for.

[00:00:46] Mike J: Matt, welcome to the show. 

[00:00:48] Matt Parish: Thanks Mike. 

[00:00:49] Deep Dive into Matt's Tax Strategies

[00:00:49] Mike J: Matt sent over a bunch of stuff beforehand so we were able to kind of deep dive into his tax returns and various things like that.

[00:00:54] And I really got excited as I was kind of going through Matt's stuff 'cause there's so much potential for different strategies we [00:01:00] can talk about, different strategies we can implement. And so I'm really looking forward to what we're gonna talk about today. So just to get started, I want to give the audience kind of a background about what Matt has going on so they can kind of get up to speed.

[00:01:11] And Matt, if I'm. Mistaken, anything anywhere in, in this description, just let me know. So, first off, you have a business called DIY retaining wall, LLC, and it's an LLC, taxes and S corporation with annual revenue in the 500,000 to about a million dollars with expected profit this year of 300,000 plus your salary.

[00:01:32] And you're expecting that to increase by 50% to a hundred percent next year as well. You've been in business for four years, you have one employee, but you're planning on hiring a lot in the coming year. You paid $30,000 in taxes last year. Does that kind of sum up kind of where you're at today, and where you're at from that standpoint?

[00:01:49] Matt Parish: Yes. Yes, it does. 

[00:01:51] Mike J: Awesome. So that's kinda the starting point. Matt's got a, a really good business and it's a really cool business, so if you're interested, check out the websites. It's really interesting. But [00:02:00] again expected profit this year, $300,000 plus his salary, he set up his corp already expected that to continue to increase and really just sounds like you have a really good, strong growing businesses, which is super exciting.

[00:02:11] So to get started Matt, when you submitted yourself for this opportunity to have a live case study you mentioned that you felt tapped out on the typical s corporation strategies, and so you're kind of looking at what, what's that next phase in tax strategy as your income continues to grow.

[00:02:27] And I just won't say first off, like great job on being kind of forefront on, on noticing like, hey, business is growing. That means my tax bill is also probably gonna grow. And, what can I do to try to help minimize that? So, before we dive into actual strategies, I just wanna kind of hear from you, what strategies have you already been implementing or feel that you've implemented?

[00:02:47] When you talk about tapping out, what are some of the things that you've done that you feel like you've already done so far? 

[00:02:53] Matt Parish: So first I have a accountable plan in place. So I'm taking the home office deduction, taking a [00:03:00] percentage of the home and subtracting out all the hallways and such for that anytime I leave the house for.

[00:03:07] Business. I'm recording that mileage and and I even have my mailbox set up close to where a lot of my kids activities are. So I can kind of, combine some of that travel. I have my. My parents on my board and my wife on my board. And so we'll have quarterly board meetings. Usually we'll do two at my house and we'll take advantage of the Augusta rule for those meetings.

[00:03:29] And then we'll do two at my parents' house. And usually I'm just counting for travel back and forth between those meetings. So we're not fully utilizing the Gua rule, but we're using, a few days a year for board meetings and then I guess, you know, within the home office deduction, I'm counting for all the, you know, internet and home repairs and more interest and all that towards that home office deduction. I think that's, basically the accountable plan is my main main expenses I'm utilizing. 

[00:03:59] Mike J: Okay. Excellent. [00:04:00] Yeah, and that's a great setup and great start. So I'm great to, happy to hear that you have done those different things. One thing that I also noticed in your tax return is that you're implementing capitalization policy, which is good.

[00:04:10] Mm-hmm. And you know, for those that are listening, a capitalization policy just means that. Any asset that we purchase that's under $2,500, we don't have to worry about capitalizing and depreciating it. We're just taking an expense for it. And I noticed that on your tax return, Matt, so that's something I think about.

[00:04:25] As far as children you have two children, right? What are the ages of them? 

[00:04:29] Matt Parish: They are four and two and a half. 

[00:04:32] Mike J: Okay, perfect. So you're in the fun stages. 

[00:04:35] Matt Parish: Yes. 

[00:04:35] Mike J: I. A 5-year-old 2-year-old, and a 1-year-old, so I'm in the same boat as you. It's a crazy life. Right. 

[00:04:42] And then you have a properly set up accountable plan that you're doing.

[00:04:44] The reimbursement center. Are you doing those monthly, quarterly, annually, kind of just adjusting as you go along? How do you typically doing the reimbursements with the accountable plan? 

[00:04:52] Matt Parish: Quarterly. 

[00:04:53] Mike J: Okay. Perfect. 

[00:04:54] Matt Parish: Mm-hmm. 

[00:04:55] Exploring Pre-Tax vs. After-Tax Dollars

[00:04:55] Mike J: Now the first thing that I kind of wanna talk about is this concept of after-tax versus [00:05:00] pre-tax dollars, and have you heard you know, whether it's the podcast or YouTube channel, have you heard about us?

[00:05:04] Talk about kinda what after-tax, pre-tax, what that means? 

[00:05:08] Matt Parish: Yes. Mm-hmm. 

[00:05:09] Mike J: Okay. So general concept is. We don't want business owners to just go and buy things they don't need just to get a tax deduction. It's how do we take spending that you're already doing and find a business purpose for it, move it from an after tax expense or spending into pre-tax spending.

[00:05:26] And so when I was looking through your books or through your tax return on the business side. I noticed a couple things that were kind of light. 

[00:05:34] Maximizing Business Meals and Travel Deductions

[00:05:35] Mike J: The first one was meals. And so, you know, you're talking about a board meeting that you had. So it looks like meals were somewhere around like $250 for the entire year was your total meal expense.

