2022 HBB Accounting Coaching Call Notes

Definition of a Business According to the IRS

• Why this is important: Everything we do and all the deductions you take is based on you having a business. It is also your end of the bargain to maintain a business. So, if you ever stop conducting business, please let us know.
• Profit Motive (Revenue minus Deductions); You have about $10,000-$15,000 in base deductions. Your goal with your business must be to get your revenue higher than your deductions. You have some time to do this, but you want to have a plan of how to get there. That plan can be a dream and doesn’t need to be based on your current circumstances.
• Working on your business consistently. We and other accounting firms use as a general rule, 45 minutes a day 3–5 days a week.
• Revenue and Consistent Revenue some revenue is necessary, but it is not the end all of whether you are a business.
• 3 out of 5 year rule says that it is up to the government to prove you are not trying to make a profit the first 2 years you are in business.
• How do I prove this? Journal activities and time spent on business and have electronic records. A Google Document or Google Sheets are highly recommended because they are backed up and time stamped.

How Tax Brackets Work. What happens if you make an extra $1,000 and get into a new tax bracket.

How Deductions work. If you have $15,000 deductions and you made $115 ,000 you will be taxed like you made $100,000.

Can’t write off anything for your w2 job. The only exception is a hybrid expense. If you use something for both your business and your w2 you can write it off, but you are writing it off because you used it for your business, not the w2 job.

Business Formation (Sole Proprietorship/LLC/S-corp)

Sole Proprietorship — You can operate as a sole proprietorship without any issues. As a sole proprietor the first time you ever let the government know your business exists is when you fill out your federal tax return for the year.

LLC — There is no difference tax wise between a sole proprietorship and an LLC. Having an LLC will do nothing for you from a tax perspective. There are a few reasons to get an LLC.

• For liability protection
• LLC’s can be changed into an S-Corp. An S-Corp can run at a loss without being declared a hobby. This would be something you would want to think about once you get to your third year and you are not at a profit yet.
• If you are making over $20,000 in Net Profit (Net Profit is revenue minus all of your expenses). Generally this would be around $50,000 in revenue. In this case you would have an LLC and treat it as an S-Corp. Decision needs to be made by March 15th.

S-corp — Only necessary once you get above $20,000 in Net Profit. This is because you do not need to pay the government self employment tax on money that goes through your S-corp. S-Corps have additional costs though. You need to do the S-Corp elections (one time fee of $250). You are strongly advised by the government to hire yourself as a w2 to run the company ($250 a year for payroll and you need to pay the 15% self employment on the w2 income). You also need to file the S-corp as a separate filling when doing your taxes (like when a boyfriend and girlfriend come to us, we need to file separate returns for them). This costs an extra $1,000-$2,000 depending on your CPA firm. We do it for $500 because our mission is to deliver great service at a fair and unbeatable price.

On $100,000 net profit, without an S-Corp you will pay $15,000 in self employment tax. With an S-Corp you will pay $6,000 in self employment tax (based on a $40,000 salary) and an extra $1,000 in accounting fees. So having an S-Corp in this case saves you $8,000, this is very significant.

With all of this just remember if your company starts to make a lot of profit contact us immediately.

Extra Tips: For married couples filing jointly. It is ideal if both you and your spouse are working on your business together in order to maximize your business deductions.

The way deductions work for real estate for rentals. Not that good for reducing your income. Long term capital improvements to your house can not count against your w2 if you make over $150,000 (same limit for both joint and single returns). Under $100,000 it is capped at $25,000. It tapers off in between.

Everything Below is Optional — Everything below here is optional. Even if you don’t do any of this we can still do a great job on your bookkeeping and tax returns. So, even though you probably didn’t do this last year, we can still do a great job on your taxes. However if you do the things below there are a few advantages:

• You may save a little more money or in some cases (such as a car purchase) a lot more money
• You will be better protected in the case of an audit
• We can do your books more accurately

A Second Checking Account — It would be useful if you were to set up a second checking account and dedicate either your current checking account or the second checking account just to business. If you a sole proprietor it is usually easier to just make your current account your business account and the new one your personal account. This is because there is more stuff that will go on your business account than your personal account in general.

If you have an LLC or S-corp then you want to make the account under your company EIN the business account. Once you have that account set up under the LLC or S-corp it is a good idea to get a business credit card and start building credit under your business.

Having a second checking account dedicated just to business makes it easier for us to do your bookkeeping. That way we know which purchases are for your business. For example, if you put business meals on your business account and other meals on your personal account it makes it very easy to do your bookkeeping for these purchases. Similarly if you spend a lot of money at Walmart or Amazon for instance it would be useful if you put the business purchases on your business account so we can easily distinguish. Additionally the government likes to see this separation of accounts.

