In this episode, Brian Mueller, CPA and founder of Mueller & Associates, guides us through the nuances of launching and optimizing a business’s finances. Brian sheds light on tax elections, the significance of tax diversification, and the optimal time to consult a CPA. Tune in to learn how strategic annual tax planning can result in substantial savings for entrepreneurs.
Listen to the full episode using the player below, or by visiting one of the links below. If you have any questions or would like to learn more, email us at info@byrdadatto.com.
Transcript
*The below transcript has been edited for readability.
Intro: Welcome to Legal 123ss with ByrdAdatto. Legal issues simplified through real client stories and real world experiences, creating simplicity in 3, 2, 1.
Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host, Brad Adatto. I’m here with my co-host, Michael Byrd.
Michael: As a business and health care law firm, we represent clients in multiple business sectors, especially health care. This season we are diving deep into the exhilarating and terrifying process of opening a business. Our theme this season is Starting a Business.
Brad: You know Michael, as we’ve covered, starting a business is really just one season of a business. What are some of the other seasons?
Michael: Yeah. And as we’ve talked about this entire year, each podcast season will cover a season [of a business]. The four seasons of a business are the Building season, so that’s where we are right now with the process of starting a business. Then the Operating season. [00:01:00] This is the day-to-day grind after you’re up and going. The Scaling season, you’ve decided to grow and all that goes with that. And then the Buying and Selling season. And today will be continuing our conversation in this Building season about starting a business. Yeah.
Brad: Now Michael, before we bring on our guest today, I know you’ve spoken in the past, but how many marathons have you run?
Michael: You know, I’m going to pause and do something I don’t normally do, and give you a pat on the back because you’re being a good friend right now. Because you know the answer. And the problem is, audience, I have run a marathon. But at some point, so much time passes that you really can’t bring it up on your own because it’s like so long ago. So you need a good friend to ask, “hey, have you ever run a marathon?” Yes, Brad. I have run one marathon and it was about seven or eight years ago.
Brad: [00:02:00] I have not run a marathon. In fact, I basically limped through one half marathon. I’m going to ask you a follow-up question, Michael. After completing the marathon, was your first bright idea that you want to run another one immediately?
Michael: It was not. I’ve run one marathon and I don’t intend to add to that list. And, I knew after finishing it, that that whatever craziness went through my brain to do that in the first place, that itch was scratched. I was done.
Brad: Maybe now we know the answer, but have you ever before that considered participating in an Ironman? And before you answer that, for audience members who don’t know, an Ironman is a triathlon where you have to swim 2.4 miles, bike for 112 miles, and then after all of that run a marathon which is 26.2 miles, all in the same day.
Michael: The reason I’ve never considered it is because of the swimming element. [00:03:00] We’ve had friends that have tried it and the idea of swimming 2.4 miles is like…I can’t wrap my brain around it.
Brad: You’re exhausted thinking about it.
Michael: Yes. I cannot wrap my brain around it. So no – I’ve never even given it a passing thought. How about you?
Brad: I like the fact that it was just the swimming. The biking of 112 miles was easy with the marathon right after. No, not even close. I mean, after training for that half marathon and kept injuring myself and tried another one, I knew that running an Ironman was not going to work for me. But one of the big fans of our show, a gentleman named Wade, apparently loves training and participating in these Ironmans.
Michael: Okay, well, where are we going today, Brad?
Brad: Well, I don’t know if even most Ironmen like Wade would be willing to participate in a crazy race that is in Queens, NY.
Michael: What’s so crazy about it?
Brad: Well, every day these participants need to run around this block and they need to do it [00:04:00] for 52 days straight.
Michael: Well, that sounds like something I could do. Just run around the block. That’s no big deal. What’s the catch?
Brad: Yeah, I might failed to say this part. You need to accumulate 3,100 miles during those 52 days. The race is called the Self-Transcendence 3,100 mile race.
Michael: 3,100 miles. I can’t quite wrap my brain around that, but that seems like a lot.