[00:05:45] And so I'm assuming that that came from the board. So you had four board meetings, I'm assuming there was meals involved with those four board meetings, and that's kind of the only thing that was taken on the meal side. Is that accurate? Does that make sense? Match to you? 

[00:05:57] Matt Parish: Yeah, there might have been like one or two client [00:06:00] meetings in there too.

[00:06:00] But, but for the most part, that's yeah, there are not too many meals in there. 

[00:06:05] Mike J: Okay. And the only thing that I say that looks like, and so, you know, obviously some people just don't go out to eat and that's totally fine. But you know, first off, I think that making sure that we're taking advantage of everything from the board meeting side is important.

[00:06:18] So, you know, whether that was $250 or whether that was more, at least that we're getting that. Piece on the board side. The other thing that I like to talk about with meals is so often we're going out to dinner with people and we're talking about our business, even with a friend or a family member.

[00:06:33] So often we're talking about our business, and I'm not saying take every meal and try to make it a business expense because the people around you will probably start. Wanting to go out to eat with you if everything, you're talking about business the entire time. But what I am saying is that there's so many opportunities that sometimes people think, well, I'm going out with a Fred and that's the intention of this meeting, and then all of a sudden we're talking about your business and we're talking about, you know, some of the struggles you're going through, or we're talking about how it's doing and what are some growth opportunities and what [00:07:00] advice do I have for you.

[00:07:01] And so when I see meal expenses at, say at $200 or five, even $500, to me, that just. Starts to click a trigger saying, Hey, there might be more opportunity for more spending on that side. So just something to think about as you're going along and having different meals. And even if it's drinks or even if you're going to a a sporting event and you're having a meal at a sporting event.

[00:07:23] Are we talking about business at that sporting events? Sometimes we are, sometimes we're not. And so it's just kind of analyzing that. Now obviously the entertainment cost of the, the ticket to a sporting event would not be included. But any meals or drinks associated with that sport event would be included if it was a business purpose for it.

[00:07:40] Matt Parish: Okay. yeah, go ahead. I did a question related to that, you know, sometimes I do talk to my wife about business when we're out to eat, but we also have my 4-year-old and 2-year-old. Is that like a red flag to the IRS to see, you know, a happy meal on the receipt? You know, if if you are talking to your wife who happens to be a more board member?

[00:07:56] Mike J: Yeah, that's a really good question. And so it depends on, you [00:08:00] know. How frequently it's happening, right? So I don't think that's a red flag to have a child at a meal, a business meal. Sure. It's a little odd, right? You're not going to typically go to a business conference and meet with a bunch of colleagues and everybody have their kids there, but it's definitely not, not possible.

[00:08:16] So, you know, I, I think when you're looking at that, it's taking that opportunity to say, what was discussed there. Now, the other piece to that is that you're gonna have some items there, like obviously your 4-year-old probably isn't contributing much to the business conversation. Now sometimes they might, and you might get some insights from a young kid that you wouldn't expect.

[00:08:37] But what you can do is you could still run that expense through your personal account, but reimburse yourself through your accountable plan for the business related items. So for the the meal for your wife and yourself. Obviously if you guys are talking business, that could be reimbursed. If the kids have, have nothing to do with talking about the business or anything like that, don't worry about reimbursing them, but just reimburse for the, your portion of, of those meals and [00:09:00] just add it to your account plan.

[00:09:01] Just like when you're doing your home office, just like when you're doing your automobile, you can add that in there directly. The other thing I noticed is there was no travel related items on there too. And so, talk to me a little bit about travel kind. What do you guys do? Is there somewhere where maybe we could start to.

[00:09:18] Plan around how do we get more travel into our business to some extent, as much as possible. 

[00:09:23] Matt Parish: Yeah. I say a lot of my travel, it's more driving, so a lot of it's mileage. So, whether I'm doing a field visit or even those board meetings where we're driving I will say I, I will have some more travel expense.

[00:09:35] This year we planned a trip to Chicago around meeting some clients at a conference. And so, and we turn it into a family vacation too. So I, this year I will have some more travel in there, but yeah, I think part of that too is just the young kid face. It's hard to get family to go up and go to like, where there's a big, you know, expedition or something and or expo and bring the family along too.

[00:09:58] So, just kinda like the [00:10:00] phase of life too. But yeah, we did have a couple trips like that this year where, where was traveling and using flights and hotels and such. 

[00:10:08] Mike J: Yeah. Yeah. So that's just one thing to think about. And you're exactly right. I get the, you know, young kid phase, like, that's tough.

[00:10:14] And, you know, how do you say go to Disney and then be like, well, by the way, dad's gotta work for, you know, half of every single day. It is tough and you, and we're not trying to like adjust family vacations to make things work, but oftentimes it can work. And so I love the idea of how do we, you know, plan a trip to Chicago?

[00:10:29] How do we potentially plan. Business around that trip. And then the other thing too is that, you know, with your business growing you could also do a board meeting that's travel related. And so that could be a potential opportunity that if you are doing, you know, one of those family trips, could we at least carve out a day or two that's a board meeting and you know, maybe we find someone for the kids or something like that, that you plan.

[00:10:50] A board meeting is part of a travel and remember. When we talk about a day when we're traveling for a day to be a business day, the majority of the day has to be spent on business. [00:11:00] When we say majority, a lot of people are like, well, that's impossible if we're on a family vacation, but the majority only means four hours in one minute.

