308: Are You Missing Out on Tax Savings for Your Childcare Center? With David Encarnacion

In this episode of Child Care Conversations, Kate and Carrie sit down with tax pro David of DaycareAccounting Pro to chat about smart, proactive tax strategies just for childcare center owners. They break down why traditional accountants might miss big savings and how working with a specialist can free up money for things like teacher bonuses or playground upgrades. 

David shares real-life success stories and tips for talking to your accountant about new strategies. If you’re ready to feel more confident and resourceful with your center’s finances, this episode is a must-listen! 

Learn more here: https://daycareaccountingpro.com/

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Transcript

Kate Young (00:51)
Welcome back and Carrie and I are so excited to start the new year with you and we are actually gonna start the new year with probably your favorite subject. Well, okay, maybe not your favorite subject.

Carrie Casey (01:01)
No, it is. It's about how to

keep the money that you earned.

Kate Young (01:06)
I love that. So how to keep the money that you earned. And today's guest is David incarnation with daycare accounting pros and he is joining us from New York and it's a little chilly there. He's all bundled up and had his first snow just before our recording. And so we are excited David to have you join us. And I'm just going to start with the elephant in the room. Like people have

QuickBooks, they have accountants, they might even have a bookkeeper. Why do they need to think about this and include more people, more professionals in their business strategy and how can you help them with that?

David Encarnacion, EA CTS (01:50)
Okay. Well, first of all, thank you for having me on. So typically this is the pecking order. CPAs, tax professionals, they typically file your tax returns. So basically what they're doing is they're reacting to what happened in the prior year and just making sure you're compliant. Tax strategists, like myself, we look at the full year picture and we try to put strategies in place.

quarter by quarter so that by the end of the year, we've saved enough that we can now dump that onto the tax return and actually see the savings. So for instance, if you go to your CPA or your accountant on April 15th and they file the tax return and you're going to owe $50,000 in taxes, all they're going to do is just basically give you the bill, tell you to go pay that.

because they're just working off of the documentation you gave them. We, on the other hand, we project what that tax bill is going to be. And during that year, we find strategies that will bring your taxable income as close to zero as possible. So when we do the tax return,

Kate Young (02:58)
So if they're starting today,

so if they're starting today in 2026, they need to talk to you now, not next, next spring. ⁓ but now so that you can take a guess and save money now. ⁓

David Encarnacion, EA CTS (03:15)
Well, if we start in January, what we're doing is focusing on 2026. So every quarter we have these calls to find out where we are and what we need to, what strategies we need to put in place before the end of the year. Now, we're in December here, at least for this recording. And there's a lot of demand right now because people waited until the last moment that they realized, my God, I'm going to pay X amount of taxes.

Kate Young (03:19)
Okay.

David Encarnacion, EA CTS (03:42)
And now they want to jump on board, but it's kind of too late. A lot of the valuable strategies close sometime in November because of the high demand. The ones that we're using right now are the ones that you can take until December 31st, but those do not have the impact that others have. So those strategies that we're looking for, the ones that have the highest leverage. By leverage, I mean, we want to use tax strategies.

that'll give us at least a 10 to 1 ratio, meaning that if I want a million dollar deduction, I can invest $100,000 into the strategy.

Carrie Casey (04:23)
Right. Which is very different than what most people are doing with their like, I need to reduce my tax burden by X amount. I'm going to make some charitable giving and that's going to help me, but that's a one to one.

David Encarnacion, EA CTS (04:23)
So we believe.

Exactly. there's for charitable giving there's like you said, typically is one to one accounts typically don't know this. We can go as high as five to one. So if you donate $20,000, you get a hundred thousand dollar deduction.

However, the typical CPA and accountant doesn't know that because we primarily focus on the strategies. We can do your tax returns. That's not a problem. We could do bookkeeping with our eyes closed. But our niche is on the tax strategies. My focus is to bring clients to as close to zero tax as possible.

Kate Young (05:06)
Okay, now that I think everybody who's listening ought to have just peeked their ears, pulled out their pencil and paper and go, okay, David child daycare tax or daycare accounting pros. But you know, like everybody needs to be making that note because he just said his goal is to make sure you're paying no taxes. Okay. Where I know you had a question. Yeah.

David Encarnacion, EA CTS (05:25)
And we believe, firmly believe,

that we should pay ourselves rather than pay tax. So in that scenario that I gave you, the 10 to 1 ratio, that hundredth, so you're getting a million dollar deduction. Example, million dollar deduction. I'm going to ask you to invest $100,000 into the strategy. It's an investment because that strategy, in one case, that strategy in five years, that $100,000 will be worth $200,000.

