Tax Strategies for a Highly Profitable Business | Episode 155 The Agent of Wealth

The government spends billions of dollars each year on goods and services, and by tapping into this vast marketplace, small businesses can secure lucrative deals, gain steady income and heightened visibility. In this episode of The Agent of Wealth Podcast, host Marc Bautis and guest Richard C. Howard dive deep into the world of government contracts.

As a career military acquisitions officer, Howard oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. He’s the CEO of DoD Contract – which guides, trains, and mentors small business owners and sales executives through the government sales process – and the host of DoD Contract Academy Podcast.

In this episode, you will learn:

The benefits of selling to the US government as a small business.
How small businesses can find opportunities to sell their products or services to the government.
How small businesses can stand out in the government procurement process.
How small businesses and startups can utilize the Small Business Innovation Research Program.
And more!

Resources:

Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.

Welcome back to The Agent of Wealth. This is your host, Marc Bautis. I’m joined by a guest for today’s episode, Richard C. Howard. Richard is a leading authority on US federal government contracts. As a career military acquisitions officer, he oversaw $82B+ in DoD contracts, and has advised and trained over 400 companies as a consultant. Richard is the CEO of DoD Contract, which guides, trains, and mentors small business owners and sales executives through the government sales process.

Richard is the host of the DoD Contract Academy Podcast, and speaks extensively on the nuance of federal contracting strategy. Richard, welcome to the show.

Thanks for having me on, Marc.

I don’t think people even realize that government contracts are out there. Can you start off by explaining this market size, and some of the benefits of selling to the government as a small business?

The Benefits of Selling to The US Government as a Small Business

The US government is the single biggest purchaser of goods and services in the world. When people think about government spending, most immediately think of big defense contractors. But in reality, the government buys just about anything you could think of – from defense and weapon-related spending, to tai chi instruction, to commodities, to food. Think about it like this: Every military base is basically a small town, or city in some cases. All of the infrastructure that goes into that town or city is paid for by the government. And they have a mandate to buy from small businesses.

So whether you’re in – cybersecurity, accounting, legal, you’re selling food, you have a franchise, you have a training business – the government is most likely buying in your area. It is very rare that I find an area where the government isn’t spending money, so the spending is vast.

The government has to buy from small businesses, yet less than half of 1% of US small businesses are actually participating in the government contracting process, despite the high spending levels.

Alright, so there’s a lot of opportunity here. How does a small business find the contracts?

How Small Businesses Can Find Opportunities to Sell to The Government

Because we’re talking about the government, there is a lot of regulation that exists to ensure there’s fairness and that the public can see what the government’s doing. So everything the government spends money on – with the exception of a couple classified contracting avenues – is public knowledge.

So, as a small business owner, you should ask, “Does the government buy what I sell?” To find your answer, go to a website like usaspending.gov and begin searching public records to find out what the government spends on.

Whatever you sell, it probably falls under something called a North American Industry Classification Code, or NAICS code. When you go into usaspending.gov, type in what you sell under NAICS – for example, accounting. The website will suggest different codes that you would fall under. You can click on that, and sort it by small business spending.

You can quickly see how much the government spends on small business contracts in your industry and area of focus.

Are these contracts location specific? Does it help if a business is located near a military base, for example, or does it not matter?

It depends on what you’re selling. By the way, government contracts certainly extend past the Department of Defense and military bases. There’s lots of different federal agencies that spend money.

Okay so once a business owner discovers how much the government is spending in their niche, what’s the next step?

Once you know that the government buys what you sell – if it’s local, they buy it in your state, or if not, you can work anywhere – the next step is to register your company. You can do that at sam.gov. That’s where all registering and most of the solicitations take place.

So when you go to sam.gov, you’ll find instructions on the screen for registering. Of course, you need to have a legal business in the United States, and come ready to register with your EIN number.

All in all, the process takes a couple weeks sometimes, but at the end of it you’ll get what they call a CAGE code and UEI number – these are federal identification numbers for your business. Once you have those, you can start bidding on contracts.

By bidding, do you mean writing proposals?

Yes.

How Small Businesses Can Stand Out in the Government Procurement Process

What can a small business do to separate themselves from the others trying to do the same thing?

