10 Questions to Ask Your CPA Each Year

Welcome back to The Dental Boardroom Podcast with Wes Read CPA, CFP!

In today's episode, we're pivoting from last week's discussion about reviewing your own financial statements to a powerful new focus: the 10 critical questions you should be asking your CPA every year — not just at tax time.

Why is this so important?

Most CPAs are historians by training — they look backward. But if you learn to engage them correctly, you can push your CPA into a more analytical, forward-thinking advisor role that will transform your practice’s financial success and help you build lasting personal wealth.

Key Points:
• Why Timing Matters: Waiting until year-end to talk with your CPA can cost you tax-saving opportunities. Meet proactively in Q2 and Q4!
• CPA as Historian vs. Planner: Most CPAs are trained to look backward, but with the right questions, you can push them to think forward.
• Financial Integration: The greatest value comes when your business cash flow planning connects directly to your personal financial goals.
• Personal Financial Independence: Route business profits smartly—either spend on personal expenses or build your balance sheet (assets).
• Avoid Financial Leaks: Without good cash flow control in the practice, money will leak away before strengthening your personal net worth.
• Schedule Smart Meetings: Ideal times to meet your CPA are after tax season (May-June) and after October 15th.
• 3 Sections for CPA Questions:

1   Profit & Loss: Understand your goals-based break-even and if you're hitting it.
2   Taxes: Stay ahead of tax liabilities, deductions, and strategic opportunities.
3   Financial Planning: Align your practice cash flow with your long-term personal financial goals.

•   Key Concept: "Goals-Based Break-Even" — how much you must collect monthly to fund your current lifestyle AND save for financial independence.

DentalBoardroomPodcast#DentalCPA#FinancialFreedom#PracticeCFO#DentistFinance#TaxPlanning#DentalPracticeManagement#FinancialIndependence#CPAQuestions#BusinessCashFlow#DentistWealth#DentalPodcast

Transcript:

Wes Read: [00:00:00] Welcome everybody to another episode of the Dental Boardroom podcast. Lately I've been on the subject of financial statements, understanding the numbers in your practice. On my last episode, I had 10 questions. To ask yourself when reviewing your financial statements each month. I'm gonna now pivot that to 10 questions to ask your CPA each year.

Now lemme start off by just saying high level. If you wait to talk with your CPA until after the year is over, you are missing. Most of the benefits that you can get from a tax planning standpoint because there's just a lot of decision making and cash movement that needs to occur during the year in order to stick the landing on December 31st to minimize your taxes.

Now CPAs are historians [00:01:00] by trade, by education. They aggregate historical numbers. They assemble them into a specific format, and then they use that formatted set of numbers to enter onto the government tax returns, both federal and state. Now, some CPAs will start to move into planning, which means forecasting.

Which is going beyond what is the historical scope of the CPA? Generally, the CPA has been looking backwards, assembling the numbers, and giving you a little bit of a story on how your business is doing and, and for some CPAs primarily only around preparing to file that tax return. That said, CPAs, even though they are, for the most part, historians by nature, if you engage your CPA and ask the right questions, they are capable of doing a finance analysis, which is a prospective analysis, which really, in my strong opinion, [00:02:00] that's where you get a lot of value out of a good CPA.

Now, because CPAs are trained as historians, as CPAs are extremely busy during tax season. This is just one of those things where you've gotta be the proactive one. Now, here at Practice CFO, we try to schedule our meetings every three to four months. And if we're doing that consistently, and if our clients are engaging those meetings, not canceling them, they're showing up, they're showing up ready and mentally to engage their numbers, to look at a forecast, then you are absolutely going to maximize.

The tax and cash flow benefits that come from really good business financial planning. And here at practice CFO of course, the tip of our spear is personal financial planning and building wealth, financial freedom. How do you then convert that business cash flow and tax planning success into your personal balance sheet to build your assets, [00:03:00] which you can then, um, use to replace your earned income with your hands?

Over time. That is what it means to become financially independent, that you could stop working because the income from your assets, IE your stocks, bonds, real estate property and any other investments can replace that earned income. Alright, so how do we get the CPA to become more analytical and perspective and advisory?

Well, if you schedule a meeting with your CPA. You're probably not gonna get a meeting with them in February, March or April, and that's okay. They have time, usually during the summer, November and December are great times to meet with your CPA as you head into the end of the year to make sure that a lot of your, your financial markers are accurate as you go into.

The end of the year. So here are 10 questions you can ask your CPA each year. [00:04:00] I'm gonna divide these into three sections. The first one is your p and l. The second section is your taxes, and the third section is business and personal financial planning. Let's kick it off the p and l, the profit and loss statement.

