Proven Ways to Reduce & Save Taxes - With David Encarnación

Speaker A: Sometimes people are a bit daunted by this subject, but we have an amazing expert today. David, thank you so much for joining the CBG podcast. Tell us a little bit about you, if you don't mind. Tell us a little bit about your background and why people should particularly listen to you in this sector.

Speaker B: Okay, thanks for having me, Nick. Well, about, I want to say about 17 years ago, I, uh, got a tax bill from the IRS for 80 plus thousand dollars on a mistake that an accountant made. Made. And I spent years trying to fix it. Went from account to account, didn't fix it. Um, finally I decided to take it on my own and I started calling the irs. Short story, I ended up negotiating it down to like $16,000 and I was able to get rid of it. Oh, wow. I remember the stress and frustration every time I received some type of notification or correspondence in the mail when I first picked it up. You know, it's like my heart just fell directly to my stomach. It's like, uh, again. And I promised myself, I'm not going to go through that again. So I started learning the tax code. My first client was a child care owner. And from there everything is history. So I started working with, with, uh, daycare child care. They recommended another, another recommended another. It got to the point where I knew more about their business than they did. So you know what, let's rebrand and focus on the child care industry. And we've been doing that. So over the past, for more than a decade now, we've been servicing the childcare industry, helping them to pay as close to, to zero and taxes as possible.

Speaker A: Love that. Oh, uh, so exciting topic for you guys. So what we're going to do, I've got a ton of questions here that, uh, David and I have pre discussed that we're going to go through that will hopefully give you some great simple things, some golden nuggets that you can immediately take, uh, off the back of this call and start to have those conversations either with Dave and his team or maybe your local team as well. So let's go into this. So, David, what are some simple ways that child care centers can legally reduce their tax bill?

Speaker B: Simple ways? You have to project your numbers quarterly. If you can forecast your taxable income, you can control it. Okay, so another thing we need is clean bookkeeping with correct categories. Now you have these owners that are spending money, but it's quoted wrong and it's not supported, so it doesn't get claimed the right way. And sometimes when you have these purchases, timing matters. So timing your purchases, timing your capital improvements, having a plan, not panic buying, like in December, because I get a lot of clients calling or and I hear it from other child care owners. Where? Oh, my accountant told me to go buy a car, buy a truck, um, go buy a playground. That's panic buying. And if you're an escort, reimbursement done correctly can be a major level. Excuse me, M. Major lever. So these type of situations can help most owners. Now, we've noticed that most either don't do them correctly or they do a sloppy job of doing it.

Speaker A: Okay.

Speaker B: We like to tell our clients, listen, simple means repeatable. If you can't, repeat it quarterly. If you cannot, plan ahead quarterly. It's not a strategy, and you're just hoping.

Speaker A: Okay, love that. So quarterly, simple line, simple breakdown of exactly what time and plan ahead rather than panic buying. Love that. So what are some of the expenses that owners often tend to miss out on claiming properly?

Speaker B: Okay. The misses Are usually boring, and that's why they add up because no one is noticing them. So things like training, certifications, licensing, uh, compliance costs, background checks, cleaning, sanitation, janitorial software systems, small repairs, those get scattered and miscategorized. Okay. And we find that meals and supplies are a common mess because most owners don't separate what's reimbursed versus what truly is an expense.

Speaker A: Okay.

Speaker B: Another big one is the tracking of assets like playground equipment, furniture, computers, build outs. If you don't track it and you don't plan depreciation correctly, you lose these benefits. So, uh, your tax bill sometimes isn't high because deductions don't exist. It's high because your records can't prove them because they're scattered and sloppy. Ah.

Speaker A: Uh, okay. Okay, interesting. Okay, next question. How can owners structure their business where llc, s corp, etc to be more tax efficient?

Speaker B: Okay, this is a big one. And this is a big misconception. Within the industry. People love to say, get an llc, like that's the finish line. Okay? And unfortunately, in the industry, we have kind of a her mentality. And it's not a mock on the industry, however, you have all these tick tockers, youtubers, uh, talking and saying, get an LLC and you save money. Fine and dandy. And LLC is just the legal structure. If you Google, what is an llc, the response you'll get, it's a disregarded entity.

Speaker A: Okay?

