I reviewed 10 contractor PL's this month, and here's what's killing their profit. One of the contractors I sat down with this month is doing $1.2 million in revenue. His lead foreman took him more than he did last year, though. And here's the part that should really bother you. According to his books, it said he was profitable on paper and great year. In reality, he was bleeding money in five different places, and he couldn't see any of them. And before you start feeling bad for the guy, don't. Because if your contractor is going anywhere from $500,000 to $5 million in revenue, I can almost guarantee you that at least two of these same five things are happening in your business right now, today. I'm an enrolled agent and I've been doing this for 25 years. And I run Savvy Tax Strategies and Bookkeeping, where we help blue-collar business owners stop working harder and start keeping more of what they make. This month, I sat down with 10 contractor profit and loss statements, PLs, plumbers, electricians, uh GCs, general contractors, roofers, HVAC, different trades, different states, different revenue levels. Same five problems over and over. So today I'm walking you through all five, what they look like, what they cost, and what to do about them. So stick around till the end. I'll tell you exactly how to figure out which ones are eating your business alive. This is episode 25 of the savvy or surrender podcast. So quick note before we dive in: the names you're about to hear are changed. The numbers are made an anonymized, made simple, but the patterns are real and they're in nearly every contractor PL that I look at. By the end of this episode, you'll know exactly what to look for in your own books, what each of these problems is costing you, and what to actually do about it. So profit killer number one, owner's comp disguised as draws. What does that mean? The first one is probably the easiest to fix and costs more than almost anything else that I that I see when I'm looking at financials. And here's the thing: it's almost never the contractor's fault. It's always their CPA or accountant's fault. Or if they don't have one, then obviously it's the contractor's fault, but usually it's because of a lack of communication with the CPA or the accountant, and they just simply haven't really done anything about it. The pattern looks kind of like this: the contractor's running as an LLC or maybe as an S-corp that got set up wrong years ago and then was never revisited. They're pulling money out as owner draws with zero strategy behind it. They're not taking payroll if they're an S-corp, or they are taking payroll and they're not an S-corp. All kinds of challenges that I've seen here. They're paying full self-employment tax on every dollar of profit. Or, on the other side of it, they're taking unreasonably low W-2 wages and quietly building an audit risk. So here's a real example. His name was Mike. Not really, but we'll call him Mike. Mike runs a $900,000 plumbing business. Net profit was around $220,000, operating as an LLC, not being taxed as an S-corp. He was paying about $33,660 a year in self-employment tax. That's Social Security and Medicare, 15.3% for the self-employment tax. We elected S-Corp status. We set his reasonable comp. We even went high at $95,000. We ran clean payroll, proper distributions, and clean books. Year one savings, roughly $14,000. Every year, forever. One simple move. So why does this happen? Usually it's because your accountant set up your entity once and never revisited it. Nobody's running the S-corp breakeven math. And most contractors assume that their CPA is either handling that. But here's the thing: compliance is not strategy. They're two completely different jobs. And most CPAs or tax professionals in general, they're only doing one of them. They're only doing the compliance on April 15th or March 15th. They're not doing the whole strategy piece. You may think they are, but if you're only talking to them at tax time, they're definitely not because all they're doing at that point is putting numbers in boxes. Hopefully it's the right numbers in the right boxes, but that's all they're doing at that point. So the fix is really pretty straightforward. You run the S-corp breakeven analysis. Generally, it pays off around $40,000 to $50,000. To be on the safe side, you could be more conservative and say around $60,000 in net profit. But the math is, you know, it's kind of nuanced, right? There's everybody's situation is different, of course. You set your reasonable comp correctly, too low, and it's an audit flag. I've seen people have no payroll. I've seen $20,000 or $18,000. That's way too low, and you're opening yourself up for an audit risk with the IRS. But if you do it too high, the challenge then is you're wasting all the savings. You want to make sure you have quarterly payroll and you want to make sure you're doing proper distributions. Now, here's something that a lot of people don't understand. Just because you take a distribution, you're still taxed on it. You're just not taxed on the Social Security and the Medicare, the self-employment tax. You're so you're saving 15% on it. But those distributions, if it's outside of your basis, meaning if you put $50,000 