September 17, 2020
As many of you guys know, we work with a high six and seven-figure business entrepreneurs here throughout California and a few other different states. I just wanted to share with you that we launched a new Facebook group, the Business Success Tribe.
If you’d like to be a part of it, join us. We’ve got a whole bunch of different conversations going on. Most are about making sales, knowing your financial numbers, what tools are working for people, and things like that. So if you want to get access to it, you go ahead and comment on our Facebook page – T R I B E – the business success tribe.
Moving on, yesterday was the expiration of the corporate tax filing. I’ve got an interesting story about that, it kind of reminded me of this story a few years ago. I thought I’d go ahead and share it with you guys.
So basically, a few years back, we had a client we were working with that was in the online space and they were doing really good. Their income was 750,000 or so a year. Their spouse actually hired the bookkeeper and the tax preparer.
What was interesting is that, in their account, the bookkeeper was just plugging away. They were just logging in numbers and not asking any questions, like pulling things in off the bank statement. And from time to time, the business owner would go ahead and share some extra input. Things like different tax receipts that were going on at the moment.
So you might think, okay, well, that’s fine. They’re going ahead and entering the numbers. Because that’s what we do, right? When we hire a bookkeeper or accountant, we just want to focus on running the business and let them handle all the number stuff. Business owners would not want to be concerned with it. Well, it is not a real good way to go.
Another interesting point is, the business owner was actually totally focused on sales reports and what was actually showing up in the bank balance over at bank of America. And so, sales reports were crushing it. He went into the bank of America.com and looked and probably said, “Hey, I’ve got a fantastic five-figure balance in there.” And things were looking really good.
Then there’s the other piece that actually showed up. And that is the accounts receivable for the business. They’re making all these sales, but they weren’t really being tracked as well as they should have been. Questions like, “What did we really get paid for?” “What payments were really being applied towards the invoices?” Things that maybe they weren’t really paid for.
Then it was time for them to go ahead and file their tax return. And you know what it’s like when you go in and the CPA or the tax preparer says, “Okay, so I just need you to go ahead and sign off on the return.” Or maybe they will send over the email that needs to be signed. And away you go. You don’t really look at it. Maybe it is because I’m the guy that’s asking questions about all sorts of things on my return as it goes.
Afterward, they did not realize that the tax return said that they had made over $325,000 net income for that particular year. Lo and behold, they ended up getting a tax bill from the IRS that says they owe roughly a hundred thousand dollars in Texas. Then they were like, “I didn’t make $325,000. That’s ridiculous!”
So what happened after is that, they ended up searching in the attempt to go ahead and see if they could actually amend the return. They went back and said to their CPA, “look, you know, this really wasn’t the case and we realized it, I didn’t take a look at the return. My asylum signed it and got it filed. But we didn’t make $325,000. And this tax bill of a hundred grand is just way over the top.”
So the CPA said, “Well, do you have the numbers? Or the documentation to go ahead and support these new numbers?“
They replied that they don’t. “We don’t have copies of receipts. We don’t have purchases of airline tickets and receipts. We don’t have any of that kind of stuff.”
Needless to say, their QuickBooks weren’t very accurate. That is the reason why they ended up coming across all these issues.
To sum it up, they ended up having to go ahead and file for an installment plan with the IRS for over a hundred thousand for five years. They paid roughly 15 to $18,000 a year, which is $1,800 a month for the next 60 months. And they couldn’t do anything about it. Even if they wanted to amend it, they didn’t have the documentation to be able to support it. If they did, it would definitely flag them for the audit.
You can only imagine the auditor for the IRS saying, “You didn’t make this. Show us.” Because they’re going to want the hundred grand.
As I always say, you gotta know your numbers to know your business. You might think you know your business, but you really don’t. Not until you know what your gross profit is. You have to know what your net income is. You have to know what your percentage of labor is, what your tax liability is looking like on a quarter by quarter basis.
That is, do you have money? Do you have money put away in reserves? Not just for the next Corona that shows up. I haven’t forbidden that you’ve got staying power. But the other is, do you actually have reserves in place to be able to make sure that you’re making your tax installments on a regular basis?
The lesson here is, you got to know your numbers. Double-check that tax return you filed. So, if you didn’t get a chance to file your tax return before the extension yesterday, and you need help. Or your books are a way behind with all the events that are happening here over the last six months or so, feel free to go ahead and message me.
And I’d love to have a conversation. See what I and my team can do to give you a hand. Contact us here.
So until next time, have a good rest of the week.
Chief Experience Officer
“Know Your Numbers, Know Your Business”