AS 90: How to save more on taxes as an Amazon FBA Seller with Josh, Founder of CPAonFire
16 Aug 2017
Today’s I’ve got on the show, who is a CPA and the founder of CPA On Fire, a tax and accounting firm specializing in working with online entrepreneurs. Over the last few years he has been working very closely with Amazon FBA and other eCommerce sellers to help them with the challenging aspects of accounting and taxes specific to eCommerce sellers.
What you’ll learn:
Can you take us to the beginning before you started your accounting firm, where did your journey begin?What’s the story of how you became the official cpa for entrepreneur on fire?
- How many employees he has
- How Amazon sellers should setup their business.
- How to big sellers legally save a lot of money on taxes
- What’s tax deductible in our e-commerce businesses
- How Donald Trump Saves on Taxes
- Distributions to owners vs. payroll
- Sales tax and set the record straight. Should we paying sales tax to all the states where FBA is at, or just our state tax
- What software tools do you recommend a seller should use. And WHY
And lots more.
Show notes coming soon.
DAVID ALADDIN: Welcome to the show, Josh.
JOSH BAUERLE: Hey. Thanks for having me.
DAVID ALADDIN: So, can you take us at the beginning before you started your accounting firm? Where did your journey begin?
JOSH BAUERLE: Yeah. So I kind of worked in several different accounting fields, I guess I did work at a Fortune 500 company out of college, doing some cost accounting. I moved into public accounting doing taxes for bigger businesses. I did some financial advising and I finally realized that all these jobs weren’t the problem. I kept thinking if I got this new job that would be the job I’d like. But I finally realized that I just didn’t like being an employee so by 2012 I went out and founded my own firm and I started specializing in working with online entrepreneurs and that’s kind of slowly evolved into really working closely with eCommerce sellers and especially Amazon FBA sellers so we got here.
DAVID ALADDIN: How long were you doing the job thing for?
JOSH BAUERLE: I did, let’s see. I did two years out of school at the Fortune 500, I did another two years at a public accounting and then a year at financial advising. About five years.
DAVID ALADDIN: Five years.
JOSH BAUERLE: Yep.
DAVID ALADDIN: So 2007-ish?
JOSH BAUERLE: Yeah. Roughly. Yep.
DAVID ALADDIN: And so when you were like wanted to quit your job was that at that time one of the hardest things to do?
JOSH BAUERLE: Yeah. It kind of came up random. It actually when I was doing the financial advising, the guy I was working for, he wanted to acquire other financial advising firms. And I said, hey, I have my CPA license why don’t we just acquire another CPA firm and we can turn those into financial advising clients. He was all on board for that and we found one that we really liked and he then kind of got cold feet and backed out at the last second and I was like, you know what? I’m still going to go through with it, I’m going to take it over. So I was working with this guy and it was kind of, he was an older guy, he’s looking in to get out of his practice. He basically just let me run the whole practice and I get x’ed him out of the total whole revenue that came in. Then he said, and beside if you want to build your own stuff on the side you can keep all of it. So I started doing that for him while just slowly building my side business and it get to the point where he kind of wasn’t being reasonable for what he want to charge me to buy his, but I felt I’ve built mine enough that I could finally go out of my own, so.
DAVID ALADDIN: Yes.
JOSH BAUERLE: It’s kind of a hybrid way of going out on your own.
DAVID ALADDIN: So it was a totally different like industry going on while we’re all building our eCommerce businesses.
JOSH BAUERLE: Right. Yeah. It’s a little different.
DAVID ALADDIN: What—if you don’t mind me asking, what kind of side cut did he give you? Like percentage?
JOSH BAUERLE: So it was—yeah, so the first year it was 26% of gross revenue. And then the second year it was 35%.
DAVID ALADDIN: Nice. Was he doing over seven figures or kind of like a small firm.
JOSH BAUERLE: No he was. It was kind of funny. He was doing, he did about $150,000.
DAVID ALADDIN: Okay. Very cool.
JOSH BAUERLE: Yeah. But it was funny it was like, I don’t know. Feel like H&R Block, or anything like that style. Like in there boom, in half hour I’m done with their tax, put everything out give it to me, go. My days were like 14 hours straight of boom, boom, boom, boom, boom doing taxes.
DAVID ALADDIN: I wish I could do my taxes in 30 minutes.
JOSH BAUERLE: That’s a—I wouldn’t advise going the route to someone who does it in 30 minutes but I will tell you that that taught me a lot about doing it because that customer sitting there right in front of you, you can’t be like oh, ask somebody like this and you’ve got to figure it out. And I learned more in those two years that I ever did.
DAVID ALADDIN: What’s the story with you becoming the official CPA on Entrepreneur on Fire?
JOSH BAUERLE: Yeah. So that happened when I really started focusing on doing my own stuff it was when Entrepreneurs on Fire first came out. And I was listening on the podcast and I emailed John, and I said, hey, I have my own tax business. If you need any guest on your show, I’d be happy to talk about how I’m building my business, and he wrote back right away and said I don’t need any guest but I need a CPA so it was perfect timing. It worked out well. I did all his stuff for free and in exchange he kind of advertised that I was their CPA and it got to the point that I’m now on their show once a month.
DAVID ALADDIN: That’s awesome. That’s straight hustle. Just by reaching out to one guy, it has launched this whole other brand for you.
JOSH BAUERLE: Yeah, exactly. I tell people I can’t guarantee reach out to someone the first time and it’s going to work out like this? But if you keep reaching out to people, something good’s going to eventually happen.
DAVID ALADDIN: I think so too. It’s like the little small stepping stones that you’ve done, you’ve created your own, you start doing it for yourself for like two years and then now you started reaching out to people and it’s like one thing led to the next like you wouldn’t have, like your brand is slightly based on like the Fire Brand.
JOSH BAUERLE: Right.
DAVID ALADDIN: Which is awesome, it gives you a lot of credibility, too.
