Are you banking at the right bank?
Your primary aim as a small business owner is doing the thing that your business does?
Right? Wrong.
More about that later.
First let’s talk about your bank and why I began thinking about the subject of where my client’s are banking. And why you should be choosing a smaller local bank and not that big bank that you are doing business with.
It is all about an IRS examination I am representing. My client banks at PNC Bank. Apparently the appeal is that the bank doesn’t have a monthly service fee. However, it doesn’t provide copies of canceled checks or deposit slips with its bank statements either. And that can be a real issue, especially when the IRS is looking for copies of canceled checks and deposit slips.
In May I wrote in our client newsletter. “How do you explain to an IRS auditor that the $2000.00 cash deposit you put in your personal checking account two years ago is not unreported income?”
Especially if your bank doesn’t provide you with a copy of deposit slips. My client was forced to pay PNC Bank money (hundreds of dollars) to retrieve copies of checks and deposit slips. They seem to have a fee for everything but monthly checking account service fees.
If my client only banked at the local Bank of Springfield or Security Bank down the street. They provide their customers copies of canceled checks and deposit slips. My client’s failure to provide copies of source documents may eventually lead to an undeserved, unwarranted tax liability.
Not having your item images returned to you can be an issue beyond the IRS. Documentation is the key to lower tax savings. Documentation is the key to proving you paid that bill. I can think of many things I would rather do than visit the bank to obtain a copy of a canceled check, instead of finding it in cabinet. Even online access has limits. Many bank limit the look back period of when and what you can print.
Setting aside the lack of available documentation, there is even a bigger, more important reason to consider moving your business to a smaller bank.
Big banks do not loan to small businesses. Small banks loan to small businesses.
Charles Wendel writes in his blog Why Banks Still Don’t Like Small Businesses
“In this hyper-regulated and politically correct world, many banks will not admit that, at their core, they dislike banking small businesses. With actions speaking louder than words, it seems apparent that despite all the hype and “We love small business” signs in the branch windows, many banks either ignore small businesses or are clueless about what it really means to work with them.
Why? First, small businesses are, well, small. You need a lot of them and much of their wallet share to make any significant dollars, to “move the needle,” as bankers like to say. Obviously, consumers are small too, but they are a core franchise for most banks and are both better understood and appreciated by senior bank management, even though they pale in attractiveness to the potential small business offers.
Small businesses also suffer from a perception that they are inherently riskier than other bank customers. During the last downturn many banks proved this to themselves by poorly managing their small business credit scoring and risk management processes. However, instead of blaming their inadequate procedures for their losses, many blamed the small businesses as if the businesses themselves were responsible for the bank’s bad judgment.
Further, bank leadership usually emerges from areas other than small business. The small business segment lacks a champion or, to use a New York phrase, a “rabbi” at the top of the house. At many banks, the segment perennially seems to be treated like Rodney Dangerfield, always fighting to get respect, even though small businesses can provide strong returns and significant non-credit income as well as the depth of a household relationship many banks want and need for growth.
“Smaller banks are generally much better at making small-business loans than big banks. This is because the loan officers and the credit officers typically work in the same building and are able to work on a loan together and find the best way to get it done. Small-business loans typically require careful thought and creativity. There is almost always a twist. The smaller banks are much better able to handle this.” What’s more, larger banks often don’t want to be bothered with handling small loans when they can focus on loans for billions of dollars, instead.”
At the risk of being accused of picking on one bank, here is one more PNC Bank story. Another client was looking to get into the trucking business. He went to his local PNC Bank requesting a loan for a tractor trailer. Excellent collateral. He was partnering with another already existing, already profitable trucking business. Excellent capacity. My client has an 800+ FICO score. Excellent character.
After requests for tax returns, financial statements, projections and other numerous requests, PNC Bank said no. Big surprise. But they did tell my client to come back with his next deal They would finance that one. Go figure.
Dan Kennedy is my favorite marketing guru. He preaches that you should be focusing on one and only one aspect of your business. Marketing. It is where all the money is he says. In fact he is even more radical. You should be the one that is selling for your business, not your employees. You should be selling to all prospective customers. However, if you really want to make it. Earn what Dan Kennedy calls that 7 figure income. You have to become more than the marketer/salesman of your business.
‘Personally, I’ve never liked it.
But I realized early on, it was irrelevant whether I liked it or not.
The question wasn’t, “Did I like it?”
The real question was “How much money did I want to make and how much freedom did I want?”
Kind of like dieting and exercise, the question isn’t “do you like to exercise and eat right?” No the real question is do you like the alternative if you don’t exercise and make the right food choices?
So it’s important, although again, not something I particularly like.
What I’m about to tell you is a transcendental factor in income.
And if you listen to what I say, you could find yourself making a lot more money across every communication channel.
You see, for at least the past 30 years or so, I’ve been teaching that the one thing that usually gets people who are earning below six-figures or a low six-figures in any business up into a high six-figures is the quantum leap of shifting from being the “doer” of your thing to the “marketer” of your thing.
That is still true.
Shifting from being a fitness instructor to a marketer of fitness training. Changing from being a veterinarian to marketing veterinarian care. Switching from a photographer to marketing photography services, and so on, will carry you a pretty good way.
I mean, most people locked into relatively low incomes, regardless of their level of expertise or excellence that they deliver, are stuck there because their primary view of their business is the doing of the thing.