Brad: Well, you would be correct, Michael, with the inability to wrap your brain around this one. The article noted that each athlete needs to run an average of 52.96 miles per day which is, for audience members keeping up, two marathons a day between only 6:00AM and midnight. And it’s considered more of a mental test for some than a physical tests, because most of these people are super athletes, but they’re runners and they must circle the same block [00:05:00] thousands of times.
Michael: Yeah, I have to agree. It would just be mostly mental for me. I mean, the physical, no big deal. A couple marathons a day for a couple months. So what in the world does this have to do with today’s guest?
Brad: Honestly, nothing that I know of, except that our guest is in Austin, Texas. And I computed that if this race was between Dallas and Austin, that each runner would need to run 17 laps to complete this course.
Michael: From Dallas to Austin. My goodness. Okay well first, Brad, that’s a super stretch to try to connect your story to our guests, But okay. Well, let’s bring our guest on.
Today we have Brian Mueller joining us. He is from Austin as you just mentioned. Brian graduated from St. Edwards University. He has a Bachelor’s of Business Administration. He also has a master’s of accounting from St. Edwards. He started as a tax examiner for the Texas [00:06:00] Comptroller of Public Accounts, and then spent the next decade in domestic and international tax litigation with several accounting firms. And so, yes, our friend Brian, he’s an accountant, started his own firm in 2016, the year I ran the marathon. There’s your connection there.
Brad: There you go.
Michael: And so he has Mueller & Associates, certified public accountants, and we’ve worked over the years many times with Brian.
Brian, welcome.
Brian: Thank you. Thanks for having me.
Brad: Absolutely. Well, we’re glad you are here. And I guess, Brian to kick off the show, the very first question we’ll have to ask you is have you ever run a marathon, participated in Ironman or done any of these ultra marathons?
Brian: No, not really. But I used to box out of a boxing gym in Austin. I still box, but just at my home gym right now. My wife doesn’t let get back to the boxing gym, so that’s the closest I can get to Marathon.
Michael: And this is not – from the way you answer that, we’re not talking about a boxing class. [00:07:00] We’re talking about boxing with other humans.
Brian: A little bit of both. Yeah.
Michael: That counts as something that I also don’t want to do.
Brad: No. We’ll have another day, another story in that one.
Michael: Absolutely. Well, good. Well, Brian, let’s jump in. We’re excited to talk with you today and get your overall perspective through our conversation on kind of things you see through your lens as an accountant on starting a business. But I’d like to start with having you tell the audience about Mueller & Associates and your clientele.
Brian: Yes, absolutely. We are a boutique CPA firm based out of Austin, with an office in San Juan, Puerto Rico, and currently opening another branch in Houston. We are a niche practitioner, which means we focused on self-employed health care entrepreneurs, and within that niche, surgical specialties, and within that niche plastic surgery. Our firm has the highest market share in Austin of plastic surgery [00:08:00] centers and med spa and aesthetic practices, about 35% of the market. And we’re taking that concept to Houston, Dallas, Fort Worth, San Antonio, where we already have clients, but want to be expanding that presence. The type of client that we work with is the type of client that you have. We have a lot in common. We actually have a lot of clients in common, and we’ve been blessed to work together with some of these clients. This is the type of client that runs this marathon; opens a business, opens another entity, grow to matter, market, grow to matter, sells the business, starts a new business, and it’s a lifecycle. It’s entrepreneurship at its bets.
Michael: That’s awesome. Yeah. We do share a lot of clients and we actually had a – when I listened to you touch on the super focus of what you do, we had a guest last season tell us that niches make riches.
Brad: Yes, exactly. Well as Michael said, Brian, this season we are focused on starting a business. As a CPA and a business advisor, we’d love for you to share some [00:09:00] of your thoughts. When a client approaches you and tells you that they want to start a business, what’s the first question you ask them?