JOSH BAUERLE: Yeah. Like you said it all builds off each other I mean if I have approached you and I don’t have all these experience on Entrepreneurs on Fire website and or podcast and the Amazing Seller podcast, you’d probably just say, this guy just want some from my podcast, like he doesn’t know what he’s doing. It’s proof that you’ve done it before. So one builds off the other like you said.
DAVID ALADDIN: Okay. So let’s get into accounting for Amazon Sellers and eCommerce Sellers.
JOSH BAUERLE: Yep.
DAVID ALADDIN: It’s like where did you begin there? So I guess let’s start at the beginning like how just sellers set up their Amazon business like legally?
JOSH BAUERLE: And to be wise? Yes that’s a good question. It is an important question. Keep in mind though that I’m only a CPA, I’m not an attorney. So I might be discussing the tax among other things so there’s definitely legal ramifications as well.
DAVID ALADDIN: Sure.
JOSH BAUERLE: But the one thing that people going to need to understand from a tax perspective is I get to hear people all the time saying oh, I’m going to open an LLC and so I can get all these write offs. And the thing you need to understand is LLC is no different than a sole proprietor. It has a zero tax benefits. In fact the IRS doesn’t even recognize an LLC you are still a sole proprietor if you’re the only owner of that business. So don’t go form an LLC thinking you’re going to save on taxes especially if you’re in a state like California where they’re going to charge you $800 a year just to have that LLC in place.
Now it could be they’d get benefits from that and talk to your attorney about that but if you’re just looking for the tax benefits there’s no benefits from the sole proprietor in the LLC. So what we tell people is you’re basically choosing—when you’re first getting started your just fine. You can go as sole proprietor, if you do want to form that LLC to actually just make things a little more official, totally fine. In fact the LLC offers a little more flexibility to go into other options so I have no issues with that as long as you understand there are no tax benefits.
So if you’re just getting started, you don’t have much coming in yet, maybe you’re not showing a profit yet you’re just fine to go with that sole proprietorship or go with that LLC, whatever you prefer there. Once you start hitting $30,000-$40,000 per year or more in profits, and just to be clear when we say profits we mean after all of your deductions or expenses so your cost for a good sold, your advertizing, your Amazon fees, everything in there. When all of that is accounted for, if you have $30,000-$40,000 left at the end of the year, now is the time to start considering an S corporation.
And the reason is an S corporation does have tax savings. So let’s just real quick let’s learn how these things are taxed because a lot of people don’t get quite how these thing works. Your business, unless you’re a C Corporation and almost none of you should be a C corporation, your business is known as passive entity, which means all of the profits from the business pass through to you the owner and you pay the taxes on that personally. Okay, so you may have an LLC in place, that’s totally fine, if your LLC, if your business profits $50,000 dollars this year, even if you never touched that money personally, every dime in the business, the IRS still says you personally are responsible for paying taxes on that $50,000 profit.
Okay, and not only if you’re a sole proprietor and LLC, not only are you going to pay ordinary taxes on that just like you’re… if you’re at a job, you’re also going to pay the self-employment taxes which is an additional 15.3% tax. Know that’s there’s Social Security and Medicare taxes though when you have a job they take half of those out. You probably don’t know your employers are paying the other half of that maybe, but now when you’re the business owner, you’ll be paying both halves of that. So once you start getting serious money in this business, $40,000-$50,000 or more, you’re going to start getting hammered on taxes, ordinary and self-employment.
Where the S corporation comes into play works the exact same way that $50,000 passes through to you the owner whether you take all, some, or none of it out, still passes through to you, you still pay all that ordinary taxes on it but you do not pay that 15.3% self-employment tax. So once you start getting out there profits that could be a pretty massive tax savings to just…
DAVID ALADDIN: And that’s because the business is responsible for paying the taxes not, it doesn’t go pass the person?
JOSH BAUERLE: No, so that the S Corporation is still a passive entity, works the exact same way. That $50,000 still passes through to you as the owner, but you only get hit with the ordinary taxes you’re not getting hit with that additional 15.3% self-employment tax.
DAVID ALADDIN: I kind of get that.
JOSH BAUERLE: So that it’s a tough concept to get. So here’s a general checklist that people can use and keep in mind every situation is unique. Talk to a CPA about this before you dive into it. But as a general guideline if you’re just getting started or you’re making less than $30,000 per year in profits, all right, and you have no legal concerns, you’re not that worried about that yet, go ahead and go for sole proprietor, totally fine just hit the ground running nothing that you need registered. If you’re making less than that $30,000 per year profits and you want to maybe make things a little formal, maybe get a little legal protection go ahead and form that LLC.
Once you get up above that $30,000-$40,000 per year in profits now is the time to make the move to be an S Corporation. Now you can start saving thousands of dollars per year in taxes. And there are some things that go into that. There are some reasons that we wait for $30,000-$40,000 per year to do that because there are some cost involvements moving to that S Corporation, a few things you got to get set up. But once you’re there the benefit is more than outweigh the cost and as that income goes up those savings will continue to grow.
DAVID ALADDIN: Do you know?
JOSH BAUERLE: Does that make sense?
DAVID ALADDIN: Yeah. Do you know if your EIN number changes if you switch them?
JOSH BAUERLE: It does not. So basically—
DAVID ALADDIN: Okay.
JOSH BAUERLE: An S Corporation is just a tax selection, so what we do first is form an LLC and then if you didn’t already have one. And then we just we’d file a form with the IRS that say, I want my LLC to be taxed as an S Corporation and everything else remains the same.
DAVID ALADDIN: Very cool. Okay I say that because you know when we changed like significant information inside of Amazon Sellers Central.
JOSH BAUERLE: Yep.
DAVID ALADDIN: Yes. It’s a nightmare.
DAVID ALADDIN: Yes. Yep. Exactly. That’s what’s cool about it. That’s a good point. For that reason it is a good idea sometimes just to start with that LLC. Because from the LLC you can make that move to the S Corporation. So the State of California maybe a little more hesitant because they do have that $800 fee per year, but like you said if you do that from the beginning when the time comes to make a move into the S Corporation, now you only have to make that tax selection, you’re not changing anything else on the back and in Amazon.
