Podcast: | (Duration: 58:00 — 53.1MB)
Panel
- E. Scott Sweeney, CPA ( 801-756-3394)
- Eric Davis ( )
- Charles Max Wood ( )
Discussion
01:02 – Scott Sweeney Introduction
02:21 – Bookkeeping
- Hiring wives
14:10 – Business Expenses
- Ordinary and Necessary Expenses
18:44 – Writing off expenses when traveling with others
22:21 – The White End Zone & The Black End Zone
24:58 – Meals
26:47 – Tracking Mileage
31:40 – and
34:49 – Health Insurance
39:10 – Business Use of the Home
41:09 – Cell Phone
45:51 – Internet
47:20 – Meals
51:12 – Remote Expenses
Picks
- (Eric)
- (Chuck)
- (Chuck)
- (Scott)
Next Week
Big company layoffs: Should I worry?
Transcript
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[Hosting and bandwidth provided by the Blue Box Group. Check them out at bluebox.net]
CHUCK: Hey everybody and welcome to Episode 51 of The Ruby Freelancers Show. This week on our panel, we have Eric Davis.
ERIC: Hello!
CHUCK: I’m Charles Max Wood from devchat.tv. And this week we have a special guest, Scott Sweeney.
SCOTT: Hello!
CHUCK: So Scott, you haven’t been on the show for probably almost a year…I think we did this right before or right after tax time. Do you want to introduce yourself really quickly for those who aren’t familiar with you?
SCOTT: I’m a CPA and I specialize in tax for individuals and small businesses, and you freelancers are an ideal clients for me. We probably process about 800 tax returns a year at my firm; we turn and up to date on all the latest tax changes and so forth. And I’ve been at this for a long time. I don’t know if there’s much more you want me to say to them.
CHUCK: [laughs] Nope. The only other thing I’m going to add is that, Scott is my CPA. He’s the guy that takes care of my taxes. I can’t recommend him highly enough, he’s probably saved me more money than I care to think about.
SCOTT: Well, that at least save my fee, right?
CHUCK: Yes, at least that. Probably 3 or 4 times that.
SCOTT: Okay. Good.
[Scott and Chuck laughs]
CHUCK: Yeah. If you didn’t save me at least that much, I probably wouldn’t come back. But I’m pretty well convinced that –
SCOTT: No, if I can’t save you my fee, then it’s not worth coming to me.
CHUCK: Yup. So anyway, last time we talked about taxes — and we’ll put a link to that in the show notes — this time, I thought we could talk a little bit more about like bookkeeping and business expenses.
SCOTT: Oh, sure!
CHUCK: I know Eric does his own books; I’ve never even dreamed of doing my own books. I’m starting to think about it mainly because I’ve been looking at a couple of different people who can do books. And I’m wondering if it’s really worth putting the money down, or if it’s something that I can just do in like a half hour or an hour a week.
SCOTT: Let me say this on that front. What I find is that entrepreneurs are so busy finding new clients, taking care for their clients, that the books get (to) put in to last place and they end up not being done very well. It may be worth it to you — and you have to kind of sit down and say “if I’ve spent the hour I’m going to spend doing books (than) trying to find a new client, would I make more money than I would if hired somebody to do the books for an hour”. That’s the tradeoff in my mind. I recommend that someone else do the books other than the entrepreneur; quite a few entrepreneurs used their wives. And I meet with more women than I do men actually because they’re the ones that actually keep track of everything. So that’s one option.
The other is to hire someone. There are software programs out there that somebody can use, but that’s been my experience…is that the entrepreneur doesn’t do a really good job of taking of the books.
CHUCK: I can see that. And when you asked the question “If you spent the time looking for a client or taking care of the client, would you make more money?” My answer would pretty much always be “Yes”.
SCOTT: The thing is that when I get bad data to do taxes, and when I say bad data I’m meaning it’s incomplete, they haven’t recorded everything that they’ve spent, then I’m sitting there saying to myself “they’re going to pay more tax than they need to”, and that would be another justification for hiring someone in.