[00:11:06] So IS looks at a business day as eight hours, and if you spend the majority of that day, at least over four hours of that day on business, that's considered a business day. So it can very easily be, you know, a board meeting from eight in the morning till one in the afternoon, and then you're going out and doing whatever you wanna do and the office doesn't care.

[00:11:22] Ever doesn't care what you're doing after that because your business day is locked in. So, just one thing to, to think about on, on the travel side.

[00:11:29] So a lot of times and I, I just had your tax return, right? So I don't have all the details and every transaction, everything like that. I didn't see cell phone and internet on there.

[00:11:37] I did see cell phone, but it was like a $200 or $300, which seems light for a cell phone. And so it could be wrapped into like office expenses or something else. I just wanted to make sure that even though I didn't see it, sometimes it can be in there. It's just not. Popping out at me, obviously. So I just wanted to make sure, and I know that you mentioned with the accountable plan that you are taking cell phone and internet, so, just making sure that, that we do that.

[00:11:59] The thing [00:12:00] to think about is that oftentimes even though your home office, let's say your home office was 10% of your house. Mine's somewhere around the 10 to 12% of my house, but you can take more of different items. So my home office is only 10 to 12% of my house, but I have a cell phone and that's 80% business and I have internet, and that's 80% business.

[00:12:19] So you can take more of a percentage on those items that are obviously used more for business and say just the home office. So think about that on the accountable plan if you're using like a worksheet or template for that accountable plan. Make sure you're adjusting the percentages for items that way more heavily on the business related items on that.

[00:12:39] Matt Parish: that's a good point. Yeah. Currently I'm just listing to my internet and then taking, you know, it's roughly 11% and 

[00:12:44] Mike J: Yeah. 

[00:12:45] Matt Parish: You know, multiplying it by all the expenses. That's a good, a good 

[00:12:47] point. 

[00:12:47] Mike J: Yeah. And definitely the cell phone, you know, the cell phone we would definitely take a lot of, and the internet, definitely, I would say, especially if you're working from home, you're taking more than the 11% maybe not 80%, maybe not 90%, especially if you're streaming and doing all [00:13:00] those things.

[00:13:00] But, feel free to get a little bit more aggressive with those items because they truly are. You know, used a lot by your business, especially if you're working at home. You imagine if you work, seven hours a day at your home office how much of that internet are you actually using in those off hours?

[00:13:15] Like, you're probably going outside, you're probably, you know, cooking the, like, so you're not necessarily using the internet in a proportional difference. It likely is closer to that 80 20 type split. Okay.

[00:13:26] And then the other thing was auto

[00:13:27] Good that you're using it. Are you using the actual method or the mileage method?

[00:13:31] Currently? 

[00:13:32] Matt Parish: Mileage method. 

[00:13:33] Mike J: Okay. Yeah, so just something to think about. There is, getting a new vehicle that there's potential to look into the actual method, if. You start to get over 50% and depending on the type of vehicle you have it looked a little bit light, but not out of realm there.

[00:13:47] So I think it was like somewhere around the $2,400 was the reimbursement amount. So I think that mileage that adds up to somewhere around, like 3000 something, 33 to 4,000 miles which is, could potentially be light. So just [00:14:00] make sure that you're tracking that, have a a mileage log that you're kind of tracking all of that activity as well.

[00:14:05] Matt Parish: Okay. 

[00:14:06] Mike J: Now for everyone out there, before we dive into more strategy, if this is something that you're enjoying. We work with small business owners going through hundreds of strategies every single day. At Tax Elm, we not only do we offer unlimited access to our team of tax professionals, but we also have a complete system to fully implement every single strategy that's available to you.

[00:14:24] So go to tax elm.com. That's TAX elm.com and book a free discovery call. Okay, back to kinda what we were talking about. 

[00:14:33] Leveraging the Augusta Rule and Board Meetings

[00:14:33] Mike J: you mentioned having a board and doing, your parents are on it. Your wife's on it. That's great. Love that concept. Love this idea of a board. I think every business should have a board.

[00:14:42] A couple things to think about there, and let's talk about the frequency of it. You mentioned that you're doing it quarterly, which I think is totally fine, but as your businesses start to grow, so you and I've looked at this last year and you've had. Growth already here in 2025. You expect significant growth into [00:15:00] 2026.

[00:15:01] One thing that you might want to consider is that instead of doing it quarterly, maybe we're bumping that up to a more regular basis. Maybe it's more of a monthly basis that allows us to not only, you know, obviously help your business as it's growing and get insights from the people that are closest to you.

[00:15:15] But it's also gonna bring those tax benefits as well. So the more meals, the more travel related, the more Augusta Rule 14 day home rental potentially rule. Related to those items. So just something to think about there is that, you know, a business that's making a couple hundred thousand dollars a year, I love the idea of a quarterly board meeting, a business that's starting to cross that half a million mark and get even bigger than that.

[00:15:35] I think it's very reasonable to say, let's start doing these a little bit more frequently, more maybe on a monthly type basis. 

[00:15:41] Matt Parish: Okay. That's good to know. 

[00:15:43] Mike J: The other thing on the Augusta rule, so when you're doing the Augusta rule, what is, what do you remember, just kind of offhand what you're using as far as the reasonable comp for the reimbursement for that?