However, from an accounting perspective it does not matter at all what account you buy something from whether or not you can take the deduction. We can take deductions from either account. Also, you can transfer money between your accounts all you want. It is not like if you transfer money to the business account you just invested money into your business that you can get out. It is all your money and you can move it around as you please.

Now from a liability perspective, however, doing these things reduces your liability protection.

The Way An Audit Works — So in an audit they don’t initially come and audit your whole life. It typically starts with a “desk audit” where the IRS looks into a particular aspect of your business. For example they would only ask you to explain your travel costs. Since you are working with us, you get free audit protection, so a CPA is going to present your professionally done books. In your books all your expenses will be for travel and they will add up correctly. An individual who is represented by a CPA with professional done books is not who the IRS is trying to audit; everything will look good, so they will go away. Which is what you want.

What they are looking for is someone who does not have their stuff together. Someone who just made stuff up or estimated or something along those lines. Mistakes on turbo tax is actually the number 1 reasons for an audit. If you were to fail a desk audit, they may then do a full audit. This is why it is important to be prepared for a desk audit.

The three most commonly audited expense categories are Travel, Meals and Entertainment, and Automotive. And we are going to go over that in just a second.

You do not need receipts to take deductions unless you paid cash and we do not need to see them; you only need receipts in the case of an audit. In some expense categories receipts are more important than others; we will go over the receipts it is important to keep. You can just take a picture of the receipt and that is sufficient for anything you will need them for; make sure your pictures are backed up to the cloud.

Travel — There are two major parts to a trip being a business trip 1) You have a business reason for the trip. This means a reason to go where you are going that has to do with your business that you can’t just do at your tax home. You should have this meeting or reason set up before you leave for your trip. 2) Work more than 50% of the time while you are there. For a 8 day trip, you would need to work 4.1 days or 4 hours and 1 minute each day. The travel days count as work days, so on a 8 day trip you would need to work 2 of the 6 days you were not traveling for a total of 4.1 working days and 4 non-working days. You could also work 4 half days instead of 2 full days. Full days and half days are based on an 8 hour work day.

The really cool thing is that your original intention for the trip does not matter. You could have had this planned as a vacation or to see relatives it doesn’t matter as long as you add a business reason and work more than 50% of the time. What matters is that you are following the law.

On a business trip you can write off transportation there, any food you eat while you are there and your lodging while you are there as well as car rentals and incidentals. While on a business trip you can write off meals eaten alone.

You want to document the business purpose of the trip. Who you meet with and what the business purpose of the meeting was if you met with anyone. Keep your meal receipts. Keep a log of your business activities while on the trip. The trip needs to be overnight.

The higher your travel expense category, say $5,000, the more they will want records.

If you are receiving a stipend, you can not write off things you are receiving a stipend for. A stipend is basically a deduction, so it would be like double dipping.

International is a little different. Whatever percentage of the time you spend working you can write off that percent of the expenses.

Meals and Entertainment — In general, any meal eaten with someone else with a business purpose is a business meal and can be deducted. It can be anyone, including your spouse or relative or significant other; it doesn’t matter that you live with a person and see them everyday, you can still have a business meal with them. The person should have some expertise, insight or relevance to your business or they could be a potential client.

Rather than sitting down and just talking about business generally, please decide on a specific business purpose for the meal ahead of time. For business meals you want to keep the receipt of the meal, record who you met with and record the business purpose of the meal.

A good way to do this is when the receipt comes, take a picture of the receipt and on the back write who you met with and the business purpose of the meeting. As long as your pictures on your phone are backed up to the cloud you have all the information you need forever.

Automotive — There are two ways to do automotive deductions. One is miles and the other is business use percentage. For your return we will calculate which is more valuable to do. Try to record your milage at the beginning of the year and the end of the year. You can do this by taking a picture of the milage on new years day or by using a milage tracking app.

For business use percentage, we sum up all of your automotive costs for the year and you are able to deduction whatever your business use percentage of your car is for all these expenses. For example if you used your car 80% for business, we can take 80% of all your automotive costs. Where this can get lowered significantly is if you commute to your w2 job in your car.

We really want you to accurately track your business use percentage using an app called mileIQ. The reason is because deprecation is a huge part of your possible savings here and our head CPA requires some sort of electronic record (or other type of record) to include depreciation in your return. Mile IQ is super easy to use. It tracks your trips and asks you to mark it as business or personal and you simply select which one. It cost $6/month, but it is definitely worth it. You need your business use to be over 50% to get these big savings. We estimate your savings here from using MileIQ will a return to you of $2,000 to $3,000 (it is a $6,000 to $9,000 deduction) on the low end and could be up to $15,000 or more in tax savings ($50,000 deduction).

Whatever kind of car you have or buy you will get a pretty significant deduction as long as you use it for your business. You can possibly deduct the whole value of a car in one year, but please note if you sell the car back you would have to count it as income, so you don’t even necessarily want to take the full depreciation in one year. However, you can not pay income on the car by trading it in for another qualifying car as long a you still have a business.

