16 min read

Moving from Reactive Tax Panic to Proactive Strategy

Moving from Reactive Tax Panic to Proactive Strategy
If your current tax planning consists of waiting for your CPA to tell you how much you owe in April, they aren't planning; they're just reacting. And that reactive approach might be costing you your own paycheck.

In this episode of The Millionaire Dentist, CPA Brodie Hough joins Jarrod to break down the costly tax and accounting pitfalls that plague dental practice owners. We pull back the curtain on why relying on prior-year estimates creates massive cash flow strain, and why chasing trendy internet tax "hacks" is a poor substitute for a healthy business foundation.

 

Announcer:
Hello, everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices to help you become the millionaire dentist you deserve to be. Please be advised we do speak with an honest tongue and may not be safe for work.

Jarrod Bridgeman:
Hello and welcome to The Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey Hiers is out traveling today. So instead, I brought in Brodie Hough. He is a CPA, and he's one of our, what do you call it here, a lead head tax dude?

Brodie Hough:
Sure. I think that's exactly on the website, I think actually.

Jarrod Bridgeman:
That's the plaque on your wall.

Brodie Hough:
Yeah, very good recall right there.

Jarrod Bridgeman:
Brodie, thank you so much for stopping in today. I wanted to bring you in. You've been here for a little while now with the company and you spend a lot of time obviously working with our clients and working on their taxes and working on the whole accounting world and the breadth of all that, and what are some common things you may have seen for people who are new to Four Quadrants and some of their previous CPAs or bookkeepers, I would say not doing their due diligence, what are some of the common things that you might have seen, some common mistakes or things that have been overlooked?

Brodie Hough:
Yeah, and I mean, I think there's definitely a couple points we'll hit on that I would say. I mean, they're not happening with every case that we look at as a potential new client, but there's a lot of commonality between a lot of these. Every new client's a brand-new case for us, and looking at it and seeing what we can obviously help with on the tax and accounting side.

Jarrod Bridgeman:
Just really, everybody's practice is unique, their personality is unique, geography, and all that. But again, there are in the world of taxes, besides some differences in states, there are federal things that are across the board.

Brodie Hough:
Correct, 100%. And I mean, even with that, there's probably a couple things in here that I'll hit on that are state-specific that cover a lot of different states as well. So I think one of those first things that we really look for, and this is kind of more just an overall theme of when we're looking at the tax returns, prior tax returns, financials and all that, seeing all the connection points between that normally or tends to be pretty normalized in the new, not new, but in the traditional CPA accounting world, that there's a lack of proactive tax planning. It's more of a reactive tax planning, which is what I mean by that, specifically when you look at tax returns, a lot of the times there's that tax surprise coming when, especially with a lot of the people that we're talking to, they are set up as an S corporation partnership, whatever that might look like. It's a pass-through entity. So they get taxed at the individual level for their business income. That can create a lot of tax surprises.


You can owe a lot of money on that if you have not been paying estimates throughout the year or anything along those lines to pay the taxes for that income that's going to be coming through on the tax return. So just with that... I mean, there's multiple things that go into that. You can incur penalties for having a balance owed because you haven't paid any in estimates. If you have paid in estimates, a lot of the times we just see that they're just giving you a basic number that's going to get paid out every single quarter. It's a flat same number again.

Jarrod Bridgeman:
And that might be based on something from the year prior.

Brodie Hough:
It's 100% based on the year prior. It's going to keep you penalty-safe so you're not going to incur any penalties with that next tax return, but it does not equate to anything that's happening in that current year activity.

Jarrod Bridgeman:
It's kind of a minimum thing you should be doing, but it's not the high level we bring.

Brodie Hough:
Correct. With that, you can create a huge tax liability if your practice keeps continuing to grow like you want it to. Growth comes with more tax liability. That's just the way it is.