The thing I find with having wives do it is that they are pretty much the bird dog and will make sure that if you spend money, there’s an accounting for it because it all comes home. And so that’s one benefit to having your wife do it.
CHUCK: Does it take much training to be able to do it? Like is there something that I could just give my wife a machine with QuickBooks or Quick Inter something on it and say “please do my books”?
SCOTT: Well QuickBooks is a little more technical. I don’t recommend QuickBooks unless you’re going to use it for invoicing, payroll, account payable, accounts receivable, that sort of thing. But if you’re just wanting to keep track of revenue and expenses, Quicken or Excel, even just a piece of paper will be sufficient because all you’re wanting to do is just keep track of what kind of expenders you’re making. So on the one hand, it’s not too difficult. On the other hand, if you’re going to do all those other things I said, then you will want QuickBooks.
ERIC: Yeah. And that’s kind of what I saw it is. I actually have a finance and accounting background and even the lowest and the simple version of QuickBooks was overly complex for my business. I use an open source package for mine and that it only works on Linux, but I mean basically you’ll just have a ledge or view (of) incoming expenses. I mean I do a bit more complex stuff just because I have reports that I like to look at just to kind of get a barometer on my business. But I’ve separated like a product out where I still had all the expenses in my company, but I want to track like the actual revenue and expenses for the product; just kind of a division. And I was just using a Google Spreadsheet for that for probably 8 or 9 months, and that actually works really good.
SCOTT: I think for something like that, that’s far better than trying to do it through QuickBooks. A lot of CPAs caught quick mess because that’s the way they come in to us. People bring the flash drive in and the next thing you know, we’re spending hours trying to figure out what they’ve done. So unless you’re going to use it for all those other purposes, I think you’re better off doing it in a very simple way.
CHUCK: Huh! Okay. Now, if my wife isn’t in a position to do it, then I probably out to be hiring somebody to do it.
SCOTT: Yes. And it doesn’t take a rocket scientist, and there’s plenty of bookkeepers out there that are entrepreneurs as well. I think you could hire a fairly bright high school student even to do this. You’re going to record the check number, the check date who it was to, and the amount. And you’re going to put those in various categories, and at the end of the year you’re going to total it all up – the categories all up, bring it in to your tax guy, and he’s going to put it into the tax software, and you’re done.
If you are wanting to use your accounting data to manage your business, then you’ll want to make those totals on whatever frequency is best for you so that you can see. And then as Eric was saying, if you got a particular product you want to track, then you could do that on a separate spreadsheet and integrate it into what you’re going to give to (the) tax guy.
CHUCK: Yeah that makes sense. I did look up GnuCash and it looks like they have versions for Windows and Mac OS as well.
ERIC: Oh yeah. I mean the user interface isn’t really that good, but I haven’t seen any accounting software that has a good user interface, so that’s not really a bad thing.
[Chuck laughs]
ERIC: And one thing I actually found that I do is, I have my accounting program where I put all the stuff in. But then, every month around like the 5th or 6th, I go through and make sure that it’s completely up to date for the previous month. And then I have a spreadsheet that I make at the beginning of the year that basically has a column for each month, and then each row is like an income or expense, and then totals. And I transfer kind of the summer report for the month into that spreadsheet. I’ve been doing that every month for about 3 or 4 years, so now I could basically look at a couple of spreadsheet and see how my revenue was and I can see if I’m forecasting that it’s going to be higher or lower. I mean it’s just simple Math and a spreadsheet, but it breaks it down to like how much profit I have, and I also use that to kind of estimate my taxes, too. And it seems to work really good and it only takes about 15 minutes every month once I have all the data entry.
SCOTT: And Eric’s doing it himself, so he’s got the discipline to force himself to do it every month, and that’s important. Depending on the number of transactions, some businesses need to do it every day because you just don’t want to get behind and can’t remember what this is for and lose the receipt, all that kind of stuff.