Good question. This is really where most companies fail in selling to the government…

Once your business is registered through sam.gov, you will begin to see what’s called a request for proposal, or RFP. At that point, a business can begin writing a proposal. But, the government is very regulated in how they buy products and services.

For instance, if I saw an RFP come out that the government is looking to buy a $3 million landscaping contract for base X, I can’t just pick up the phone and talk to someone to get my questions about the contract answered. Now, if it’s a big contract, the government will answer most questions publicly through sam.gov. In those cases, you might get some answers that can inform your proposal.

But otherwise, you won’t be able to set up a meeting with a government worker. You won’t be able to develop a relationship…

So, before the RFP comes out, there’s something called the market research phase. Let’s say you’re a software developer, and the government is putting a command and control platform together, and you have a great user interface for that. Well, it’s during the market research phase that you can engage with the government if you really want to have a shot at landing the contract later on. Meaning, before the RFP comes out, we want to know who is doing the purchase, and we want to know the details of the opportunity ahead of time.

If you want to differentiate yourself from the rest of the herd, you want to look for things like a request for information or sources sought. When those come out, they’re squarely in the market research phase. At that point, you can set up a meeting with the government.

I recommend small businesses to respond to requests for information. They’ll answer questions like:

How long have you been in business?
Do you have past performance?
What do you think of the approach the government wants to take?

And, you’ll be able to suggest things. For instance, when you register your business, there are different certifications. Examples include:

Small business certification
Woman-owned small business certification
Disabled Veteran-owned small business certification

If you happen to have one of those certifications, you do have a leg up, because the government needs to set aside a specific percentage of contracts to those certified businesses.

But, back to the market research phase, you can actually recommend that the government lists the contract for a specific certified group. So, you’re helping the government write the solicitation, and you can give yourself a leg-up if you suggest a certification you have.

Okay, so you’re trying to influence the decision a little bit. Have you ever seen a case where a small business had a product or service that the government isn’t spending on, but they propose it to them?

Yeah, there are a couple of ways to do that. I would say if you take away one tip on selling to the government, it’s to get meetings and build relationships with the people that actually buy what you sell. There’s a lot of ways to do that, but mainly through research.

If your business sells a product or service that the government is not actively looking for, but you want to sell to the government, the government needs two things: A requirement, and funding.

The Small Business Innovation Research Program

If it’s an innovative solution of some kind, for example a patent, you can go after something called the Small Business Innovative Research Program, or SBIR. Any government agency that spends a certain amount of money in research and development has got to contribute to this program. So, the SBIR program spends about $4 billion a year on innovative research and development contracts with small businesses.

This is a way to basically propose your product or service to the government, because they have funding in the SBIR program. If the review panel thinks that what you have is innovative, and that it would achieve a government need, you can win one of those contracts.

Phase one of SBIR is kind of low dollar. Let’s say, for example, you’re creating a VR training system. In that case, phase one might just be a feasibility study. You might propose that the government uses a VR or augmented reality training system to help maintain or fix aircrafts, for instance. Well, that might resonate with the board. That first phase one event is probably going to be somewhere around $100,000-$150,000, which is small for government contracts.

But, what you’re really doing is:

You’re establishing past performance with the government, because now you have a contract.
They’re now going to help you find people in the government that would potentially sponsor you.

Now you can’t totally rely on the government SBIR office, you also need to put yourself out there to find a sponsor. If you find somebody willing to sponsor, but they don’t necessarily have to have money, they just sign a memorandum of understanding for you to go to phase two.

Phase two is to develop a prototype, or set up a demonstration. There could be a lot of different things that you’re recommending, but that’s the phase two piece.

The Small Business Innovative Research Program is really great for getting your feet wet. Even if you have a developed product but you’re modifying it for government use, that would also qualify for the program.

Going back to finding these opportunities, my father actually had a government contract through a larger corporation. He created a pellet that went into 50 caliber ammunition. He wouldn’t get the government contract himself, but General Dynamics or Olin would go through him to create this component of their contracts with the government. Are there opportunities like that out there?

