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A Tax Attorney’s Guide to Maximizing Profits and Minimizing Taxes

Sharon Winsmith is the Owner and CEO of Winsmith Tax, a full-service tax firm that helps entrepreneurs and businesses maximize profits using a holistic tax strategy. Before founding Winsmith Tax, Sharon worked as the Director of PwC, a leading professional services network and one of the “Big Four” accounting firms.

Sharon has more than 10 years of experience as a tax attorney and has helped a wide range of clients — from high-net-worth individuals to Fortune 500 companies — structure their global operations. She has also directly aided clients with creating tax structures for acquisitions totaling more than $45 billion.

Here’s a glimpse of what you’ll learn:

Sharon Winsmith talks about her background as a tax attorney and reveals why she started Winsmith Tax
What is the difference between a tax attorney and a CPA?
Sharon explains how she helps businesses effectively reduce their taxes
Practical strategies for maximizing business tax deductions as an e-commerce entrepreneur
How to make smart investments that offer substantial tax benefits
Sharon shares the problems with traditional retirement plans
The importance of planning — not deciding — to exit your business
A critical aspect of your business’ success: building a top-notch financial team

In this episode…

Do you want to build a fast-growing business that is easily transferable? Are you looking for strategies to help you increase your profits and reduce your annual expenses — including hefty taxes?

It’s no secret that there are legal ways to pay almost no money in tax. However, the process of saving large amounts on taxes is so complex that most business owners don’t know where to start. Luckily, Sharon Winsmith, an experienced tax attorney and entrepreneur, is here to share her proven strategies and techniques for reducing your taxes, growing your company, and creating a highly sellable business.

In this episode of the Quiet Light Podcast, Joe Valley sits down with Sharon Winsmith, the Owner and CEO of Winsmith Tax, to discuss how you can grow your business’ profits by reducing your taxes. Listen in as Sharon shares the importance of creating a financial system, the best-kept secrets for business-related tax deductions, and the ins and outs of making smart real estate investments. Stay tuned!

Resources Mentioned in this episode

Sponsor for this episode…

This episode is brought to you by Quiet Light, a brokerage firm that wants to help you successfully sell your online business.

There is no wrong reason for selling your business. However, there is a right time and a right way. The team of leading entrepreneurs at Quiet Light wants to help you discover the right time and strategy for selling your business. By providing trustworthy advice, effective strategies, and honest valuations, your Quiet Light advisor isn’t your every-day broker—they’re your partner and friend through every phase of the exit planning process.

If you’re new to the prospect of buying and selling, Quiet Light is here to support you. Their plethora of top-notch resources will provide everything you need to know about when and how to buy or sell an online business. Quiet Light offers high-quality videos, articles, podcasts, and guides to help you make the best decision for your online business.

Not sure what your business is really worth? No worries. Quiet Light offers a free valuation and marketplace-ready assessment on their website. That’s right—this quick, easy, and free valuation has no strings attached. Knowing the true value of your business has never been easier!

What are you waiting for? Quiet Light is offering the best experience, strategies, and advice to make your exit successful. To learn more, go to quietlight.com, email [email protected], or call 800.746.5034 today.

Episode Transcript

Intro 0:07

Hi, folks, it’s the Quiet Light Podcast where we share relentlessly honest insights, actionable tips, and entrepreneurial stories that will help founders identify and reach their goals.

Joe Valley 0:29

Hey folks, Joe Valley here from Quiet Light Brokerage and the Quiet Light Podcast. Thanks once again for joining us. today’s podcast as always, I know, is sponsored by Quiet Light, Quiet Light advisors, Quiet Light Brokerage, whatever you want to call it these days. We are all serial entrepreneurs that have built, bought and sold their own online keyword online business. If you don’t know about us go to quietlight.com We are here to help first and foremost. Now before we jump into our pretty amazing guests today, I’m excited to learn along the way with you guys, I’m gonna ask a lot of smart hopefully questions probably some dumb ones too. But before we get there, I want to give a shout out to Gino Wickman. Gino is the author of Traction and his latest book is The Entrepreneurial Leap. So for those of you that are out there in the audience, thinking about taking the leap to entrepreneurship, you might want to read this first, it will help you determine whether or not being an entrepreneur is right for you. Now, there are different levels of it whether you’re a visionary entrepreneur or a business owner where it makes more sense to buy a franchise and have all the systems and processes in place. But I would suggest that Gino is going to come on the podcast we’re recording in 30 days, so it’s probably not going to air until sometime in May. But Gino Wickman, The Entrepreneurial Leap, the author of Traction founder, co founder of EOS and the endorser of my upcoming book, The EXITpreneur’s Playbook But enough about us enough about me enough about Gino, let’s talk about today’s guest. Her name is Sharon Winsmith. She’s from Winsmith Tax, and she lives in New York. She lives in New York, New York, I think right? And the only thing I’m going to say about her interaction is that she did not lie, cheat or steal but still paid almost zero taxes in 2020. Is that right Sharon?

Sharon Winsmith 2:24

That’s right.

Joe Valley 2:27

All right. Well, you want to know how you did it. But why don’t you Why don’t you tell us a little bit more about yourself? I think the intro the fact that I establish it. You live in New York, New York, where it’s 13%. In New York City, what’s the what’s the what are the tax brackets here, in New York.

Sharon Winsmith 2:45

when you add city and state together, it’s over 13%. So you’re right. So the

Joe Valley 2:49

federal and state side is ridiculous. Most people fled or flee New York or California, generally, head to Austin, where they’re not paying any state taxes. We know a lot of entrepreneurs that have done that. But you know, to go from 13% to you know, almost zero takes some planning some thinking and it doesn’t happen by accident. So Sharon’s going to talk to us about five or six steps or tips that she can help you employ to minimize your tax because it’s not about how much money you make. It’s about how much money you keep. So Sharon, give us a little bit of background on yourself. Did you just jump right into this? Or did you go work for a big firm or get a great, great degree? Tell us about yourself?