DAVID ALADDIN: Now that’s good to know. That’s awesome. Okay so—
JOSH BAUERLE: Just to give you an idea, just one more thing, to give you an idea how powerful that move may be? If you are at a $100,000 per year in profits that can easily save you $8,000-$10,000 per year in taxes.
DAVID ALADDIN: I think you said the between the Social Security tax and the Medicare tax that’s paid over. That’s 12%, 12.5%?
JOSH BAUERLE: 15.3.
DAVID ALADDIN: 15.3? Jeez, that’s a lot. Yeah. Once you get over a hundred—
DAVID ALADDIN: That’s just big. Yep.
DAVID ALADDIN: To 300, yeah. Okay, so besides switching to S Corp, what are like some of the smartest and like biggest sellers legally doing to save a lot of money? Because I feel like there’s a lot of things going on when you get to that height where you can just cut taxes down.
JOSH BAUERLE: Yeah. I’d say it probably feels like there’s more than there is. But what we see is a lot of people doing once they start making serious money is the one big thing they’re doing is they’re finding a way to start to deduct their travel. So they’re going somewhere overseas and they’re turning it into a business trip, whether that’s going to a conference for eCommerce sellers or Amazon sellers or it’s going to see their suppliers or whatever it is. If they take a week long, two week long vacation for their family, they’re going to find a way to make at least a portion of that tax deductable by making it business related.
So I guess that the biggest thing we see people doing is starting to turn personal expenses into business expenses. All right. So a room in your home, maybe you start using your garage to store your inventory, like on FBA if I don’t need that but there are some people who do that, putting a room in their houses and office and start to deduct that. Cell phones, things that they use personally, home internet; those are personal expenses now you have a business now you can start to deduct that stuff.
The big thing is the IRS has a standard of, in order to deduct this you have to show that it increased the bottom line of your business, okay. So as you give this go deduct this to every random thing that you spend money on, but if you can show that by spending money on this it increased your business in some way? Then we can find a way to deduct that, all right. So your home internet, very, very clear, you can’t run an Amazon business without your internet, right? So that’s a very clear business deduction even if you’re using it personally in the evenings or whatever. Anything you’re spending money on run that through your mind is this helping my business in some way? If the answer is yes, there’s a good chance we can deduct at least a portion of that on your taxes.
DAVID ALADDIN: Okay, when you say deductions, like so does that mean like deducted from my profits and then?
JOSH BAUERLE: Yeah. So that’s a good question. Right off’s are a little confusing to people because some people assume, oh, I get a $10,000 right off that means I reduce my taxes by $10,000 dollars. What a deduction or a write-off is it reduces your profits like you said. So if you bring in a $100,000 total gross revenue in your Amazon business, and then you pay $30,000 of that to Amazon, now you have $70,000. And let’s say your cost of goods sold worth $35,000, now your profits are $35,000. Then you deduct $10,000 in advertising, now your $25,000. Then we start throwing off these travels and home internet and cell phone, and you deduct another $10,000. Now you’re down to $15,000. And that’s what your profits are and that’s what your taxed on is $15,000 dollars. So all write-off does is decrease the amount of money that you are taxed on.
DAVID ALADDIN: I get it so yeah you want to decrease—you want to have as many deductions as possible to decrease the profit that get’s taxed on?
JOSH BAUERLE: Exactly.
DAVID ALADDIN: Okay. So we got to figure out where we’re going to get most deductions.
JOSH BAUERLE: Right.
DAVID ALADDIN: So I’m going to try in September with Shaun Hart [00:15:13], that entire trip ticket, hotel cost, those are all deductions?
JOSH BAUERLE: Yeah. So let’s run through this here, how long are you there for?
DAVID ALADDIN: Two weeks?
JOSH BAUERLE: Okay. And most of the time spend on business?
DAVID ALADDIN: Yeah, probably majority.
JOSH BAUERLE: Okay so if the majority of the time is spend on business and it’s very clear, 100%, the flight, the hotel, rental car when you’re there. Anything you’re spending money on, it’s a business trip, and you can deduct all of that.
DAVID ALADDIN: And then so, okay. Move and pass deductions, let’s talk about inventory. Let’s say—
JOSH BAUERLE: Yeah.
DAVID ALADDIN: Let’s say I buy about a hundred grand of inventory.
JOSH BAUERLE: Yep.
DAVID ALADDIN: All right. Where does this all fit in to the whole puzzle?
JOSH BAUERLE: Yeah, so inventory is by far the most confusing part taxes for an eCommerce sellers because the IRS says, so basically any other expense as soon as you spend that money it’s an expense and you can deduct it. Do you go by $10,000 worth of advertising today you can deduct the $10,000. With inventory? You cannot deduct it until you sell it. Okay, so if you buy a $100,000 worth of inventory this year and at the end of the year you still have $50,000 of it left in stock? You can only deduct the $50,000 of that on your taxes. Does that make sense?
DAVID ALADDIN: Yeah, so basically we have to get to zero inventories by December 29?
JOSH BAUERLE: Yeah. I mean that’s the ultimate goal. I mean that would make things easy. The thing to remember is you’re going to ultimately get to deduct it so let’s say that next year you sell that $50,000, now you’re deducting $50,000 next year that you didn’t pay for that year you paid for the year before, so it all evens out in the end. But where we see people running into trouble is they get to the end of the year and says oh, I’m going to go buy a big inventory purchase to get my taxes down, but the problem is almost none of that sells by the end of the year, so now they didn’t reduce their taxes and now all their cash flow is tied up in that inventory and so they don’t have any money to pay those taxes.
DAVID ALADDIN: Yeah. So how’s that work?
JOSH BAUERLE: Basically you got to pay it one way or another. The IRS is good about letting you set up a payment plan. Say you—as long as you owe less than $50,000 they’ll let you set up a payment plan. And as long as you keep the amount that you propose you’ll get it paid within 5 years they’ll typically go with it. So don’t get too caught up there but you just want to be mindful of your cash flow. Don’t go buy a huge inventory purchase on December 30, and think you’re going to get a tax deduction. Now you have all these inventory and no money to pay taxes.
