Podcast: A Strategic Approach to Making Taxes Your Ally in 2021

Russell Benaroya: Hey, everyone. Welcome to the Stride 2 Freedom podcast. My name is Russell Benaroya, and I’m the co-founder of Stride Services—a virtual back office, bookkeeping, and accounting firm serving hundreds of clients around the United States.

This podcast is designed to help small business owners focus on growth and innovation. In other words, focus on those things that inspired you to start your business in the first place. We call it your genius zone. We do our job on this podcast when business owners feel like they have the trust and confidence to build the right team of partners around them that will help them grow. Thanks for joining. Let’s go.

Hey, everyone, Russell here. Hey, I want to give you a heads up. About halfway through this podcast, my computer battery died. I did not have my power cord and so I did a quick shift to my mobile phone. So it may get a little bit choppier. You may hear that transition in terms of the quality of audio. But just wanted to give you a heads up.

It was a great interview with Scott Hoppe, I know you’ll enjoy it, but didn’t want you to be surprised by the change in fidelity. Okay, thanks.

Hi, everyone. Welcome to the stride to freedom podcast today. I’m Russell Benaroya, your host of the podcast, and responsible for taking pretty much any topic and making it one of the most exciting and important things you can listen to today. Well, maybe not exactly but let’s find out.

I’ve got Scott Hoppe on the call today. Hi, Scott.

Scott Hoppe: Hey there, Russell. Hi, everyone.

Russell Benaroya: Scott is a tax CPA, but stay with me for a second here. If you are a business owner, it may be something to get excited about because guys like Scott work with clients to help them architect a tax strategy that can have major implications on their cash flow every year. And what business owner doesn’t want to hear about that?

Scott works with a number of our clients as the founder and CEO of a really progressive tax CPA firm called Why Blu, and he works with clients throughout the United States. I wanted to have him on the call today because we are on the precipice of what could be some pretty significant tax changes in our country. Tax strategy seems to be a topic that’s pretty opaque for a lot of business owners, but like I said, can have really significant implications.

So let’s jump in, get to know Scott, and how he serves organizations like yours. Scott, you’re ready to rock and roll?

Scott Hoppe: I’m ready.

Russell Benaroya: Awesome. By the way, Scott, your LinkedIn says that if you win the lottery, you would be doing exactly what you are doing now. Tell me more about that because that’s insane.

Scott Hoppe: You probably wouldn’t paint that picture as a CPA on the tax roll. Where I would land on that and why it feels that way for me every day is I’m running a business. I work with high achievers. We smile, we’re talking, we’re saving people money. I have fun. I look forward every day to starting work.

Russell Benaroya: Well, I’ve enjoyed working with you. I think you’ve got great energy. I think it’s something that attracts me to you and probably your clients as well. Give me the background on Why Blu and why Why Blu. There’s a story for everything. There’s definitely a story for that.

Scott Hoppe: Not too far off from Stride. You’re looking for some meaning in your name. What we really wanted to break away from early on was that white male name on the door and get the Why Blu was one of the first ways we could do that.

Blu is about the color; representing trust and integrity. That’s what we wanted to lead with. Then you get to like, why blue? Then you start working yourself around like, well, there are real-life limitations that every business owner faces.

Russell Benaroya: Like getting a domain.

Scott Hoppe: I wanted the domain and Why Blu was short enough. I was happy with it.

Russell Benaroya: What year was that?

Scott Hoppe: 2014.

Russell Benaroya: What was the motivation for you to break out on your own and start your own firm?

Scott Hoppe: When I look at being the leader of a practice and the messages that you bring together, it’s how can you be authentic with it? When I look at myself, throughout my childhood the whole time, I was always entrepreneurial. When I was 12, I had a lawn mowing business with my neighbor.

The sole purpose of going around mowing lawns was to raise enough money to buy a go-kart. The best part of all, this is a good entrepreneurial story, we didn’t even have a lawnmower. We had no equipment. So we used the people’s equipment that went to the houses too.

I remember being like on a Word Doc, putting clip art in, and we’re handing out flyers. We had a great time. We ended up getting like 300 bucks and splitting it. After that, I worked at Circuit City, if you remember those.

Russell Benaroya: Sure.

Scott Hoppe: And I built computers on the side because I saw that the people coming in to buy these off the shelf HPs, they didn’t have what they needed. I felt the need and that kind of spun up my whole IT business.

A little later on, I sold bounce houses. I worked at a bounce house company and then I became a reseller for them because I moved away from where their warehouse was, that I worked at and I was a sales manager there.