Brian: You know, the first thing I do is listen. I like to start these conversations with the end in mind, trying to understand what they want to accomplish at the end of the road. So I listen to them. Tell me a little bit about what you’re trying to accomplish. Tell me a little bit about your objectives down the road. Do you have an exit plan for this? What is this going to look like down the road? And I try to just really allow the client to open up and tell me as much as they can. At some point, I take ownership of the conversation and I tell them, every transaction that you have in life is going to have tax, legal, accounting, operational conversations. And at that point, I start breaking down each of the components. I have a conversation about entity formation, with the goal of them bringing in the attorneys. But you know, we talk about entry level asset preservation, liability isolation, and all that ownership. We talk about [00:10:00] the tax ramifications as far as tax selections. We talk about accounting, we talk about operational considerations, so really those four.
Michael: Do you find, Brian, that you’re working with your clients when they’re starting their practices from the very beginning or when they’re already up and operational and they may be starting their second or third business, going into that entrepreneurial spirit you’re talking about?
Brian: Yeah. Typically our clients in average have four to eight entities. Well, what that tells you is they’re going to be running established businesses, what I call mature companies or growth companies. But once in a while we do come across, and this happens, somebody who maybe used to work in another practice or just moved to Texas and they’re opening in their own shop. And at that point we start with the first entity. And typically what you’ll see is the common transition – they set up that professional [00:11:00] entity to get started. Down the road they may go and build their surgery center. There may be another entity down the road. They may own the real estate for the clinic side of the business, the med spa, that will be another entity. And then we start diversifying. Because there are other things that these clients are going to have – investment holding companies, family-level partnerships, so that entity portfolio keeps growing as they grow and ultimately as they become wealthier.
Michael: So I’m going to ask a follow up to that. If someone’s looking to start a new business, when would you advise is the best time for them to reach out to a CPA like yourself and have these conversations where you’re breaking down the end in mind and then kind of getting into, at least entry level, the different issues that they need to think about?
Brian: I would recommend that’s done immediately. I’ll recommend for instance, a plastic surgeon. Let’s [00:12:00] say the example of somebody that used to work from out of practice and they’re going to go up in their own shop. Don’t spend any time Googling things, right? Go ahead and find the right team. You’ll need a good accountant or a CPA. You’ll need a good attorney. Just like you always hear in life, you need a good accountant, a good attorney, and a good doctor. So find that partner from the get go and build a strong foundation that’s going to allow you to then build on that foundation and grow, as opposed to not having a strong foundation. And then you’ll be having compliance issues or fixing things down the road or overpaying taxes. And then, at some point you’ll have to match and make the right call. So it’s truly as early as possible, as early as they are ready to launch their own practice.
Michael: And what’s your observation on how your client-base tends to capitalize or fund their startups? Are they borrowing money? Are they raising money, or are they kind of self-funding?
Brian: [00:13:00] I would say most, as far as those clients that are brand new business owners, it’ll be a little bit of their own money with a combination of line of credit or perhaps some sort of funding from the bank. You know, short term loans. You will not see a plastic surgeon get outside funding or private equity that early, or crowdfunding, or venture capital. So these are people that, generally speaking, have worked for a little bit, so they have saved some money and ultimately they’ll rely on savings and, as I said, short-term liquidity like lines of credits.
Brad: Interesting. And so taking a step back a little bit, let’s use this plastic surgeon as the example and keep going with this. So a plastic surgeon comes in your office and says, “Brian, I’m ready to start a medical practice.” What type of tax election should they consider if they’re starting their own professional entity? And why [00:14:00] would you advise those?
Brian: Yes. That’s a really good question, and there is a lot of misinformation out there. A lot of people think, well, they should be taxed an S-Corporation because of the self-employment tax savings and other considerations. The reality is, different tax elections have pros and cons, and there’s tax selection that are going to be better to absorb losses in the first year. So sometimes the S-Corporation is going to be the way to go, generally speaking, if you want to have net profits of a hundred grand and more. But the S-corporation will actually have more limitations as far as deductible losses, if a practice will have losses the first year. So there’s going to be more flexible tax statuses for losses. You know, things like partnership tax status, of course, that will require a multi-member practice, not just a one physician practice.