Sharon Winsmith 3:32

Thanks, Joe. So my background is I’m actually a tax attorney. And I spent the past several years working at a Big Four accounting firm. And a few years ago, I kind of identified this area of the market that I felt like is being kind of grossly underserved. And that is entrepreneurs and investors. And so when I say entrepreneurs and investors, I’m really talking about, you know, me and you, Joe and your audience and owners of businesses are multiple businesses, as well as individuals who have investments in real estate and other passive investments. So I started Winsmith Tax a few years ago to really kind of partner with those types of clients and really help them come up with strategies and ways that they can reduce their taxes.

Joe Valley 4:17

Okay, now, you said the word tax attorney in there, what’s the difference between a tax attorney and a CPA and a tax mitigation specialist and a tax advisor and all these different things?

Sharon Winsmith 4:29

So that’s a good question. So there at the end of the day, there’s really not that much different. I mean, when you’re deciding, you know, your for who your tax advisor should be, you should really pick the person who’s the right fit and can really proactively bring you you know, tax tips and suggestions. And so the difference really is a CPA is someone who can, if you’re a big company, a public company, and you need to have an audit done, you need a CPA to do that. I actually cannot do audit of, you know, large public companies that need those done, but the only The other difference I’ll mention is as a tax attorney, I am an attorney. So while I can help you with your tax return and give you tax advice, I also can comment on the legal implications that are relevant to your business. So I can really kind of come in and advise you from a holistic perspective on what you should really be thinking about from a tax and a legal standpoint. And there’s a lot of situations where those two areas crossover and so being able to really have the knowledge of both can be very helpful.

Joe Valley 5:27

Thank God, people like you are passionate about this stuff. Because the rest of us are just, I know, people’s eyes are already glazing over. But this is so so critical. We have a colleague that he literally pays like 1% in taxes, it’s just insane. And I personally have not taken the right steps over the years, I could earn an awful lot less and keep an awful lot more with more plan and implementation things in place. And folks, just for the record, I’m working with Sharon on my own tax mitigation strategies. Back to the tax attorney, you actually go to law school and decide the tax is going to be your specialty, you have to pass the bar and everything as well.

Sharon Winsmith 6:12

I did Yes. I went to law school. And then I actually did a fourth year that’s just specialize in tax law after that. So I did pass the bar I am I am licensed in the state of New York as a licensed attorney.

Joe Valley 6:23

Okay, good. Now we’ve got that out of the way. Now, some of the things you and I have talked about is that it’s it’s good to have a plan in place before people even build or buy a business and start earning real income, because taxes are generally the largest expense that they have. But the reality is, Sharon is that we’re not that thoughtful. We, as entrepreneurs, don’t plan things out. It’s It’s It’s, you know, ready fire aim more often than not help us with, you know, the first and foremost for those that might be buying a business or, you know, are still your two or three years in? What are some of the the plans that they can put in place for a strategy and structure to mitigate taxes?

Sharon Winsmith 7:08

Yeah, and you make a good point, Joe, that the sooner in the process, you can do this, the better. But what you want, ideally, what would happen is before you buy the business, or before you buy any assets, or hire any employees or start making money, you come to me and we just you know, we sit down and go over? What are you looking at buying? You know, what are your short term and long term business goals and objectives? And then I’d also ask a lot about your personal life. And, you know, where when do you think you’re going to need a lot of cash to buy a house? Or are there situations where you might need access to significant sums of money that might otherwise be tied up in your business. So what we do is, we really help you come up with a strategy. And what that means is, we’ll put you in a structure. So we’ll help you decide what legal entities you should have, should you own the business, you know, through a separate LLC that you set up? Or, you know, how do we want to treat that entity from a tax perspective? Do we want to treat that LLC, as you know, some people may have heard of an S corp or a C Corp can sometimes be a strategy that we use. So I will work with, with business owners to really help them come up with a structure and figure out you know, how, what strategy can we use to really make sure that we’re reducing their taxes, but also giving them access to cash when they need it?

Joe Valley 8:25

You know, it’s interesting, I’ve been self employed since 1997. So it’ll be 24 years in September of this year. And the only, I’ve always had a CPA and the CPA is not qualified to do. It’s, it’s not their specialty tax mitigation is not their specialty, they give me some basic advice here and there, maximize your SAP or 401k or Roth, when I could do what I can’t anymore, but basic stuff that we can read about. And at one point, I met with my attorney, and my CPA, and they created this structure for me. And I think the only ones I think I told you, the only ones who made money out of it was them. It got really, really complicated for me, and I didn’t really feel or see the true tax reduction. And part of the problem, Sharon is that people in this audience and myself included, we are very asset light, right. I at this point in my life, I don’t own any real estate except for the house that I live in. And my business and the people that are listening to this, their businesses, they don’t have, you know, machinery and equipment and things that are going to depreciate like crazy to reduce their taxes. How is it that people can maximize their deductions? legitimate legitimately when they when they own e commerce businesses like I do and like the people in the audience do?

Sharon Winsmith 9:56

Yeah, Joe, and that’s a good point. I mean, that is kind of the issue that that e-commerce, business owner spaces without those large, you know, investments and tangible assets that can depreciate, you really have very little that you can do. So, there’s a number of things that we can do. And a lot of it depends on, you know, specific facts of every different business owner, because no, no kind of two situations are alike. But I’m sure you know, some of the things that you can consider doing is, you know, kind of the low hanging fruit here is, as a business owner, you really need to kind of always think about things, and then after tax standpoint, and so, you know, anytime and this is you, most people probably know you can really, you need to be maximizing your business deductions, and you need to get creative when thinking about, okay, if I want to go on a trip with my family, how can I tack on a business meeting or some other business purpose that can allow you to then deduct either all or a large piece of that trip? So you really need to be thinking about things and then after tax standpoint, and how can I maximize deductions across the board. And that is the beauty of being a business owner, you know, if you’re an employee who’s getting a W2 and a salary from a company, you basically cannot deduct anything, but when you become a,

Joe Valley 11:08

so a couple of summers ago, I went to Switzerland, I went to France and Switzerland with my family and another family came with us, should I have set up a meeting, even if it’s just a lunch meeting, or dinner meeting with somebody in France and Switzerland to be able to write off a portion of that trip.