Speaker B: It's insignificant. For those math geniuses out there is a zero to the left means nothing. I have yet to see a tick tock or youtuber talk about the tax consequences of creating these LLCs.

Speaker A: Okay.

Speaker B: So the tax efficient efficiency comes from how your tax, how you structure your tax classification. So if you're a, a center doing real profit, talking about 500, 000, and you're staying on a schedule C forever, that can mean that you pay extra self employment tax that you don't need to.

Speaker A: Okay.

Speaker B: I had, I had a client about eight years ago. Um, I did a workshop here in New York City. And during that workshop, she was taking notes like fires coming out of a pen. And we've had a conversation afterwards, come to find out that she was a schedule C finder when she should have been an escort, even though she was an llc.

Speaker A: Okay.

Speaker B: So we kind of restructured her entity by doing that one Strategy. She saved $25,000.

Speaker A: Oh, wow.

Speaker B: Okay. So I told her, hey, don't spend that money on handbags or go on vacation. Take it. Invest it into your business. She invested in staffing, and within a year, she went from an in home to a center.

Speaker A: Okay.

Speaker B: There's also another flip side to that, because sometimes people elect escort too early. And one of the requirements when you change a classification from a schedule C or sole proprietor to an escort is that the owner is required to take a reasonable wage in the form of a W2. And sometimes they don't run payroll. Right. And created a compliance headache that sooner or later eats up your savings and your profits.

Speaker A: Okay.

Speaker B: So the right answer depends on profit level, um, your payroll discipline, and your growth plans. We like to tell clients that if your net income is consistently above $75,000, at that point you may, may elect to be an escort. Um, but we review entity structures as a business evolves.

Speaker A: Okay.

Speaker B: Your setup should change when your numbers change.

Speaker A: Oh, interesting. Okay, that's really interesting. I love that. Okay. Hopefully you guys are getting lots of golden nuggets on this already. And this is why we're doing it this particular way with David, really set questions. Because I should imagine, David, these are a lot of the questions you get all the time that come to you, as in, in your particular, uh, profession.

Speaker B: Yes. And a lot of times there's a lot of misconception, especially when. Because even when I ask a client, you know, what type of entity are you? Their response is, I'm an llc. Okay. So I have to go further. How are you being taxed? I'm an llc. Immediately, that tells me they don't know.

Speaker A: Yes.

Speaker B: And the fact that you don't know is a problem. But I understand there's a Lack of guidance in the industry. So that's why I'm doing this, so that you could understand that there are all our options in which you can legitimate change your tax classification. And when we're talking about changing tax classification, we're not discussing changing your LLC or changing your ein. That stuff remains the same. We're just telling the irs, I don't want you to tax me as a sole proprietor. I want you to tax me as an escort.

Speaker A: Okay.

Speaker B: As an escort, you're going to gain benefit from being that type of entity.

Speaker A: Love that. Okay, next question. What should child care owners be doing throughout the year? Not just a tax time to save on their taxes,

Speaker B: tax planning. You have the tax plan on a monthly basis. You have to close your books. You have to know your numbers. I tell all my clients you have to know your numbers. And from time to time, I quiz them, I give them pop calls. Hey, where's your account at? As a business owner, everyone needs to know their numbers. And unfortunately, I'm a little bit controversial. So I'm going to throw this out there. Over the next 18 to 24 months, a lot of childcare centers will be closing. Yeah. And those owners that know their numbers will be able to pick up sensors at a bargain because they can pull the trigger and purchase. So it's critical to know those numbers. Now, when we talk about quarterly tax projections, you have to know if you have to make any estimated tax payments every quarter, you should strategize to figure out what you need to do so that by December 31st, you know exactly how much taxes you're going to pay. Yeah, I tell my clients. You and I decide how much taxes we're going to pay for next year.

Speaker A: Yeah.

Speaker B: So the year end, most people call me the year. Right. What's going on? What kind of what? Uh, looking for that, um, drive by advice that I call. What can I do? Can I, uh, buy a car? Can I buy a playground? No. Unless you just be a final check, not a crisis. Yes. If you wait until tax time be waiting until today to discuss strategy for 2025, it's too late. At that point, your return is just a scoreboard. Your game is over. You know, so the IRS doesn't reward busy. They reward people who are organized.