into the company, that's after tax money. So when you pull that $50,000 out, that's not taxed money. But anything above that, anything beyond that net income, you're pulling out money from the business, that's going to get taxed. It's going to be at your federal rate. And then if you have a state rate, it's going to be taxed at that too. So you don't have to pay Social Security Medicare. Are you going to save that? But you do still owe taxes on it. A lot of times I see people think, oh, those distributions are not taxed, which is why they're trying to take such a low salary. Yes, we want to make the salary competitive, have it be reasonable, as the IRS says. Whatever that number is completely depends on you and your business. But the distributions, we still need to understand that we are going to have to pay taxes on it ultimately. So that example, that's number one, and that's the structural one. The next one is more of a numbers problem, and it's the one that makes contractors think they had a great year when they actually lost money on half their jobs. So it's profit killer number two, job costing. That isn't really job costing. So I'm gonna say something that's probably gonna sting a little bit for a lot of contractors. But most contractors have no idea which of their jobs are actually making them money. They think they do, but they usually don't. And here's the pattern materials and direct labor get lumped into a single cost of goods sold bucket with no job tagging. Overhead allocations are either non-existent or wildly wrong, and jobs that look profitable on the surface, but are actually losers once you load up in the true cost. And the worst part is bidding the next job using the exact same flawed assumptions that lost money on the last one, well, obviously that's just gonna make it worse and it's gonna compound. So here's a real example with a gentleman named Dave, who might have been Mike, but now he's Dave. He's a general contractor and he's doing about $2.1 million in sales. His PL showed a 22% gross margin. Solid. Looked pretty good. Then we actually broke it down by job. Three of his five biggest jobs that year were under 8% margin. One was actually negative. He was funding his losing jobs with cash from his winners and calling it a profitable year. So real margin after we fixed the cost thing is really what it comes down to. And it was only 14%, which means he had three options. He needed to raise his prices, he needed to change his job mix, or he needed to stop bidding work that was killing him. But until we did the work to expose it, he didn't even know that there was a problem. He looked at the overall PL, saw 22%, and was happy with it. So why does this happen? A couple of reasons. QuickBooks set up by somebody else who doesn't know construction, no class tracking, no project tracking. You do need to get the higher level of QuickBooks in order to be able to do project tracking, but it is essential for anybody who's doing more than service work. If you're doing five, 10 jobs a day because you're just hopping from job to job, maybe project tracking is not necessary for you. But if you have a job that's lasting more than a day or two, you definitely want to make sure that you're tracking each job and the profitability on it. And we're gonna talk about true costs more here in a second. So the other issue, too, is that a lot of times the owner's in the field, not in the books, they don't really know what's going in there. And the bookkeeper is maybe at the data entry level. They're not really construction savvy. So here's the fix real job costing, set up with class, project tracking turned on, you want burdened labor rates, not just simply hourly wages, the real loaded costs. So what does that mean? Well, every employee that you have, let's say you're paying them $20 an hour, obviously you pay more than $20 an hour for that employee. But if you're not taking track of that, if you're not, if you're not looking at that inside of your cost of goods sold, then you think you're being more profitable than you are. So whether that's taxes, health insurance, entertainment, or whatever other benefits that you're providing, any of those things that go towards that employee, you want to make sure that you're loading it into the labor rates for the project cost thing. So that's what burdened labor rates is. It's the real cost of that employee. A defensible overhead allocation methodology means we're putting all of that together. And then the monthly jobs reports need to be looked at by the owner at least monthly. You need to be looking at your jobs and seeing which ones were profitable, which ones weren't. What did we do different? What happened on them so that you know how to fix it? This is obviously very uh true, especially when uh prices are going up and down on lumber or paint or whatever. That never happens, right? Of course not. So now that you know what your jobs are actually making, the next one is about whether you actually have the cash flow to show for any of it. Because here's a fun fact being profitable on paper and has money in the bank, those are two completely different things. So here's profit killer number three: no separation between operating cash and tax