Sharon Winsmith 11:25

So and there are special rules that apply when it’s international travel. So it does get a little bit tricky there, let’s pretend

Joe Valley 11:29

to Wyoming instead,

Sharon Winsmith 11:32

well, but even in the international context, so there are ways it does need to be a bonafide business purpose. So I wouldn’t just grab coffee with someone in Switzerland and then write off a large piece of trip. So you really have to make it you know, a bonafide business reason for why, you know, a piece of that trip to Switzerland with your family was deductible. So maybe it’s you attended a conference for a day, or you know, maybe you try to line out the best thing lineup is speaking engagements, get your name out there, get Quiet Light’s name out there, you know, use it as an opportunity to really market the brand while you’re there. So there’s all kinds of different ways that you could really do something or spend a part of a few hours out of your trip and make that a business trip.

Joe Valley 12:11

So simple thing for me, and I’m going to talk about myself folks here and the things that I could be doing, just as example. So, look, we’re in a pandemic, I haven’t seen my parents, they live in Maine, haven’t seen them for 15 months, and they’re getting their second dose of the vaccine in a couple of weeks. At that time, I’d like to hop on a plane or in the car and get up there. What you’re saying though, Sharon, is I need to think about that trip and why not fly into Boston, and go see some aggregators, right? There’s four or five, right? have meetings with some aggregators, rent a car, then drive the rest of the way up to Maine. It’s a complete business expense. Right? What? Most of it except most of it, right?

Sharon Winsmith 12:56

Yeah. Right. Most of it would be and so absolutely, Joe, I mean, yeah, get creative and find ways why, exactly like you said, why wouldn’t you take that opportunity to tack on an extra, you know, few hours a day to do a bonafide.

Joe Valley 13:09

So just some forethought on trips like that? What other what other types of business deductions could people think about in advance of actually taking trips and plans and things of that nature.

Sharon Winsmith 13:21

So a big thing that you can do is with your car, because that actually is an asset that could be depreciated. So you can actually take your car and make it a business car, or you can make it largely a car that you use for business purposes. And then that can allow you to take some depreciation for your car, or it can allow you to deduct the fuel expense, you know, when you’re going to see a client, that kind of thing. So your car is a great asset where you know, you can use that as as more of a business asset than something used in your personal life.

Joe Valley 13:49

So most of us in the e commerce world really don’t need our car to run our business. Now, because of the growth of this, there’s more people that we could visit locally, right? If I had to Charlotte, I can go see Bill D’Alessandro and a bunch of other folks that are in the e commerce space. My CPA has always told me that I can I need to track my miles that are used specifically for business, and I can only deduct those. is is is that what we’re limited to? Or is there an alternative in terms of you know, depreciating the entire vehicle?

Sharon Winsmith 14:28

So what you said is generally right, I mean, you’re in a bit of a different situation than I am Joe. So for example, I am in New York City and I do have a car and that is a business car because I really only use that car for business purposes me otherwise you don’t need a car in New York City. So for me, it’s a little bit easier. But for you You’re right. I mean, you are using the car largely probably for personal rather than business unless you can kind of change the way you think about that. But you are right, you would track the miles and then you know you get a certain deduction for a piece of those miles. But if you’re Going through a client or something business related, and you fill up the car on the way, I mean that that is a that fuel cost is a business expense.

Joe Valley 15:09

These are all low hanging fruit things that I think most people in the audience probably know about what let’s talk about the big things, the things that you’re going to advise me to do in the coming years. And some of those are making investments that don’t have anything to do with my e commerce business. It’s looking at, I think you call them tax preferred asset classes, can you can you, in broad terms, talk about what you’d advise me or somebody in my position to do when I have no write offs? And these low, low hanging fruits? They don’t add up to all that much. So what can I do to live like you and pay almost no taxes?

Sharon Winsmith 15:49

So and that’s exactly right, Joe. So you do need to start thinking about where can I make investments and assets classes that are going to either give me large depreciation deductions, or give me kind of tax free cash flow? And so I think kind of a mistake a lot of people make is they take the money that they get from their business or their salary, that they pay themselves from their business. And they put it into a stock. Yes, yes.

Joe Valley 16:14

Yes, yes, I’m guilty. I’m guilty and guilty. That’s all I do now, automatically send a certain amount of money to Brian up at Morgan Stanley, and Portland, Maine, every single month. I’m an idiot. So please, yes, plain ol. Like, I’m not an idiot. I’m kidding. But explain all the ways that I am doing things wrong. I think I understand it. But I want to make sure that I have the capacity to do it. Right. So there’s, there’s a payoff. And, you know, people are going to need to really understand, is that payoff worth it. So let’s, let’s talk about what some of those investments would be. And then how we create, make sure we don’t create second or third jobs for ourselves.

Sharon Winsmith 17:01

Yeah, so the absolute best best asset class to invest in from a tax perspective is real estate. So we all kind of heard recently that Donald Trump doesn’t really pay any tax. And so a lot of people are really surprised by that. But I think anyone in the tax community was kind of like, well duh, he’s, um, he’s a real estate investor. So you really would struggle to make a net profit, you know, you might, you’re going to make cash and you’re going to get cash every month. But you’re not paying tax on that cash because you get these really large depreciation deductions that can offset that income.