So I have done a couple episodes recently on how to understand your profit and loss statement and how to make it a storyteller as a document, as a set of data points for you, rather than just a set of numbers that is largely French to most of you. And you basically either don't look at it or you scan it, file it away and say, I just don't have time to try to make heads or tails of what this means actually for me.

So I spent a lot of time on that. That's really, really important if you wanna compete successfully today, in my opinion, as a great dentist in a marketplace that is competitive, particularly with institutional money, IE DSOs, where you got a lot of suits, you got a lot of business people involved who are very savvy [00:05:00] around understanding their numbers.

So I think to compete well with them, we have to understand our numbers. Now, even if you are just a phenomenal dentist who inspires your patients and inspires your, your team and you have chairs, full patients are accepting case presentations, all of that, I think absolutely that dentist right there can have a great financial life, no doubt.

But if that dentist right there. Doesn't have a good plan around the traffic controlling of their dollar through the company's expenses, debt, taxes, and personal spending. I guarantee you there's gonna be a lot of leaks from the time that dollar lands in the business checking account from patients. From insurance companies to the time that it actually lands on the doctor's personal income statement and personal balance sheet.

There's just a lot of leaks because of inefficient cashflow management in the practice. You may not have as [00:06:00] much money as you could at the bottom line at the end of the day to then transfer over to your personal finances. Now remember, when you transfer money from business to your personal finances, either through a payroll check or through a distribution.

One of two things will happen to it. It will get spent on consumer goods, or it can be saved by purchasing an asset. Now that's very important to understand the distinction between those two. The value, the economic value that you are able to extract out of your business, outta your dental practice, over into your personal checking account, your personal life.

It can end up in one of two places in your personal. Expenses, your per, I'll call it your personal p and l, it's gonna either end up there and it goes out the door for entertainment, for travel, for your kids', things, for hobbies, for a lot of that kind of stuff. And a lot of it goes to to consumer goods [00:07:00] to live.

I mean, we all have a budget and that is okay. However, to the extent that you can have it land instead of on your personal. P and L, your personal expense statement, IE. Instead of spending it, if you can route it to your personal balance sheet, which shows your assets, which is everything you own, and your liabilities, which is everything you owe.

And the difference between those two is your personal net worth. So your personal net worth and your personal net worth is the single number. That indicates how prepared you are for financial independence. And if your assets are $10 million and your liabilities are $1 million, maybe like a home loan or a mortgage loan on a rental property, something like that, you have a $9 million net worth and $9 million net worth.

Let's say you can take 5% on that every year. That's about $450,000 that you could live [00:08:00] on just from the income from your assets alone. All you gotta do is get up and breathe. That is a wonderful place to be. Now, it's not easy, of course, to get to $10 million. That requires dedication, and it requires that you route as much of that value out of your dental practice to your personal balance sheet.

By buying stocks, by buying bonds, by buying real estate properties, by paying down debt, by doing those things that build that net worth. And as a financial planner, as a certified financial planner, which I am, I'm always, I've always got an eye toward the personal effect of your practice and your numbers.

Of course at practice CFO, we claim that is what our greatest value is, is that we intersect or we integrate the CPA or business side with the personal financial side where we discuss life goals. What matters to you? What matters to you that has a dollar sign attached to it, and how do we fuse the analysis of your business?

Cash flows with your personal goals and personal expenses and [00:09:00] needs together in a sustainable way. That is the aim, the whole mission statement behind practice CFO. How do you take all of the economics in your business to your personal life and drive financial independence and financial organization, which of course creates financial peace of mind.

Alright, here we go. So make sure you get your CPA. I would ideally try to meet with them at a minimum, minimum once a year, probably in Q4, but ideally you would meet with them sometime. Right after tax season, maybe end of April or May or even June, and then right after October 15th, which is when the extended 10 forties are due, so after October 15th, they're usually gonna be gone to Hawaii or Europe or some vacation for a couple weeks, your CPA, but they will come back and then in November they're back in the office.

Schedule that meeting. Here are the questions that you can ask them first, the p and l questions. This is assuming your CPAs. Does your profit [00:10:00] and loss statement, they do your accounting or they have a bookkeeper, somebody in their office who does the accounting. If not, they can get the p and l from your bookkeeper and they can do the analysis.

Alright, p and l. Question number one. What is my goals-based break? Even now, a lot of CPAs are gonna say, whoa, whoa, whoa. I'm not a consultant. I'm not a financial planner. I don't know what your goals are, so how can I calculate your. Goals-based break, even if I don't know your goals, this is where you've got a teamwork with your CPA and possibly, possibly bring together your financial planner and your CPA in the same room.

Yep, in the same room. Ideally physically, if not virtually, but as long as we get them together talking that is. That is critical. Now, in my opinion, that is the, a great option. It is second great option as opposed to having a, where the CP and the financial planner are essentially under the same tax id.

