ROSS BRANNON

What is your opinion on the accounting industry?

SETH PEABODY

They're the opposite of proactive, they're reactionary. When something hits the fan, that's when they react, rather than stopping it from hitting the fan.

ROSS BRANNON

Don’t you have a name for reactionary reporters, instead of pro-active ones?

SETH PEABODY

That's right, the history reporters. Here’s how it works. You work all year, and keep track of your income and expenses, all your deductions, and you give them to your CPA. Then he does your taxes, which is just reporting about the prior year. What we do is go in and change the history during the year, so you don't have to pay as much in income tax.

ROSS BRANNON

Talk a little bit more specifically about the tax planning you do, and the tax planning that high income earners who are reading this should be doing.

SETH PEABODY

A lot of people think tax planning is just telling you what your tax is. That is part of what we do, but we use various strategies depending on who you are and what available savings you can reinvest to reduce tax. Are you selling your business? Where are you in your career? We take all that information and build out a tax model, and then we start adding tax strategies to reduce that income. Or, we set up a plan to pay the income tax, so rather than you getting a $50,000 or $100,000 tax bill on April 15^th, you know it’s coming so you can begin preparing for it the previous year.

ROSS BRANNON

Let's talk about someone who makes an average income of $500,000 and owns their own dental practice. Would it be your opinion that they are likely paying more tax than they have to?

SETH PEABODY

Yes. I like to refer to a sliding scale where you have the maximum at one end and a minimum at the other. What tax planning does is get you to that minimum. Most of our clients are in a federal 37% tax bracket. Typically, we can get them down to at least 35%, but we probably can get three quarters of our clients back down to a 24% tax bracket.

ROSS BRANNON

For any IRS agent reading this, that’s done through legal strategies that the tax code allows, correct?

SETH PEABODY

Correct. A lot of CPAs don't do the investigation and the due diligence to find strategies to reduce tax. They use your traditional strategies, such as, fully funding your retirement plan. Well, that may not be a good idea because what's the tax rate going to be when you retire? Right now, it's the lowest it's been in years. Maybe not fully funding your retirement plan, and putting it into savings and paying the tax now, rather than paying the tax later, may make sense. It depends. Everybody is different. That's why you have to put it on paper.

ROSS BRANNON

In my experience, a lot of CPAs are worried about reducing the tax they have to tell you that you owe, and that's about the extent of the tax planning. Is that a fair statement?

SETH PEABODY

Yes, they’re just telling you what you owe, they’re not actually putting any strategies in place to reduce tax. When I say “strategies,” I'm talking about traditional things like fully funding retirement plans, or your HSA, or your 529. We're doing other strategies that are all over the tax code, which a lot of people just don't know about.

ROSS BRANNON

I imagine you don’t just wait until April to talk to your clients about their taxes. When do you have tax planning meetings with your clients, and how often?

SETH PEABODY

For most clients, we typically have them twice a year. Around July, we run a tax model. We take your financial statements from your practice, figure out what your investment income is going to be, and fill out a tax return. Then we come up with various different scenarios on how to reduce that tax. Now we meet and go over the game plan, and if need be, execute what we’re talking about and planning for. Then we meet again late in the year, October through December, to see what has happened based on what we talked about in the summer, whether there are any changes we need to make, or just complete the plan and execute it, and update you on how much tax you owe.

We’re probably saving our dentists north of $100,000 a year. That's six figures that they don't have to give to Uncle Sam. They can put it back into their practice, or invest into the stock market or other investments.

ROSS BRANNON

How did you end up becoming a forward-thinking tax CPA and not just a regular, as you call them, “history reporter” CPA? What makes you different?

SETH PEABODY

While I was working at other firms, I realized I didn’t like what other CPAs were doing. I knew I wanted to develop a plan, a process, procedures for planning for businesses, so they know what their tax is long before its due and they can start saving for it. The funny thing is, we go against the grain, and we tell a lot of clients not to pay estimated tax payments because you can't get those dollars back during the year to reinvest somewhere else.

ROSS BRANNON

Being a W-2 employee is the worst way to get paid. You are truly limited by your deductions. You've got your property tax, your mortgage interest, charitable donations and a few others, but it really comes down to those main things. Whereas a business owner has other opportunities. Talk about the differences from a tax standpoint for a business owner versus a W-2 employee.

SETH PEABODY

The business owner is deducting what most people would call unreimbursed business expenses. If you're a W-2 employee, you have some business expenses that don't get reimbursed which you can't deduct. As a business owner, you're reimbursing yourself for all sorts of expenses, such as meals, entertainment, travel, auto expenses, things like that. To me, W-2 employees are handcuffed in what they can and can’t do in terms of reducing their tax.

ROSS BRANNON

What percentage of people do you think don't have a great grasp of how our tax system works?

SETH PEABODY

The IRS never fully revamps our tax code. When people are taking advantage of something, they just change that specific part. Bitcoin is a good thing right now. How are they going to account for it? Currently they tax Bitcoin at capital gain rates, but the majority of people are not paying cap tax on their Bitcoin trading and sales.

ROSS BRANNON

What are some of the biggest things you see that dentists should do, that most aren't doing before they come see you?