Joe Valley 17:33

So let’s actually do two things. Because one thing we didn’t do was defined depreciation, and we’re just you and I understand it, we’re assuming that people listening to and then a question about interest deduction at certain income level. So would you define depreciation in this case, when it’s real estate, please.

Sharon Winsmith 17:52

So depreciation, so I go out and I buy, let’s say, an investment property at the beach that I’m going to use, I’m going to rent that out if you know short term rentals. So when I pay for that property, I get to depreciate the value that is attributable to the building. So you have two pieces, you have the land that the building sits on, and you have the building itself. So you cannot depreciate the land piece so that that’s just you don’t get a deduction for that. But the depreciate, I can depreciate the building. And as you can imagine, that is a significant sum of money

Joe Valley 18:24

is so 17 years, how many years is the depreciate

Sharon Winsmith 18:27

depends, it depends it for residential rental, it’s 27 and a half. But there are situations where you can accelerate and pieces of those deductions, I won’t get into the, you know, the nuances of those roles. But so if I go out and buy a million dollar rental property, and let’s say, let’s just say for argument’s sake, a million of that is attributable to the building, a piece of that would be the land, but I can depreciate that a million over the span of, you know, 27.5 years, but there are ways to speed that up a bit. So any rental income I get is going to be pretty much completely offset by that depreciation alone. And then on top of that, you’ve got other deductions related to the property, like property taxes, and that type of thing that you would also claim against that rent.

Joe Valley 19:14

So if all I do is break even on that property, and get to enjoy it now and then like, I think you are up in Cape Cod right now, instead of being in the city, a million dollar piece of real estate deducted over 27 and a half years is about $36,000 a year. If you’re just breaking even on that you’re saving, you know, you’re you’re reducing your tax load by not 36,000. But you’re taking 36,000 maybe from the 40% tax bracket, it’s 40% of that number. So you get the perk of having a property to go to now and then and you’ve got other deductions as well. And if you do it right, there’s probably going to be some cash flow too. Okay. All right. I got that. All right. Buying a we talking about a week. rental property we talking about commercial real estate, or is it just whatever tickles your fancy.

Sharon Winsmith 20:05

It’s really anything I mean, any asset, any building that you’re going to rent, whether it’s commercial or short term rentals, or long term rentals, you can take large depreciation deductions for that as well.

Joe Valley 20:16

And those are probably the most passive, right? If it’s going to be real estate, because you can put a property management company in to manage it for you and not have to deal with the tenants.

Sharon Winsmith 20:26

You can’t there, you can. So there are there, you need to differentiate when you’re talking about real estate investing between passive and active. And so if you are just a pass, and you can also invest in real estate funds, so I have a lot of investment, I don’t have the time to really actively manage real estate because I focus most of my time on my tax business. So I invest in real estate funds, they give me cash, they deposit cash into my bank account every month, and then I get a K one at the end of the year from them, where I got, you know, this amount of rental money, but here comes my depreciation deduction, that’s going to completely offset that

Joe Valley 21:00

when you’re investing in a real estate fund, you actually get the depreciation benefits

Sharon Winsmith 21:04

you do that gets passed on to the to the owners of the property, so you still get those benefits. And then you are I will, I will caveat that as a passive investor in real estate, you are subject to a limitation that you typically cannot use those losses, because you’re going to show from a tax perspective, a net loss on that real estate, you cannot usually use that to then offset your other active income if you are a passive real estate investor. But if you can, if you have a spouse, for example, they can be qualified as an active real estate investor, that is the best case scenario, because then the losses are not really generally limited between what you can offset. So if you have a spouse that’s got all these losses from real estate investing, and then you’ve got all this net income from your business, those two can usually offset in that case. And that is the best case scenario

Joe Valley 21:54

define the difference between passive and active when it comes to real estate investing.

Sharon Winsmith 21:59

So as a general rule, active real estate, you have to have over 750 hours a year into into real estate investor managing those properties. There’s a few other roles. But so as you can see there is a high threshold that you do have to kind of pass, you can’t just kind of spend a couple hours a week on it, and call yourself an active real estate investor. So you would have to kind of go through these hurdles to make sure that you would be considered that. And you can’t, you can’t be like spending most of your time in a business and then also be an active real estate investor, you have to kind of over 50% of your time has to be focused on real estate investing.

Joe Valley 22:35

Okay, so it’s not necessarily investing in the real estate funds, where you get the income and appreciation that can’t really be considered active, because all you’re doing is giving money and not spending at least 15 hours a week on it, which is terrible. Just the math there.

Sharon Winsmith 22:49

That’s right, you can’t just invest in real estate funds and consider yourself an active investor, you could actively manage real estate properties and meet the definition and then pull in those investments in those real estate funds as well, there is an argument or position that you can take that that should all be included, okay. But even but even if you can’t qualify as an active investor, I would much rather or, you know, I would much rather get cash flow that’s not taxed to me, then have this money, you know, 100% of that money in a stock account that I’m going to pay 40% tax on at the end of the day.

Joe Valley 23:25

Okay, so my, my brother just opened a storage rental unit facility, you know, we can store your extra junk. And he’s got one building now. And his goal is to have two more in the next five years. Would it make sense from my perspective, and I represent the people in the audience, to join forces, in a sense with my brother and accelerate the expansion of the storage units and, you know, partially fund or wholly funded, the other two, obviously cut an arrangement with him. And there and there’s, there’s not a lot, I got to be honest with you, the buildings, they’re there, they’re not not worth a whole lot. And they’re probably, you know, the I don’t know how they depreciate, but is that would that make sense in terms of something passive like that as an investment option?