So I’ve had the bug the whole time. It didn’t matter what I was going to be doing; I was going to run a business. It just happens to be that I’m a CPA and that I happen to have done all that work, and here I am.

Russell Benaroya: Love it. What are some reasons that clients come to you? When they call on you, what is the problem they’re typically trying to solve?

Scott Hoppe: There’s quite a few of them but there’s usually a common thread. The common thread is that they’ve been underserved and they’re looking to elevate their level of advisors. So who was right for them when they initially hired their current provider is no longer the right size.

As their sophistication grows, as your entity and even your personal finances evolve, you need to see how your team is evolving around with you. That would be the consistent theme.

Russell Benaroya: What are some of the considerations that we should be taking into account as we look at a new administration? What should be on our mind as a business owner right now?

Scott Hoppe: There are a few things. But even before we got to looking at Biden-Trump plans, back in July, we actually pushed out to all of our clients to file something called a protective claim letter.

A protective claim letter is something you file with the IRS and you say, “Hey, there’s an uncertain event that’s going to be coming up. By the time that the event is determined, I can’t amend my tax return to get a refund. So I’m going to put this letter in that suspends that.” It puts you in a holding pattern.

When we did that, it had to do with the health care law and getting in Texas versus California going to the Supreme Court. So as soon as we heard the Supreme Court was going to hear their case, we went in and said, “If this gets reversed, everyone’s going to get refunds.”

But it started in 2016. If our clients don’t file this letter, they’re out of luck. What ended up happening was we got that out there and we said, “Hey, look, the chances are remote. We don’t really think the Supreme Court is going to do that.” But then, what happens?” What’s going on right now? We have a new justice coming in.

Now, all of a sudden, the game’s changed. Maybe what I thought was a remote chance is actually becoming a really big chance. And for a very average investor, that’s $30,000 plus of free money they’re going to get back just because of filing one letter that put in a protective claim.

So the first question I’d be asking myself if I’m listening to this, did my CPA tell me about that letter?  Well, TBD. That’s the part of a good advisor, even though there’s a tremendous amount of uncertainty into the future. We still want to have these conversations and think, how can we position ourselves?

So take that lens and go into Biden versus Trump plans? We go, who’s going to get elected? We don’t we don’t know. We may not know for a few weeks after.

Russell Benaroya: This is not the podcast to be delving into politics, even though we all have feelings.

Scott Hoppe: So you’re looking at, well, we don’t know what the outcome will be. Even if it is Biden, we don’t know if all of his plans will pass. There has to be a whole new wave. What we’re really looking at, past that, is how do we get access to assets in the most efficient way possible?

Assets, for a business owner, it’s always cash. We have a major decision that we’re thinking about between Biden versus Trump, and we’ve already altered some of our clients’ plans to do with liquidation. So selling some equity, or selling some of their founder shares.

What they were going to do in terms of spreading out a sale over several years thinking, “I’ll spread the tax out. I’ll spread the income recognition out, that’s great for me.” We said, “Well, look, if it’s a Biden win, that plan will cost you $350,000 more. Let’s actually bring all that money into 2020.”

And by moving all the income into one year, they’ve saved the bundle of potential. No numbers have changed, but potentially, that could be a big win. And that was enough saying, “Hey, all else is equal to me. I’m going to get the cash today cheaper.” That’s how we’re looking at it.

Russell Benaroya: I know you have very customized conversations with clients because every client has their own circumstances and situation. So you really become an important advisor. But my guess is that there are categories of conversation that you have with clients.

I recall you were on a webinar with me, boy, it was like a year and a half ago, and we were talking about how to optimize your ownership. Like, should you be an LLC? Or should you be an S-corp and minimize your taxes? I’m curious if there are some categories of conversation that you have with clients that you always make sure you want to bring to the surface?

Scott Hoppe: That portion is important and what I see often is the focus is on the wrong area. They’ll go, “I want to be legal, but save me the most money.” And I’m like, “Okay, well, let’s step back from that plan and think first. Let’s talk about entity selection and let’s talk about entity management.”

Entity selection is are you an LLC? Are you a C-corp? Or you’re an S-corp? Are you a sole proprietor? Entity management is usually mismanagement. That’s where we’re not being as efficient as we can be within those realms, or we’re missing deductions that we should have. We’re misreporting information; something along those lines.

When we have that come up and what are we and what makes sense, the frame always starts off with, “Where you are, is it serving you for who you are now?” Oftentimes, that’s the person that steps out and goes like zero to a million, to about 5 million, and they’re an LLC. When you’re an LLC, that’s like one of the interesting things because it’s the elite designation.