So why would you pay the tax when you could pay yourself?

Carrie Casey (05:54)
Yeah. I mean, that's what a good business owner in any business does. Right? This is what the billionaires are doing. This is what the multimillionaires are doing so that every year they're earning more money instead of giving more money to the federal government. Now we want to pay what is fair, but not more than what is fair for the benefit.

you're getting from, you know, the infrastructure of the federal government. So if somebody's going, okay, well, I'm just the director. I'm not the one who has to pay these bills. Why would somebody who is a manager of a business care how much taxes is being paid by the owner? Why does it matter to that mid level manager?

David Encarnacion, EA CTS (06:48)
Well, if I was a middle of a manager, I would want the owner to know about these tax strategies because those tax savings will in turn benefit the manager via teaching bonuses, more money into the center where they're purchasing a second location, a third location. So technically the manager doesn't is going to it's not going to get an actual benefit, but they will because now they're building goodwill with the owner.

They're bringing the owner strategies. They're bringing the ⁓ resources that the owner is going to benefit from. And if I'm an owner and I have an employee that's bringing me resources that are going to benefit, that person is going to be number one on my list.

Carrie Casey (07:30)
Yeah, especially if it allows enough savings that you guys could have brought on another staff person or you could have upgraded the playground or all of those kinds of things that you as a director may want because you want more money to be going into the program. Well, if they have to pay a half a million dollars in taxes, they can't be putting 30000 into a new playground or even 10000 into a new playground.

And you know, I know there are playgrounds at y'all centers that range from a $500 playground to a half a million dollar playground depending on your program. And if you're a director and you're like, I don't have a tax bill that is more than $20,000. I get that. And I'm somewhat glad for you because you're not having to pay that. But if you can save your owner that $20,000, then

David Encarnacion, EA CTS (08:00)
And unfortunately,

Carrie Casey (08:27)
that $20,000 can go into the program. It doesn't go into their pocket exclusively. It's gonna go back into the program because people don't own childcare centers so that they don't support the program. They buy it because they want to be in that industry.

David Encarnacion, EA CTS (08:43)
and the other elephant in the room that I have to address. And this I get a lot. I get childcare owners that call up and they basically want to have like a back and forth with me about taxes.

And it's funny because you're going to lose that game. These owners, they want to do the bookkeeping. They want to do the taxes. They want to give me tax advice. And then when they go through all of that, my next question is, what's your capacity and what's your enrollment? And chances are they're leaving hundreds of thousands of dollars on the table. So my job is kind of like a coach is to change that mindset. taxes, bookkeeping.

We can remove that burden. I need you to focus on the enrollment. I had one person that was leaving on the table $2.3 million of revenue because he was not a capacity. It was a he. I said, Lloyd, stop talking to me about taxes. This is your problem. $100,000 in taxes is nothing. That $2.3 million can solve a lot of problems. So that's what you should focus on. And business owners need to focus on that.

Tax issues you have to leave for the professionals. Focus on what you can control and what's going to drive the revenue to the business. Because 2.3 million sitting on the table? That's insane to

Kate Young (10:02)
It is. And what's interesting, you brought that up because Carrie and I do a lot with, ⁓ owners and directors and helping them understand even like how to read the profit and loss statement. So like we are like, you know, entry level. So it's like somebody who came from childcare and you know, introduction to here's a PNL because Carrie and I grew up reading those as kids.

well, okay, teenagers, maybe not kids, but we were teenagers by the time our parents were showing us and having us look at PNLs. And so one of the things that we've discovered is that most folks don't even know the number that they are leaving on the table, that they don't understand also the lifetime value of a client. ⁓ Everybody's saying, no, people just choose childcare year by year. And I'm like, why, why are they only coming to you year by year? Why are you not thinking of them as a,

Five to twelve year investment Because if they came with you came to you that whole time That's a that's a much bigger annual or much bigger return on investment for lack of a better term, right?

Carrie Casey (11:10)
Yeah. And I

mean, if somebody trusted you with their child for one year, what did you do in that first year to make them not trust you the next year? I'm concerned. And if it's that they're going to the public, you know, to a free option, that makes some sense. But I keep telling people when they get all mad about free options in childcare, there have been free elementary schools for over 150, almost 200 years in the United States.

Kate Young (11:20)
You

Carrie Casey (11:39)
But people keep going to private schools and people keep homeschooling. So there's always going to be competition. Anyway, I'm going to get off of that soapbox because that can totally get us in a different direction.