You have the C-Corporation tax status that basically has pros and cons as well. But right now C-Corporations are tax at 21%, which is going to be a lower rate [00:15:00] than the marginal bracket at the individual level of 37%. So we actually leverage C-Corporations as well, not like the operating entity, but we bring them into the portfolio of entities from a tax planning perspective. And then the other consideration that a lot people don’t know about is IRS audit risk. Let’s say that somebody has an entity that has not elected S-Corp or C-Corp partnership tax status, then that entity is going to be taxed a disregarded entity and it will file a Schedule C with the individual return for the plastic surgeon. That schedule carries a lot of audit risk, therefore it’s not a good idea to just not elect anything.
But when you elect something, you have to keep in mind the things that I just mentioned; your level of profitability, will you have a large losses because maybe your practice is having depreciation and you want to take that depreciation direction the first year? And ultimately, maybe first you want to go as a partnership and then elect s-corp. I mean, there’s multiple ways to approach it. Therefore, the importance of having a good long [00:16:00] conversation with an advisor, discussing the business plan and understanding what’s going to happen the first year. And perhaps we go with one tax status the first year and switch to another one second year. And at that point we’re set.
Michael: And I’m going to recap a little bit to make sure that my amateur accounting brain follows the bouncing ball because that was a lot of really good information you just shared for our audience. In our example, we’re talking about a plastic surgeon goes to start their own business, but you could insert any medical professional going to start their own practice. What I heard you saying, Brian, is that there’s basically four choices they have. They could tax themselves as a C-Corp, elective C-Corp, they could elect themselves as an S-Corp, or they could be a disregarded entity, or if there was some way that they could have someone else [00:17:00] as a partner, they could be elect being taxed as a partnership. Is that a good recount of what the menu of choices would be?
Brian: Yes, it is. I always talk about tax diversification when we do our advanced spending seminars in town. And basically, I always say when you work with a financial advisor, they talk about diversifying your portfolio so you don’t have all your eggs in one basket. So from a tax perspective, you’re correct, Michael, you can be taxed as four things, but not all entities have the flexibility to be taxed as four things. It’s also part of the conversation. But you can be taxed as a, generally speaking, let’s say a typical setup, a professional limited liability company, PLLC, fairly popular these days. The PLLC could be taxed as a C-Corporation, S-Corporation, partnership if the PLLC has two members, two owners or more, or it could be disregarded. And again, each tax status has pros and cons, just like everything in life. So, you have to understand them well, [00:18:00] so you can leverage the best out of each.
Michael: That was a really good explanation. I love how you painted the picture for the audience on just the strategy that’s involved.
Brad: Yeah. And I thought that was very fascinating too that you have had clients who start off as a disregard and then they might go to an S-Corp, or they might be a C-Corp and then you change them to an S-Corp. So it’s interesting to know that on day one you’re planning out two or three years out, that there may be a modification to our tax election. So that’s very interesting.
Michael: So once the entities formed, Brian, talk a little bit about some other considerations and tax planning business should consider.
Brian: Yes. Basically our firm has two annual tax planning seasons, and I wanted to expand as to that’s part of our value proposition as able to advisory firm. And basically, as we get together our clients twice a year [00:19:00] to do tax planning and we build multiple scenarios. We’ll look at tax planning as level one, two and three. The first thing really, when it comes to level one tax planning, we’ll look at pre-tax vehicles, maxing our retirement accounts, health savings accounts, HRA health reimbursement arrangements. And within the retirement accounts, there is like seven, eight choices. And we’re trying to accomplish a couple things here. When we do level one tax vehicles planning – we’re trying to help the client. Let’s say this plastic surgeon put money aside for retirement, because as we know entrepreneurs get busy, and they put the money back in the business. So build that retirement on the side, access 37% tax savings and some compounding within the accounts and ultimately have funding for medical expenses via the HSA, and so on and so forth. That’s level one.