You're gonna get a lot better coordination with that. Now that's self-serving because that is the nature of practice. CFO [00:11:00] where we integrate under the same company, meaning that our team here, it consists of our tax team, our accounting team, our and our CFO team. The integration of those. We also have our 4 0 1 Ks in-house as well with our investment team.

So the level of integration is extremely tight. Now, when you don't have that, you have what I call an unbundled model of service providers across your accountant, bookkeeper, CP, a financial planner, an investment advisor. It may be unbundled at some level. Uh, there you have to be the one to coordinate the interaction across them such that the ultimate plan.

Really is maximized. But if you don't do that, I can tell you that there's going to be inefficiencies in your financial ecosystem without that level of coordination. So going back to this question number one, what is my goals based break even? Here's what you do is you find out from [00:12:00] your financial planner, how much do I need to be saving every year?

And you could break that down into every month. In order to meet my personal financial goals. So if I wanna be financially independent at age 60, and I wanna be able to live on, let's say, $8,000 after tax, so $8,000 a month, maybe you assume your home mortgage is paid off, whatever that number is, whether it's 4,000 or 25,000, but you come up with that number, your financial planner should easily be able to run the numbers in their software and tell you how much you need to be saving.

Each month toward your personal balance sheet, which is your investments, paying down your debt, real estate properties, et cetera, in order to meet those goals. Now, if you go to your CPA and say, I need the following, I need $10,000 to be able to spend today, and I need $7,000 to be able to set aside in my investment accounts such as a 401k [00:13:00] or a brokerage account, et cetera.

In order to meet my goals, and maybe you have other goals, like you wanna buy the down payment on a house, or you want a second home, or you want to send your kids to a private college and pay that for four years. Now you may want everything under the sun, but the reality is good financial planning will find the intersection between your means and your wants, and it will really focus on that intersection.

In other words, what is realistic? That's a give and take. What your goals are, IE future needs and what your needs are today, but have that discussion with your financial planner. Sit down with your CPA. And say, this is what I need. I need $7,000 to save. Now I need $10,000 to spend. Now back that into the practice.

That's gonna come out to me through payroll, it's gonna come out to me through distributions. Those are the two ways that you extract financial value out of your practice to your personal life. Then what your CPA can do, and this is largely an Excel [00:14:00] analysis, an Excel spreadsheet analysis. They can look at what your income has been.

They can look at what your overhead has been. They know or should know what your tax is going to be, your projected taxes. They can look at your debt payments and they can look at therefore, all of those numbers on your p and l and back into whether or not you have enough to live off $10,000 today and save SE $7,000 for your future.

And that is an analysis that you don't wanna ballpark, that you really want that in a spreadsheet with the analysis. Now I have a, a spreadsheet for that. I use a lot. It's called the break even calculator. And it will put in what your savings goals are, what your living needs are, what your taxes, what your debt is, all of that.

And it's sort of then backs into what is your goals-based break even. And so there may be a little work there with your ccp, but if your CCP sits down and does the analysis, they're, they're gonna be, they're intelligent people. They're masters at the spreadsheet, they should be able to calculate, okay, if you want [00:15:00] the 10,000, now $7,000 for the future.

If you wanna have enough to of course, pay off all your debt, pay your taxes and your overhead, you basically need to be collecting X every year or X every month in order to meet those goals. And if that number is significantly higher than what you think you are capable of doing. Then you either need to hire a practice management consultant, marketing company, whatever to get your collections up, or you need to reduce your spending today or push back the day that you become financially independent.

So there's all these levers that you can control, and that's a very personal decision, how you align those levers to meet your life financial. Bottom line is that if you at least have those goals set and defined as a dollar amount, your CPA should be able to run some numbers and back into what is your breakeven collections in order to meet those goals.

Alright? Now your collections is one thing, but also in that analysis you're also calculating your profit and your profit is down [00:16:00] more toward the bottom of the profit and loss statement, and that's after paying labor labs, supplies, facility marketing and admin. That is called your operating income, and that's of course, that's before paying you.

If you've listened to me on my podcast, your operating income is your collections after paying all of that overhead, but before paying anything for you, your personal payroll, your personal taxes, your debt, your 401k funding, all of that, that comes below your operating income. That way your operating income gives me the true economic net output from your dental practice.

If you're a client of practice, CFO, that's highlighted in this big orange bolded line that says your operating income, and you know that that is the punchline of your financial statements. I'll look at that number every month. So going on to my, my questions, my second question still relates to the break even.

The first question is, what is my goals-based break even? The second question is, did I meet. My goal, space [00:17:00] break even collections, target. So let's say your goal space break even is 1.6 million. Let's do, let's do an easy number here, 1.2 million for the year, a hundred thousand dollars a month. Then you simply look at your financial statements for the past 12 months and ask yourself, have I met those collections?