In the tax world, there is no such thing as an LLC tax. Stay with me if that seems like a little weird because what you can be is, you can default to some things. If you’re the only owner of that LLC, you default to a sole proprietorship for tax purposes. If you are in a partnership, you default to a partnership as an LLC. Outside of those defaults, you can elect to be other things. You can elect to be an S-corp, you can elect to be a C-corp.

So you go, “That’s kind of cool.” You could form an LLC, and you can be anything in the tax roll. You don’t have to change your EIN, you don’t have to open up your bank accounts. It’s flexible.

Well, that that is nice except when we get into it and you’re a single-member LLC and you’ve grown. Why haven’t you made that entity selection beyond the default? You’re getting taxed so heavily on all your incomes—getting taxed on self-employment tax plus income tax. If you’re in California or New York, I mean, then you’re really off the charts. So we talk about, let’s do what Biden does, and let’s be an S-Corp.

If you look up any news there, you’ll see that’s what they’re doing. They’re managing their tax obligation using S-corps as the entity and I’m really watching what I pay myself through payroll. For me, that’s where the conversation starts.

The other concern is maybe you’re past that. Like, “Scott, that’s great. I was an LLC, I’ve done the S-Corp thing. We’re set.” Well, have you outgrown it? Maybe you’re actually spitting so much income back to your personal tax return that it’s very inefficient. Because you have to pay tax every time you have the money when it flows through to your personal return.

Remember, S-Corps don’t pay tax themselves. California will say you’ll pay 1.5%, but by and large, it just shows up on your personal return. With a C-Corp, you actually pay the tax at the corporate level. So when we’re looking at, have you outgrown the S-Corp, we’re just looking at what’s your personal tax rate and how that compares? There’s no magic number so it could be $2 million or It could be well above that, 20 million if you’re using revenue.

What we’re looking at then is, what’s more efficient for you to get access to assets? We’re talking about cash. Is it going to be more efficient for you to get that money into a C-Corp, pay tax there, then distribute it out? Or are you going to be more efficient staying as this S-Corp where you have to pay everything right away on your personal return?

You have to blend tax rates and compare them. At the end of the day, we’re looking at two tax rates and we’re saying, “What’s the better answer?” That’s the analysis that we’re doing on the other end for entity selection.

Russell Benaroya: This is part of how you guide your clients in conversation? This is the standard operating procedure for you?

Scott Hoppe: Yes, exactly. That’s when you start thinking about who’s your advisor and who’s on the other side. Most often, it’s a tax preparer they’re hiring. They go, “I want a tax advisor, but I have a tax preparer.” The real catch there is your tax preparer is not always going to be your tax advisor. Otherwise, you just may be investing more in having someone like us on your team early on so we can grow with you. At least we’re having those conversations.

Russell Benaroya: One of the things that has always impressed me about you is the systems that you put in place to acquire information from the clients. You just make it pretty easy. Everything is paperless, you’re 100% remote in how you work as a company. Talk a little bit about how your process and systems help you help your clients.

Scott Hoppe: It’s right, we’re augmented. I get hesitant because there’s not a magic trick on the other end. There are no computers getting the work done. The way you look at it is how can you have these tools serve you so the team is able to show up and know what issues are important? Also, where should we focus our time and energy really? How should the fees that you’re paying us get applied the most effectively?

So reducing friction is a really great strategy to get there and spending phone calls or live meetings on the core issue. I don’t want to spend 30 minutes on the call like, “It looks like we’re missing this document.” We get to take care of that and then you don’t have to pay for my time.

So us being efficient saves you money. Also, the saving ends up being, where’s the conversation at? You’ll get a mix of Google Forms on your intake. We’ll use Drive files and everything gets dropped off. We’re able to be super responsive to that because that’s all we use. We’ve set up the system to notify us, “Hey, they dropped something off.” We can get right on it. We don’t have to wait for something to show up in the mail to process it. We don’t have to wait for you to email us, “Hey, I uploaded that thing.”

We can get right on it and be like, “That was actually close to the document we wanted, but we’re missing a couple of pages.” When you can reduce those lag times, then all of a sudden, the projects can get out the door faster. We can get to those core conversations. We can talk about entity selection.

Lots of people were impacted by COVID. Our fortunate side is we were COVID-ready with our distributed setup. I know you have clients that are also fully distributed.

Russell Benaroya: We’ve been 100% remote workforce for over five years so we have employees in 17 states today.

Scott Hoppe: Exactly. I think accounting, as an industry, did a very good job of moving remote. The biggest hiccup for us as an industry was the people side. We didn’t know how to do it, but then our hands were forced and we realized we could do it. It’s not that big of a deal.