We look at tax diversification. Do you have the right entities? Do you have the right statuses? We see [00:20:00] a lot of clients, even established clients that only have one S-Corporation, and that’s it, and that’s real bad to have an S-Corp, a C-Corp partnership, and you should be leveraging the best out of each. And that requires a longer conversation with an advisor that understands those considerations and how that plays into a particular client’s portfolio of entities. Then contingent on the client being cash basis, accrual basis, we’ll look at timing of income deductions. We’ll look at depreciation optimization, amortization optimization. That’s kind of like the level one bucket. And then we talk about charity cash, not cash. How do we go out and get the best out of charitable deductions? Then we can go to level two, and I could have – I’m so passionate about this that we could be talking about hours, but when we get to level two, I would say that most CPAs and more clients would do 80% of level one strategies for the most part. But they don’t do 20% of them. Level two at that point is just next level [00:21:00].
And we’re looking at more unique obscure sections of the internal revenue code where we can leverage things. We actually teach our clients how to take tax free vacations, how to get tax free rental income out of their entities. How do you income strip your entity legally and get to pay the least amount of tax while you’re getting money out tax free? And we actually use three or four sections of the code to do that. That’s pretty unique. Pretty advanced, clients love it. By the time we get to level three, at that point, we’re talking about things like cost irrigation, how to get the most appreciation out of your real estate. We bring private insurance things that are way more advanced and will require certain level of profitability and cash flow to be able to have those strategies or things that are perhaps jurisdictional, that you can do in different jurisdictions. And I’m not talking about you open an entity in The Bahamas. No, not that. I’m talking about really leveraging jurisdictions that are good, that are not being attacked [00:22:00] by the IRS because are good jurisdictions and some clients may qualify to do some things in those jurisdictions.
What’s the end result of all this? I want to share some statistics with you, some real numbers. Our most recent tax planning season saved our clients combined north of $28 million. The average client saves about $374,000 a year. That’s the average. There’s clients that save way more than that. It requires these multi-year approach with a lot of structuring, a lot of education. And ultimately as you look at some of the client testimonials, they say, hey, going through that exercise building, the foundation pays off because with the tax savings, the clients can put the money back in the business, or they can go and open more businesses, the money goes back into the economy. It’s really a win-win when tax savings go back to the pockets of entrepreneurs.
Michael: I’m curious too. That’s really fascinating. As part of the exercise with your clients, are you talking to them [00:23:00] kind of about their risk tolerance? In other words, if you’re in level two or level three planning and it’s a greater area of the tax code, is that a factor that you go through with them? Or do you just by your nature stick to more conservative approaches?
Brian: Yeah, that’s a really good follow up question. We really take a education based approach especially by the time you get to level two, level three; some of the strategies will require clients to go via multiple presentations and understand the ins and outs to the extent they can understand it. And we need to understand their risk appetite for some of these things. There’s clients that clearly, they want to take more risk. And this is not because we’re doing something that’s bad or illegal. No, it’s because the more advanced the strategy, clearly the more interest that the IRS is going to have on [00:24:00] it from the perspective that it’s generating more tax savings. The IRS is the business of collecting the taxes, and we’re in the business of helping the client save the tax. So each client will bring a unique risk appetite, but all clients are going to go through the same standardized process of being educated on these things. And ultimately, we walk our clients through the whole process of structuring and implementation of the strategies, and that also gives a sense of comfort, like they’re not doing this alone.
Brad: Awesome. And in the last minute that we have left together, you kind of talked about this a little bit earlier, but talk about another strategy, and it sounds like a lot of it tax planning for the person. But when you’re advising on the business side, what are some of the things that someone should consider how to maximize their profitability?
Brian: Yes. So another thing that our firm does, we have an outsourced CFO division, and it’s heavy on health care entrepreneurs. The bulk of our clients [00:25:00] that we do outsource CFO services for are basically plastic surgeons or other specialties, highly profitable. And what we do as the outsource CFO is really help clean up the business. We actually place more emphasis first, the first three to six months in looking at not necessarily the top line of the income statement or the P&L, but actually the middle line, and we go straight to salaries and wages because that bucket of salaries and wages will represent the highest ratio of expenses as a ratio of total gross revenues. So we build models that we call revenue centers so that we can track all the productivity for each provider.