DAVID ALADDIN: Interesting. Yeah. Okay, let’s talk about sales tax.
JOSH BAUERLE: Yeah. The other fun one.
DAVID ALADDIN: Yeah. I feel like we’re getting taxed everywhere, first of all.
JOSH BAUERLE: Yeah. Well the good thing about sales taxes is it’s not a tax you’re paying. Your customers are paying it. So as long as you’re doing it correctly it’s something that’s added on to the purchase price and then you’re just paying it—you’re just collecting it for the government and paying it to the government. But the big question comes is what states should you be collecting that in? And for most people that’s pretty clear. Because all of this is the state that you have to have a clear presence in, you have to collect and pay sales tax in that state. All right.
So for most people it’s just where they live and where they run their business from. So I’m in Ohio. If I set up my Amazon business, the common sense would say I’m only located in Ohio, I only have to collect and pay sales tax and sales to other people located in Ohio. All right. That would be pretty simple. But where Amazon FBA becomes a little different is one form of physical presence is inventory located in the state. And Amazon can store your inventory in what is it now, 22 different states?
DAVID ALADDIN: It’s out there, yeah.
JOSH BAUERLE: Yep. I think it’s 22 different states. Seems like you can start your inventory in. So technically speaking, you could have what they call nexus is 22 different states or 23, if you live in a different one. And technically you should be collecting and paying sales tax on sales within all 22 or 23 of those states if those states all require sales tax. So that’s what the rules say. Now I’ll tell you that most Amazon sellers, I would guess 85%-90% or more are only collecting and paying in the state that they are located, okay. So what State are you located in, David?
DAVID ALADDIN: Florida.
JOSH BAUERLE: Florida? Okay. So most people in your case are just saying, okay I’m in Florida, my business is in Florida, I’m going to collect sales tax on all sales from people within the State of Florida and only within the State of Florida. Right? That’s what most people are doing. And to date, we have not had any clients that, any of the other states have come back on about it. But you want to be careful here, because the letter of the law says that you should be doing it in any state that Amazon stores had inventory. Okay. So what we’re advising most people at this point is, all right, start with your home state, that’s a must. If you’re not doing that you need to do that like tomorrow.
Get that set up and start doing your home state. From there start monitoring what states you’re starting to have a large amount of sales in. And then maybe you slowly move on to those states. So the big one for most people is going to be California, right? You’ll probably have a lot of sales in California. So maybe you go register for sales tax and start collecting and paying in California. Then you look at Texas. Okay, now I’m starting to have a lot in Texas, let’s start registering and paying in Texas. So just slowly monitor change.
It’s a little bit of a risk-reward thing. If you have a hundred dollars per quarter of sales in Illinois, you probably don’t have to worry about Illinois coming after you. So I’d do a little bit of risk-reward here. Start out in your home state and slowly work your way out. Make sense?
DAVID ALADDIN: I’ve asked Stellar Sellers and it seems like they’re only paying their sales tax in that particular state that they live in as well.
JOSH BAUERLE: That’s what most people are doing. And like I said, I personally have not any clients that other states have come back on but the constant rumor is its right around the corner with these states we’re going to get together and say okay, let’s go after all the Amazon sellers.
DAVID ALADDIN: I feel like it would be a paper disaster if you have to apply to every state and, I couldn’t even imagine like if there’s a seller that does that at this moment.
JOSH BAUERLE: I mean we actually worked with a few that do it in all 22 states.
DAVID ALADDIN: Wow. Yeah.
JOSH BAUERLE: Yep. Because they’re big enough, I mean they are doing, if we have something to do with 10 million dollars they just don’t want to risk it they’re registered in every state.
DAVID ALADDIN: Now that makes sense.
JOSH BAUERLE: It’s time consuming, it’s expensive to get registered in those states so I totally get why people aren’t doing it. The one thing I say is if you’re to the point where you’re going to start doing this I highly, highly recommend using something like either TaxDrive or Taxify. They can link right it up with your Amazon account and they can automatically file on every state you want to file them for you. Just take it completely out of your hands.
DAVID ALADDIN: Yeah. Like I heard if you stop doing eCommerce for whatever reason you set to file or cancel out this are…
JOSH BAUERLE: Yeah. If you don’t have sales they still expect a zero return for you physically going close out of that account.
DAVID ALADDIN: Yeah. Well it was stressing me out for a while because…
JOSH BAUERLE: It’s a stressful situation like—
DAVID ALADDIN: Yeah.
JOSH BAUERLE: I’m sure there are some people are going to give me this and to this saying holy crap, what do I do?
DAVID ALADDIN: Yeah.
JOSH BAUERLE: If that’s you do what we’re talking about start out on your home state that’s a must. You got to do that. Don’t overstress about the other states just kind of talk to other people, talk to your CPA and slowly work your way up to the other states if you feel like you need to.
DAVID ALADDIN: I feel like it’s like a huge grace on right now.
JOSH BAUERLE: It’s exactly what it is.
DAVID ALADDIN: I think it’s kind of start by with Amazon like they didn’t collect the sales tax for you.
JOSH BAUERLE: I’m sure that your audience all makes part of their living off Amazon. We all love Amazon but they can easily end this problem by collecting it themselves.
DAVID ALADDIN: Just collecting it. Exactly. I was thinking the same thing. I think it would be something political that would force them into that, too.
JOSH BAUERLE: Well, the way the rules technically say it is when you sell on consignment for someone which is basically what is Amazon is doing for you, that you’re in charge of the sales tax so the way most people read the rules is Amazon is that one in charge of that, but guess what Amazon has more power and they can hire more expensive attorneys so—
DAVID ALADDIN: Yeah.
JOSH BAUERLE: If the states come after you, you’re on your own.