Jarrod Bridgeman:
Yet you're basing your own income, your cash flow, everything upon numbers that are lower and out of date, and as you said, with the tax surprises when they roll around come tax time, all of a sudden there's a big chunk owed. We've seen some pretty large numbers with-

Brodie Hough:
Oh, 100%. We've seen huge numbers owed, which then creates either those penalties or just a cash flow problem right there. Oh, suddenly I owe $80,000 or plus even... We've seen more than that, too. It just creates a strain on the practice all of a sudden, and that growth is all of a sudden being harmed.

Jarrod Bridgeman:
And we've seen with a lot of practice owners before they join with us, when they owe that kind of money, they'll oftentimes not give themselves a paycheck. Except their own staff to pay for. So, as a business owner potentially collecting 1.2 million or more, and yet they still can't pay themselves because of things like this.

Brodie Hough:
It can harp the cashflow, which I think a lot of people like to talk about the tax savings that they're doing and all that and not talking about the cashflow aspect too. I think that's something that we do very well here, is we're looking at the full picture, we're just not looking at the tax savings picture. I know that is our moneymaker on the accounting and tax side that we want to have saved us-

Jarrod Bridgeman:
Besides your face, the moneymakers.

Brodie Hough:
Yes. I mean, you said it, I didn't it. But the tax savings aspect, that's obviously the eye-opener, we can save you this much in tax savings and blah, blah, blah.

Jarrod Bridgeman:
Well, and then are they surprised about that because they've maybe been mentally trained or have been looking online for various "strategies" to save money, and it's always like some kind of game or shtick where like, oh, I better take some pictures of my kids and throw them on the website. Now I can pay them out. Now I can do... I better buy this piece of equipment I'm never going to use to try and save some money to not pay taxes, yet you're paying more than-

Brodie Hough:
No, 100%. I mean, all these tax strategies... I mean, you even see it on TikTok and Instagram and all that, these one-minute videos going, "Here's the new best thing to beat the IRS as a business owner." And I mean, yes, there's some validity to it. Not always, but there is some validity to it. But it's just talking about the tax savings aspect. We say all the time, yeah, it's great to get a $30,000 tax savings based on buying a piece of equipment or something, but just FYI, you have to put 100K towards that piece of equipment. So there's 70k you're out right there just on that.

Jarrod Bridgeman:
And you better make sure it's in use, you use it too, is it a machine that's going to make money?

Brodie Hough:
Correct. Right. And the potential answer is yes, but then do you have the cash flow to handle that and handle that debt for a couple years at least?

Jarrod Bridgeman:
So when some people come in, and you see all these kind of tricks and hacks, like a DIY hack, they do all these different things. They're trying to balance 18 different little tiny things they're doing. What do you flip that on instead of trying to do 18 stupid little things? Is there a simpler way to kind of just start rolling?

Brodie Hough:
Yeah, I think that's the way we kind of handle it, is we're all going for those different tax strategies when it's the right time to do it. I think it's setting the foundation, making the practice healthy, making cash flow healthy, optimizing tax savings in the meantime, still, not just ignoring it and just going, "Yeah, whatever you owe in taxes is what you owe in taxes." We're not going to do that. So we'll still make sure we're using the most optimal accelerated depreciation method.

Jarrod Bridgeman:
And saving taxes on things the practice is already doing, not trying to go out of your way to create something to save money.

Brodie Hough:
Right. But yeah, with the accelerated depreciation I just mentioned. We're not asking you to go out and buy equipment just for the tax savings, but if you need it, go buy it, and then we're going to optimize it, and that's something that's commonly missed, too, is they just take the standard depreciation deduction and then don't get the accelerated tax deduction out of that that they could have taken. And there's different various methods we don't have to get into on today's podcast, but there's multiple routes you can take that, and basically any situation you're in almost, there's some type of accelerated depreciation you can take for always, maybe not the full value of that asset, but for an asset that's bigger than what you couldn't normally. But besides the point.