[00:15:54] Matt Parish: did like a single night hotel, like for my parents coming and visiting and then and then like [00:16:00] a rental of like our basically family room, dining room area. What that would be equivalent renting it out at a local hotel. Yeah, for like a boardroom there. And I think I got like a comp for I wanna say like $600 or something to like rent out a space for a few hours. And I also got the equivalent price of renting a a hotel room. And then yeah, I made sure it had like the boardroom had the a. Screen monitor, whiteboard, like all the things that we would potentially need in a medium like that.

[00:16:31] Mike J: Love that. And so, I, I think that that's good. Again, we wanna dot our i's cross some t's on any type of tax strategy. The importance is knowing the strategy, then implementing it. And not only implementing but implementing it correctly. And so it sounds like you've kind of started to dot your I's and t's in, which is really good.

[00:16:45] A couple thoughts on the boardroom. One, if you have an opportunity or want to, take care of your parents in any sort of way. You also have the ability to do the Augusta rule with them as long as they're not renting out their personal residence. 'cause you [00:17:00] mentioned that right now you're quarterly, hopefully we're gonna move to monthly, but right now you're quarterly and if we move to monthly and we're having half of those meetings at your parents' house if there was ever an opportunity like, Hey, I just wanna take care of my parents a little bit in some way or another, and I don't know their situation, but just know that as long as they're not renting their personal residence out.

[00:17:18] They can rent their personal residence out for 14 days or less than pay no taxes on it. So it would be a great opportunity that you could pay them for rent for their house. And they wouldn't have to pay taxes on it as long as their total rental days were 14 days or less. So a lot of people almost think that Augusto can only work on yourself.

[00:17:34] It works on everybody and anybody. It just, the reasoning in, in the, the reimbursement amount has to make sense for the scenario. So just something to think about there. 

[00:17:43] Matt Parish: Okay. 

[00:17:45] Optimizing S Corporation Salary

[00:17:45] Mike J: Let's talk about your S corporation. Mm-hmm. So expected profit and just remind me again, expected profit this year of $300,000 plus, kind of what you're gonna take as a salary as well.

[00:17:57] Is that correct? 

[00:17:59] Matt Parish: Correct. Mm-hmm. [00:18:00] 

[00:18:00] Mike J: Okay. In what amount are you taking as a salary or planning to take as a salary? 

[00:18:04] Matt Parish: Right now it's 80,000. 

[00:18:07] Mike J: Okay. So. Just, I just wanna make sure we're on the same page. So $300,000 in profit, plus you're taking an $80,000 salary. So if you were taking no salary, you'd be somewhere in the $380,000 range.

[00:18:21] Does that make sense? 

[00:18:22] Matt Parish: Correct. 

[00:18:22] Mike J: Mm-hmm. Okay. So I think that the biggest thing, one thing to think about is we want to make sure that that salary makes sense. We wanna make sure as a, as corporation, we're required to take a reasonable salary based on the work that we're doing. And so we don't want the salary to be too high because then we're paying more in self-employment taxes than necessary.

[00:18:39] We don't want the salary to be too low because now we're coming up to the IRS radar. I noticed on your tax return last year. That you had profit of $50,000 and you had a salary of 77,000, so it looks like your salary stayed the same. It's just the business is growing and that's why the profit has significantly increased from last year.

[00:18:59] Matt Parish: Mm-hmm. [00:19:00] 

[00:19:00] Mike J: When I look at, and there's two methods to determining an scorp salary, there is what I call simplified method where. 30 to 50% of our profit we're taken as a salary. That's kind of just a back of a napkin starting point to say, Hey, am I in a reasonable range that the iris traditionally is not gonna raise a red flag again, no guarantees, but at least gets us a starting point to it.

[00:19:22] Then the second piece is to say, okay, how much time am I spend being an engineer? How much time am I spent doing marketing? How many ti, how much time I spent doing administrative work? Calculate how much time you're spending all those different activities on an annual basis or a weekly basis, and then annualize it and find a reasonable rate or what it would cost for each of those positions.

[00:19:41] So, as an example, an engineer isn't gonna get paid a lot more than someone doing marketing work or administrative type work. And so as a business owner, we oftentimes don't spend a hundred percent of our time. In our specialty, we're doing marketing, we're doing administrative work, and so that will lead to tend to lead to a lower dollar amount for those specific [00:20:00] items that we're doing.

[00:20:00] So that's the more complicated method where we're saying, okay, we want to concrete this reasonable salary. I talk about all that because when I see a salary of 77,000 with a profit of 50,000. If we do the back of the napkin, that 30 to 50% that salary's probably too high. Mm-hmm. And we could probably go lower on it.

[00:20:19] When I see an $80,000 salary on a total of three 80, that is obviously close to, what is that, 20%? Yeah. Somewhere around the 20 to 25%. So now we've kind of flipped that script. Right. I like the closer to the 20 then versus over 50%. The biggest thing now. So if, if you, if I were to talk to you last year, I would've said, we can take your salary down a little bit.

[00:20:44] You may want to mm-hmm. Reanalyze that salary and bring it down a little bit. Now we're talking to it this year and it's exact flipped. And so I'm not saying that we need to raise your salary, it's just that you're out of that 30 to 50%. Kind of back a napkin number. And so now we just wanna make sure that [00:21:00] calculation that we did, we want to go to the more complex method and make sure that calculation that we did matches up.

[00:21:05] Calculating a Reasonable Salary

[00:21:05] Mike J: And we can find and provide proof on why $80,000 is a good salary. And so if we're ever under that 30%, I say we just need to make sure that we're doing that calculation to make sure that that is a reasonable number. Okay. Does that make sense? 

