Isai Bismark Cortez's path toward becoming one of California's top tax attorneys began when he was a child. His grandfather, an immigrant from El Salvador, received a letter from the IRS regarding some kind of tax issue and it caused the family, who were not familiar with the law, a lot of grief and anxiety. A young Cortez grew up inspired to help and be a defender of those who might be vulnerable and in the same situation.
"When I was really young, my grandfather got a letter from the IRS and he was really freaked out," he tells me. "My family is from El Salvador, they're refugees, but they were able to stay in this country because of government policies at the time. So my grandfather got this letter from the IRS., [He was the] toughest guy I ever met in my life, but he was scared, intimidated and didn't know what to do. Would this tax issue result in being deported? Could he lose his good citizenship status? These were all unknown fears. So I told my grandpa when I was 4 years old, 'When I grow up I'm going to be an accountant. I'm going to fight the government to protect my grandpa.' And so I always had this advocate-like way of being."
Cortez acknowledges that the letter his grandfather received was most likely nothing to worry about. But as a non-English speaking immigrant, receiving something so formal from the government was understandably a nerve-wracking experience. Cortez grew up wanting to not only learn everything he could about the law to protect himself and his family but also to help others from having to deal with a similar ordeal in the future.
Cortez is an L.A. native and now operates his own firm as lead attorney for Bismark Tax, focusing on tax resolution for entrepreneurs and small businesses between $1 million and $20 million in size. He has worked with companies and brands on hundreds of audits over the years and his goal is always to help protect them from potential IRS errors. He earned his bachelor's in business administration from California State University Northridge; his juris doctorate from Penn State, and his master of law from UCLA. In short, he knows his stuff.
During law school, Cortez worked for the Pennsylvania Department of Revenue's office of chief counsel, which is where he found his true passion for tax code. Cortez says he knew that the tax system needed improvement and if there was something he could do to help taxpayers he would.
With the rise of work-from-home and in-office hybrids; crypto and other digital currencies; NFT and blockchain e-commerce, as well as the evolving complexities of the law in each individual state, having a tax law expert in your corner is critical.
To help small business owners simplify their lives, he's also been working on a new software program called SynkBooks, which is his own proprietary version of what the larger SAS accounting software companies like Intuit offer. Synkbooks syncs up your bank account debits and credits to create a seamless way to connect your business' invoices and payments. As a small biz owner himself, Cortez knows how easy it is to get stuck 'in the business' and forget to work on the mundane but critical business details that could become your greatest liability and expense.
If you're on the payroll of a major corporation, odds are that once you file your paperwork with the accounting department your taxes are fairly simple. However the people who are most vulnerable to tax misinformation, errors and audits are people who run their own businesses and have to structure their own taxes.
Here are Isai Cortez's six tips for how to win one of the biggest potential liabilities and expense battles for a small business -- your taxes!
1. Fools Rush In -- Company Structure Is Key
Despite what "LLC Twitter" (a community of insufferable amateur financial advisers, entrepreneurs, investors and scammers on Twitter) says, don't rush into forming a LLC or corporation. Many people start a business and rush right into something unnecessary. Cortez says that the taxes and fees that corporations have to pay can add up quickly so it's best to know if your vision for your company is viable before rushing towards something bigger. "Consult a real expert, do not go through all the paperwork until you know that this is what you want to do," he says.
He tells me that if someone rushes to incorporate and then the idea goes bust, the cost (usually $2,500 minimum) to unwind can be an expensive mistake. "Be mindful before you incorporate," he says.
2. That's Actually Not a Write Off ...
Don't think that a setting up your S-corporation is an excuse to write off all your personal expenses. Cortez says that he hates when people are told that forming a certain structure means they can just write off all of their expenses as business expenses. Especially with everyone working from home, it's complicated and opens biz owners up to potential IRS problems.
"That's how people get into trouble," Cortez tells me. "You have to have ordinary and necessary business expenses. Ask a real tax expert to help with the questionable gray areas and details."
3. Plan Early
Once you operate in business make sure you have all your ducks in a row, and plan to file a tax return every year, not just on time but early. "If you operate in this country you must file a tax return," he says. He advises new businesses to prioritize getting all of their bookkeeping, legal and accounting elements in order once they begin operating.