Jarrod Bridgeman:
Brodie, I've heard this mentioned around the office a couple different times, just talking with you, Kevin, or Steve Levy, the pass-through entity tax. I think I have a handle on that, but can you kind of talk about that with me?

Brodie Hough:
Yeah. So this is one of actually those state items that I referred to a little bit earlier. So this is actually relatively newish. It's depending on the state. I think probably some of the older states that adopted it early are maybe five, six years into it, and then the more recent states are probably one or two years into it now. I think most states now, I believe every single state with income tax, except for maybe a couple, and they're in the process of adding this, actually, I believe, have this pass-through entity tax now. So what's going on here is, especially before the One Big Beautiful Bill, state taxes on your personal tax return would be limited if you were itemized deduction. So you would get limited at $10,000, and that includes all state withholding from your W-2s, property taxes, and basically any other state tax that's applicable to your state.


So people are reaching 30, 40-plus-K pretty easily in a lot of the cases that we're looking at with practice owners and higher-income worth people, that they were just getting limited on that state tax deduction. So this was a state workaround that to where you were able to... Basically, what's going on here is you are adding a business tax. So this taxes the business at the state level for... Depending on the state, it depends on the percentage, but it's usually three to 5%, within that range.

Jarrod Bridgeman:
So, because you've mentioned this is in the grand scheme of things, relatively new, five, six years at most for some of the states, is that why some practices have kind of missed this? Because they've been in business for 20 years and now this is... And this kind of touches back on the proactive-

Brodie Hough:
Correct. 100%. Yeah, look at you making the connections here.

Jarrod Bridgeman:
I appreciate you helping walk me through this.

Brodie Hough:
But no, yeah. So that is ultimately something that, in this grand scheme of things, what it's doing is you're allowed to make estimated payments, your individual estimated payments that would come out of your personal funds. You can make it through the business; you get a business tax deduction, which lowers your tax liability for the business, and then you get a state credit on your return as well. So it's a little workaround there that was actually... We were worried was potentially going to be next with the One Big Beautiful Bill. I think about every version of the One Big Beautiful Bill had this being axed out because they were already going to increase the state deduction allowed, but they actually, in the last minute, revised that and kept it in place.


So it's still active and very useful for a lot of practice owners now. So that is something that's very commonly missed, and it's very rare that we actually do see that optimized because it is new. And again, like you said, the proactiveness, there's not a lot of CPAs proactively looking at, especially at the state level, that's when you're getting very unique in that aspect as well.

Jarrod Bridgeman:
Okay. In terms of... This might be a stupid statement, a stupid question, but I mean, how important is really proper reporting to even begin doing all this stuff? I mean, if you don't have the right numbers, you're kind of screwed from the get-go.

Brodie Hough:
Yeah, and with the proper reporting aspect, it can be just as simple as not reporting something in the right form. Or we've seen it in the past, where shareholder health insurance, excuse me, that is very scrutinized by the IRS, meaning that it has very specific rules on how to report that. That needs to be reported... If you pay your shareholder health insurance or you pay for your health insurance through the practice, you can take that as a deduction on your business, but you have to include it on your W-2 as income; then, with that, you can take the deduction of it on your personal return. So it's ultimately worth it in tax savings, but if you do not report on your W-2, all of a sudden, that deduction on your personal return is technically not allowed.


So we've seen it to where they're reporting it as other income, but not through the W-2, and technically, that's not right. So if the IRS ever came back and looked at it, you're probably out of deduction and owe some taxes on that, plus penalties and interest for not doing it correctly. So that's just one example. But yes, overall, the proper reporting aspect, it's a minute detail, but it can open up potential IRS red flags that can flag you down and then bring on an audit, and no one wants those.

Jarrod Bridgeman:
If it has been done incorrectly in the past, is this one of those things that can be amended?

Brodie Hough:
Yes.

Jarrod Bridgeman:
Can you go back X amount of years? I don't know how far back you can go, but that's something you can fix?