Yes. That’s a really good point. There is a variety of ways the government can buy things from a small or large business owner. For example:

Contracts.
Subcontracting.
Sole source contracts.

As a business owner, you need to understand how the government is buying what you’re selling. That’s something that you can do pretty easily with the research tools the government offers.

Let’s say you own a company that is licensed to do HVAC. Over time, you’ve built a relationship with the government office that purchases contracts in construction. From that relationship, you learn that next year, Hanscom Air Force Base is going to be building an office building, and you have interest in installing the HVAC system. But, you aren’t able to take the full construction contract.

What I recommend you do is look through a website like usaspending.gov to see which construction companies have done that type of work with the government – illustrating past performance – and reach out to them about this upcoming opportunity. The fact that you’re bringing them this opportunity sweetened the pot for them to work with you, involving you in the project.

If you reach out to three companies like that, you’ll get at least one or two bites to form an agreement and go after a large contract together. That’s very helpful for a small business, because the big company can handle the proposal writing, and so on.

Artificial intelligence is all the rage right now. Do you see AI being used to uncover some of these opportunities, or to help small businesses in this process?

It’s interesting that you bring that up. Two of my recent episodes on the DoD Contract Academy Podcast were about AI in the government space.

One of them is called Govly, which uses artificial intelligence and machine learning to enable government contractors, OEMs, and distributors to accurately plan for government purchases years in advance

The other is called Rogue, which is an AI tool specifically designed to help businesses write proposals for government contracts. It kind of works like ChatGPT.

Business Financing and Government Contracts

What happens if a business needs financing to fulfill an order from the government?

First, it depends on the contract. If it’s a SBIR contract, where the business is developing something for the first time, then you can win the contract before you have to start development. But those are research and development contracts.

So let’s say you win a small services contract that involves employing 20 people. The small business will have to pay those individual employees before the government pays the small business. That’s because there’s about a 90 day turnaround time on invoicing to the government.

Now, there are certain financing houses set up specifically for government contractors. One thing to know is once you win that government contract, it’s one of the most secure contracts you’re going to have. So a lot of banks know they can count on the government paying the business.

That’s also one of the reasons companies go after government contracts – because it increases the value of your company.

Are Government Contracts Recession-Proof?

In addition to AI, the other thing that we’re constantly hearing about is this looming recession. At a high level, how is government spending compared to other industries?

Government spending is more stable. I always recommend that business owners – small or large – have one stream of income from commercial sales and another stream of income from government sector sales. The government is spending year over year, whether there’s a recession or not.

But I would say that the government experiences difficulties in different ways, and typically at different times.

Usually, if you have a three-year government contract, for example, you’ll receive that funding month over month. Now, there are times when the government shuts down, or when there is sequestration. The government can terminate a contract for convenience. But if they do, there are regulations to protect the companies that held the government contract.

That’s good. Well, we’re just about out of time. Richard, thank you for joining me today. You did a great job explaining how businesses can leverage government contracts as well as how to navigate the government procurement process. What’s the best way for our listeners to contact you or learn more about your advisory coaching services?

Your listeners can go to dodcontract.com to schedule a consultation. On the website, we also have courses available. And of course your listeners can check out my podcast, DoD Contract Academy, on whatever platform they like to listen on.

Great, we’ll link to those resources in the show notes. Thanks again, Richard. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.

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While this podcast aims to provide valuable insights into tax strategies for business owners, it does not replace the guidance of a qualified tax professional. Tax planning is complex, and requires you to seek professional advice tailored to your unique circumstances.

Attention, business owners! Are you ready to unlock some secrets to maximizing your profits? Tune into this episode of The Agent of Wealth Podcast, where host Marc Bautis is joined by John Briggs, Founder of Incite Tax, a CPA firm focused on serving business owners, and the author of Profit First for Microgyms: A Simple System for Healthy Cashflow. Through his 12+ years of entrepreneurship, he has helped business owners combat IRS bullying, improve cash flow management, and manage stress and burn out.

In this episode, you will learn:

The greatest challenge business owners face concerning finances.
Simple tips for business owners who feel overwhelmed with their financial situation.
Why a business owner should review their entity structure.
What business owners need to know about business expenses/write-offs.
What the corporate rent rule is, and how business owners can use it to their advantage.
And more!