And then do make the decision making around. If you have not, can you meet those collections or do you need to change your goals? Or do you just need to figure out a way? To grow your collections. Alright, now onto the third one. Coming back to your profit after the labor labs, supplies, facility, marketing and admin.

What's left is called your operating income and did you meet your goals based operating income, your goals based, break even operating income. So for example, if your goals and your overhead and your taxes and your debt and your living expenses, if it all adds up to you needing to collect. I'm gonna use a bigger number here, $2 million a year in order for you to meet all [00:18:00] of those goals in your practice.

Well, after paying your labor lab supplies, facility marketing and admin, let's say those things constitute 65% of your 2 million. 65% of your 2 million, that's 1.3 million, 2 million times 65% is 1.3 million. That's how much is going to pay your true business operating expenses. So what's left? What's left is 700,000.

That's your operating income. That is, I, I absolutely think you should set goals for your operating income, not just your profit, because you're, I'm sorry, not just your collections. Because your collections may be X, and if you can work on reducing some of your overhead costs, then you may not need to collect as much in order to meet your operating income target.

So that's the third question to ask your CPA, did I meet? What is my profit needs? We calculated collection needs, but what about my profit after [00:19:00] those overhead expenses? The, the fourth question under the p and l analysis is, are my expenses. Labor labs, facility marketing and admin are my expenses healthy relative to industry norms.

Now, if you have a general dentist, they're not gonna know off the top of their head. If you have a, a dental specialty accountant or CPA, most of them are gonna know that for a gp, LA Labor should come in somewhere around 26 to 29%. Labs probably should come in somewhere on the low end of one or 2% on the very lowest.

If you have a CAD cam and you use it religiously, or if you don't have a cadcam and you use high-end labs, you may be all the way up to 11 or 12%, but standard rates are somewhere around six to 8%. Facility marketing and admin, they should be able to at least do a little bit of research. Not terribly difficult, especially with AI [00:20:00] these days to come up with or to search what is the healthy range.

Those categories. So one more example here. If your collections are $2 million in your practice, you have a great practice, $2 million collections, and your labor costs are $1 million. Your labor costs are therefore 50% of your collections. Which means 50% or half of every dollar you deposit in your business checking account from patients and insurance is going to labor.

I'm gonna tell you right away, you got labor cost issues because 50% is astronomically high, and I have absolutely seen it at 50%. Now if you run a large multi-specialty practice and you have, you have oral surgeons in there periodontist, and you're paying 40 to 50% on a lot of these, you're gonna be higher than the industry standards.

At 28 [00:21:00] to 29%, you're probably gonna be closer to 35 to 37%, depending on how much of your collections are coming from those specialty. Treatments and therefore you're gonna have because of that higher labor cost. So there's a little bit of relative relativity here that is unique to your own practice, but a good CPA should be able to tell you are your labor labs, facility marketing and admin expenses each individually in healthy ranges.

It's almost like you go get your biomarkers for your health tested and they show these sort of. Line, um, charts and on the low end, it, it's unhealthy and on the high end, it it's unhealthy and you want to be in this green space in the middle. That's a little bit what, uh, the analysis is here, your financial health markers in each of these categories.

Okay, so those are the first four questions they relate to your profit and loss statement. Let's now go on to taxes. Number one in taxes. So this is question number five, but the first one in the tax [00:22:00] section is my own W2. Now, let me back up and say most of you listening as dental practice owners are set up as S corporations.

If you are a single owner, if you are a partnership, this particular question does not apply because if you're a partnership, then you do not pay yourself a W2. Instead, you pull out money through what are called guaranteed payments and distributions. Those do not need to run through payroll. They're not subject to FICA taxes.

They're subject to self-employment taxes, which is essentially the same thing on your 10 40, but that is different. It's S corporations where you have to pay yourself as an employee of your own corporation and how much you pay yourself has a significant effect on the. Likelihood of you being audited and also a significant effect on how much you can fund into your [00:23:00] 401k plan.

And if you have what's called a defined benefit plan, which is like a 401k on total steroids, where you can fund these things with hundreds of thousands of dollars sometimes and still get a hundred percent tax deduction is your W2 high enough to allow you to maximize contributions to those types of retirement plans.

They're called ERISA plans, which is the tax act that implemented the rules around these business savings mechanisms known as 401k and pension plans. I define benefit plans. So is the first question though. Hey, CPA is my W2 paying to myself high enough to avoid an IRS audit. The number one reason why the IRS audits dental practice owners is because those dental practice owners do not pay themselves adequately high.