Sharon Winsmith 24:19

That would I mean, assuming the numbers work out and the numbers make sense, then yes, that would absolutely be a good option. There also are a lot of passive real estate funds that you can invest in that do specialize kind of in the storage unit space as well, but that also qualifies as investments in real estate that she could depreciate. Okay,

Joe Valley 24:38

so I’m gonna end up being a passive investor, because I’m not going to put the time into it. My wife might be active, but if we’re both passive, really just the storage unit thing we’re really just investing in, and is it ETFs that we are focused on real estate?

Sharon Winsmith 24:54

It’s really fun. I mean, it’s just real estate funds. Yeah. And then you know, You, the law says that kind of accumulate with respect to those passive investments and the real estate, then we’ll just, you know, you get to carry those over and you’ll get to take those and the year that you actually dispose of the property, the underlying property to which those losses relate.

Joe Valley 25:15

So I’m, you know, thrilled and excited to be doing some of these things to reduce my tax burden, as long as it’s not gonna cost me a lot more time. And I’m not going to negative cash flow, I don’t have to write a check, I don’t want to write a check every month to just reduce my tax burden. That makes sense, but it doesn’t feel right. So I get it, I understand what let’s talk about some other alternatives, right, many of us listening, or speaking, in my case, live in, you know, relatively small towns, and we all have homes. And, you know, I always see, you know, I’ve got an air conditioning problem right now. And the folks that will come by, I never feel like they’re very good at marketing and services, I thought, you know, if I wasn’t doing what I was doing now, maybe something like that would make sense. But that’s very service oriented. Actually, there’s not a lot of equipment there. I guess other than trucks that people drive to go and perform the services with something like that make sense? If it’s fairly passive, and we can all be like Shaquille praslin put a seal in place to run the business. folks listening probably know who Shaquille is, you don’t know yet. But would that make sense? Or what do you think that?

Sharon Winsmith 26:22

No, that that could make sense. I mean, the best if you’re going to do that, and kind of buy or invest in these companies that you’re going to run more semi absentee, the bigger depreciation deductions that you can get. So that one sounds good, because you could depreciate the trucks. But when you think about like the shipping, you know, businesses, those types of things where the truck is a large portion of that, there’s some franchises that you can, you know, buy where there’s really large investments and you know, big tangible assets like that. Laundry mats, things like that car washes, other things like that, where you could be a passive investor, but they’re going to kick off, you know, cash flow to you, but there’s going to be these large depreciation deductions that can offset that are great investment. I like the idea of a laundromat, or carwash, that

Joe Valley 27:08

sounds very cool. What about what about retirement funds? might my CPAs always you know, having me max out my SAP, I tried to figure out, you and I talked about a backdoor Roth, I’ve got money that’s not in a Roth, I’m not qualified to put money towards a Roth anymore. You had said at one point to stop investing, or stop using 401, KS and IRAs and things with traditional IRAs and things of that nature. What what in that area, that part of our investing? Would you recommend people focus on and change?

Sharon Winsmith 27:39

Yeah, that’s an excellent question, Joe. And this is one of my favorite talking points, because I absolutely love hate.

Joe Valley 27:45

You’re about to geek out on this then aren’t you? Okay, go.

Sharon Winsmith 27:48

I hate 401K’s I hate traditional IRAs, the first thing I would tell any client is stop. Unless you are in a situation where your company is matching what you’re putting in, which is not going to be the case, when you’re the business owner, then stop contributing to those. All you’re doing is deferring the tax burden down the road. And if it’s terrible, I’ll talk to you about why those accounts are terrible. You’re right, a traditional IRA is great, if you can, you know there are there are income limitations on who can make contributions to sorry, to a Roth IRA. Yeah. So if you can do a Roth IRA, and you are below those income thresholds, those are great. I’m a big fan of Roth IRAs. You can do backdoor. So if you do have a traditional IRA, there is a way to do a backdoor Roth IRA. So if you are above these income thresholds, you could still do a backdoor Roth IRA in some cases, and convert that traditional IRA to the Roth IRA. But you will be subject to tax on the amount in that account at that point.

Joe Valley 28:48

So you and I talked about this now, and I just had to make a note to reach out to Brian to ask him about the backdoor Roth IRAs. So I will get that done. And the situation there, folks, is that I’m going to go ahead and pay some taxes. Now, if I do a backdoor Roth, and I convert money to a Roth IRA from my SAP and 401k. But the upside is that it’s going to grow tax free. And when I take it out, I’m not gonna owe any taxes. He didn’t want to pay anything at all. So I’m willing to pay it now. Because odds are, taxes are just going to go up in the future. Simple as that I’m going to be at a higher tax bracket and taxes overall, will probably go up. Alright, so what? I’m sorry, go ahead.

Sharon Winsmith 29:33

Well, there’s a few other things I mean, with 401k is, for example, you’re very limited in what you can invest in, you have very little control over you know, what investments you can make and can’t make, as well as the absolute worst part about these retirement plans is that when you die, the full amount is subject to inheritance tax. So if you’re above the estate tax threshold, your your heirs are going to get those accounts and be subject to tax on 100% of the money that’s been there. And another thing you mentioned Is that we don’t know, we can’t predict what’s going to happen when we retire. But if I were a betting person, I would bet very strongly that tax rates will go up. And they will go up a lot over the next few years. And we can, you know, debate the reasons why that would happen. But I just, I can’t foresee a scenario where I wouldn’t rather pay tax on that money, let that money grow tax free in a Roth IRA, and then not be subject to estate tax on it not be subject to income tax on it when I take it out. And even if you can’t do a Roth IRA, there are other strategies that are very similar, that we can work with, you know, some of these high earners to get them in similar situations that basically are very similar to what a Roth IRA.

Joe Valley 30:41

Yeah. So, you know, I don’t qualify for a Roth anymore. And my, my CPA always has me, you know, I take a certain amount of payroll. And at the end of the year, she says, Well, you know, take this extra amount so that you can max out your SAP and I think this year, I’m like, contributing 50 $55,000 to my SAP, your advices. Don’t do that. I can’t if it’s new money, I can’t do a backdoor Roth, I assume, right? Yes or no? It’s new money.