Resources:

Incitetax.com | profitfirstformicrogyms.com | Profit First for Microgyms: A Simple System for Healthy Cashflow | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call

Disclosure: The transcript below has been lightly edited for clarity and content. It is not a direct transcription of the full conversation, which can be listened to above.

Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. Today I’m joined by John Briggs, Founder of Incite Tax, a CPA firm, and the author of Profit First for Microgyms: A Simple System for Healthy Cashflow. Through his 12+ years of entrepreneurship, he has helped business owners combat IRS bullying, improve cash flow management, and manage stress and burn out. John, welcome to the show.

Thanks for having me, Marc.

We’re recording this in April, which is a great time to have this discussion, since everyone has this heightened awareness around taxes. Before I get into the questions, can you talk a little bit about your work at Insight Tax? I see that you categorize your team as “nontraditional accounts that help combat IRS bullying.” Can you talk a bit about the firm, your team, and this mission?

How Incite Tax is Different

Yeah, I’ll start with a little bit of background. I worked at Deloitte, which is one of the big four accounting firms, and in the accounting space. When working there, I realized I was rewarded based on my billable hours, but I didn’t control my workflow. In fact, in a normal accounting office, only a couple people control the workflow. So what happens is, if you haven’t been given something else to work on, you don’t want to be penalized for being smarter or more efficient than the others, so you take your time on assignments. That model ends up penalizing the client, because they end up with a larger bill than expected solely because they bottlenecked the process flow of tax returns.

So, I wanted to create a better way. I also don’t love the idea of working a minimum of 55 hours a week during tax season. In my previous position, if I wanted to keep my job, I had to work 55 hours. If I wanted to be promoted, I had to work longer hours than that.

While I don’t buy into the concept of work-life balance, I do think it’s possible to have a work-life imbalance. I wanted to create a firm where people had a life outside of work.

Incite Tax is non-traditional in the sense that we don’t always think the client is right, and we don’t push ourselves to work crazy hours – in fact, last tax season, our team averaged 42.6 hours a week. That is quite the feat in the accounting industry.

It’s great that you’re able to maintain that balance. How do you do it? Do you push people away, or do you ramp up hiring?

We haven’t had to say no to clients… What we do is we communicate the expectations upfront. For example, if a client comes to us in April, we’ll communicate with them through email to help them understand the process and timeline – in that case, we wouldn’t be able to get them their tax return until May. But normally, our turnaround time is two weeks.

We also have really good systems. Are you familiar with the Scrum model?

Yes.

It was invented for tech companies, but there is some application of it to service-based companies. So we do that with a couple of different teams, which helps us be more efficient.

And Incite Tax primarily serves business owners, correct?

Primarily business owners, but we do their personal returns as well.

The Greatest Challenge Business Owners Face Concerning Finances

What would you say is the biggest challenge that business owners have with their finances? I’m sure there’s a lot, but let’s start with one.

The biggest challenge is that entrepreneurs didn’t go into business to look after their numbers. Business owners are passionate about their industry, service or product.

Depending on where business owners get their information, they can start to believe that taxes, bookkeeping and cash flow management are a necessary evil. They might think, ‘Oh, I’m a business owner… I know I have to do that… but I’m going to hope someone else takes care of it.’ Or, maybe they only take the time to look at their finances once a year.

This is really one of the biggest challenges we overcome when working with business owners. The reality is, if you maintain your bookkeeping, and maintain quality tax strategies – which only takes a small amount of time on an ongoing basis, maybe a couple times a month – the information you’ll glean will make the business that much better.

Absolutely. At Incite Tax, you take a fractional CFO model, right?

Correct.

At what size does a business need to hire a full-time CFO?

Good question. I actually believe all growth companies will eventually have that need.

We were dealing with a client that had five automotive locations. I immediately knew they were too large of a business to outsource this kind of stuff. Because:

Not only are you paying a premium to us, since we have to have margins to stay in business.
With the amount of information they needed on a daily basis, it just didn’t make sense.