That brings up a very interesting question because we’ve been there. For the longest time, for client acquisition and for employee retention, this is what we do. And there was no other game in town. Now we have to actually reflect and go, “How do we want our persona to evolve?” Now that everyone is remote, there’s more to it than just being remote. That’s an early thought, but I can’t hit the easy button anymore and I recognize that.

Russell Benaroya: Is there any technology that’s evolving in tax preparation, that is helping you be more strategic with your clients or giving better tools to your clients, or is that not happening?

Scott Hoppe: We’re really seeing it more on the accounting side than the tax side. You’re probably catching that; how can we show up with dashboards and communicate information more visually to our clients? We have big walls behind every piece of software. What ends up happening is you have all this really important information that’s locked up. We’re trying to find our own solutions around that, but from a technical standpoint, it’s nothing but the people doing the work and flagging opportunities.

For us, it will be a new C-Corp, they’re in Delaware, they’ve raised a few million dollars, they’re only spending money. The first thing that goes off in my mind is are they taking the R&D credit? Have they been talking about it? I’m shocked how many of the CEOs are like, “We heard about it.” I’m like, “It’s not enough to hear about it. “We’re going to get you hundreds of thousands of dollars back for cash flow.”

That’s the spot where, unfortunately, there’s no magic around the software. You have to know these facts. We can do the best we can for the team to empower them to know, these are the triggers to look through it. We can do that with a QBO and a Xero because you can write into the APIs and start pulling out mass information and get a read. Is someone running red a lot more than normal? Are they now moving into the black and we need to talk about that? The returns are retroactive. You’re like, “I already know I lost money last year. Thanks for the reminder.”

Russell Benaroya: Except for that R&D tax credit, you can go back multiple periods, right?

Scott Hoppe: That’s right, depending on how you use the credit.

Russell Benaroya: That R&D tax credit seems like a real aha moment for people when they realize, “Oh, my gosh, Scott, you’re helping me unlock thousands or hundreds of thousands of dollars.” What other aha moments have you experienced in interacting with your clients? Maybe that whole entity selection, I could see that definitely been an aha moment. Any others that just delight the heck out of your clients?

Scott Hoppe: So much of our job when you look at it, it’s easy to see say, “I have to pay X amount.” But it’s hard to capture all the things you didn’t do that could have cost you. If I deliver a $300,000 tax bill, was that a good number or a bad number? I don’t know. In some cases, that could have been a million-dollar bill if you did that wrong or maybe it could have been even more efficient.

The other biggest moments that we have are especially around our founder clients. You work under a C-Corp and you also have the founders. QSBS is their huge aha moment. They’ll have a liquidation secondary sale and their shares will be tax-free. But they have some rules. One of the companies has to qualify, so we’ll just assume that’s already happened, but you have a rule, individually, that you’ve held your stock for five years.

Where we see that mistake happen is it’ll be like four years, 10 months, and then they’ll go through that secondary. If they’d just waited two more months, 3 million of tax could have been zero million.

Russell Benaroya: Right.

Scott Hoppe: They’re like, “Oh, my goodness.” Those are the ones that we can navigate away from ahead of time because we’ll be plugged in on their equity and tracking it. That’s more of an individual side. When you think about how much of your value in the business is outside the business and it’s within the shares that you’re holding, you want to be holistic. It’s great to be able to have that conversation on both ends.

Russell Benaroya: Last question for you. Is there anything that you wish people would ask you when they’re evaluating a tax partner like Why Blue that they don’t?

Scott Hoppe: I would think about focusing their attention on the right area. The worst one would be like, “All we care about is let’s lower this dollar amount by all means possible.” Meanwhile, they’ll do a bunch of inefficient things. Maybe they’ll be doing some board advising positions. So they’re getting issued options for advising other companies.

They’re creating all this AMT tax that they don’t even have to create. They’re sitting there like, “Why am I getting a $3,000 penalty for not paying enough taxes each year?” You’re sitting there like, “You’re focused on a $3,000 bill while you’re creating this huge AMT bill.”

In your ideal situation, you want to see that focus go to these areas that you can control. Like, where do you have the levers? If I was coming in, I’d be like, “What levers do I have?” That would be where I’d want to start the conversation about what I can really do and where can I go?

Russell Benaroya: I’m thinking about myself as a business owner. I’m sure many people listening come up with these questions and issues after the fact. Part of it is because there isn’t a cadence of communication with my tax CPA that sets the stage for having those conversations. Meaning, it’s totally up to me if I ever reach out. My experience with you is you take a slightly more hands-on consistent state of the relationship, state of the circumstance orientation.