Sharon Winsmith 31:07

Um, well, there’s very, there’s very few situations where you can do a backdoor Roth IRA, but you can’t, you can’t kind of keep doing them. Right year. Okay. So yeah. So

Joe Valley 31:18

your advice to me, and I haven’t seen the full details yet. But I can tell it’s going to be just stop doing that and invest in something that is passive. And there’s, there’s lots of depreciation opportunities,

Sharon Winsmith 31:31

right? Absolutely. So yes, and there are some other kind of other ways where that we’ll talk about further where it basically can get you in a structure where it’s going to mimic a lot of the benefits of a Roth IRA.

Joe Valley 31:43

Okay. And I know, I’m simplifying the hell out of this. But you know, I’m simple minded, what can I What can I tell you? All right, so stop using 401Ks, and traditional IRAs, and those, those folks, they are earning too much to contribute to a Roth at this point. Anyway, they’ve got to consider taking that money that they would be putting into the RA into the into the Sep or 401k, and putting it in something that’s more passive or with lots of deductions. Excuse me, folks. Okay, any other tips or thoughts on that, as you want to geek out a little bit more on on 401Ks and traditional Roth,

Sharon Winsmith 32:20

the only other thing I mentioned is there can be I won’t get too far into the details, but there can be life insurance policies that we can set you up with that will really will work with an insurance company to set that up. But they basically can give you a lot of the benefits as well as really have a good estate tax benefit, where you’re not getting hit on the estate tax on the full amount. Because life insurance policies if set up properly, you put them in the name of the beneficiaries, and they come out of your estate, so they don’t even go through your estate for estate tax purposes. So that’s just another example of a tool that we can use you and I didn’t even talk

Joe Valley 32:53

about it. I’ve got someone me, we’ve got an umbrella policy. You know, my my guys at Morgan Stanley, I would say probably 16, 17 years ago, pitched me on $100,000 life insurance policy, one time $100,000. And it would be worth 10 million when I died, even if I died a year later. And I did the math on it, and I was gonna invest all of this money, and I was gonna let it sit and I’m not gonna die young and all of a sudden, it was gonna be worth so much more. I kind of wish I did it. Point blank. There’s,

Sharon Winsmith 33:28

yeah, it’s important. It’s important to make sure you also work with a tax person, because most of these types of insurance policies don’t work to accomplish what we want to accomplish. It’s only very specific types. And then yeah, so we can really set that up where and you can also borrow from it. So if you do need that money after retirement, just like you would have been taking distributions from your 401k or IRA, you can borrow against this policy and get the same effect, but in a more tax preferred way.

Joe Valley 33:55

So part of our discussion, when you do the full workup is going to be about insurance as well. Absolutely. And you’re gonna make me change everything I’m doing, which is good. That’s what I’m looking for. I need to, again, I pay a ridiculous amount of money in taxes, and I just shrug my shoulders and say, Okay, well, I’m not Donald Trump in many, many ways. I’m not him, but I’m not I’m not a real estate mogul where I’m maximizing every possible deduction. And I’m paying a lot in taxes. All right, okay. Ultimately, we’re all going to pass on our businesses to somebody. Either, it’s going to be a new owner that pays us for it. It’s going to be a child or spouse. Or maybe we’re just going to let it die on the vine, which is probably the worst option. We always acquire. I talk about, you know, make sure you decide to sell your business. I’m sorry. I said that completely backwards. Folks. You’ve heard me say it a million times. plan to sell not decide to sell plan to sell your business. You don’t want to wake up and decide. I hate this. I’m tired. I got to move on. It’s too much risk. I have too much inventory. These Chinese folks are killing me or you know, my utility patent is expired, you want to plan your exit. And we always talk about it from a preparing your business to sell. But from your perspective, you want to get people into conversations with you long before they’re deciding to sell. You want them to plan it out so that you can minimize their taxes as much as possible, right?

Sharon Winsmith 35:20

Absolutely. And that will impact the structure that we put you in from day one, depending on what types of exits you’re thinking about. And there can also be restrictions. So, you know, if you’re thinking about IPO and your business, at some point, we’re going to need to know that because we’re going to have to put you in a certain structure that will allow you to do that.

Joe Valley 35:37

Let’s assume most people in the audience are not doing that. I have a client. Now, but yeah, let’s assume they’re not most, most people are probably just on the hamster wheel. You know, they thought the entrepreneurial life was gonna be amazing. They’re spinning, spinning, spinning, I can’t get off. And they just they’re going to jump off when they exit. So they’ve got to, they’re probably an LLC or an S Corp. Probably 95% of the transactions that I’ve done over the last decade are those what kind of quick little thoughts and ideas can you give out? I know that no two businesses are alike, nor no two people in the audience are alike. But what what would you throw out there for them to consider?

Sharon Winsmith 36:13

Yeah, so there’s a number of different things. And it will depend on kind of what what specific structure you have in place. But, you know, as you mentioned, Joe, it’s the vast majority of time, it’s an asset. So you have very few buyers who are willing to do a stock sale if you do get it. But that’s great, because there’s a lot of flexibility that we have there to plan for that. But you don’t want a situation where you’re planning for a stock sale, and then you can’t sell your business because you set your structure up in a way where if you don’t do if you do an asset sale, you’re going to build on that on the taxes.

Joe Valley 36:42

Yeah, right, I can tell you that. Again, 90, probably 99% of the transactions are in fact, asset sales. And in the asset purchase agreement. The asset allocation is probably on average, only 20%. And goodwill is 80%. Now, that doesn’t mean much to most folks. But those listening instead of watching. Sharon is smiling and shaking her head off to Yeah. Okay. Okay. So what do we do for those folks thinking in advance?