DAVID ALADDIN: And just a side note for those listening, once you get your sales tax number you can put it into Amazon and then it starts collecting tax for that state, so for the past two years for me that sales tax comes out of my pocket but moving forward it will be paid by or collected by Amazon and then I can spend it for the sales tax. You know really into Florida.
JOSH BAUERLE: Yeah, that seems super confusing to try and figure out like I got to know which sales where at Ohio. Amazon will do all that for you, you just got to basically be a click in the button and tell them which state you want to start collecting that in, right.
DAVID ALADDIN: Yeah. Actually I use TaxDrive for calculating the number from that.
JOSH BAUERLE: Right.
DAVID ALADDIN: Right, like off.
JOSH BAUERLE: Right. Exactly. That I highly, even if you’re only doing your home stay, I highly recommend doing TaxDrive.
DAVID ALADDIN: Yeah.
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Okay. So this is kind of unrelated, but I’m curious like do you know how Donald Trump, you know, avoids taxes?
JOSH BAUERLE: I get this… yeah. The thing is like he, first of all he hasn’t released his tax return so we don’t know what he does and doesn’t pay in taxes. But when you hear of someone like that, not paying taxes, it’s a little bit misleading because Donald Trump was big into real estate and what happens is when you buy real estate, if he goes and buys a 100 million dollar of real estate, he doesn’t get a 100 million dollar deduction like a normal expenses. You have to depreciate that over 39 years. Okay. Take a 100 million dollars and divided by 39 years and he’s taking that each year going forward even though he didn’t buy it in that year. So if 5 years after that he has a year where not much income came in, he can have depreciation from prior years that wipes out all of that income. So it’s misleading to say that he doesn’t pay taxes, he’s not given any tax advantages that you and I aren’t getting. He’s just buying really, really expensive assets that can’t be deducted all at once, they had to be depreciated over several years.
DAVID ALADDIN: You mean like, increasing in value? Like the—
JOSH BAUERLE: No, so let’s just keep the number simple. Let’s just say that it’s a hundred thousand dollars and we have to deduct it over ten years. The year he buys it, he can’t take a hundred thousand dollar, instead he takes $10,000 per year for ten years.
DAVID ALADDIN: I see.
JOSH BAUERLE: So five years down the road, he’s given a $10,000 deduction for something he bought five years ago.
DAVID ALADDIN: And so he’s got multiple properties that are given that deduction.
JOSH BAUERLE: Right. So in any given year his income goes down he easily have enough prior year deductions that wipes out all those income out.
DAVID ALADDIN: That’s interesting.
JOSH BAUERLE: It’s actually a disadvantage because he’s not given to take it all at once.
DAVID ALADDIN: Yeah.
JOSH BAUERLE: But you could run into certain years where it’s enough that it wipes out all your taxable income.
DAVID ALADDIN: Okay. So—
JOSH BAUERLE: All right?
DAVID ALADDIN: Yeah.
JOSH BAUERLE: Trust me. The rich pay their share of taxes, trust me.
DAVID ALADDIN: How about—
JOSH BAUERLE: We’re doing some taxes for some rich people and they pay some taxes.
DAVID ALADDIN: Okay, I’m currently setting up payroll because—
JOSH BAUERLE: Yep.
DAVID ALADDIN: I’m buying a house and I want to see payroll checks. Distribution versus payroll and like what distribution that you won’t get taxed on in the Medicare and the Social Security so…
JOSH BAUERLE: What type of entity are you?
DAVID ALADDIN: LLC, I think. S Corp at the moment, yeah.
JOSH BAUERLE: You are an S Corp, okay.
DAVID ALADDIN: Yeah.
JOSH BAUERLE: Okay. This depends on your entity. Number one if you’re an S Corp you have to be on payroll, okay. There’s no way around that. You can’t just take your distributions up. And the reason they do that is because as we talked about with the S Corporation, those profits, when you take them out of distributions they don’t get hit with that self-employment tax at 15.3% tax. So the IRS came in and said, okay, fine. We’ll let you have that tax free, those security tax free but we’re going to make you get them payroll, because when you pay yourself a salary we’re going to turn around and get hit in payroll taxes which is that same 15.3% tax. Okay, so that’s why we have, when I talked about you don’t want to do an S Corp unless you’re at that $30,000-$40,000 premium profits that’s the reason why it’s because they’re going to make you give on payroll and that’s going to eat up a chunk of the savings.
Okay, so if you’re not an S Corp this conversation doesn’t apply to you. If you’re Sole Proprietor and LLC this conversation doesn’t apply because your tax on the 100% of the profits both ordinary and self employment tax so you can take out as much in distributions as you want or as little in distribution as you want and it’s going to be treated at the exact same way for tax purposes.
DAVID ALADDIN: Okay, let’s…
JOSH BAUERLE: It…
DAVID ALADDIN: Yeah. Let’s say like I am an LLC. And I want to get payroll just for the sake of getting paychecks and you know.
JOSH BAUERLE: You can’t. You’re actually not allowed to take payroll if you’re an LLC and an owner of an LLC.
DAVID ALADDIN: Even if it’s a multi-member LLC?
JOSH BAUERLE: The owners of the LLC technically cannot be on payroll. They pay themselves in either distribution or what they called guaranteed payments.
DAVID ALADDIN: Wow, okay. And then so—
JOSH BAUERLE: I mean—
DAVID ALADDIN: Go ahead.
JOSH BAUERLE: So it actually doesn’t matter like it’s kind of weird that your loan officers are telling you that you need to take payroll because on your tax return it all shows up as income. So my guess is if it like, you had your CPA, write them a letter and say, hey, this was all income to him so you can see it online, 17 of this tax return and they would understand. So if you’re an LLC if your loan officer tries to say, oh, you have to be on payroll so we can get you a loan, that’s not necessarily true. So just make sure that you’re communicating with them and what type of entity you are and how actually are you paying yourself.
DAVID ALADDIN: How would you show distribution to—
JOSH BAUERLE: Addition.
DAVID ALADDIN: Yeah.