W2 wages from their S corporation. [00:24:00] Now, why is the IRS so keen on you paying yourself a high enough W2 salary as opposed to not paying yourself any W2 and simply transferring the money from your business checking account to your personal checking account through draws IE distributions? Why does the IS even care?

Because from an income standpoint. Whether or not you pay yourself as a W2 or not, it doesn't matter. You're gonna pay the same income taxes, pretty much the same income taxes. Now, there are various types of taxes, employment taxes, which is FICA and Social Security. Social, it's FIC, which is Social Security and Medicare.

That's one type of tax income. Tax is tax on your income. Sales tax is the tax on things that you buy. Property taxes are taxes on the property you own. So there, there's all these types of taxes and it is [00:25:00] pretty crazy when you add 'em all up how much you're paying in taxes, especially if you're in a state like California or New York, New York, where you have these 10, 11, 12% state income tax rates.

Now going back to this question though, here's a key concept for US corp owners. When you pay yourself a W2, your profits of your corporation go down dollar for dollar by the amount that you pay yourself. A W2 think of it as you're just an employee, like your hygienist or your front office, and if you pay them an extra dollar, your profit to your corporation goes down by a dollar.

And so when you pay yourself money through payroll. That's gonna lower your profit by the amount that you paid yourself. And so what is the reason then that the r rs wants that W2? It's because W2 is subject to one type of tax that your distributions are not. And that is the FICA taxes that I mentioned.

Social Security is 6.2% employee, 6.2% employee, [00:26:00] employer, sorry, that's 12.4% for Social Security, 12.4%. So on your first a hundred thousand dollars of W2. You're paying 12.4%. $12,400 is going to FICA taxes that isn't even touching the income tax that you're gonna owe. And so that's a material amount for sure.

On 200,000. It's a lot more than that now. The second one is Medicare. And Medicare is a lot less than Social Security. Social Security being 6.2, employee employer 12.4 total. Since here's the employee and the employer for you, you're paying a hundred percent of that and for your employees, you're only paying half of it.

The Medicare tax is 1.45%. You 1.45%, employer 2.9% total. So when you add those two up, the 2.9 and the 12.4, you have [00:27:00] 15.3%. Now the social security tax is capped out. It's capped out. This changes every year, but it's, right now it's somewhere around 1 65, 1 70,000, 170,000 or so, and that will likely keep going up.

So once your W2 is above that number, you only pay the 2.9%. So this becomes less relevant when you get above that. So when you ask what is a reasonably high W2, in order to avoid an IRS audit. If you pay yourself that 170,000 and at a minimum, therefore you have paid in your full social security amount, you are not gonna be audited over this issue.

DRS is not gonna come and audit you over the Medicare 2.9% only. They're just, they're, they're just not. So if you've got 170, you're probably good. Now, if your dental practice nets you after overhead $2 million, and you're only taking 170,000 in W2. [00:28:00] You're taking the rest, which is what, like 1.83 million if you're taking the rest as a distribution on your K one.

That's pretty lopsided. That possibly could lead to an IRS audit, but most likely not because again, at 170,000 you've already capped, you've hit the the ceiling and paid in the most of these social security taxes that you're already gonna pay. So, and since the full amount of your $2 million profit is taxed the same way from an income tax standpoint, whether or not you pay yourself a W2 or you take it all as distribution, it doesn't, doesn't matter because it's like a teeter totter.

The higher W2, the lower the profits, the lower W2, the higher the profits, but the sum of them is always the same. The sum of them is always the same, so the iris is probably fine. If you pay yourself 170,000, you're probably probably good. Now some CPAs will say, well, no, not necessarily. As a flow through S corporation, you should probably [00:29:00] pay half of your profits as a W2.

So in that wild ex example of $2 million profits, again, I know that's a wild example, but I'm just trying to punctuate my point here, that they would wanna say that you should pay yourself a million dollars in W2 and a million dollars in distribu. Let's bring that $2 million back down to Planet Earth.

And let's say that your total profits are 500,000. You're running a good practice after your overhead. You got $500,000 left. A conservative CPA would say you should pay yourself 250,000. If you're with me and you don't have a 401k defined benefit plan, I'm gonna say, you know what? 150,000, probably fine, and I'm gonna go ahead and save you seven, eight, $9,000 in FICA taxes.

Why not? Not gonna get audited at that. It's high enough. And who doesn't wanna save? Seven, eight, $9,000? Tax planning is about grabbing a few thousand here, a few thousand there across a wide spectrum of tax planning strategies with some of them being grabbing a $30,000 tax deduction such as a 401k or a hundred thousand dollars tax deduction on a defined benefit.

But for the most part, tax planning is about [00:30:00] casting a wide net and getting a lot of small savings, and in the aggregate, bringing your taxes down by 25 to 30%. That's what usually good tax planning is all about, and managing your FICA taxes as an S-Corp owner is one of those. Mechanisms of tax savings.