Sharon Winsmith 37:14

Yeah, so there’s a number of things that we can do, we could try to structure in an installment agreement where you pay you kind of stagger, you know, the capital gains tax over a number of yours, there can be some risks that are associated. Yeah,

Joe Valley 37:27

yeah, that’s it. That’s that that sounds risky, is that just a simple seller note.

Sharon Winsmith 37:30

So it, you can do it with a seller note, but there’s other ways that it can be done, where the seller is not involved, and you reduce that kind of business risk of I have to then get paid only if the seller, you know, or if the buyer, you know, still runs the business profitably. So there are ways we can structure this where it’s kind of a play on the installment rolls. But you don’t, you’re not contingent on, you know, whoever comes in and buys the business paying you On that note, it’s really done for through a trust, right.

Joe Valley 38:00

So call we had someone on the podcast to talk about those things. What does

Sharon Winsmith 38:03

that call? Well, there’s a number of different trust. There’s the deferred sales trust, which is very popular for for business owners, there’s charitable remainder trust that can be used if you kind of want to if you’re want to develop or sell, you know, ultimately give a piece of your estate to a charity. There there is there’s things like Aesop’s but those are a little bit less flexible. And there’s only really work in a very specific fact pattern.

Joe Valley 38:25

Yeah, we don’t we acquire, like, we don’t have enough people on payroll, or right, you know, because we’re a lot of independent contracts, which is like everybody in the audience. So I don’t think any SOP is going to be an option for 99%. But the charitable remainder trust the other types of trusts. Were just for the record, folks, it’s not an urn out. And it’s not a seller note the money goes into a specific, call it a middleman, if you will. And and it’s there for you. And you get paid on that every year and you’re mitigating your taxes, because you’re not paying all your capital gains taxes up front, that one’s so correct. That’s right, that broad sweeping terms. I know it’s not correct, but in broad three returns the general picture.

Sharon Winsmith 39:05

Yeah, that’s the general idea. And then there’s other kind of, you know, I call them estate planning mechanisms. But there’s other mechanisms that can be used, you can set up family office, you know, structures that might make sense in some fact patterns as well. There can be ways to you, you know, give over time a piece tax free to your kids, so that some of the game goes to them, but then you have the kiddie tax rolls to think about. So there’s really a lot of nuances

Joe Valley 39:32

what level of let’s talk actual numbers like we did at the beginning where it was a million dollars against somebody selling their business for a million bucks. You know, we generally say look, ballpark on average, you could be looking at somewhere around 25% state and federal depending upon what state you live in. And it goes up and down depending upon the size of their, their, what their net income is, of course, but it with these different trusts. Can you take that? You know, typically averaged 25% down to 20, or 15, or 10? Or what are we talking about in terms of total savings.

Sharon Winsmith 40:06

So and you have to examine if it makes sense because these trusts aren’t, they’re not cheap. I mean, they are complex. And they are, they do cost money to set up. So sometimes if the sell price is on the lower end, it doesn’t make a lot of sense, your definition of lower. So when you get into a self price of a couple million, that’s when these things I think, start to make sense from an economical standpoint,

Joe Valley 40:27

our average our average close transaction last year was 1.7. So we’re getting close. Well, right,

Sharon Winsmith 40:31

right. So so these are more situations where you would start to think about these things. And it depends, I mean, they’re, they’re structures where you can eliminate the capital gains tax completely, but you will have to pay some tax on other aspects or items related to that money that you’re deferring. But, you know, typically, you could stagger it out over a couple of years. And that way you can do it and make the amount that you receive, such that you’re in a lower income bracket. And your tax rate is lower each year, rather than just a big, you know, lump sum head and one year, but the tax rate is actually going to be a lot higher than 24%. Because the federal rate would be 24. And then, you know, whatever stayed on top of that, as well, as, you know, there there could be other taxes that would apply as

Joe Valley 41:16

this is what the new administration, we’re assuming that this is gonna go up, has it gone up already? Or is it due? This is we’re talking in February of 2021?

Sharon Winsmith 41:24

It has not gone up already. But I personally would expect the corporate tax rates go up and the individual tax rate to go up, if not this year, or next year. So

Joe Valley 41:34

at what point? Do people at what point? Is it too late to engage you in this situation? For by way of example, I’ve got a client $5.5 million listing, it’s a C Corp. It’s a very sellable business, and you’re going to get it sold, already listed too late. Now on to the other one was, he’s launching something in two days for $23 million. And that’s an S Corp. Neither one of these folks have engaged with someone like yourself, Is it too late for them? Or is it still worth a conversation

Sharon Winsmith 42:07

is I would say, as long as the sale has not gone through, it’s always worth a conversation. And there can be situations where it is too late to set these up. You know, if you if you’re under contract, maybe we can do something. But again, it’s always better to come as soon as possible. And honestly, we should be talking about how you’re planning to exit before you even start the business. Because that that’s really when you want to structure that I know, I know.

Joe Valley 42:31

I know that. I know, I know. And, you know, that’s great, but it’s just not reality, right? People, I attract these things, and they, they hustle and they work hard and they wake up and all of a sudden they’ve done 5 million in revenue and their business is worth you know, four or $5 million. That’s not a that’s not a multiple of earnings, folks. It’s multiple discretionary earnings still. Okay, so all of this, they’re not going to call you before they ever started business. I can promise you, right? They’re gonna call you and go, Oh, wow. My business I thought was worth a half a million but projecting out I think I’m worth 10 million by the end of 2021. What do we do? Those are the conversations that are going to happen. And you can still work with them. Right? They haven’t signed the agreement. You can still work with them. All right.

