This article is part of a series featuring Black entrepreneurs whose companies focus on helping Black business owners.
Cindy McGhee, 43, learned the tremendous power of tax planning while working as a staff accountant, fresh out of college, at Ernst & Young in Memphis. Seeing how businesses were using tax law to legally save themselves significant amounts of money, she began to imagine a firm that offered the same options to underrepresented entrepreneurs. With $16,000 of her savings, McGhee launched the CPA firm NextGen in Tulsa in 2017. An all-female company in a male-dominated industry, NextGen has expanded rapidly: It hit $1.5 million in revenue in 2021, and grew its client roster to 1,100 that year from 86 in 2018. McGhee sat down with Inc. to share her business journey and her advice for companies seeking to reduce their tax burden.
What do business owners need to know about their financial performance that they often aren't aware of?
We found a problem in the industry: The accounting reports that are typically produced for a business owner don't make sense to the business owner. While the existing format produces accurate and complete information with a historical review, it doesn't extract meaningful data. It doesn't talk about how the business performs in the industry compared with its competitors. So we can't use an analytical tool without the option for it to be customized by what's meaningful to that business. And that's where we come in to help support them. Right now we lean heavily into what we call "benchmarking analysis," where we compare our clients to similar-size organizations in their industry.
What are some misunderstandings business owners have about tax planning?
First, I think tax planning as a concept is something that people have deemed optional. That's an oversight and a mistake for business owners. Tax planning is a necessity. If you're not strategically minimizing your tax burden, you're paying too much. In fact, statistics show that 93 percent of business owners overpay in taxes. That means you're not able to reinvest in your business or reward yourself as the leader of the business, because you're giving money to the IRS that you really shouldn't be.
Second, I think many times business owners don't realize the authority that they have when it comes to taxes. If you sit back and just let the IRS have its way, you're gonna pay a lot in taxes, but if you step into a position of power and recognize tax planning, you will benefit from it a lot.
What are some simple things that small-business owners can do to reduce how much they pay in taxes?
Usually business owners don't realize that there is a difference between the legal entity classification and the taxable classification. Those two are completely separate. Most small-business owners choose limited liability company (LLC) as their legal classification, but the Subchapter S corporation tax status--a special tax status granted by the IRS that lets corporations pass their corporate income, credits, and deductions through to their shareholders--is the most tax-advantaged classification for small businesses. So a great step is to file IRS form 2553 to have your LLC taxed as an S corporation. The form is easy to fill out and grants you access to many of the tax benefits large organizations have utilized for decades.
Aside from changing your company's tax classification, what else can you do?
Apply for the Augusta Rule. It allows homeowners to rent their home for up to 14 days per year without needing to report that rental income on their individual tax return. This rule applies to any taxpayer who owns a home in the United States as long as your home is not your primary place of business. In short, this means you can rent your home to your business for business meetings, business dinners, or any business activity. The rental fee is paid by your business to you as the homeowner. That fee represents a valid deduction to the business, but is not considered income to you personally when you stay under the 14-day limit. So if a nice meeting room costs $1,000 a day, the Augusta Rule allows your business to pay you personally $14,000--$1,000 times 14 days--as tax-free income and creates a $14,000 tax deduction for your business.
How does NextGen help minority founders?
I don't say "minority founders." I like to call them "underestimated founders," because we really aim to help support them to turn into the majority of founders. It's part of our vision to create and educate the next generation of ultra-successful entrepreneurs. Underestimated founders are often overlooked. Even when they are working with a CPA firm, they often have a trust gap, because they don't feel like they have shared experience. We bring this fresh perspective, this feminine energy, and this attention to the small guys who will someday become big guys with our help.