As an outsourced CFO, we can only focus so much on each individual client. The reality is, if they want more focus, they will pay for that. So I told them it would save them money, and get them better on-time reporting, if they hired a full-time CFO.

Not to mention, if you have a very customized business, having someone in house is going to be important. They will live and breathe the different customizing going on with your clients – including invoicing and agreements – which an outsource company will ever be able to do.

A lot of business owners tell me, “I send my documents over to my CPA, they spit back a return, and that’s it.” How does Incite Tax do more of the strategic planning?

Well, we have different services:

Tax services.
Bookkeeping.
Profit First cash management.
CFO services.
IRS tax resolution.

If we’re hired to bookkeep, the books are getting done. If we’re hired for tax services, there are a handful of business owners that just want to get their taxes done, and that’s it.

But most business owners feel the pain of paying taxes. They wonder, ‘Am I paying too much?’ So, first, we sit down with a new client for a consulting meeting. There, we ask questions like:

Do you have the right business structure?
Do you understand what you can write off?
Do you understand what your business can’t write off?

Those are some simple things about business that are often misunderstood by entrepreneurs. We start there.

Then, we identify tax strategies and get those going.

Depending on the size of the business and the curiosity of the client, they determine if they want to meet us:

Monthly
Quarterly, or
Yearly.

Then, we build those meetings into our services.

One complaint I hear from business owners is that they just get overwhelmed – whether it be with bookkeeping, taxes, cash flow management, etc. What are some tips you have for business owners who are overwhelmed?

Let me go over three strategies, which I feel like are low hanging fruit, that every business owner listening can do.

Why a Business Owner Should Review Their Entity Structure

The first: Look at your entity structure. How are you classified? Are you a sole proprietor? Are you an LLC? Are you a corporation?

If you’re in a business where you make a product or sell a service, we have found it’s very important that those taxpayers have an S-corporation in their tax structure. The reason is because of the way the IRS ties in self-employment tax to business owner’s income. The S-corp gives you the most favorable outcome, and you pay the least amount of self-employment tax. Because you have your income tax – everybody pays their income tax – but based on how you have things structured, the self-employment tax is on top of your income tax. You can minimize that with a well-structured S-corporation.

That’s the first tip. Look at your entity structure. If you’re making a product or selling a service and you don’t have an S-corporation in place, it’s worth talking to a CPA to see if it would save you money. Chances are it will.

A side note on that.. Some accountants will not recommend an S-corp because it does complicate the business owner’s filings – once you have an S-corp, you have a separate business tax return. And, on top of that, if you work in your S-corp, the IRS basically requires you to pay yourself a W-2. Even if you’re the only employee.

So you’re probably thinking, ‘Now I have a separate business return and I have to run payroll? Oh, forget about it.’ Well, we have found that if your taxable income is $10,000+ in business income, it makes sense. You’ll still save more in taxes than what you’re paying the tax professional to prepare. Anything above that $10,000 in business income, the savings are crazy. For example, I’ve done this for clients with $100,000 of taxable income, and this literally saved them $12,000 a year. Just by running it through an S-corp.

If you are going to do an S-corp, make sure you’re choosing an amount that is considered reasonable, but not more than reasonable. A good accountant should help you walk through it.

Understanding Business Tax Deductions

Now, let’s talk about writing off deductions.

The tax code defines a write-off as something that’s ordinary or necessary, which are two really vague terms. Because there was some confusion there, the IRS went ahead and created a rev proc that clarified what ordinary and necessary means by saying if it’s helpful and appropriate. Really, these are synonyms for ordinary and necessary, right?

So the way we explain it is this… If I’m spending a dollar, can I relate it to my business in any way? If I can, then it’s a write-off.

What if the answer is yes to that question, but the business owner is also able to get some personal use out of the expense?

Yeah, there are a few expenses that fall into that category:

Travel (in some cases).
Cell phone use.
Vehicle use.

For those handful of expenses, business owners must track what’s the business use is compared to personal use.

Yeah, that makes sense.

I’ll also say this… If it’s a business expense, pay for it out of a business account. You have to keep it separate.