JOSH BAUERLE: They actually don’t show because it doesn’t matter. So because your tax on 100% of the profits. So the IRS allows you to take those profits out tax free because they are already taxing you on the profits. So if your business makes $50,000 after all of your expenses, the IRS says, all right were taxing you personally on all $50,000. You can go ahead and take off $50,000 out in distributions; you can take none of it out in distributions it doesn’t matter because we’re taxing you on all $50,000.
DAVID ALADDIN: And that $50,000 you get to have some business side and when you take—
JOSH BAUERLE: No. No business tax, but your business will never pay any taxes.
DAVID ALADDIN: That’s why I have an accountant.
JOSH BAUERLE: It’s confusing. It is confusing. Keep in mind this name, Passive Entity. Unless you’re a C Corp and again almost none of the audience should ever be C Corporation. Unless you’re a C Corporation, it is what they call a Passive Entity, which means all taxes pass through to you as the business owner. I see. So when I take a distribution it’s only being taxed as a personal, under my personal, you know.
JOSH BAUERLE: It’s not being taxed at all. Distributions have no taxes.
DAVID ALADDIN: Zero?
JOSH BAUERLE: It depends on the—you’re taxed on the profits. So technically your… when you take a distribution all you’re doing is taking out those profits that you’re taxed on. So your business—
DAVID ALADDIN: I see. I see. Yeah. But… Go ahead.
JOSH BAUERLE: Let’s say it’s $50,000. When you go to file your tax return, all your tax return, and personal tax return is going to show is $50,000 of income, because that’s what your business made. So whether you take $50,000 in distributions, $25,000 in distribution that makes no difference on taxes. You’re taxed on the $50,000 profit.
DAVID ALADDIN: So it doesn’t make sense to take a payroll technically. But wave on the distribution…
JOSH BAUERLE: Unless you are an S Corp in which case you have to, right? So the S Corp is where things get interesting, because the S Corporation, the IRS says, you have to take a payroll. There’s no way around it because we don’t want you saving all of that money on the Self-employment taxes. So that’s where it comes in. All right, how much do I take in payroll, how much do I take in distributions? Because you want the distributions to be as high as possible and the payroll to be as low as possible. That’s where you get the tax savings.
So if the IRS says you have to have what they call the reasonable salary, okay? So they’re not going to let you say, I’m an S Corporation, I’m… okay, fine. You tell me I have to be on payroll I’m going to pay myself $5000 a year. Find them on payroll. That’s not good enough. You have to basically the standard is, what would you have to pay to replace yourself in the business? So let’s say you want to keep the business, right, but you want to be out of the day to day, what would you pay someone to replace you? And I get those Amazon FBA sellers that are hard because you can’t exactly go on monster.com and look for job openings for Amazon FBA running a business, right? So it takes a little bit of guess work but I guess it just comes down to common sense like if your business is making $200,000 a year, you can’t go pay yourself $10,000. You want to be up close to the $40,000-$50,000 per range in the salary portion.
DAVID ALADDIN: No, it’s awesome advice. I was thinking maybe you’re in the six figure range but…
JOSH BAUERLE: Yeah, you want it—I mean it depends on your situation, too. Like if you’ve recently think that you could not pay anyone less than a $100,000 to replace you in the business then pay yourself $100,000. But keep in mind that tax saving come by keeping that salary as low as possibly can.
DAVID ALADDIN: So distributions are the secret? Payroll sucks.
JOSH BAUERLE: It’s basically… now that sucks because you get hit with those self-employment or payroll taxes, but you’re also going to have to pay it. You’re going to use the payroll; I’m assuming you’re using a payroll company?
DAVID ALADDIN: Yeah.
JOSH BAUERLE: Right.
DAVID ALADDIN: Sorry. Go ahead.
JOSH BAUERLE: No. Now you have to start paying a payroll company do it for you. So some people think, okay, fine, I’ll pay myself a salary, all right, here’s my check for $5000, there’s my salary for the month, like no. You got to actually pay payroll taxes on it. You got to file all the payroll tax reports. There are some that are monthly, some that are quarterly, some that are state, some that are federal. This is a pain in the butt. So you want to use a payroll company for it even if you’re the only employee in your business.
DAVID ALADDIN: Yeah. I’m in the exact same process right now and doing it through Zenefits. [ph]
JOSH BAUERLE: Okay.
DAVID ALADDIN: Yeah. I’m sending myself a salary. The low that you can get it at a reasonable amount make the most sense because—
JOSH BAUERLE: Absolutely.
DAVID ALADDIN: It seems they just kill you with Medicaide and Social Security.
JOSH BAUERLE: So that’s exactly, think… this is why the S Corp saves you money. Think of all you’re paying in that Social security and Medicare, if you’re an LLC, 100% of your business profits will be paying all of that. That’s why the S Corp says—
DAVID ALADDIN: Say that one more time?
JOSH BAUERLE: So if you’re a Sole Proprietor or an LLC, all of the profits in your business are paying that Social Security and Medicare tax. So as an S Corp it’s only the salary portion. When you’re a sole proprietor and LLC all the profits pay that.
DAVID ALADDIN: Let’s talk about Social Security for a second because does that even like—
JOSH BAUERLE: Okay.
DAVID ALADDIN: Relate to us when we’re older?
JOSH BAUERLE: Yes. Yeah, well, who knows, your guess is as good as mine if that is still around coz it’s not looking good. But yeah, I mean technically what’s happening is you’re paying in now so when you retire you can take a portion of your life time earnings in every month in Social Security checks but basically what you’re doing is paying for the people that are currently retired to take their earnings.
DAVID ALADDIN: Sounds like a Ponzi scheme.
JOSH BAUERLE: I don’t understand how it’s not a Ponzi scheme to be honest with you.
DAVID ALADDIN: Yeah. I heard that the most you can make is about $2000 a month off social security, so if you’re paying a large amount it doesn’t make sense to do that.
JOSH BAUERLE: Yep. It’s a tough process and I mean there’s no guarantees that—how old are you?
DAVID ALADDIN: Thirty.