The cooking of the food, the cracking of the bat, the fixing of the tooth, the waxing of the car, the styling of the hair, the – whatever. And when you shift out of that so that you’re actually now in the marketing of that thing, that’s a pretty good income leap.
But truth be told, it has its limits. It’s NOT the thing that gets you to a 7-figure income.
And it is questionable whether it will give you the exact freedom you are seeking. Because although you are making more money, you are also most likely still working a lot of hours for it.
Let me show you what making the next shift can do.
I make 7-figures from copywriting alone. That is only partially the way I make money though. I only spend 20% of my time writing.
Imagine making that leap in your business and only working at your “thing” 20% of the time. How would THAT change your life?
So here’s the thing you must do to make the next quantum leap.As I mentioned, personally it is a thing I never really liked, but I do it because the alternative is worse. So this really is pretty important.
You must shift from focusing on being the “marketer of your thing” to focusing on “the status of the individual providing the thing.”
Because even when you are the marketer of your thing, the focus is still on the thing, not on the greatest possible point of differentiation, which is the status of the individual providing the thing. Increasingly all other options for differentiation are becoming harder and harder to use and sustain. But one thing that will always make you different is who you are.
The easiest place to look for examples of this is with celebrities and professional athletes.
There are professional football players who make a good six-figure income. They are elite athletes who reach an income level that many never will. But, unless you are a diehard fan, you likely wouldn’t recognize their name even if they offer big contributions to the team.
As an example, NFL player Ryan Taylor is probably a name you aren’t familiar with. You probably don’t even know what team he plays for, but he makes a solid 6-figure income and is in his 4th year playing professional football.
In comparison, Johnny Manziel better known as Johnny Football is in his rookie season. He has less experience than Ryan Taylor, yet Manziel makes $2 million a year not including endorsement deals. You probably also recognize the name Johnny Manziel or at least have heard the name Johnny Football even if you aren’t a fan. .
The big difference is that Manziel knows how to market his personal brand. That, more than his ability or experience, has put money in his pocket.
For instance earlier this year, prior to knowing whether or not Manziel would be a boom or a bust in the NFL, Nike signed him to the largest endorsement deal from this year’s NFL rookie class. It had nothing to do with experience or even how well he plays.
So if you want to join the 7-Figure club, then you’ll have to get out of the business of marketing your thing and get into the business of marketing you, even if you dislike doing it as much as I do
“Dumb business owners get a customer in order to make a sale.
Smart business owners make a sale in order to get a customer!”
S Corporation SE Avoidance Still A Solid Strategy
Peter J. Reilly writes a tax Blog for forbes.com. His most recent blog highlights an entry he wrote back in 2013 concerning the use of S Corporations to avoid self employment tax as one of the most popular entries he has written. Below I included a portion of this blog.
“Even though Sean P. McAlary lost in Tax Court, the decision in his case shows that S Corporations are still a valid self-employment tax avoidance strategy. If you operate as a sole-proprietorship, all of its income will be subject to self-employment tax. If you put the business into an S Corporation, none of the income will be subject to self-employment tax. Entrepreneurs will be inclined to heavily discount any decrease in future social security benefits as a trade-off, so organizing as an S Corporation and avoiding self-employment tax seems like a no-brainer for a sole proprietor.
Is The Game Worth The Candle ?
If you convert a proprietorship to an S Corporation, there are some costs to weigh. If you are going to take salary below the FICA max, there may be an effect on future social security benefits. Actually quantifying that is challenging, but you can give it a shot with some of the calculator programs. I have never gone through that exercise and my experience is that most business owners are dismissive of it. So you can take that factor as a “just saying” if you want.
Operating as an S Corporation will require another tax return to be filed, which might cost something. In principle, your individual return should be somewhat easier, since a Schedule C is no longer required. You may need to “remind” your tax preparer of that in order to realize that saving on the individual return that might offset some of the cost of the S Corporation return. If you are a brown paper bag type of client with a masochistic CPA, the realization on doing your return might be so lousy that even without your Schedule C, standard charges might come out higher than what you paid in the previous year. On the other hand if you are a mensch with a CPA who “knows how to bill” your fee will never go down from one year to the next if you don’t ask.
Although there is a good chance that the potential for your individual return being audited will go down, the S Corporation return will be another return that potentially could be audited. I don’t know how that balances out and I suspect that nobody knows, although you will find plenty of people who will tell you they know.
If your business involves significant debt and has irregular income, there are a lot of tax traps in operating as an S Corporation. It gets really complicated if you have multiple businesses and real estate ownership is somehow involved. If you are the type of person inclined to pay the bills out of whatever account happens to have sufficient cash and let your accountant sort it out with journal entries, you may be setting yourself up for an income tax nightmare in your quest to save a few thousand dollars in SE tax. I have known partners in professional practices who contributed their partnership interests into S Corporations and encouraged me to do the same. I never regretted not doing it and they came to regret having done it, except the one who died. I’m pretty sure his executor really regretted it.
Finally, don’t ignore state and local income taxes in planning this move. There can be pluses and minuses depending on which state or states you are dealing with. New Hampshire is a particularly nasty place to fool with S Corporations and don’t get me started on New York City. Regardless, you need to consider state and local taxes carefully, particularly since you are not really saving a very high percentage federally from making this move.
Conclusion
Despite court losses and the lack of any discernible policy justification, it appears that the S Corporation SE tax avoidance strategy is still solid. Small business owners should examine the implication carefully, though, before jumping into it.
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