cash. And this kind of gets into the profit first methodology that we've talked about on a number of episodes. So here's a quick gut check. If the IRS sent you a bill today, where when I'm filming this, we're into quarter two now. So let's say the IRS sent you a bill for all of quarter one, which you've already made in profit this year. Could you write them a check without panicking, without using your line of credit, without selling something? If the answer is no, then this one's here for you. Now here's the pattern: one operating account, maybe a savings account that mostly stays empty, and tax money is being commingled with operating cash. So what happens as the owner of the business is you see a healthy balance. So you reinvest it, you pay yourself, you buy some equipment. Then April hits, and there's a $40,000 tax bill, and there's no money to pay it. Then the cycle starts. Extension, payment plan, penalties, interest repeat next year. I had a client that I brought on this year that was literally paying taxes from the last three years and just needed to add it to her payment plan. That's not a good prescription. Now you're just constantly behind and you can't even get caught up. We'll call her Sarah. Sarah runs an electrical company. She'd been on the IRS payment plan for three straight years, not because she didn't make any money. She made plenty of money. She just never set the tax money aside. So she was paying about $4,200 a year in penalties and interest just for being late. That's almost a vacation, right? That's a new truck payment gone every single year because of a system problem, not a profit problem. So why does this happen? Because nobody taught business owners, contractors specifically right now, but business owners in general, how to manage cash. You were taught how to run jobs. Profit first isn't on the radar, and you tried it half, or maybe you tried it half-heartedly and you gave up. And let's be honest, I'll figure it out at tax time as a strategy until it's not. So here's the fix multiple bank accounts. Again, we've talked about profit first, but even if you don't fully roll out profit first, even if you just have a simple operating account and a tax account, and maybe a profit account would be cool too. But hey, let's just, you know, let's get the bare basics here. Of course, the profit first framework, again, we've talked about it in a number of episodes. You can check back in the videos or in the podcast. Operating account, tax account, profit account, owner's pay account. But you have to adapt it for contractors, for seasonality, for big material outlays, for all the ways that cash flow actually works. And that's really where I get into now, more into the cash flow of helping businesses understand lines of credits and what they can get when they need it, how to pay it down, percentage-based allocations every time money comes in. How much does it need that how much needs to go to taxes? How much can we put towards profit? So, and then having quarterly true-ups based on actual tax projections, not just gut feel, but actually looking at the numbers and paying the correct amount of tax at that quarterly tax payment so that you're paid up. And I'm not giving you a tax return in March or April with $30,000 being owed. I had one this year, their penalty was $10,000 because they didn't make the quarterly estimated payment. That was the penalty, it was $10,000. And here's the rule that matters the most the tax money never gets touched, like ever. In fact, in Mike McCallowick's book, Profit First, which by the way is right here. In his book, he talks about having your tax account and your profit account in a separate bank. Why does he say that? Because if you see the money sitting there and you have a bill come due, that's the first account you're gonna try to raid. So he says, just put it out of sight so you're not even looking at it. All right, so your structure's tight. Now you know your real margins, your cash is allocated. Next one is all about the asset side because contractors love buying equipment, especially on December 28th, 29th, 30th, 31st. And most of you guys are doing that wrong as well. So here's what I've seen. This is profit killer number four. Equipment bought wrong. December rolls around, and every contractor I know suddenly needs a new truck. It's 100% deductible now, right? The new tax law made it permanent. I'd be stupid not to buy it, right? Here's where I have to be the bad guy because the one big beautiful bill, that's the law, the tax law that got signed on July of 2025. Another episode about that as well. It did make 100% bonus depreciation permanent. And yes, if it's over 6,000 bounds, you can do section 179. And they increased those limits as well. Not that a truck is ever gonna approach those limits, but they've approached they've included those two. So for property placed in service after January 19th, 2025, you're able to bonus depreciate 100% of the truck. So that part's true. What's also true is that 100% deductible doesn't mean free, obviously. And most of you are still probably buying the equipment wrong. Here's the pattern that I mostly see. You hear 100% bonus depreciation is back and it's permanent. And so you treat it as a green