JOSH BAUERLE: Okay, yeah, I’m thirty-three. There are no guarantees that you and I will ever see Social security in this current form.
DAVID ALADDIN: That’s yeah. So depressing.
JOSH BAUERLE: Depressing.
DAVID ALADDIN: All right. So what software tools do you recommend for sellers?
JOSH BAUERLE: Yeah. So we haven’t talked about bookkeeping and that’s… this is the number one most important part of all this. You have to know your numbers, all right. So all these deductions we are talking about, they’re worthless if you’re not tracking them. And to do this I highly recommend some type of accounting software. For me, for eCommerce sellers and especially Amazon sellers, I think Xero is the best one you can go with here. Xero, X E R O. They can sync up with a lot of the Amazon tools like X20 is the big one, right, that Amazon sellers use. It syncs right up to that. But basically all its going to do is you’re going to have a business bank account, business credit card, whatever other business accounts that you have, that software is going to sync right up to it, so every time spend money or every time money comes in it’s going to automatically hit that software and all you’re going to have to do is go in and say what it is for. Okay. So if you go and spend $10,000 on Facebook ads, that $10,000 is going to show up in Xero, all you have to do is go in there and label that it’s for advertizing.
So if you’re going to try to do the bookkeeping yourself, I highly recommend you using some type of software. So there’s Xero, there’s Quickbooks online, there’s even a few free ones like Wave. If it were me I’d just go with the Xero because it’s pretty compatible with Amazon but any of those will work, just make sure you’re using some kind of cloud base software that’s going to sync up with your bank accounts. Other tools, I mean, that’s… if you’re going to start doing the payroll stuff, Gusto is the one that we typically use. They’re very cheap, they’re I mean relatively speaking, they’re very cheap. They’re $45 a month, if you’re the only employee. Zenefits, as you said they’re ones you’ve used before. But to me the ultimate is when we’re talking taxes are you’ve got to have that bookkeeping under control. You have to have some type of system in place.
DAVID ALADDIN: Great idea. It starts to get to become a nightmare.
JOSH BAUERLE: Yeah, I can’t tell you how many people we go to do the taxes at the end of the year and they just try and give us a bunch of receipts. I’m like what? Wait a minute here, you have to keep this organized we can’t look through all your receipts and put them together for u. This stuff has got to be organized.
DAVID ALADDIN: What are the tips you have for sellers?
JOSH BAUERLE: As far as taxes and accounting?
DAVID ALADDIN: Yeah.
JOSH BAUERLE: You know, it’s being organized, if we’re talking about this book keeping and you’re saying you hate this, I don’t have time for this, I’m not going to do this—go hire a bookkeeper. You can… bench.com is one who we partner with a lot. They can, their fees probably a year, you can pay somewhere $300-$400 a month. If you’re doing serious money in Amazon this is well worth the cost. You can find individuals that will do this for you maybe a little cheaper. All right. So but if, you either need to get the software to do it yourself or you need to pay someone to do it if you know you’re not going to do it, but one way or another, it has to get done.
Going back to the inventory, make sure that you know that if you spend that big money on inventory at the end of the year that is not going to be a tax deduction. So make sure you’re going with your cash flow properly. Make sure you’re setting aside money for taxes, okay. Remember that, those taxes are going to come due. Don’t think that because you’re personally not taking money out of the business that you’re not going to get hit with any taxes. You’re taxed on the profits regardless of what you take out. And then make sure that you’re in that proper entity, all right? If you’re doing more than $30,000-$40,000 per year in profits, you got to make sure you’re doing that S Corp or a big chunk of money is getting thrown away to Social Security and Medicare taxes.
DAVID ALADDIN: I feel like this is the perfect episode for every Amazon seller to listen to.
JOSH BAUERLE: It seems, there’s a lot… it’s a confusing industry when it comes to accounting and taxes, and it doesn’t have to be that way if you can just get the right information and I don’t recommend doing this—I know it sounds self-serving for me to say go hire a CPA because I am a CPA, but this stuff gets confusing. Usually—
DAVID ALADDIN: For sure.
JOSH BAUERLE: Yeah. Usually what we’re telling you here is to understand the basics but then go talk to a qualified person. Make sure that someone understands the eCommerce world. Make sure someone that doesn’t, when you say you’re just doing Amazon FBA, say what FBA stands for? Let them know. Make sure they know your industry because there are some very specific things to your industry that can be done.
DAVID ALADDIN: Awesome. Are there any like tax tricks that we haven’t discussed yet? That is legal.
JOSH BAUERLE: Yeah. That’s the key, right. You know, nothing standing out. It really… honestly, it comes down to doing the basics. It’s making sure that you’re in the right business entity. It’s making sure all these personal expenses can become business expenses, that you’re doing it right. Like in your case, take a trip to China, and make it a business expense. It’s just making sure everything that you can do is, that you’re taking advantage of everything you can take advantage of and that comes down to working with the right person. The only other thing I guess once you’re making serious money, like high like… $300,000, $400,000 for more per year in profits, then we can start doing more advanced stuff like opening up retirement accounts within the business. So we can open up a Zafra 401K within the business. You can put $53,000 per year in that it completely wipes out $53,000 of taxable income.
DAVID ALADDIN: Okay, that’s huge! Yeah.
JOSH BAUERLE: Exactly. So as profits go up, now we can start getting creative in using cooler things like that.
DAVID ALADDIN: Can we actually go more into that?
JOSH BAUERLE: Yeah.
DAVID ALADDIN: There are definitely a bunch of us who are in that kind of category. So you said open up a 401K within the business?
JOSH BAUERLE: Yeah. So, either a 401K or a Zep is what I would go with. They both have a $53,000 dollar per year limit of what you could put in. The way you go about doing that is differently. So it’s with a Zep, you can put up a flat 25% of your salary if you are an S Corporation which if you are in that profit level you’re going to be an S Corporation, okay. So that’s where things get a little tricky is you want your salary to be as low as possible in one respect, but if you want to max out that Zep, then it would be 25% of your salary. So if you want to get all the way up to the $53,000, you got to pay yourself $212,000 per year in salary. All right. The 401K actually is a little easier to contribute that $53,000 per year max. They let you do $18,000 right off the bat, as long as your salary is at least $18,000 per year, you can do $18,000.