Scott Hoppe: From a business standpoint, it’s actually a lot easier for us, especially when you partner with Stride, to know that the financials are in good shape. I can get a pulse on what’s going on and where the business is at. But from an individual standpoint, that level of clarity is really hard to get unless you ask.

For us, four times a year minimum, we’re messaging like, “Hey, what’s going on?” We’re trying to get a read on materiality because material numbers mean different things to different people. We’re engaging them in those conversations so we can get ahead of it.

If anything, it also opens that door up for, “I haven’t sold my house yet, but I’m thinking about it. Is there something I should be considering?” That’s been the biggest Q4 item. In San Francisco, where I where I’m at, it’s all these $2-$3 million homes that are moving hands that were bought for somewhere in the range of $800,000 to $1 million dollars. There’s potentially a really big tax liability on the other side, but what can we use to change that before the facts are closed? We have some tools for that.

Russell Benaroya: What do you tell them? That’s an interesting question.

Scott Hoppe:  If you have a $1 million-dollar business, you must have lived there for some time. What have you done to the property? Then they start walking me through, “Well, we redid the bathroom, we did the kitchen.” And I’m ticking off in my head around, “How much of what you’re saying has meat on the bones for us to change the tax answer?”

Then we get commissions, which is an obvious one. There’s a couple of hidden ones that are in there too, around the closing statement from when you bought the house. There’s nothing about that at the moment that makes it a tax advantage, but there are adjustments on that initial purchase that we can make when you sell the house.

So we go through the whole history. The catch there is not everything becomes a write-off. What you do matters. You replace the kitchen, that’s the physical house, no problem. But if you put a nest in and it’s staying with the house, does that count?

So you got to go line by line, item by item and, and make that determination. It’s a lot of legwork, but on the other end of it, we’re usually talking about a few hundred thousand dollars of tax. So people are pretty motivated.

Russell Benaroya: Super motivated and it pays to keep good records. On that point, I imagine a lot of people today who are now, all of a sudden, working from their home. Now we’re like, “I have a home office.” This is an expense that also factors into the impact of their house on tax planning.

Scott Hoppe: You’re probably thinking about that from two angles; like a C-Corp and your employees. They may be asking, “Can I get money back or what does that look like?” Then there’s you also personally.

From the employee standpoint, it’s a little bit funny because pre-Trump law, you could write that off as a miscellaneous deduction, and post-Trump, that’s gone. So the employees need to go to the employer when, before, they didn’t have to say, “I want to A reimbursement for whatever.”

So it’s something to consider. It’s something you can do, but it may not be a fringe benefit and it could still have a tax consequence on either side. Your employees’ hands are pretty tied otherwise if the employer doesn’t do something.

Russell Benaroya: I was with a group of entrepreneurs about two months ago, and they were so excited to tell me about this rule that they learned about. They were super excited about it called the Augusta Rule. Do you know this?

It originated in Augusta, Georgia, where the masters are held. Apparently, it was this idea that during the Augusta Golf Tournament, or the Masters Tournament, they would rent out their house, but they wouldn’t report the income.

So there’s this rule called the Augusta Rule that basically says that if you rent your house out for something less than 14 days a year, you don’t have to report that income. There are some techniques or tactics around how to monetize this asset or liability for many people.

Scott Hoppe: That’s easy. Let’s say, pre-COVID, you got a Super Bowl coming to town. Let’s go out of town for a couple of weeks and we’ll make like Airbnb rental 13 days minimum and then all that money is tax-free. You don’t have to report it if it’s under the days count. Great tool, but then you start thinking about how it can apply outside of that.

When you have these closely-held companies, your C-Corp, and you’re holding your board meetings at the house, there’s a potential there. It’s not as clean as, Oh, yeah, sure. No problem. You need to do a little legwork around it. Is it legit? Is it really set up that way? Now, it’s arm’s length. It’s your house.

Russell Benaroya:  Exactly. No, that arm’s length dynamic is an important one. It’s such an interesting puzzle that could take you down some dark paths if you’re not asking the right questions, or I suppose having somebody like you is helpful.

Anyway, Scott, it’s super fun having you on board. Thank you for accommodating a bit of my technical glitch. I’ve learned along the way not to freak out about this stuff. It all comes together in the end. It’s the beauty of post-production editing.

I was excited to have you on today, I think of you as a friend and certainly a great partner for Stride. You serve so many of our clients so well. I want to create opportunities for you to share out the way that you work because the way that you work is such a service to significant strategic decisions for business owners and the implications are quite meaningful. Thank you for coming on today and sharing your experience.

Scott Hoppe: Absolutely. It’s been a pleasure for the last few years.

Russell Benaroya: All right. Thanks, Scott.