[00:21:19] Matt Parish: It does. And I think my original number I took, I was like working about 30 hours a week and so I took the average engineer salary, the accounting that they worked 45 to 50 hours a week and multiplied it out.

[00:21:33] That's how I got that original 77 number. Mm-hmm. And then I. Yeah, increase for inflation for this year, but I haven't revisited it again for this year. Other than that, 

[00:21:43] Mike J: yeah. Again, you're just below what I call the safe range, and that 30, 50% is just what I call safe.

[00:21:48] Like typically the IRS isn't gonna touch it. If you're in that range, you're below that, which is fine, but now we just need to make sure that we either raise it or. More importantly, I'd say before we raise it, let's run the numbers. So [00:22:00] figure out how much time you're spent being, you know, your profession, how much time you're spending doing marketing, how much time you're spending doing administrative work.

[00:22:06] And then there's a gov, there's a government website in like gsa.gov I believe it is where you can look at wage rates in different cities. And so we could look at, you know, how much does an administrative person make in North Carolina? How much does a marketing person make? In North Carolina, how much does an engineer make in North Carolina?

[00:22:24] And we can say, Hey, if you're spending 30 hours a week, maybe 20 of those are as an engineer, and maybe five is marketing, and maybe five is administrative work, and let's multiply that out by the hourly rate that's reasonable for your area. Annualize it and then make sure that we just had that support.

[00:22:40] Because if the IRS came knocking and said, Hey, your salary's not reasonable enough, we have then a fight. We have proof to say, here's why we believe our salary is reasonable enough. And that's just that, again, that.in our, i's crossing our t's on the implementation piece. Hmm. 

[00:22:53] Matt Parish: All right. 

[00:22:55] Retirement Planning Insights

[00:22:55] Mike J: The next thing I wanna talk about was retirement.

[00:22:57] What are you doing from a retirement [00:23:00] standpoint? Currently, I didn't see anything on the tax return last year, and so. A couple questions on that one, how much do you want and can you afford to put away towards retirement? Some people are like, I'm not a retirement person. I don't put money towards retirement.

[00:23:13] That's fine. And we just wanna talk about what our plan is otherwise, so, and, and it could be coming from your spouse as well. So talk to us a little bit about what retirement planning looks like right now. 

[00:23:23] Matt Parish: Yeah, so with my wife's employer, she, she has, 4 0 3 B HSA. So we we're currently contributing to those.

[00:23:32] I do have a sole 4 0 1 case set up. I have contributed that in prior years, and I think it was partially oversight last year, not to contributing to that last year, but but yeah, I do have that sole 401k set up and, and, plan to contribute to it this year. 

[00:23:48] Mike J: Okay, excellent. 

[00:23:49] Maximizing Solo 401k Contributions

[00:23:49] Mike J: So yeah, love a solo 401k and whether it's Roth or traditionally, you have both of those options, obviously in there.

[00:23:54] And really high contribution limits to going to a solo 401k. I think the numbers this year is like 20 [00:24:00] 3005. As an employee plus 25% of your salary. So if you're at 80, that's another 20 $20,000 that you could put in there. So you're looking at 43,500 would be the, the maximum amount that you could put into a, a solo 401k.

[00:24:14] So some can get to some pretty big numbers with that. And obviously you could do less than that, but that's at least the, the potential you have, 

[00:24:22] Matt Parish: right? 

[00:24:23] Mike J: I look at retirement as, as a deferral. Or deferral of some sort. It's not a great, it's not a hundred percent tax elimination. It's a tax deferral in some cases, or we're, or we're getting no elimination today in a future benefit from it.

[00:24:37] So just something to think about there as well as if you like to, invest in things that are maybe outside of the stock market. You know, one thing to think about too is a self-directed solo 401k, and so that's where you can invest in alternative assets if you want to get involved in that. There's just some really cool plan opportunities.

[00:24:55] But if you have friends that are opening businesses and you want to help fund those using [00:25:00] retirement plan and massive potential growth with that, there is different planning that you can do with that solo 401k where you can do a self-directed account with it as well. 

[00:25:09] Matt Parish: And I'll say that, that sole 401k, I set that up.

[00:25:12] For that reason. I have like a real estate syndication I invest in through it. And I do have that, that capability through it. Awesome. 

[00:25:20] Investing in Real Estate and Syndications

[00:25:26] Matt Parish: I guess the other, like from the investment standpoint, I do try and invest in real estate through like syndications and get so where I'm a limited partner mm-hmm.

[00:25:29] In those syndications and, so that was something that was investing pretty heavily in in recent years. Last couple years have, you know, with little kids and business growing, haven't had the time to like dive into researching those deals. But that is something that I have been contributing to previously.

[00:25:47] Mike J: Yeah. And and another thing too is if you ever get to the point where you're like, I wanna put more away towards retirement, and we're hitting caps on what you can do in, we could always say, Hey, can we hire your spouse at all in your business? Is there anything that maybe your spouse could do [00:26:00] part-time in her business and just.

[00:26:01] Put all of those funds that we're paying our spouse away towards retirement. So, there is that potential if you're ever saying, Hey, I'm capping out here and I wanna put more in, there is different, more advanced plan options that we can do. Or we can also hire our spouse and then start to max out their size as much as possible based on the work they're doing and everything else.

[00:26:18] So, as you're, as they're growing and potentially able to put more away. Something that there's, there's potential there. And, and yeah, love the idea of investing in real estate, especially if you're passive on the side. You know, the problem with self-directed accounts, we just need to be careful about how active you're involved in some of those investments.