Sharon Winsmith 43:17

Yes, absolutely. Absolutely. We can still work with

Joe Valley 43:20

all right. All right. So in my situation, Sharon, I have any commerce bookkeeper. I have two of them, one for Quiet Light one for my other business. And I have two CPAs, one for Quiet Light and one for my other business. I have a financial advisor at Morgan Stanley. And and very shortly I’ll have you do I have the right team in place the right experts? Or maybe you don’t know, because you haven’t met these other folks? how important it is, is it to have these people being able to communicate with each other or having the right team in place in general.

Sharon Winsmith 43:59

I think that is one of the most critical things to the success of your business is having the right team in place and having it in place as early as possible. I think what you mentioned Joe, you know, having a good tax person having an attorney, having an insurance is very important. And so anytime you do anything big with your business, you have to take into account insurance risk and what that might mean as well as insurance can then become a part of your kind of wealth building strategy, you know, as we’ve talked about, with some ways to kind of, you know, instead of doing this 401k that’s a whole new mindset.

Joe Valley 44:31

That’s a new mindset insurance is a wealth building strategy. I’ve got to focus it is

Sharon Winsmith 44:36

it is and so and and then a financial if I’ve got a financial advisor is always important and I think it’s important that you make sure you’re teaming with the right people. I think you know, people always want to just pay they they’ll shop around for the the cheapest CPA out there and they’ll pay 1000 bucks to have their return done. But my question is that CPA really bringing you strategies that are going to help you reduce your tax. So

Joe Valley 44:58

by the way, folks, I told Sharon that my CPA cost 1000 bucks. I think she just threw my CPA under the bus?

Sharon Winsmith 45:05

No, I actually thought you were paying less than that. Right? But that’s very common, I have people come to me and they’re paying, you know, $800 for a business that’s worth, you know, several million. And so I view myself, I’m really a member of your wealth planning team, I’m not, you know, I do file your tax return. But that is kind of, that’s not really the value add service that I provide. It’s really in partnering with you, and helping you identify these strategies, which are going to, you know, make investments and more tax deferred assets and that type of thing. So that’s what

Joe Valley 45:38

I am. Alright, definitely gonna have the team in place. What if somebody wanted to engage with you? What’s, what’s the process? Is it I mean, obviously, they can find you there reach out, and we’ll give you their contact information in a minute. But is it you? What you and I did? Is it fairly common you and I had a conversation about all of my assets, and where where things were, we didn’t even talk about insurance yet. Talked about my kids, school, German funds, all that good stuff. And you’re going to take, you know, a couple of weeks and coming together with a plan and then present the plan to me. And then I we decide to implement and move forward with it or not, right?

Sharon Winsmith 46:14

That’s right. Yeah, that’s right, Joe. And then I always offer a free, you know, phone call as a free consultation. And so, you know, I’ll be able to tell really quickly, are you is your structure already optimized, and there’s nothing I can do, are there things that I can do, and I’ll tell you, if I, if I can’t save you any money, I’m not going to charge you. And that’s the biggest tax that will be when you go to sell your business. And so that’s where the value we can really bring what we’re really show itself.

Joe Valley 46:37

And that folks means that you have to plan to sell don’t decide to sell, I know I got it reversed earlier on. But it’s all part of the bigger picture that we’re doing here at Quiet Light, it’s, it’s, it’s not just, we’re not just here to earn money off of you, right? That’s not what we do, the more we help you, the more you’re going to earn and the more you’re going to save. And that’s why Sharon is here on the podcast, because you’re going to save more money, if you connect with her. When you decide to sell your business. And we always say eventual exit, right? We’re not here to help you exit today or tomorrow, it’s your eventual exit when the time is right for you. If the if the time is next week, so be it, we’re here to help. But ideally, we want to see you build a more valuable asset for yourself. And oddly enough, it helps Sharon earn more money and also earn more money. But you get to keep more money. At the end of the day as well, your business is gonna be worth more, it’s going to be an easier transaction, it’s going to transfer easier, you’re gonna have a better deal structure. At the end of the day, you have more money in the bank, and you’re going to sleep better, right? You’re going to sleep better, because there’s not sorts of all sorts of entanglements for 12 to 36 months after closing, when you’re hoping and praying that you get paid. On the back end. We want to put you know, the best deal structure together upfront and save as much money on taxes as possible on the way. Okay, folks, it’s Sharon Winsmith, from Winsmith Tax. How do they find you, Sharon,

Sharon Winsmith 48:02

you can go to my website at winsmithtax.com and schedule a free consultation or you can email me at [email protected],

Joe Valley 48:09

I would highly recommend you do it. Folks, I’ve talked to 1000s of you at this point. And hundreds of you should be having this conversation we’re sharing right now the rest of you should be paying attention to all of what she said today, and looking at different alternatives until your business is going to be big enough or moving in that direction. Or if you really want to do exactly what she says and you don’t own a business yet, but you’re planning on buying one or building one, then you would call her. But I don’t think you’re going to get any of those phone calls. Because we’re entrepreneurs. We say, we got this, and then we don’t and then we have to hire you to help us unravel and fix and go on the right path. So, Sharon, you’re awesome. I can’t wait to mitigate my taxes and save an awful lot of money on an annual basis. Especially if I ever decide to exit and I’m not going to live forever. So at some point, I would exit there’s no question about it. Thanks for sharing your wisdom and experience with the audience at Quiet Light. I will perhaps have you back on and we’ll talk about an update of my own personal tax situation to make it more real for the audience.

Sharon Winsmith 49:13

Great. Thanks so much Joe. appreciate you having me on.

Outro 49:20

Today’s podcast was produced by Rise25 and the Quiet Light content team. If you have a suggestion for a future podcast subject or guest, email us at [email protected]. Be sure to follow us on YouTube, Facebook, LinkedIn, Twitter and Instagram and subscribe to the show wherever you get your podcasts. Thanks for listening. We’ll see you next week.