Even if a company didn't make any profit in a fiscal year they still have to file a tax return as an operating corporation, unlike a personal tax return that is dependent upon making a certain amount. Make sure you have a good bookkeeper, or good bookkeeping system, a CPA, or accountant who's with you year in year out and someone to go to for legal advice.
4. You Don't Need Fancy Accounting Software
Excel is your friend and if you're on a budget is sufficient for all your bookkeeping needs. Cortez tells me that one of the reasons that he's gotten to where he is today is that his spreadsheets have spoken for themselves. He says he's submitted them to the IRS and every time the auditors are very impressed. He's even had auditors tell him that his spreadsheets were so airtight that if only a fraction of the charges being contested proved to be accurate, they'd give him credit for the entire thing and conclude the audit. That's a powerful spreadsheet!
Whether you're using one of the mainstream market products, or you're working with a CPA, keeping your records neat and tidy in a spreadsheet makes life a lot easier for everyone involved. And even better, don't just wait until the end of the fiscal year, keep your records updated every quarter as you go.
5. Don't Throw That Shoebox of Receipts Away Just Yet!
Nowadays there are a hundred apps and websites that help you get all your tax materials together, but Cortez cautions against tossing out your expense receipts as soon as your tax return is processed.
"That shoebox in my opinion is something that you should always save," he says. "For at least three to six years. Three years is probably good practice... six years is best practices." Cortez says that just in case of an audit, it's always a good idea to have copies of your receipts and bank statements match. He says there are ways to digitize that but whatever you do, hold on to your records for a few years just in case.
6. Fringe Benefits Are Real, but ...
Fringe benefits and special write offs may apply, especially for freelancers and entrepreneurs working remotely these days but they have to make sense. As an example, there's a trend for people to buy G-wagons because they are classified in a certain weight class of vehicle where write-offs might be legit. But be careful! Write-offs have to make sense for your business and the IRS might challenge ones that are questionable. Perhaps if you run a delivery service, getting an electric car might make sense for your company, but if you work from home at a computer you might not be able to convince the IRS that a Tesla is a necessary expense. Consult your tax expert for your individual situation.
Any purchase that you intend to write off as a business expense has to be "ordinary and necessary" to the business in order for it to be legitimate. Cortez tells me that some people have even litigated over clothes, claiming a designer suit or dress is a tax write off. "The IRS has this rule that if you can wear it on the street it's not tax deductible," he says.
Cortez explains that the number of small businesses that are starting out right now in the wake of Covid-19 pandemic is huge and that there may not be enough supply for the demand when it comes to CPAs and accountants. He tells me that all of his colleagues are hugely busy right now and the need for their help is real.
"I had someone offer to hire me for $1,000 an hour," he says. The client was so nervous about their taxes that they were losing sleep. Don't be that guy! Cortez advises that if you're starting a small business and you have someone helping you set up your taxes, be sure to make sure they're your person when it comes time to file.
Be careful where you spend your money when delegating to the experts. Cortez says that once you start the process of starting a business and registering your company, your email address will get out there and you need to be vigilant about where you spend your money.
"For the most part my experience has not been very good with people who cold-call you," he says. "Be mindful of where you spend your money. Even myself as a lawyer, I've been burned before." Be careful that you do your due diligence before hiring someone. The best price might not always mean the best service. If you can get referrals from people you trust, even better.
Being successful doesn't mean you're exempt from keeping your financial house in order. "I know people who are doctors and lawyers, and their books are a disaster," Cortez says. "People who've never hired me as a tax lawyer are the people who have had a good CPA or good bookkeeper. I've done maybe 200 audits face to face with the IRS, I've had maybe two audits from a CPA or a good bookkeeper where the person was there from the beginning to the end and the books were not wrong, and one actually got a refund of $30,000. It's rare when you find a good teammate that you're going to have those issues."
So what's the lesson here? It doesn't matter how successful your business is or how much money you make in a year, if your books are a disaster, you're running the risk of having trouble when it comes tax time.
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