David Encarnacion, EA CTS (11:52)
And you guys brought up ⁓ another one of our, what we call cornerstones. Our clients have to know their numbers. I don't need them to be an expert. Those bookkeeping clients, we send them their reports every month. Every quarter we have a call to review together because I need them to know their numbers. You need to know how much you're spending on payroll and you need to know how much you're spending on insurance. You need to know what you're spending.

If you can get a handle on that, when opportunities arise, and I'm seeing it already, childcare centers are closing. When those opportunities arise and you know you're getting a bargain, if you know your numbers, you could pull the trigger without having to call me. And that's why I want them to get to that point where you can say, OK, I know my numbers. I'll pull the trigger. OK, David, I made this purchase. OK, we're good.

because they know their numbers. If you have to call me and wait a week for me to get back to you, that opportunity can lose. So owners, they have to know the numbers. I don't need them to be an expert. Like I always make this example with Elon Musk. Elon Musk has no idea how to get to the moon, but he has a group of engineers that do, and they just feed him the information and he makes a decision. That's the level that we want our childcare owners to be at.

Kate Young (13:14)
Well, and I think it's really important that the managers or the directors also know those numbers and how it relates to them. Kind like you talked about, you you need to know how much you're leaving on the table. That's really important for the owner, but the owner needs to share that with the director so that the director understands why...

Carrie Casey (13:14)
Absolutely.

Kate Young (13:34)
If that room is licensed for 18 kids, there should be 18 kids in that room, not 12, which is what their buddy wants, right? ⁓ They need to understand that difference. Okay, six.

Carrie Casey (13:43)
Well, maybe not 18, 16, because sometimes

the rooms, you know, 18 is not gonna really work. But you have to have what your functional capacity is for every room. And whatever your functional capacity is, it needs to be enrolled to that functional capacity.

David Encarnacion, EA CTS (14:03)
Exactly. And I love these childcare owners that they're very aggressive and insightful. They'll see a room, we'll do the numbers. If that room was producing $50,000 with X number of kids, why don't we refurbish it and use a different level of kids or use that room for part-time, increase the enrollment, therefore increasing the income. So we go as low as telling you what each room is producing. So if we know one room is producing

100,000, another one's producing 50, hey, why don't we get two rooms at 100,000? Or what do we have to do to do that so that you increase your income?

Carrie Casey (14:41)
Yeah, doing things like having diverse enrollment schedules so that you've got people who are always picking up at three o'clock. So why aren't you enrolling another kid from three to six? You know, why aren't we filling those enrollment gaps? And this is something we've been preaching for over 20 years and people were like, we don't have to because we're at full enrollment. Everybody went to we're just taking full time. And I was like,

Guys, you have to have diversity of your income streams. And that means you've got to have part-time, you've got to have drop-in, you've got to accept subsidies. You may have one employee only, or only one person using the subsidy, but if you've got the contract for the subsidy, if the economics in that area change, you can put more kids in the subsidy program because a major employer left or whatever. You've got to have that diversity. Drives me crazy.

David Encarnacion, EA CTS (15:11)
Yes.

and two part

timers, more revenue than one full time.

Carrie Casey (15:42)
Yeah, the rule of thumb I tell them is it should be 170 % of your full time.

Kate Young (15:47)
Is that, what do you normally say David? I'm like, David made a face.

David Encarnacion, EA CTS (15:51)
With regards to what? I'm sorry.

Kate Young (15:53)
So how much would you so Carrie, when we talk with owners who are, we're trying to explain to them why they need to be doing two part time to one full time. Uh, we use the, the, the numbers of about 170%. Uh, you know, the two of them together, what is the metric that you use if you're having two part time for that one FTE, what would you say the, it's about the same. Okay. Just making sure. Cause if you had some secret sauce, I wanted to know.

David Encarnacion, EA CTS (16:15)
It's about the same. Yeah.

No,

no. It's about the same. That part, I steal from the owners. I OK, this is what you're doing, and I compare with different owners. OK. And we get to a benchmark. But yeah, that's about right.

Kate Young (16:27)
Ha ha!

Carrie Casey (16:32)
Yeah, it drives me crazy when

they're like, Oh, this person is morning and so their their base tuition is 800. So the morning person pays 400 and the afternoon person pays 400. I'm like, Ah, no, thank you. No morning person pays 600 afternoon person pays 600 then I end up with more money.