[00:26:33] If you're doing syndications, you're passive in nature. The beauty behind having those locked up in a retirement plan is that it's gonna grow tax free. And so whether it's on a Roth side or whether it's on a traditional side, it's at least growing inside that account. And you're not taking taxes out now.

[00:26:48] You'll take taxes out later. But you know, imagine you had a, you put a hundred thousand dollars into a syndication that grew to $200,000 in a year, or in five years, seven [00:27:00] years, whatever it might be, grew to $200,000. You could then reinvest that 200, that full 200 because it's not taxed today. Whereas if mm-hmm.

[00:27:07] You were on the other side, that 200,000, if you withdrew it, you'd have to pay taxes on it, and then you could reinvest it, but there would be a tax, your investment wouldn't go as far because they're, you're hitting taxes. During the term of it, instead of, you know, if it's traditional account, you don't pay taxes till the end.

[00:27:23] If it's a Roth account, it's growing tax free anyways. Mm-hmm. And tax free withdrawals too. So love the idea of kind of wrapping that into your retirement account, especially if it's something you want to invest in anyways. Doing a retirement account could be super powerful and, and just help that money grow that much quicker.

[00:27:36] Matt Parish: Mm-hmm. 

[00:27:37] Mike J: Yeah. Real quick. So for those listening, if you're not quite ready to book a discovery call a tax zone, but still want more, we just released a brand new tax saving starter kit and it's a hundred percent free. Inside you'll get our ultimate list of business deductions and real case studies showing how others have saved 5,000 to $25,000 or more.

[00:27:56] Just head on over to tax Savings podcast.com [00:28:00] starter kit. That's tax Savings podcast.com/starter kit. Okay. Matt, back to you. 

[00:28:06] Health Savings Accounts (HSAs)

[00:28:10] Mike J: When we talk about HSA, you mentioned that your wife is using an HSA. Are you accumulating funds in that HSA or are you just using that, putting money into the HSA, getting the tax benefit and then paying medical expenses using the HSA?

[00:28:19] Matt Parish: No, we're, we're investing it. Okay. So we're saving the receipts and trying to save 'em digitally and then yeah, investing that into like a, yeah. Stock fund or something be fund. Yeah. 

[00:28:30] Mike J: Great. And that's just what I always recommend to people if you can afford it, right? Mm-hmm. Is don't use HSA funds instead use your own funds, pay for your medical expenses.

[00:28:39] And if you hit a money crunch down the road. Well, then you have those receipts and you can get reimbursed for it tax free. But I love the idea of having those funds grow in an HSA. Just keep growing, keep growing tax free, get a, you get a tax benefit going in tax free growth inside of it. And when you use it for qualified medical expenses, tax withdrawal.

[00:28:56] So think of it as like a secondary retirement account. And you [00:29:00] can also self, self-direct in HSA too. Something that if you're into that self-directing stuff and you plan on letting those funds sit in there and grow for a while, and you maybe aren't gonna be, need to be as liquid with it. You could also think about self-directing your HSA as well.

[00:29:14] Self-employed health insurance. Are you getting health insurance through your wife's employer? 

[00:29:19] Matt Parish: Correct. 

[00:29:20] Mike J: Okay. Yes. That's why I figured I didn't see any deduction for it. So assume that it was coming from somewhere and probably just not from self-employed, so. Mm-hmm. That makes sense. Alright.

[00:29:28] A few things as we get to wrap up here. First one, and this is just more of a comment you had a lot of passive. Losses, and I'm assuming these are from some of the syndications that you've had that create that upfront depreciation. And so you're generating cash flow from those syndications likely right now not paying any taxes on it.

[00:29:47] And I think there was like a $60,000 or so in carry forward of passive losses. Mm-hmm. So just know that if you have passive income. Those losses will offset that. Mm-hmm. Or when you exit those syndications, obviously you're probably gonna have more [00:30:00] than that. Those carry forward losses. So you'll offset some of that income at that point too.

[00:30:04] Matt Parish: Mm-hmm. 

[00:30:05] Mike J: Okay. 

[00:30:06] Hiring and Employee Benefits

[00:30:06] Mike J: Let's talk about hiring real quick. You mentioned looking to hire this year. How many people are you looking to hire? Are these family members? Are these kind of outsiders? What does that look like? 

[00:30:15] Matt Parish: Be Yeah, outside people, so probably, probably the first position would be another engineer.

[00:30:20] So I'm looking to hire, I also utilize, I have about, four or five contractors. Okay. 10, nine contractors I use for like drafting services. So, but as far as hiring employee, I think my next hire is gonna be another engineer. 

[00:30:34] Mike J: Okay. Perfect. So just something to think about as you're bringing in new employees, we need to think about that retirement plan. So, work with your retirement plan provider when you're bringing them on to understand like, how is that gonna work? Because no longer is a solo four. Once you have outside employees, a solo 401k is not gonna work. Now, that could be a year down the road until they start to vest, and there's different things that you can work with on your retirement plan There.

[00:30:55] But check your plan document and work with your retirement plan provider as you're starting to bring those [00:31:00] employees on, just so that you know kind of what your limitations are. Because let's say we're looking to hire next year and we know that we're not gonna have a solo four one k opportunity anymore, maybe that means okay, let's bump up and make sure we're doing everything that we can to max out that solo four one k as this might be our last year of it.

[00:31:15] Now, of course, we can go into a 401k moving forward. But just the benefits to max out that solo 401k and max out, the employer portion just for you could start to go away as we start to add employees to it. 