Now, if you have a four one K or a defined benefit plan, and we're trying to max that and put away 70, $80,000 in a 401k, or between you and your spouse and. Or defined benefit plan where you're stuck in 300,000 in there, then everything changes. Now in order to fund it at that level, you've gotta pay yourself a very high W2 because contribution levels to these retirement business, retirement plans is a function of your W2, not your distributions or net profit.

It's all based on your W2. And so in that case, I care less about saving a few thousand dollars in FICA taxes, and I care a lot more about saving 30, 40, 50, 60 a hundred thousand dollars in [00:31:00] income taxes. Income taxes are higher than FICA taxes. If you're in a higher tax bracket, so I become a lot more concerned with your income taxes and therefore the 401k defined benefit plans allow me to reduce your income taxes significantly, and therefore I need to gross your W2 way up all the way, sometimes up to 350, 300 70,000, and with every year that passes, that's gonna go up more because the ARS has a a limit on how much you can.

Pay yourself as a W2 and get the benefit of funding your 401k to defined benefit plan. After that number, let's say it's this year, let's say it's 360,000. After that number, you're not getting any benefit. You're simply paying an extra 2.9% in FICA taxes and that's it. So all of that needs to be, it's like a puzzle with all the pieces on the table.

You really need to bring them all together to decide exactly what's the right amount of a W2. So this is where you want to ask your CP. A. Is my ta, my W2 high enough to avoid an IRS audit [00:32:00] or if I have a 401k and to defined benefit plan, and I have good surplus cash flow and I want to max that. Then the next question is not, how not is your W2 high enough to avoid an IR IRS audit?

It becomes, is my W2 high enough to maximize my 401k and my defined benefit plan? Alright, that's number five. Question number six, what taxes am I projected to owe? Am I on track with my W2 tax withholdings and or my quarterly estimated tax payments? Am I on track to avoid having to owe something at tax time and especially avoiding an underpayment penalty.

And in this question is also embedded. How can I reduce my tax burden? So that's all one question. What taxes am I projected to owe? Am I on track to a paid it and how can I reduce that? So a few comments on here, a few education comments about the taxes you, you owe. A good CPA will [00:33:00] do a tax projection.

Which is simply them forecasting out what is gonna be your net income and what is gonna be the sum of your W2 payment, which is entirely controlled. You set your W2 payment, the sum of your W2 payment, and the other end of that teeter-totter W2 on one side. On the other end is your profits. Flow out on your K one and they will take the sum of those and they will run the tax analysis.

They'll look at what your home mortgage interest tax deduction was last year, what you may have contributed to charitable contributions, other sort of tax planning items. And they will then determine what is an estimated amount that you are projected to owe. And then from there we make the decision, how do we want to pay that?

Let's say you're gonna owe a hundred thousand dollars in federal taxes. You can pay quarterly $25,000, that's totally fine. Or you can have a hundred thousand dollars deducted out of your W2 payroll throughout the year, and that's totally fine. At the end of the day, it [00:34:00] ends up in the same place with the IRS and will count toward your tax liability.

The difference there is that your quarterly estimated payments, if you're late on those, you have late penalty on that. Theoretically, if you ran yourself one big gigantic W2 on December 31st, let's say for 200,000 and you withheld a hundred thousand dollars of income taxes, guess what? There is no late penalty because that a hundred thousand dollars that you paid to the IRS as a deduction from your W2 paycheck on that 1231 payroll will be counted as if it was pay to the IRS.

Equally month by month throughout the year, and so there is no late payment penalty on withholding from your W2. Now here at Practice CFO, when we do our business in financial planning, we generally withhold a hundred percent of income taxes from the W2, and our clients don't do quarterly estimated tax payments on occasion for extenuating reasons.

We may [00:35:00] need to do that at times. Let's go into the second part of this question. What taxes am I projected to owe? Am I on track? How can I reduce my, how can I reduce my tax bur burden? This is obviously one of the most important things you can ask. Ask your tax CPA, and I'll tell you what, if you don't do it, your tax CPA is just statistically pretty unlikely to go through your situation and come up with tax planning Strateg.

You've gotta, you've gotta elicit this from them. Unless you're with a really good dental financial planning firm that does CPA work. Like Practice CFO, we are a financial planning firm. We are all about how you save taxes, how you maximize your financial outcome. And the CPA arm of our business, the accounting, tax, and payroll, is just to give us the x-rays needed in order to do great analysis of the numbers.

That's the main reason we are not a CPA that offers on the side financial planning and investment services. We are [00:36:00] a firm that offers financial planning, both business and personal and investment services that has an under engine. Of CPA services that allow us to be the best financial planners we can be for you, because I believe that whoever is advising you needs to understand really well the heart of your cash flow, which is your dental practice, because that's where most of the hard work is, and most of the place where that hard work pays off and has the most dividends to you, metaphorically speaking.