With my clients, I also even go as far to recommend they have a dedicated credit card for business use. It doesn’t have to be a business credit card in your business name. It can be in your personal name, that’s fine. But for simplicity, I’ve always found it easier and clearer to have one card for business use and another credit card for personal use.

The Corporate Rent Rule

The third one we call the corporate rent rule. Now, bear with me, as this tip could save you $3,000-$6,000 in taxes.

As we’re filming this episode in April, The Masters just happened, which is a golf tournament in Augusta, Georgia. Some people actually call this the Augusta rule for that reason.

Basically, homeowners in Augusta rent out their homes for The Masters, as an influx of spectators visit to attend, and they need accommodations. The homes go for a pretty substantial rental amount, for about 10 days.

Well, the tax rule says that if I rent a property for more than 14 days, that makes it a rental activity, which means I have to claim rental income. But if I rent my property for less than 14 days, it is not considered a rental activity, which means I do not have to report any of the income on that property. The key is it is less than 14 days.

So how does this relate to business owners?

As a business owner, you’re supposed to have corporate meeting minutes. So, for example, you can schedule a monthly board meeting and instead of renting a hotel or another space, you can rent the space of your home.

So, once a month, I have a meeting at my house. My business pays me personally to rent the house. Therefore my business gets a rent expense – because it’s ordinary and necessary, and helpful and appropriate – which lowers my taxable income. I do not have to pick it up as rental income, so my tax income stays lowered.

This is one of the lowest hanging fruits for a business owner. If you rent your house for board meetings one day a month, that’s 12 days in the year – and under the 14 day rule. As a general rule, we recommend $1,250 for the day use. That’s a $15,000 write off. So I just lowered my taxable income by $15,000, even though I get to use that money personally. Based on your tax rate, that’s going to save you $3,000 to $6,000 in taxes.

Makes sense. Now, let’s transition to talk about your niche, which is the subject of your book Profit First for Microgyms: A Simple System for Healthy Cashflow. What is a microgym?

A microgym is a boutique fitness studio. Sometimes it’s easier to think about it in the context of what it is not.. It is not a global gym, like Gold’s Gym, Planet Fitness or 24-Hour Fitness. Those types of gyms rent equipment and, honestly, count on the members not showing up. Because if everyone paying showed up to work out, they wouldn’t have enough space.

A microgym is more hands-on. You pay for their advice, for consulting. There’s equipment in most microgyms, but most of the time there’s trainers involved. That could be one-on-one training. It could be a group class. Examples include Orange Theory, CrossFit, Barry’s Bootcamp… Those are all microgyms.

So what is about these types of businesses that made you want to focus on them?

I read a book called The Pumpkin Plan by Mike Michalowicz. If you’re not familiar with the book, I recommend you read it. But the synopsis is… Pumpkin farmers grow thousand pound pumpkins because they focus on one pumpkin. In fact, after planting the seeds, they pluck off 80% of the pumpkins as soon as they sprout. Then, they repeat the process, because they’re identifying which ones are growing the biggest and the fastest. They want all the nutrients of the vine to go to that one pumpkin. So I read the book, and went through the exercises recommended in the book.

In doing so, I identified that we had a good concentration of gym clients. They were great, but they knew very little about taxes. So, we kind of started marketing a lot towards this niche. As of today, we have more gym clients than any other accounting firm in the United States.

While working with gym owners, I realized I was trekking the Profit First model, which Mike Michalowicz originally wrote, to improve their cash flow. And Mike had opened up the opportunity for those of us who were really niche focused to write a book. So, we did just that.

Gym owners are really great people – there’s this charitable undertone in what they do, because they’re improving their client’s lives. But sometimes, gym owners fall on their swords. The main message of my book is: They deserve to be profitable.

Well, John, we’re just about out of time. Thank you for joining us today and sharing your expertise. There’s a lot to learn from you beyond what we covered today… How best can our listeners learn more about what you do?

Our firm’s website is the best first place to go to, which is incitetax.com. There, you’ll find a ton of free resources, including our blog. We have written articles about some of the things we discussed today, like the corporate rent rule. But you’ll find much more, too.

Awesome. We’ll link to that in the show notes. Thanks again, John. And thank you to everyone who tuned in to today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review on the show.