[00:31:29] Matt Parish: Okay. 

[00:31:29] Mike J: The other thing too is obviously as we're looking to hire there we want to be competitive.

[00:31:35] And so a couple things about being competitive. Usually when we talk about hiring, there's two main topics. What's retirement options and one does healthcare look like? So retirement options, obviously we just talked about that. Start to work with your retirement plan provider about what kind of options you have as you start to bring on employees.

[00:31:53] But when we look at health offerings. Start to kind of run some ideas about what you would plan to do there. Now [00:32:00] some businesses can get away with 5, 10, 15 employees and not need to offer health benefits 'cause they're getting it from their spouse or they're using the money that you're paying them and they're getting something from the market and that's okay.

[00:32:10] But if. We're starting to, we wanna be able to get any talent we want. We might need to offer something competitive from a healthcare side, and especially for someone that's just getting started in that hiring process. I love the concept of a qera. So it's a health reimbursement arrangement.

[00:32:26] It's called a qra for smaller businesses. Okay. But basically how it works is you are, you're offering a reimbursement amount where they go out, they get their own health insurance, they get whatever they wanna do, they submit receipts, and you'll say, we will refund, or we'll reimburse you, you know, x amount of dollars per month to cover healthcare costs.

[00:32:45] And it's a gonna be a plan across the board for all your employees. But it's an easy way to, to not have to. Dive into offering a group healthcare plan, but you can still offer a health benefit and they just get to choose exactly what plan they want, so. 

[00:32:59] Matt Parish: Mm-hmm. [00:33:00] 

[00:33:00] Mike J: I know as a small business owner myself, especially when I started to hire a while back I was always worried about this healthcare piece because I'm like, group plan sounds crazy, and then I'm forcing 'em into a plan that they maybe don't want and mm-hmm.

[00:33:10] How does that work if they don't need a plan because they got it from a spouse? It was a lot of confusion and I wish I would've known about QS back then because it would've made that process a little bit easier. And then you can obviously grow and graduate into something else as your business continues to grow.

[00:33:24] But you at least have that solid plan for some of those initial hires. So something to look into is a, is a QRA plan as you're looking to hire. 

[00:33:32] Matt Parish: Okay. 

[00:33:34] Mike J: And then work opportunity tax credit, probably not going to be something that's involved with hiring an engineer, but it could be. And so, look at the work opportunity tax credit.

[00:33:43] There's just some tax credits out there when you're hiring people from a distinguished group. Depending if they could be military, they could be disabled, various different categories that qualify for that lower income where you can get a tax credit that can help offset some of the amount that you're paying them as well.

[00:33:59] Matt Parish: Okay. 

[00:33:59] Advanced Tax Strategies

[00:33:59] Mike J: [00:34:00] So I know we're coming up on timeline, but I wanted to talk about this concept of kind of core strategies versus advanced strategies. 'cause you are starting to get into the realm of where advanced planning and advanced strategies are gonna become available to you. And when we talk about core strategies is a lot of what we talked about today.

[00:34:17] Think of things like an S Corporation, retirement home office, hiring your kids when the time makes sense. Obviously it might not make sense now, but that will come up down, down the road, setting up a board Augusta rule, doing all those things, what I call core tax strategies. Core tax strategies, things are available to people making $10,000 a year to people making $10 million a year.

[00:34:35] And that's what we love about core strategies. We say we always wanna implement core strategies as much as possible. And once we've done everything we can on the core strategies and you're getting close to getting there, then we're gonna say. We still have a tax bill, how do we solve that? And that's when we look into advanced type planning and advanced planning.

[00:34:53] I like to BA break up into five main categories, and then within each category we have [00:35:00] multiple different types of strategies or different versions of that strategy with different partners, different ways to do it, but they all pull in kind of the same category. And so when we talk about advanced planning, there's advanced retirement planning.

[00:35:11] So before we look into advanced retirement planning, I'd say, let's make sure we're maxing out our 4 0 1 connection and everything we can do there. Mm-hmm. If we're doing that and we still wanna go into more retirement, there's some advancement plan that we can do on that side. The second concept we talked about is asset purchase strateg.

[00:35:27] Then we talk about asset donation strategies. We talk about investing in oil and gas and taking the tax breaks from that, and then we talk about captive insurance. So in your specific state, I would say advanced retirement plan. Not necessarily yet. Until we get to the point where we're already doing everything we can.

[00:35:43] Right. Then we'll talk about that. Captive strategies start to come into play once we hit about 150 to, or 1.5 million to 2 million in revenue. So again, a little bit down the road, but that can provide as another opportunity. So really kind of the three main categories we look at for you is asset [00:36:00] purchase strategies, asset donation strategies, and oil and gas investments.

[00:36:03] Now, we could also add on real estate and maybe doing a short term rental with real estate and how can we do a short term rental? Use that to offset your income. And a lot of planning with short-term rentals on real estate. A lot of wealth planning with long-term rentals on real estate. So you could probably add that in as a secondary.

[00:36:18] Bucket as well. But that's where we would start to go down and start to explore some of these additional opportunities to say, Hey, we've done everything we can on the core side. But our business is growing, we're doing really well, and now we still have tax problems. Now we can start to eat new way with that.

[00:36:32] Using advanced tax strategies and advanced strategies can make a big impact. Really be quick depending on kinda what strategy makes sense. And like I said, within each of those strategies, so within NASA purchase strategies, we have things where we're talking about solar related items, we're talking about software, we're talking about heavy equipment, and how do we.