Speaker A: Oh, I love that. Okay, next one. Uh, are there any tax credits or deductions specific to child care businesses that they should know about right now?

Speaker B: I get this a lot. And there aren't a bunch of magical child care only credits that fix everything. It's not the case, the wins usually come from fundamental deductions. You know, you plan your depreciation on equipment, on capital improvements. You look at your retirement contributions only if the cash flow supports it. Um, depending on your entity type, sometimes you may find in specific states higher credits. Um, and that depends on who you hire and the eligibility. Okay, so the, the big thing is you don't discover these at tax time. You plan them, uh, all year long. So right now we're in a planning session with 2026.

Speaker A: Love that.

Speaker B: So when we file your tax returns in 2027, we're as close to zero taxes as possible.

Speaker A: Love that. Okay, next one. How can payroll and staffing decisions impact your taxes?

Speaker B: Okay, payroll is massive. So if you're a charcare center, I'm going to give you some numbers. Your payroll should be, for a highly efficient running sensor, should be anywhere between 35 and 30, 40% of your gross income. If you're on the higher end, which I've seen some is because they're a. It's usually an owner that's not on site, meaning they manage the center from sometimes different states. And I can't understand that. The next massive mistake, misclassifying workers. You guys have to stop doing this. You have to start. Stop trying to pay N99 stock with HBW2. Okay? These can create penalties and back taxes that are going to wipe out your profits. I see. I've seen so far about a handful of centers. One is currently in court right now for workers top audit. One made a settlement already in which they're paying the employees right around 1500 bucks a month. At least. In New York, the penalties for not paying or classifying your workers properly start at $5,000 a month.

Speaker A: Okay.

Speaker B: I have a client right now who has a $32,000 bill because she wasn't classifying her employees correctly. And staffing matters. So for S Corp owners, a, uh, reasonable page. Excuse me. Regional wage you have to pay yourself. Staff timing matters. Bonuses, raises, hiring. Those are business decisions with real tax consequences. Yeah. So if you're making moves without quarterly projections, I'm gonna live on that. Projecting forward, you're basically guessing. So payroll isn't just, um, paying people. It's a compliance and tax system.

Speaker A: Okay. Yep, definitely. Okay, next one. What's the best way for owners to separate personal and business finances to stay compliant and save money?

Speaker B: Keyword there. Separate. You have to separate everything. You can't commingle funds because when you do that, your bookkeeping is a mess. So you have to have separate bank accounts, separate credit cards, and a consistent owner pay method. Period. If you blend the spending, your bookkeeping becomes a mess. And those of you who have those messages, you understand that cleanup gets expensive. It's slow, it's inaccurate. And when it's inaccurate, your tax return is inaccurate. Yeah, because. And that when your tax return is inaccurate, you miss deductions. Or you anything you really can't support. So mixing finances equals mixed results. Separate everything.

Speaker A: Love that. Okay, and what records of systems should, uh, childcare businesses have in place to maximize deductions?

Speaker B: Sorry, repeat that question again.

Speaker A: Uh, what. What records or systems should childcare businesses have in place to maximize the deduction?

Speaker B: Well, everyone should be using some type of accounting software. 0. Whatever the case may be, that's a must. You need on a monthly basis to close those books, you need to review those numbers, you need to know exactly where you are, and you need to project for next month. So we have to find systems that do maybe receipt capture process. Okay? They capture the receipts and log it into your QuickBooks. Payroll reports have to be filed and organized. Mileage laws, if you. If you have any. And a fixed set of asset list for equipment and improvements. Oh, and you need a real P and L, a real profit and loss. And by real, I mean it has to be reconciled, categorized accordingly and consistent. When the system is working tight, you can do taxpaying fast because the data is trustworthy. Okay, so if you have no system, no savings. Yeah, great. I can have a great strategy for you. But if the data is back, the strategy is back.

Speaker A: Yeah. Okay. Love that. And last one, because, David, there's a ton of value already providing for our audience. I love this. So many nuggets I can take away. Last one from my side. Uh, what's one tax saving strategy that most owners aren't using, but they should be using right now?

Speaker B: A quarterly tax planning meeting with execution.

Speaker A: Okay.