David Encarnacion, EA CTS (16:43)
⁓ 600, 600.

Exactly.

Kate Young (16:52)
Yeah, because

it's not like you've got less staff or any less responsibility.

And I think that that's really, really important. So David, if somebody is listening to this and they are a manager, they're a director and they're listening to this episode, how could they approach their owner so that the owner listens, but not feeling like, especially if it's a female director and maybe a couple or a male owner, how could they take this?

suggestion to them and it be heard not ⁓ you're silly or you don't know what you're talking about. How do they word that for them?

David Encarnacion, EA CTS (17:35)
We're talking about the tax strategy information.

Kate Young (17:36)
Yeah.

Sorry. Yes. I'm gonna switch chats.

David Encarnacion, EA CTS (17:41)
we have tons of case studies. usually, you know, we check case studies. because if you see us on social media, share a post or a video. Getting to them, they just have to understand anyone that's paying more than $50,000 in tax is a crime in our eyes. And especially when you have the resources to pay less than that.

They just have to get it in their face. Hey, listen, I think you may want to talk with David, talk to someone on his team, see what you can do to figure out this tax bill. So generally, we look at on the business end, your net income is over $300,000, you need to speak to us. If your W-2 income is over $250,000, you need to speak to us. If combined, you're above $500,000, you definitely need to speak

Because at that point, you're paying easily 50, $60,000 in tax. We've had clients. I had a client. I'll give you an example, story. So my client, Nikki, we had a call via Zoom. And she was giving me some numbers. And I was mulling it over in my head. said, I think she paid $251,000 in 2022. I told her, I think I can save you at least $100,000 in tax.

She was taken back. I was like, are you sure? Is this a scam? like, I can do it. She said, do you mind if I come visit you? She came all the from Virginia, flew up with her accountant. I didn't know that. I was like, OK. So we started talking. I started going through the tax return. Why didn't we do this? Why didn't we do this? Why didn't we do this? I look up. She's looking at her accountant.

Kate Young (19:09)
you

David Encarnacion, EA CTS (19:19)
She says, leaves. Leaves me with a check. The following year, we brought that bill with the same level of income, $2 million of income. We brought the bill down from $251 to $39. And in 2024, with the same $2 million, we got down to $7. This year, I got it down to $0.

Carrie Casey (19:39)
That's pretty powerful. That's pretty powerful.

Kate Young (19:42)
So

let me get that math correct. So the first year you saved her 151,000 roughly.

David Encarnacion, EA CTS (19:48)
No, 212.

212.

Kate Young (19:50)
And what did you say for the second year?

David Encarnacion, EA CTS (19:52)
247, no 244.

Kate Young (19:55)
Okay, so just in the first couple of years you saved her a half a million dollars.

I don't know about you, but if you're listening to this episode and you think that the owner of your program would appreciate you handing them half a million dollars, you need to forward this episode over to them and say, this was really intriguing. I think there might be, like, I'd love it if you'd listen to it and then talk to me about it because I have a lot of questions. Because the best thing you can do as a manager is ask your owner,

David Encarnacion, EA CTS (20:00)
Exactly.

Kate Young (20:29)
to give you advice. This is one of the few places you probably are not the expert. So don't ask your owner to give you advice on what to do with a toddler. That's not going to be beneficial to you. But if you're having this discussion and you've now listened to this episode and you've gone on to David's website and you've checked out the, the, the social media links, all of that, by the way, will be in our show notes. And you're like, okay, really.

My owner needs to listen, needs to have a conversation with this guy. And then say, I'd love to talk about it afterwards.

David Encarnacion, EA CTS (21:02)
I'm gonna share another one.

I'm

going to share another one. So.

I'm gonna, did you know that?

You, you guys, Karen, Karen, Kate, you can start a business, have the IRS funded and collect interest as revenue.

Carrie Casey (21:23)
I did not.

David Encarnacion, EA CTS (21:24)
Here's what I mean.

We have a strategy that we can go back three years. And the taxes you paid in the last three years will request refunds. An example, let's say you paid $100,000 for the past three years. We're going to request that $300,000 combined in refunds.

We're to take that 300. We're going to place it into a strategy in which now you just funded that business with IRS money because you already paid that tax. We requested it. Now you have to put that money towards the strategy. Otherwise it's tax fraud. We put it towards the strategy. But for that year 2025, and let's say we did, we collected refunds for 22, 23, 24, placed it in this strategy for 25.

You would also get

a $530,000 deduction.