DAVID ALADDIN: Wow.
JOSH BAUERLE: Then, it’s an additional 25% of your salary. So to max out that $53,000, you’d have to pay yourself $140,000 in payroll. Right that’s still high but it’s obviously $72,000 less plus Zep. So there are pluses and minuses to both. The 401K is a little harder and a little more expensive to set up. The Zep’s easier. So make sure that you talk to a financial adviser or your CPA which one’s best for you, but the bottom line is if you’re making serious money on this thing, that’s $53,000 per year you’re just wiping off of your taxable income and it’s not like you’re spending money to do it. You’re getting a tax break to save more money.
DAVID ALADDIN: What! That’s huge. I felt like my accountant—
JOSH BAUERLE: Right.
DAVID ALADDIN: Didn’t say this, I don’t know why.
JOSH BAUERLE: Right.
DAVID ALADDIN: Hope he’s not listening to us.
JOSH BAUERLE: So that’s… I mean, in order to get a $53,000 production in advertising you have to spend money in advertising, right? With this, you’re just putting it in your retirement savings account.
DAVID ALADDIN: Yeah. And it’s going into the market, too.
JOSH BAUERLE: Right. Exactly. And it’s growing tax deferred until you retire. So you’re not paying taxes on any of the income until you pull it out.
DAVID ALADDIN: That’s powerful.
JOSH BAUERLE: It’s huge. Yeah.
DAVID ALADDIN: Yeah. I have a personal 401K that I contribute to.
JOSH BAUERLE: Okay.
DAVID ALADDIN: But that seems kind of pointless. You just put the thing on the business.
JOSH BAUERLE: You have an IRA, you mean?
DAVID ALADDIN: I think it’s just, yeah I guess. Is that the same thing?
JOSH BAUERLE: Probably an IRA, individual retirement account. It does have a limit of $5500 per year.
DAVID ALADDIN: That sounds low.
JOSH BAUERLE: Okay.
DAVID ALADDIN: But.
JOSH BAUERLE: So if it’s an IRA you have a limit of $5500 per year. It’s the same type that if you can contribute to a traditional IRA and get a $5500 deduction per year. Right. What this 401K or the Zep does is increases that potentially all the way up to $53,000.
DAVID ALADDIN: Awesome. So, okay. The 401K is huge, so anything else I not know about?
JOSH BAUERLE: That’s the big stuff. I have a… we talked about Entrepreneurs on Fire, I don’t know if you’ve seen but they recently moved to Puerto Rico so if you’re open to moving there’s some huge, huge tax benefits to living in Puerto Rico.
DAVID ALADDIN: What?!
JOSH BAUERLE: Yeah.
DAVID ALADDIN: That sounds ridiculous. Are they making that much cheddar?
JOSH BAUERLE: Flat 4% tax rate.
DAVID ALADDIN: Wow!
JOSH BAUERLE: Instead of, I mean if you’re making millions of dollars per year you’re basically paying 50% taxes, so to keep that down to 4% is pretty big deal.
DAVID ALADDIN: All right. So did he leave US like ex-patriot?
JOSH BAUERLE: No. So that’s the great part about it is you can remain a US citizen because Puerto Rico is a US territory. You vote, you can do everything. It’s the only place in the world where the US says, okay, you can just follow Puerto Rico’s tax rules and you don’t have to follow ours. Basically anywhere else in the world if you’re a US citizen, you could be living in England, or wherever, the IRS still says, too bad, you’re a US citizen; we tax your worldwide income. In Puerto Rico, for whatever reason, they say, follow Puerto Rican tax laws.
DAVID ALADDIN: And the requirement there is you have to be a resident for a year or something?
JOSH BAUERLE: Yeah. So you got to spend more than six months in Puerto Rico and it has to be your main home. So we’ve seen some people try and get around that and keep their California home and just kind of spend part time in Puerto Rico. That’s not going to work. They’re going to look into it and make sure that you’re doing the legit. And there’s also, there’s some big time, you have to get accepted into this program. So this program, this 4% program is only for US businesses who moved their business to Puerto Rico. And your business has to meet certain standards as well, but if you’re making enough money that this start to sound good, then look into this. It’s called Act 20 and Act 22 in Puerto Rico.
DAVID ALADDIN: Everyone’s like writing it down right now.
JOSH BAUERLE: Right. Right. Puerto Rico doesn’t look like the worst place in the world to live either. Some pretty nice stuff there.
DAVID ALADDIN: That’s an awesome tip. Okay, so, all right. My last question is, can you buy like a warehouse and that would take out, that would be all tax deductable from your profits?
JOSH BAUERLE: So it is a tax deduction but this is where we’re going to go back to the Donald Trump conversation. When you buy a large asset like that, basically if you buy any asset that’s over probably $500, you don’t get to deduct that all at once. You have to spread that out over a certain number of years, and how many years depends on what type of asset it is. If we’re talking of warehouse which is commercial real estate, you’re talking 39.5 years that you have to spread that out over.
DAVID ALADDIN: What?!
JOSH BAUERLE: So let’s just say that you bought a warehouse for $39,000 just to make the math easy, you’re going to get a $1000 deduction for 39 years.
DAVID ALADDIN: That’s… I don’t get it. Who came out with that law?
JOSH BAUERLE: It’s the IRS for you.
DAVID ALADDIN: All right. It’s been a pleasure having you on. How can people reach out to you?
DAVID ALADDIN: Awesome. Dude, it has been a pleasure having you on and definitely learned a ton in this episode. I actually am going to have to listen to it again. On my next—
JOSH BAUERLE: Awesome. Thanks for having me. It was fun.
DAVID ALADDIN: Yeah. On my next ride to the gym. Thanks a lot again. David Aladdin, Josh Bauerle, out.
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