light to buy whatever, whenever you buy equipment in December, purely for the deduction, not because the business actually needs it. So you take advice from the dealership finance guy who someone now knows tax law, and you confuse tax deductible with free or smart purchase. Those are not the same thing. And I know you're probably thinking nobody actually does this, right? Yes, I had a client last year, he bought three different trucks because he thought he could keep depreciating them. True story. So here's one example of a client that bought a $90,000 truck on December 28th to save on taxes. Now, he did not ask me in advance if he should do this. He just simply thought it'd be a good idea. He was in the 22% bracket, and with a hundred percent bonus appreciation, he was able to write off the whole thing in year one. He saved roughly $20,000, $19,800 in taxes. He spent $90,000 on this truck. I think he put down $25,000 or so. Uh, you know, so he he almost broke broke even on that part. But now he's got a payment as well of over $1,000 a month. So all to save $20,000, he gave up, you know, roughly $75,000, $80,000 once financing is done. That's not a tax strategy, that's a dealership strategy with a tax bow on it. The deduction was real, the decision was still wrong. And real quick, while I'm on the topic of the new tax law, the one big beautiful bill also made the $199A QBI deduction permanent. Now, that was probably a bunch of gobbledygook for you. You have no idea what I just said. Don't worry about the 199A part, although you can go and look it up. QBI deduction, qualified business income deduction. That became permanent as well. That was actually on the chopping block for 2025. It was done, or not on the chopping block, I guess. It was it was set to expire, I should say. Uh that was a 20% pass-through deduction that was supposed to expire, and it didn't. Now it's permanent. So that probably is one of the least known parts of the One Big Beautiful bill, or at least one of the least known parts in tax strategy, is how to use QBI and be able to save almost 20% or up to 20% on your business. So we're definitely going to talk about that in a future episode. Just wanted to throw that out there. All right. So most contractors look at they're either miscalculating that or they're leaving money on the table because they're not running it with their tax accountant. W-2 wages aren't optimized correctly. Like I said, it's going to be a whole episode itself that that's coming up. So if you're an S-corp or an LLC and the words QBI and reasonable comp don't make you nervous, you should probably subscribe so that you can catch that one. All right, back to the trucks. Here's the nuance that most contractors miss. The big, beautiful bill made 100% bonus appreciation permanent. No more phase down. Section 179 limit jumped to $2.5 million with a $4 million phase out. Also expanded. We talked about that. The deduction is bigger, more available than ever. But a deduction is only valuable if you have the income to offset it and the cash flow to support the purchase. The guy that bought the truck, he's in the landscaping business. He was also calling me crying about how he didn't have any income coming in because it was winter time and he didn't have any jobs. Why do you buy a truck then? That's not the time to go buy a truck. So if you're in a low-income year or period, you might actually want to spread the deduction. Here's another thing. If you bonus it all up front and you still have the truck, what are you going to do next year? Well, you're going to you can't buy another truck. And if you do, you have to offset the depreciation from the one that you bought this year. So sometimes depreciating, doing a bonus appreciation or taking section 179 faster than the asset value, the lifetime asset value, doesn't make sense. What if you did it as a straight line deduction over five years, the time that you're going to have the truck? Maybe that makes more sense. Or maybe it makes more sense to lease it. So sometimes the right answer is you just simply don't buy it at all, as well, right? It just kind of depends on what the situation is. But the perfect fix is multi year tax projection. Understanding exactly how this purchase is going to impact cash. Flow and your taxes for the next several years before any major equipment is purchased. Knowing next year's projected income could change that answer. Cash flow analysis alongside the tax analysis, because deduction does not equal cash savings, lease versus buy versus finance with real numbers. That's where a CFO controller level service really shines with real numbers. So that all helps you understand all of this stuff. Now, if your CPA or accountant hasn't called you to talk about how the one big beautiful bill changed your equipment strategy, that's one that could be a tell. That could be one big issue. Law passed in July of 2025. We're well past the point of, you know, I didn't know, is it an acceptable answer from your tax pro. All right, here's the last one. And this is the most dangerous one because it's the one that makes contractors feel rich when they're actually broke. Profit killer number five, the phantom profit on the PL. So here's a question that should make you or make every contractor uncomfortable. If your PL says you made $300,000 last year, do you know where it's at? Like look at your bank account right now. Is it there? Because for most business owners, and especially most contractors that I look at, it's not. And that's not a tax problem. That's a phantom profit problem. Here's, here's every time I get this question from a client. So a PL shows healthy and net income, right? Maybe the accounts receivable is bloated. 