So you funded the business with the IRS's money. And if you have, let's say, $500,000 of taxable income, we just wipe that out with that strategy and you pay zero tax. So you paid zero taxes. It was funded by the IRS. And you're collecting interest and you have a business. You can't beat that.

Carrie Casey (22:35)
We're good.

Kate Young (22:36)
I feel like we need to like...

Yeah!

Carrie Casey (22:41)
No. So I

have one last question because we're pretty much at time, but if the owner is listening, business owner is listening and they're like, okay, but I've had this accountant for 12 years and he's a great accountant and he's never told me about any of this. How do, because I've heard of there being conflict between ⁓ accountants, CPAs and tax strategists because

we trust the accountant, they've been looking at our numbers for years, how do we have a conversation to bring the two sides of the tax issue together, the person who wants to pay them, and the person who wants to prevent us from having to pay them.

David Encarnacion, EA CTS (23:27)
So I'm glad you brought that up. Every client that comes through our doors goes through a tax assessment. We do a tax assessment to find out where exactly they are. It's like an x-ray of their financials. And now we can determine what we have and whether problem lies and how to address it. When we give the client a tax plan, they have three options. They can execute the plan themselves. And we give them all the tax law and all the documentation that they can go do it themselves. They can take that to their accountant. Or they can just simply hire us.

If you go take it to your account, there may be some friction there because that account may not be familiar with those strategies or how to implement.

Now, we're going to provide all the tax code and all the laws, but now it's your accountant's job to read up on it and get familiar with it so that he knows how to apply it.

The clients that come to us, they just give it to us. You guys do it. Because now we put it into, we implement it. We know exactly where it goes in the tax return. And there no questions. Like for instance, next week I have a call with a financial advisor that they want some of our strategies because they want to bring it to their clients because one of our clients says, me run this by my advisor. And I love that. So they go, I've never heard of this. Exactly. So now we're going to have a longer conversation to see how it benefits.

Carrie Casey (24:17)
you

David Encarnacion, EA CTS (24:43)
our mutual client, but as well as their clients. So the strategies are there. ⁓ If the accountant person's account is privy enough to know how these strategies work, they can execute the tax return flawlessly. If not, they just come to us.

Kate Young (25:01)
And it's nobody, mean, just like a lot of other specialties, I mean, let's look at doctors, okay? So just because somebody has an MD, so just because somebody has a CPA doesn't necessarily mean that makes them an expert in everything. I would not go to my general practitioner for things like if I know I need surgery, I'm not gonna go to my general practitioner. If you are going to your accountant and asking your...

accountant who just does taxes, tax strategy or investment advice or financial planning advice, because there are some that do that. There's even some that have additional degrees in addition to being a CPA. Right?

So, you know, to me, this is no different than most professional organizations or professionals who have specialties. And what's beautiful is that David and his organization have specialties at all levels. So they've got folks who just do taxes. They've got the bookkeepers. They can help you with all of that, but they take it a step further with some specialists like David, who absolutely can help you with paying lessen taxes through legal.

tax strategies and we are not talking about you know a little you know a little underground something something right so we're talking

Carrie Casey (26:22)
We're not hiding money

under, we're not hiding money in the backyard. We're not putting it in the mattress. We're doing things that are set up in the legal code and that benefit other organizations, other projects. It's not just about you. It's also some of these strategies are helping things like include increasing the amount of solar power. Cause that's one that David and I talked about in a previous phone call.

You know, so it's helping other things a lot of times as well.

Kate Young (26:52)
Absolutely. David, how would people get ahold of you? What's the best way to get ahold of you and anything you want to end the conversation with?

David Encarnacion, EA CTS (27:00)
The easiest way would be to go to our website, which is www.daycareaccountingpro.com. If you see a social media, we usually have links there. They can schedule an appointment. They can call 718-515-2532, and we'll definitely reach out. Schedule an appointment to talk. Like I always say, the conversations, uncomfortable conversations are priceless.

And if you're ready to have that uncomfortable conversation with me, trust me, you'll be surprised.

Carrie Casey (27:29)
Amazing amazing guys. I think this one is one that is definitely gonna go in the best of in our catalog Because this can change the way your business operates absolutely reach out to David and his team and If you learn something you didn't know in this show, which I'm 98 % sure you did Please share it with someone else who needs to know this information and go in send us a message in ⁓

on your app, can text the show. Text us a show with additional questions. Maybe we need to have David back on. You guys tell us. So we look forward to talking to you again in a few days.

David Encarnacion, EA CTS (28:12)
Thanks, Gary.