Brodie Hough:
Yeah. So usually you can go back... The IRS will only audit you for the last three years as long as there's no ill content there from your point of view of you are actively doing it this way to avoid taxes in some way, which I think would be hard to argue just on the shareholder health insurance example. But you could definitely go back and amend. And the nice thing with this one, it would probably...

Depending on how you reported it, but if you did report it as other income and still took the deduction, it actually probably won't affect you on taxes. It's just you're like, hey, I had to fix this. We wanted to make sure it was within the IRS guidelines to make sure it was reported correctly. No additional taxes are owed, and no additional refund is being refunded to you as well; it's just we really just want to make sure we're crossing the T's and dotting the I's.

Jarrod Bridgeman:
And cotting the Is. Neither one of us can talk about this.

Brodie Hough:
No, no, we can't.

Jarrod Bridgeman:
It's about nap time for me.

Brodie Hough:
I feel that. I say, it's not even noon yet, and I'm with you there.

Jarrod Bridgeman:
Listen, dude, my kids are with my mother for the week. They visit every summer. And so I've been really enjoying my free time this week. But I stayed up late watching a movie, now I'm tired. That's my problem. I party hard.

Brodie Hough:
Yeah. Well, that sounds like the perfect night to not have to deal with the kids or anything. Just be able to, "I'm going to watch a movie."

Jarrod Bridgeman:
Yeah, watch whatever I want. I can watch a scary movie and not be worried about my eight-year-old.

Brodie Hough:
Yeah, that's literally adult life. And then you do it, and then you hate yourself the next morning for it.

Jarrod Bridgeman:
Brodie, in terms of this is an issue I think within companies and internal, external, whoever your teams are, but a lack of communication can really dog just about any business venture or personal venture that you're going on. Do you often find that there is not only lack of communication between a CPA or accountant and the client, the practice owner, but obviously lack of or zero communication between an accountant and my personal planner and financial advisor, and all those things? How badly can that affect your income, your cash flow, your life?

Brodie Hough:
Yeah. I mean, this is a very common issue as well that we see pretty often. It creates a lot of issues. Yes, it might just be timing issues, and that's probably best case scenario with this is just that, oh, your tax return's getting delayed because your personal finance documentation, the 1099s, blah, blah, blah, that's summarizing all the dividends and interests that you've earned over the year in capital gains not ready by the time it's to file the original due date, which is fine. It's not a huge ordeal. But just simple stuff like that can lead to, again, that you're reactive with your tax planning. Even cash flow management that we talked about. If those two parties aren't in direct communication with each other often, the accountant or the CPA/accountant is just going to worry about those tax savings numbers, because again, that's how they substantiate how much you're paying them and everything.


It's like, yeah, well, we're saving you this much in tax savings, and we're getting all the filings done and all that. We're making sure you're in compliance and all that jazz. And then the finance team's just going to worry about your investments. We're going to make you the most money. We don't care what it's going to cost you in taxes, and so on and so forth; we're just there to make you as much money on the back end of what you're saving, which is great. Don't get me wrong. They're both coming from good sides. They want you to be better, ultimately financially, but the communication aspect between those two can be life-changing in how things are planned and how much money you can save. You're not optimizing everything, both between the personal and business, and taxes overall, and just the accounting.

Jarrod Bridgeman:
And again, like we said in the previous podcasts, the better cash flow you have, or the more income you're making yourself, that's more money you could be saving, you could be investing on top of all that.

Brodie Hough:
Yeah. Well, that and then it literally could be just as simple as we can talk with your personal finance team and get you... Okay, you need to pay yourself only this much, and then for tax purposes, we get you to this number, then we take the rest out in distributions because you have the room or something along those lines. So then you're not getting taxed on it, that can go to tax savings, blah, blah, blah.

We'll throw some of it to the 401k. So that's tax-free money right there that you're not getting taxed on. We'll throw a little bit red to the other. There's just so many different paths you can go when we're in communication with them to optimize the whole picture instead of just looking at one little snippet of that whole picture.