So as you ask your CPA, how can I reduce my tax burden? Engage them in that. Analysis and discussion. Have them look at things like, am I gonna take 1 79 deduction on any equipment I bought this year? Or bonus depreciation? Is that the right decision? I usually will say, if you finance. The acquisition of your x-ray machine or your CAD cabs or your dental chairs or your build out, usually you don't want to take a lot of 1 79 deduction 'cause you're accelerating future [00:37:00] year tax deductions into the current year, which makes the current year look great.

But then in future years, when you're paying the debt off and you're not getting any tax deduction because you accelerate all the depreciation, it creates a false assumption that you don't owe a lot in. Taxes because that first year you really reduced your taxes. So, but talk about the most effective way of using depreciation in your taxes, uh, in your, of the equipment you buy.

The second thing is timing of expenses at year end. Can you push out deposits? Can you accelerate some, some, uh, some vendor payments. Timing of expenses is a nice way to defer taxes down the road. It doesn't eliminate them, but it can defer them down the road Also. If you can time your taxes such that you're able to in one year front load some expenses or do some timing in order to get your tax rate lower.

If your tax income moves from being outside of the phase out [00:38:00] limits on various other tax deductions to being inside of. Phase out limits, you recover a lot of these tax benefits or strategies that are phased out. That's why it's critical for me to know when I'm meeting with the client is are they on the cusp or right there on the edges of these tax phase outs on your 10 40 tax return.

Now, I haven't talked about that in this podcast, and there's way too much education to go into what are our phase, but let me just. Synthesize that down by saying if your income on your personal 10 40 is under a certain amount for married filing joint, that's usually somewhere around 3 75 to somewhere around upper four hundreds.

If, if you're in that or below that, there are a number of tax benefits that you can get that you don't get if you're above that phase out range. So if I can pull some, some levers. To get you from, let's say 500,000 of taxable income [00:39:00] down to 425,000 of taxable income. If I can just get that $75,000 reduction, I'm gonna recover some of these other and really nice tax benefits.

Some of them are. The qualified business income tax deduction where you get to deduct 20% of your K one that has a phase out for married filing joint at 483,000, and for single taxpayers at 241,000. If I can get you below that 43 as married filing joint, I'm gonna recover some of that tax deduction that was phased out.

So now not only am I lowering your income tax because I lowered your, your taxable income, but I'm also lowering it. More by recovering these other tax benefits, like the qualified business income tax deduction or the child tax credit is another one, or student loan interest deductions or your ability to fund a Roth ira.

There's a handful of these nice tax benefits that you, as you get up into the 400 to $500,000 range as as married filing joint or 200, [00:40:00] 250,000 single, that you lose those benefits. And if I can get you those benefits back, it's almost like I'm getting this compounded or amplified tax benefit, like two for one if I can do that.

So that's why it's really important to say, what can I do right now to lower my taxes? Can I fund this 401k, which not only will reduce my income tax at me, gimme those benefits back. Can I fund a 401k? Can I, um, can I time, uh, things, can I get my kids on payroll? Can I get my spouse on payroll and maximize that 401k?

There's a number of other things, like a big checklist you can do, and I would make sure that you go through that with your CPA. Alright, number seven, do I have excess distributions? Do I have a loan to shareholder? Excess distributions is when you pull out from your business, checking to your personal checking account, more cash than you have in what's called tax basis.

Tax basis is like your piggy bank account for your business. [00:41:00] When you start your business, theoretically you start your business. You have this empty piggy bank. You can put money in that piggy bank by transferring money from your personal account into that piggy bank. Or you can earn money by doing your, your work as a dentist.

And you pull out and, and so the money you earn goes in that piggy bank. And if you pull out less from that piggy bank than you put in from earnings, then you're actually building this thing called tax basis. And that's good 'cause that allows you to pull money outta that piggy bank. As soon as that piggy bank is empty and you keep pulling money out of it, then you run into a problem called excess distributions.

And you may ask Wes, how can I pull money out of an empty piggy bank? The reason why is a lot of times you have money in that piggy bank, but this is the IRS's calculation of what's in that piggy bank, and your net income per the IRS may be lower than the cash net income, and that's because you may do a section 1 79 deduction.

You finance the purchase of the equipment? Well, [00:42:00] what happens there when you do a 1 79 deduction, let's say it's a hundred thousand dollars piece of equipment, you just lowered your taxable income by a hundred thousand dollars, but you actually didn't have a hundred thousand dollars go out of your checking account because you financed it through a loan.