We also highly recommend leasing a car. Basically, the lease price they charge is calculated on the depreciation of the car for the length of the lease. So it is actually the most you can deduct and you don’t lose any money because you would have had to sell the car back anyway. You actually get car in good shape this way as well. It is very optimal in this way. You get the 25%-30% off the lease.

It is important to note that you do not make money buying a large expensive car. You do get the car essentially get the car 25% to 30% off the price, but you will indeed have less money. If you were to keep buying things that are fully deductible you eventually will not have any money.

In general, if you want to save your money, you need to pay taxes on it. The exception here and the best way to go about saving money for your future, without paying taxes, is to work with a Financial Planer. A Financial Planner can get you set up with the correct tax advantaged investment accounts (401k, Roth, etc.). We actually have this in a part of our company we call HBB Financial. You get access to HBB Financial with your tax package. Financial planning is definitely an art and you can meet with our Head Financial Planner as often as you would like for free. Just let us know if you are interested and we can set up the initial meeting for you. Whether you feel you are ready for this step or not, it is definitely in your best interest to start to understand what options are out there and available for you.

There are ways to increase wealth and take deductions. For example vending machines; if you buy $50,000 in vending machines and you know it is going to make you $25,000 a year for the next 10 years. In this case you have increased your wealth and gotten a deduction. This is essentially investing in your business. BUT you only want to invest in something you know will pay you back otherwise you will just lose all of your money and even though you are paying less taxes, your wealth goes way down when you lose money.

Free is better the deductible.

Other common deductions with restriction — With health insurance and home office you need a positive net profit in your business in order to take these as deductions deductions. Net profit is revenue minus all your expenses. In general this would be around $30,000 in revenue to hit this point. NOTHING else we have talked about today or will talk about today has this restriction, just Home Office and Health Insurance.

• Home Office, You can take the percentage of your Office Space divided by your total square footage. A percentage of all costs (including rent if you rent) that go into your home if you have a home office. 25% is a reasonable limit.
• Health Insurance

Other Common Deductions:

• Cell Phone and Internet
• Office Supplies, most physical things that are useful for your business. Computer, tablet, step stool. Small ticket items: if it is a deduction take it as a deduction.
• Continuing Education /Training /Personal Development /Conferences /Certificates.
• Tax Preparation (our services) or any professional service you use for your business like legal.
• Advertising Costs, Instagram, Facebook, Tic Tok, Snap Chat
• Software as a Service
• Any costs that go into making your product

Hire Your Kids — You can hire your kids for your business. You must pay them a reasonable rate that you would pay someone else to do the job. Keep track of their tasks and hours. If they are under 18 they will pay no taxes on the first $12,550 you pay them, however it is a deduction for you. This should generally be done as a w2 employee. This will allow you to provide them with more fringe benefits which can lead to big tax savings. Let us know if you would like help adding your kids to payroll. You can just run payroll once a year.

Issuing 1099s — If you pay someone in America over $600 as a business you are suppose to issue them a 1099. If you do not issue a 1099, even though it is a valid deduction for your business you may lose the entire expense. To do this have them fill out a w9. Have them do this before you pay the more than the $600, otherwise they can refuse to do this. Do not wait until the end of the year after you paid someone $5,000 or more before asking them to fill out the w9.

Contact us to issue the 1099.

1099 workers are preferable over w2 workers. If you are thinking about hiring someone as a w2 worker, please give us a call first.

The Process/Timeline Of Business Tax Preparation — The cost of our Business Tax Preparation is $1,345. Today we collected a $200 retainer. The next step is in January, where we will invite you to use an online software called Wave Accounting (waveapps.com). There you will connect your bank accounts so we can download all of the transactions you have made for the year.

Next we will collect another $450 retainer before we being the bookkeeping. Our team will go through and mark each of your transactions as either business or personal. Once we are done, we will email you with questions… we always have questions. After a few emails back and forth we will finalize your books.

Your books will then go off to our CPA team who will prepare your taxes. There may be additional questions and emails at this point. Once your tax return is finalized, you will receive your tax return and all of your bookkeeping for the year. Finally, we will collect the final payment of $695. Once we collect the final payment, we will e-file your taxes and your taxes are done for the year.

Notices — If you get notices from the IRS, don’t do anything just send them to us and we will let you know what they mean and how to proceed.

Referrals — If you have enjoyed working with us please feel free to refer us. We have a generous referral program and appreciate the business.

If you enjoyed working with us and if you see us on Facebook please give us a thumbs up.

Please Ask Us Questions — If you have any questions, please please, reach out. The best is to send them by email and if we need to communicate on the phone we will. It is important that you ask questions rather than trying to figure anything out yourself or being worried or confused.