So for instance, within the health care, whether that will be plastic surgeon or on the non-surgical side, a nurse injector or an NP or an institution, and we’re tracking that monthly, that basically, that’s what drives revenue. But at the [00:26:00] same time, when you have non-productive plastic surgeons or non-productive providers you have two problems. It’s very expensive. And then as a CFO, we take these businesses to expand, scale, and all the way through an exit. We’ve done eight exits over the last two years, about 300 million in revenue, private equity, venture capital competitors. So with the CFO, we can really help get the business linked up. Then we focus on scalability, so the top line can grow, and we take a business model and basically mirror it in a different market within Texas and get that business to a peak where it can be approached by private equity and can be acquired by private equity.
Michael: Brian, that’s all real incredibly insightful. We have come to the end of our episode today and are so appreciative of the wisdom and time that you’ve [00:27:00] given us. What we’ll do next, Brian, is we’ll go into commercial and on the other side, Brad and I will do a quick legal wrap up. We appreciate you being here today.
Brian: Thank you so much for having me.
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Brad: Welcome back to Legal 123s with ByrdAdatto. I’m your host Brad Adatto, with my co-host, Michael Byrd. Now Michael, this season, our theme is Starting a Business, and we really are camping out on this building season and bringing these great individuals in to come help us. I’m really happy Brian was able to [00:28:00] come in and talk to us from a tax perspective and just in general from accounting perspective with things to consider. He laid down some great knowledge for our audience, but one of the things he did talk about was at some point you’re going to have to start thinking about the benefits that you want to have as an owner. And then you have to start thinking from a legal perspective, okay, great, how does that impact me legally? Am I compliant with an ERISA plan? Am I using an ERISA attorney because of how I’m growing or what I’m doing with my practice? Or does my employee handbook really reflect the same benefits I’m trying to give to my employees? And so, as you’re doing the tax planning, make sure whatever your documentation reflects. So if you have some special type of tax planning that you’re doing that’s beneficial, you got to make sure it’s meeting either from the ERISA perspective, obviously, which I’m sure Brian’s doing, but in general, on top of that is does your employee handbook reflect those same type [00:29:00] of changes? But what else did – I know he brought some other stuff, but what else did you catch on today?
Michael: What really jumped out to me is that when we talk about starting a business throughout this season, there’s going to be a lot of kind of feeling of things, tasks that need to get done. to be able to start a business that we want to – we do want to demystify the process, you know it’s that it can be done. Yet, we also don’t want to just gloss over the fact that there’s real strategic opportunities when you start a business to do some planning. And I thought Brian did a great job of illustrating that there’s some real strategy that goes into that decision on which box you check on how you’re going to be taxed with getting your EIN, and of course more once you’re up and operational. But there is a sacrifice you make as a business if you kind of go the DIY route or legal [00:30:00] zoom route to get yourself up and going, you will be up and going. But was there a missed opportunity and you know, kind of using today’s show, on the tax planning side.
Brad: Right. Final thought?
Michael: Well I think that, that when you’re deciding to open a business, you can do it and open multiple businesses. You can go the monotonous route, like you’re running this transcendent race around the block a bunch of times, or you can expand it and make it creative and lively and have someone like Brian that helps kind of show you the bigger picture.
Brad: Well, awesome. For that one Michael and audience members, please join us next Wednesday as we continue to learn about starting a business when we bring on a banker, Chris Williams will be joining us.
Thanks again for joining us today. And remember, if you like this episode, please subscribe, make sure to give us a five star rating and share with your friends.
Michael: You can also sign up for the ByrdAdatto newsletter by going to our [00:31:00] website at www.byrdadatto.com.
Outro: ByrdAdatto is providing this podcast as a public service. This podcast is for educational purposes only. This podcast does not constitute legal advice, nor does it establish an attorney-client relationship. Reference to any specific product or entity does not constitute an endorsement or recommendation by ByrdAdatto. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Please consult with an attorney on your legal issues.