SETH PEABODY

100%, real tax planning, as opposed to just taking your vouchers that the CPA gave you, which is calculations from prior year's tax, not current year's tax. If you're growing, and you pay your estimated taxes each quarter, you think you’re good because your CPA gave you these tax forms, but then you wind up owing $100,000 in April because your practice was generating more income. Most people don't know the estimated tax payments are a calculation of last year's tax, not this year. So, you have to know what this year's tax is, and then plan against it. The majority that come to see me have not done real tax planning.

ROSS BRANNON

I don't think I've ever met another CPA who does tax planning like you do. I think you're somewhat of a unicorn. Do you know other CPAs that do what you do?

SETH PEABODY

Very few, and when I find them, I keep very close contact with them, and try to share ideas with them. I think I know four CPAs that I would grab a beer with. CPAs, by nature, are just not proactive. They think what they're doing is enough, but what client has a consultant, an advisor, to teach him how to mitigate and minimize income tax?

ROSS BRANNON

Besides a tax-planning CPA, what other advisors should a dentist have?

SETH PEABODY

You need a financial advisor. I think an insurance consultant would be good. You really need a team, and the people on your team need to know each other.

ROSS BRANNON

What's your opinion on buying equipment? Dentists are always being pushed and promoted to buy equipment from different names. A lot of people like to buy equipment for the deduction, but I'm not a fan of spending a dollar to save 37 cents. What's your take on buying equipment for a dental practice?

SETH PEABODY

Buy the equipment if you need the equipment. Is it going to increase production? Is it going to increase collections? Is it going to reduce expenses? Is it going to give you more time? If it makes sense, then, yes, buy it. You’re right, everybody thinks they’re going to buy equipment to reduce their taxes, but if you bought $100,000 worth of equipment, you’re only actually reducing your tax around $40,000. You’ve lost $60,000 worth of cashflow. How are you going to make that back? If that piece of machinery doesn't do what it needs to do for you, then you basically just lit money on fire. You might as well just give the money to charity. You get the same deduction.

ROSS BRANNON

When you look at dentists in general, what would you say are one or two things they need to stop doing now, and flip side, one or two things they should start doing now?

SETH PEABODY

It's the same question. Have a real tax plan. Know what your tax actually is, not what the refund is, or what you paid. A lot of times, they're different than what your tax is. Then, figure out how to reduce that tax. Don't think about purchases, think about spending money. A dollar of deduction is not a dollar of reduction of tax. It's a percentage of that, because it's a deduction. It’s still an expense.

ROSS BRANNON

You just said something that a lot of people don’t know. There’s a big difference between a deduction and a credit.

SETH PEABODY

A deduction is taken from the top, and then you calculate your tax. A dollar reduces your income. That dollar is then multiplied by the tax rate. A credit is a dollar-for-dollar reduction of tax. A deduction is a percentage of reduction of tax.

ROSS BRANNON

What do dentists need to stop doing, besides not tax planning?

SETH PEABODY

Fully funding their retirement plans. A lot of people are trying to sell the defined benefit plans, and socking all this money away, but they're not looking down the road, they're only looking at now. They're not looking at what tax rates will be later. If you're investing a dollar in your retirement plan or spending a dollar, you need to figure out what that dollar is really doing. A lot of people think if you put $19,500 into your 401(k), your tax goes down by that amount. That's not true. That's not how it works. It's a deduction. I think actually knowing where their dollars are going is pretty important.

ROSS BRANNON

In your experience, are dentists typically good at managing cashflow?

SETH PEABODY

They typically need help. Most of my clients are going gangbusters on their practices. They’re growing like crazy. We’re doing cashflow management, and talking about where they're spending the dollars. A lot of dentists think their practice is like an ATM. Everybody on the planet has teeth, or needs teeth, so your practice just prints money. You need to know where that cash was going. You may think you have tons of cashflow, but I would bet you have holes in your plan. It’s likely siphoning out pretty quick in areas you could protect, and taxes is one of them.

ROSS BRANNON

What does the phrase financial health mean to you?

SETH PEABODY

It’s being able to save and meet your net worth goals that you have set up for when you retire. If you're financially unhealthy, you're living paycheck to paycheck, you've levered everything. You may be living high on the hog, but you may have just as much debt as you have income.

ROSS BRANNON

What's the best advice you've ever received?

SETH PEABODY

Look at things proactively, especially when it comes to taxes. Don't just wait for the information, go get the information and decipher it. Don't just wait till the end of the year to do a tax plan when you have the whole year.

ROSS BRANNON

What advice would you give to someone fresh out of dental school, hitting the real world tomorrow?

SETH PEABODY

They’re probably starting out as a W-2. I would tell them to figure out what their tax is. It's easy. We work with a lot of associates as well, just to start educating them. Eventually, a lot of them want to own their own practices. We start educating them about taxes in business.

I look at net worth, cashflow, income and taxes. Net worth is the driver of how valuable you are. It’s how you measure your assets. Cashflow is important. That’s cash coming in and going out. Then you look at your actual income. If you invested in something and it was sending you distributions, you may not be paying tax on those distributions. Then we look at taxes, which can cover all the above. Those are the main drivers to me. It's about growing your net worth. If you're growing your net worth, then you're going to have problems with cashflow, income, and taxes.

ROSS BRANNON

I was talking to someone years ago who was complaining about taxes. I said a tax problem is a good problem to have. He said I sounded like his CPA. I said, "If you can't appreciate a tax problem, you've never been broke." Thank you for sharing your tax insights.