60 days, 90 days, 120 days, outstanding. Retainage is sitting on jobs for months. Maybe they even forget about retainage or they get the retainage, but then they don't take it off of the AR. Work in progress, not being tracked properly. Cash flow is a disaster while the income statement looks great. The owner's profitable on paper with stress about making payroll. And both of those things can be true at the same time. So our next guy, we're gonna call him Tom. He's a roofer, and his PL showed that he made $340,000 in net income for the year. His bank account had $11,000 in it. His accounts receivable was $280,000, half of it over 90 days. He wasn't even paying tax on the $340,000. It was that it just hadn't actually been collected yet. So his cash position was so bad he almost missed payroll twice. I see this happen a lot on commercial jobs, where maybe you have a big general contractor that pays net 30 when they receive the invoice, but you're paying your guys every week. You can grow broke. So being profitable on paper, but broke in real life is really a thing. So why does this happen? Well, acquirled versus cash accounting confusion, no accounts receivable management process, not making sure that money is being collected, sending the invoice in hoping instead of actual real collections uh standard operating procedure or cadence, some kind of SOP for that. Customers who pay slow because nobody makes them pay fast, right? If nobody, yeah, I mean, you you've all seen those general contractors or those developers that they will just pay slow because they can and they don't care. If you're not gonna push them, they're gonna pay you slower. So customers who pay slow because nobody makes them pay fast are a bleed on your PL. Retainage and progress billing managed by Feel is not the system. So here's your fix weekly accounts receivable review, not monthly, clear payment terms and enforcement. I want you to pull your AR report, pull your AR receivable or aged receivables report every single week. Make sure that you know exactly where those accounts receivable are. And again, you want clear payment terms. Don't I hesitate to ever do any net 30. Now, sometimes you're gonna work with a GC or a big developer or something, you're not gonna have a choice. I understand that, right? Sometimes you're the little guy and you just have to play by the rules. But make sure that you have it billed then and invoice as quickly as possible so that you can get on those payment terms quickly. And then deposits and progress billing structured into every contract. A cash flow forecast that separates from the PL, uh, that is separate from the PL. And depending on your situation, in almost all cases, a cash basis tax election makes the most sense. Very rarely, unless you're really big uh contractor, very rarely should you really be on an accrual basis. You need to be on a cash basis. Okay, so that's the five. Now let's look at what to actually do about it. Here's what I want you to do or take from this episode. If you recognized that your business had two of these and most contractors will, the issue isn't that you're a bad operator. It's you could be a great operator. That's why you have a business in the first place. The issue is that nobody ever showed you the financial side. Your CPA does compliance, your bookkeeper does things in the past, their data entry. Nobody is doing strategy, and that's where the gap is. That's where the money is leaking. So here's what to do. You've got two paths depending on where you are. Path one, if you want to see which of these are happening in your business, I do something called a profit audit. We sit down, I look at your numbers, I tell you straight up what's leaking and what it's costing you. Link in the show notes here. No pitch, no pressure, just a real diagnostic from someone who's looked at hundreds of contractor books over 25 years. And then there's path two. If you already know you've got a strategy problem and you're ready to fix it, that's exactly what we do inside the savvy boss or business operating success system. It's a system that I built for contractors who are tired of working hard and not having anything to show for it. So, again, links in the show notes for that one as well. You can go to meetwithsavvy.com to schedule a discovery call to see which path you're on and which one makes the most sense for you. And one more thing, if you want the companion guide to this episode, the five profit killers hiding in your contractor PL with a full self-diagnostic and exact next stop next steps, grab that at savy taxstrategies.com slash profit killers. It's a free download, no catch. Don't let another quarter go by leaking money that you're never gonna get back. And I'll see you on the next episode.