Jarrod Bridgeman:
The things I have realized from working here is we don't have a magic bullet, it's not a magic wand, it's getting all these minute details, as you've mentioned, in place and greased and working properly, and then that machine starts clicking. If a listener is out there and they're feeling like, "Yeah, you're right. I've never even heard of this pass-through entity tax. I feel like I have to call my accountant every time anything I see on the news is happening." That's not the end of the world. A lot of people deal with this, but it's not too late to start trying to fix things or at least finding out these red flags and issues.

Brodie Hough:
Oh, yeah. Yeah. No, I think taking that first step and realizing that your current CPA or even the finance side, your pointer are not being the proactive side of things and more of the reactive, that's the first step to figuring out the solution-

Jarrod Bridgeman:
And if they have these issues, they can just call you personally on your cell phone, right?

Brodie Hough:
Yeah, absolutely.

Jarrod Bridgeman:
I'll just put that out there. It's 555... But no, not to cut you off, but I just want our listeners out there to know that these are issues that can cause thousands and thousands and thousands of dollars, but it's not rare. People run into these all the time and it's not the end of the world, but there are solutions and ways and things that you can do to fix this, to make life easier and start having the money you deserve after years of school, years of working in the chair and breaking your back and adult babysitting your staff and all these things, and you just got to take that first step, which I know is hard.

Brodie Hough:
Yeah. No, absolutely. And I mean, yeah, we've talked about all the numbers and how this can help you in tax savings, retirement savings, blah, blah, blah.

Jarrod Bridgeman:
What's it feel like?

Brodie Hough:
Yeah, 100%. That's where I was going, the stress level. You can go down dramatically with having all these things connected, and you don't have to worry about it, and all you need to focus on is the practice.

Jarrod Bridgeman:
And more time at home because you're not constantly working on your books, because things are in order. You still got to do that if you have a team like us, but having time with your spouse, your kids, your family, being less stressed, can afford a vacation potentially. You know what I mean? So this all sounds nice.

Brodie Hough:
Yeah. I mean, it sounds almost too good to be true, but it's definitely, like you said, it's reachable, and a lot of it is taking that first step, like you said.

Jarrod Bridgeman:
And finding someone who knows what they're talking about are proactive because this stuff can be complicated. I'm sitting here acting like I know what you're talking about, and I don't.

Brodie Hough:
Oh, we know.

Jarrod Bridgeman:
Okay. Yeah. That glazed-over look I had in my eyes. Brodie, thanks so much for stopping in. Is there any last little things you think you just need to get out there and make sure our listeners hear?

Brodie Hough:
I mean, just to summarize it, I think that this is truly what we've been talking about today is the difference between a great CPA/financial planner and a good one. You have plenty of good ones out there. It's the ones that are proactive and are coming to you first with solutions when they see a problem, instead of waiting for you to bring up either the solution or the problem to even get the ball started.

Jarrod Bridgeman:
Thanks, Brodie. Folks, by the way, if you're interested in learning more about Four Quadrants and the things that we do, and just want to get some CE credit, possibly, we're going to be hosting some more events throughout the country. We're going to be in Ann Arbor in Birmingham, Michigan; we're going to be in Maple Grove in St. Paul, Minnesota; and we're going to be in Hinsdale and Vernon Hills, Illinois. Check out our website, fourquadrantsadvisory.com, and click on the events button, and you can check those out. Casey and his team will be out and about.

It's really awesome, steakhouse places with a bourbon tasting. It's going to be a little bit of fun. You'll learn some stuff, and you'll walk away being like either, "I'm killing it, I'm great," or B, "Shit. I got to do something," and usually it's the, shit, I got to do something part.

Brodie Hough:
And that's all right.

Jarrod Bridgeman:
That's all right. Brodie, thanks again. And folks, we'll see you next week.

Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why, year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.

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