[00:36:49] Start kind of a business to help take advantage of depreciation, tax credits and different things like that. As a donation, we're talking about land and donating land or tangible assets. So [00:37:00] kind of this way, let's say you bought a stock for a hundred dollars and two years later, later that stock's worth $500.

[00:37:07] If we then donate that stock to charity. Get a $500 charitable deduction, even though we only paid a hundred dollars for that stock. And that's because we could get a donation based on the fair market value of that stock. So those are some of the advanced plans that we'd start to look into once we've kind of capped out the cortex strategy side.

[00:37:24] Matt Parish: That is something I'm trying to work with my church on, setting up like a, you know, accept crypto donations so that we can, we have a little bit of crypto that has appreciated that we could just take advantage of that strategy. 

[00:37:36] Mike J: Yeah, I love that concept because if you're gonna be donating anyways, I'd rather see donate a stock or donate crypto and let the church eat that capital gain, which they're not gonna eat that capital gain because they're not profit.

[00:37:48] And so, yeah, definitely work with other church. I'm on the finance team in our church, and. I said we will do anything possible. You know, we'll open up whatever account we'll need to because as soon as we get it, we're just gonna sell it and convert to cash out anyways. But [00:38:00] I'll open up any kind of account you need, if it's gonna mean, you know, making it a tax benefit for you and also obviously, and the church as well.

[00:38:07] So definitely work with them on those things. Yeah. So, you know, Matt, we could go on for hours, but what we're really doing is just kind of getting started on different planning opportunities and then taking the opportunities that you're already implementing, which is great, but just optimizing them a little bit more.

[00:38:22] Making sure that what we're doing is first off down our, I cross our Ts, making sure we're implementing it correctly, but then making sure that we're implementing it to the fullest extent possible. Because so many people say, well, I've heard of this strategy, I've heard of that strategy. But then when we start to get into it, it's, but you're not implementing it or you're not implementing it to its fullest extent.

[00:38:40] And so we always say that the tax plan is something we're continuously doing around, you know, although accountable plan is something you can set up and kind of forget about, we still wanna be revisiting that to make sure we're always maximizing it year after year. And that goes with any. Type of strategy.

[00:38:55] Final Thoughts and Action Steps

[00:38:55] Mike J: So Matt has this been helpful? What are some of the things that kind of, you've taken outta this that you're can say, hey, [00:39:00] that's something that is an action plan today. And then maybe something that I want to continue to dig into to see kind of what options are out there for that. 

[00:39:06] Matt Parish: Yeah, definitely. I, I think some of the things that my key takeaways side, you know, increasing board meetings since I'm hitting higher revenues, increasing those once a month instead once a quarter and taking more advantage of meals out and even if I have my kids with me.

[00:39:19] But we still talk about business just taking that. The people that are associated with that meal and reimbursing myself for that. That's, I think those two will be big things that I'll start implementing right away. And and I know I need to revisit my my salary, so that's something I'll be working on.

[00:39:37] Might not be going up or down you, depending on what that calculation comes out to, but I know that's something I to probably do my, I cross my ts little bit better on and. Increase my retirement savings. That's something I can start doing this year. So I missed that boat last year. Just guys. Kind of got behind eight ball, but somehow wanna take advantage of this year.

[00:39:57] Mike J: Yeah, no, that, that's great. And a lot of times too, when we're [00:40:00] talking about tech strategy, sometimes it's not necessarily that we're changing anything, but it's just making sure that we're creating a rock solid foundation in your salary is the right piece. Right? Like, if that salary makes sense.

[00:40:10] Totally fine, but let's just make sure. Then we have the solid documentation to support it so that if the iris does come knocking, we don't have anything to worry about because we've already done the legwork for that. So a lot of times when we talk about tax planning, it's, Hey, you might be implementing it, but are you doing it correctly?

[00:40:24] Are you debt in your Cru keys? Do you have, if you're doing the 14 day home run, are you just saying, oh, I'm just reimbursing. $10,000 for a meeting. Well, that doesn't make sense. So it's kind of putting that legwork to make sure that it's solidified as well. Or if you're only doing a hundred dollars, that also doesn't make sense.

[00:40:39] You know, let's do some more research on kind of what is reasonable and start to, dig into that. So, Matt came in thinking he's already squeezed all the juice out of the s-corp setup, but by the end of our session, we've kind of uncovered a path to cut his tax bill more. We started to talk about advanced strategies and kind of where the potential there would be a significant cut into it and a lots of stuff.

[00:40:58] It's not magic. It's [00:41:00] just strategy that most business owners never hear about or never think about, or never put to fruition. They never complete the setup for it. And if you're listening to this thinking, wait, I could be missing something too. The answer is probably yes. Start with our free tax savings starter [email protected].

[00:41:17] Slash starter kit or book a discovery call with our team at Tax Elm. You can go to Tax Elm, that's TX elm.com and let's uncover your hidden savings. Either way, don't leave thousands of dollars on this table. And if you found this helpful, don't forget to hit subscribe. Hit that like button, and share it with a business owner who's sick of paying too much at tax.

[00:41:35] Matt. Thanks again for coming on, and I cannot wait to hear your success story and kind of where you go from here and where you go from a tax planning expert and I want to reiterate this again, you take an action in looking at saving on taxes and opportunity to help grow your wealth and grow your business is an excellent step that you're taking.

[00:41:51] I just wanna say you, you're doing a great job. 

[00:41:53] Matt Parish: Thank you, Mike. I appreciate this.