So the IRS, your piggy bank is empty, but your checking account, in that example, it has a hundred thousand dollars sitting in it. So you go pull out a hundred thousand dollars outta your checking account because you financed the purchase of this equipment for a hundred thousand and you took a 1 79 deduction.

Therefore, to the IRS, your piggy bank is zero and you just pulled out a hundred thousand dollars. IS doesn't like that, and that's called an excess distribution, and you have to pay a penalty on that. It's usually around 30% plus or minus on top of the income tax. So that's not good. And so what CPAs will often do is they will recategorize that a hundred thousand dollars distribution to you from business checking to personal checking as a loan, and that's called a loan to shareholder.

The loan to shareholders' fine. If it's under a certain amount, let's say a hundred thousand [00:43:00] dollars, it's not gonna draw attention. But remember, on your business income tax return, there's specifically a row that asks What is the loan to shareholder? And the IRS can see that number. And if it gets too high, the iris is gonna say, whoa, whoa, whoa.

That's not actually a loan from the corporation of you. That's just you pulling out too much money. You're not paying it back. There's not interest rate, there's no, there's no repayment schedule. Sorry. We're gonna come in and we're gonna reclass that loan to shareholder as a distribution and you're gonna pay excess distributions tax.

Alright, so that's number seven. Do I have excess distributions and do I have a loan to shareholder? If so, how do I solve that? Number eight, what PTE tax payments do I need to make? And by what now? I think my, my most recent podcast episode was to make sure you're taking advantage of the PTE. Is if you're in a state that has income taxes, like California, then you can make the income tax payment through your corporation and you can get a federal tax deduction on that.

It's huge. It's huge. You do not wanna make, that's like free money, and a lot of times if your [00:44:00] CPA's proactive, they're not giving you advice. You miss making. The PTE payment through your corporation by the due dates, then you lost that free taxes that has such low hanging fruit for you. Those of you in a state that has income tax and has a law that allows you to get a, to take the advantage of the pass through entity tax in California, that's called the AB one 50 tax.

So ask your CPA if you're in a tax that pays income taxes, uh, what PTE tax payments do I need to make? And by when? Alright, those are the taxes. Lemme go to the, that was, that was question eight. Let me go to question nine and 10, which is in the section on business and personal financial planning. The first one is, can I fund a 401k or profit sharing plan?

How about a defined benefit plan? If so, what percentage of the total contributions out of my pocket go to me parenthetically and my spouse, and how much to my staff? Now, ideally you want that number to be more than 65%. So if you pay a hundred thousand dollars into a [00:45:00] 401k, ideally 65,000 of that went to you.

And if you have your spouse on payroll, your spouse, then it really makes sense because you get a hundred percent tax deduction and you get to grow that money tax deferred for a long time. So you don't need 80, 90% going to you and only only 20 or 10% going to the staff. I mean, that's great. That's a, that's an ideal scenario, but it's, it works too if you're at 65 to 70% going to you and your spouse.

So this is where you ask your CPA, can I set up a 401k profit share? How should I structure that plan? And if you're older, maybe less staffed, and you're really cash flow, I mean you're cranking it. Maybe your debt's paid off. Can you set up a defined benefit plan and how much should you fund into that? So that's question number nine.

Question number 10. Finally, how much money can I safely pull out of my practice to my personal checking account through payroll and draws to spend? Personally, what [00:46:00] is a safe amount to avoid? That excess distribution tax I was telling you about later, and to avoid running negative in the cash in your checking account and to avoid not paying enough in your taxes such that you suddenly are slapped with a big tax liability on April 15th.

How much can I safely pull out of my practice from personal to checking from, uh, sorry, business a checking to personal checking, such that I don't jeopardize my cashflow and my financial situation. That, uh, is definitely needs a spreadsheet analysis and your CPA should be able to put their head down and figure that out.

Now again, emphasizing that a lot of these questions, the CPAs are not gonna come voluntarily to you with an answer. You gotta go extract that a little bit. Now, this doesn't mean to be a demi, a diminishing statement about the value and services of CPAs. It's by the nature of their profession is they're largely just looking back, aggregating numbers and giving them to business owners.

[00:47:00] For the business owners and their team to do something with, and ultimately also the CPA to file the tax return. But there's so much more that you can get out of a good CPA, uh, you can possibly also get these out of a really good financial planner if they have a good eye on what tax planning is, or ideally, you get them two together, but you gotta be the one to sort of harness your team, bring them together, ask these questions, and get these answers.

And if you do that, I guarantee you, you're gonna end up in a better situation financially at the end of the year. You're gonna stick that landing as I love to say. Alright, everybody, 10 questions to ask your CPA during the year, not after the year is over, but during the year in order to maximize the financial output to you and improve your financial condition.

Thanks for joining. Until next time, see you.