Speaker B: Not a quick phone call. If you're waiting for tax time to discuss strategy with your accountant, your game is over. Because you're too late. A, uh, quick phone call doesn't do it. We have to strategize quarterly because every quarter, income and expenses change, situations arise. The tax code, you saw it last year, changed. So we. If we do this on a quarterly basis, we can keep up with the trend. So by the end of the year, we know exactly how much you're paying. It's not, um. It's not, don't send me your numbers. It's not your account saying, send me your numbers. It doesn't mean anything. I'm talking projection, an action list. You have to have deadlines, you have to follow through. This is where savings actually comes from. This timing, it's structure and ultimately implementation. Love that most owners, um, don't overpay taxes because they're lazy. They overpay because they're being reactive. And if you're waiting to see your account at tax time, he's basically a historian. He's react, uh, or she, they're reacting to what happened in 2025. You have to be proactive and in 2026 you have to start strategizing. So by the end of the year, you know exactly how much taxes you're going to pay.

Speaker A: 100%.

Speaker B: If you want a different tax outcome, you have to try a different process.

Speaker A: Yeah, no, I love that. Um, we're the same with us in our business, David. We meet with our financial team consistently. Every week we have a meeting in the diary without fail, it happens. One quick thing here that I think some people might be unclear about in terms of obviously as a business owner, particularly in the early childhood education space, very, very busy. Particularly if they're smaller based centers, they're doing a lot of the run around themselves. How much time do they realistically need to spend per month allocating to get things like this in order?

Speaker B: Okay, when you say let's talk about the size and um, what revenue size are we discussing?

Speaker A: So let's assume that we're talking about a center that maybe is a commercial building, can look after anywhere between 50 to 150 children, might still be involved in the day to day, they're on site as an owner. So a lot of their time is still running around getting caught up in the day today. How much time would you say that that owner needs to designate to block off time specifically to deal with these action items?

Speaker B: It is my firm belief that they should hire someone to do that. My time is valuable. I do not do my own bookkeeping. It is pointless. I prefer to spend time working on the business, not in the business. And I understand the job. Your industry, your owners wear 15 different hats. You're the CEO, you're a therapist, sometimes even a debt collector. That has to stop. You have to delegate those tax to someone within your staff to handle so you can focus on building the business. Because at, uh, the end of the year, that tax bill falls on you, not the community. So if you want to keep those profits, you have to figure out a way where you're in the hands of someone who can guide you, give you the guidance as to how to structure your business. Because my focus is to transform your business so it's not so much how much time think of it this way, how much will it cost you? Not tax plan.

Speaker A: I couldn't agree more with you. I couldn't agree more. I think one of the things we all need to realize is where is our time most efficiently spent? You know, the skill sets that we good at and we surround ourselves with those experts that are good at what they need to do. And the impact as you talked about the savings financially that could have on your business is worth 10 times over what it's going to cost you to do that. David, I could talk to you all day about this financial there's a lot of value provided there and we've gone through in bullet points, lots of information. Any last points that you would give someone, just last tips of advice you give someone before we wrap up this podcast.

Speaker B: I know a little bit controversial and if you're listening to this and it's hitting home and you're tired of writing big checks to the IRS just because you're running on default, you need to stop. You need to stop guessing. You need to get a tax plan in place, you need to get a hold of your deadlines, you need to get control. If you want help, just reach out to us. We'll see if you qualify for a tax planning model and we make sure that at the end of the day the implementation which is the hard part of the tax planning gets done and on time by the year end like I said before because you and I decide how much taxes you're going to pay. So times time, time to stop guessing and get on the ball. Love that.

Speaker A: Uh, and uh, David, how do people reach out to you if they're interested in. Find out more. You know you really hit home here with some key messages for them. How do they reach out to you? What's the best way to contact you guys?

Speaker B: The easiest way is through social media. Any of those ads that you see or you can go to www.daycare accountingpropro.com Love that David.

Speaker A: I appreciate you jumping on M everyone when you watch this. I know a lot of you watch these the replays. Make sure if you've got any questions drop them in the comments down below. We'll make sure David's obviously tagged in as well if there's any follow up questions, make sure you reach out. David, absolute pleasure to have you on. Love the nuggets you shared with us and uh, hopefully we can catch up a few months from now and share some more amazing nuggets you've got to share with our awesome community as well.

Speaker B: Absolutely. Great work, Nick.

Speaker A: By the way, I appreciate you having.