Do What the Government Wants You to Do: A CPA's Playbook for Paying Less Tax

Ask Manny Singh how a business owner can legally pay less in taxes and his answer starts with a reframe. “I always tell them do what the government wants you to do,” he says.

Singh is a certified public accountant and the founder of MSG Tax & Accounting in Rancho Cucamonga, and a member of the Bloomington Chamber of Commerce. On the BCC Spotlight he walked through the incentives most owners overlook, the real differences between business structures, and what actually happens when the IRS sends a letter.

From Garden Grove to his own firm

Singh grew up in Garden Grove and went to Garden Grove High School. He was good at math but arrived at Orange Coast College, the junior college in Costa Mesa, without a plan. A counselor pointed him to an accounting course taught by a CPA he remembers as Mr. Johnson, whose passion for the subject pulled him in. “I asked a lot of stupid questions, right? Just kind of learning how businesses work, and I kind of knew after that what I wanted to do with my life.”

From there he went to Cal State Fullerton, then took his first job at a CPA firm in Irvine that served high-net-worth clients and specialized in real estate taxation, including partnership returns. He later moved to the Inland Empire to work at a smaller firm, where he dealt with business owners directly and handled IRS issues, before opening his own practice. He credits the managers, partners and seniors at those firms, along with his professors, for taking him from not knowing how to prepare a tax return to representing clients before the IRS.

Taxes follow incentives

Singh’s core idea is that the tax code rewards behavior the government wants to see. Real estate investors take on the tenants and repairs the government would rather not manage as public housing, and in return they get deductions such as depreciation and the 1031 exchange. Business owners put capital to work and hire employees who pay taxes, which costs the government less than unemployment checks. Investors who hold a stock for more than 12 months pay the lower long-term capital gains rate instead of the ordinary income rate they would owe on a quick sale.

LLC, S corp or C corp?

“It depends” is the honest answer, Singh says, but he does clear up the most common misconception: “LLCs alone just don’t help you save money on taxes.” An LLC is about liability protection. If the business is sued, it helps shield personal assets such as a home or a car.

The savings come from electing S corporation status. His rule of thumb is that the election usually starts to pay off at around $70,000 to $80,000 or more in profit, because an S corp costs more to run than a single-member LLC reported on Schedule C. The benefit is avoiding the 15.3% employment tax on the difference between the owner’s reasonable salary and the profit.

That salary belongs on a W-2, he says. If an owner skips reasonable compensation, the IRS can compare year-end distributions with the W-2 salary and assess employment taxes on a reasonable amount, plus penalties.

C corporations pay a flat 21% rate on profit, which can suit some businesses depending on where the owner wants to take them. The tradeoff is double taxation: money taken out of a C corp is treated like a dividend and taxed again on the owner’s personal return.

Read your numbers like a story

What separates his firm from once-a-year tax prep, Singh says, is helping clients understand their numbers well enough to see where they are bleeding. He described a client whose sales were strong but whose bank account did not show it, because accounts receivable were too high. His advice: offer a small discount for paying early, add a penalty once an invoice passes 30 or 60 days, and pay your own vendors on the last day before a penalty applies. That timing alone, he says, can be “the difference between being bankrupt and a thriving business.”

What triggers an audit

When a client gets an IRS letter, Singh reviews it and builds a plan for the next steps. Last year he represented a client whose audit began with a meeting at an IRS office in Santa Ana, where they discussed the company’s industry, employees and bookkeeping before providing the documentation the auditor asked for. The best outcome is a no-change audit. If there is an adjustment, the options are to work it out with the auditor or take it to appeals.

“A lot of people think the IRS is out to get you, but they’re pretty reasonable,” he says. The red flags he sees most often are S corps without reasonable compensation, Schedule C filers whose deductions look heavy next to others in the same business code, and tax credits. Some audits are simply random. “As long as you’re keeping your records, you should be okay.”

Getting out of the bubble

Singh found the chamber through a networking event in Rialto, then saw BCC on social media and wanted in. Accountants, he jokes, would rather stay in their bubble and do taxes all day, but entrepreneurs have to push past that. “Whenever you get yourself out of your comfort zone, you never know who you’re going to run into.”

His goal now is to educate the community: helping local entrepreneurs make more money, keep more of it, and run their businesses with less stress. He said he is interested in teaching chamber workshops on taxes and business structure.

This article summarizes a conversation and is not tax or legal advice. Talk to a licensed professional about your own situation.