CHUCK: Yeah. The thing that I’ve run into is, I mean I have a lot of stuff going on in my business; it’s not just with consulting. I have a podcast sponsorships and I have the Ruby Rogues Parley, which is kind of a community sponsorship, and then I divvy that money back out to the members of that podcast, and things like that. And so it gets a little more complicated than just keeping track of what I’m spending, and then the couple of big checks that come in from clients every month.
And so, for me to do it myself I’ve had to categorize all kinds of stuff because I usually get income from Stripe, which is the way you’re now doing the Parley list – every day I get some money from them.
ERIC: What would actually — because I already have my book sells and they come in every day, every other day, whatever, and they goes to Paypal — what I actually found works the best, because I do my books every week when I pay bills and do personal finance stuff, all basically instead of entering each payment, I will do a summary one like “this week I made X dollars on this book, this week I made X dollars on this other book” and just have one item that I enter in there. Basically I do that and I have a little — I kind of keep track of like “okay this is the last one I entered” so I don’t double enter things, and that works great because it still gets all the numbers in there, but it’s not at the detail that I really need. And if I ever need to see like individual transactions, I just login to Paypal or Stripe and look at the individual ones.
CHUCK: That makes sense.
SCOTT: And Chuck, it sounds like you may need to get somebody to help. Because –
CHUCK: Yeah. I think I’m going to.
SCOTT: To get those kind of complications, you need somebody who’s used to it and have the mindset to be able to separate things properly, and then combine them into one big number. And again, how do you want to spend your time.
CHUCK: Yeah. I’m pretty much to the point where I know I need to get somebody. I fired the firm that was doing my bookkeeping last year, and that’s kind of the boat I’m in. That’s why I’ve come to see you at this because I need bookkeeping done for the last three months of last year.
SCOTT: Ah!
CHUCK: And so yeah, I’ve been trying to figure that out. So I’ll probably wind up hiring somebody to do that, but I wasn’t quite sure how, what I needed to do, how I needed to go about it. I did talk to one bookkeeping company here in Lehi, and they want to do everything through a QuickBooks and they would effectively just do it all, and then there’s some Cloud service that they use that would allow me to have my books on my machine – in my QuickBooks as well. So I’m just trying to decide if that’s the way to go or if I should find somebody else that can just give me a different way of doing it.
SCOTT: Well, what were they wanting to charge you for that?
CHUCK: They were saying $35 an hour.
SCOTT: That’s pretty standard. I mean that’s what I charge. If they’re going to use QuickBooks, that’s fine because they’re used to it and they all know what they’re doing. But, I make a lot of money by training people how to run QuickBooks.
CHUCK: Oh, I bet!
SCOTT: So, you really kind of need to be an accountant to make that program work. You have to understand debits and credits, and what’s going here and what’s going there; there’s a lot of ways to make a mistakes in that.
CHUCK: Yeah it makes sense. Alright, I think we’ve kind of covered whether or not you want to do it yourself and things like that. Another thing that I wanted to get into is just business expenses. I’m kind of curious, how far can you go as far as writing things off? Just to give you an example, last weekend my father-in-law took us all down to St. George for the Homeshow. And while I was down there, I talked to a member of the Homeshow board about putting together an iPhone app for them. And so the joke was “Oh! Chuck is to write this trip off now”. Is that actually the case?
SCOTT: Technically, a business trip needs to be planned and then carried out. But, I would — and I won’t have any trouble at all, Chuck, taking that as a deduction on your tax return especially if the customer comes through in a producer’s revenue.
CHUCK: Right.
SCOTT: Because at that point then, you did business; and the terminology is “ordinary and necessary”. It was ordinary and necessary for you to go St. George to be able to meet this individual to be able to produce revenue. And that’s what you’re on the business of doing – it’s producing revenue. So that being the case, then easily we write that off.
Now, if nothing comes to pass, then I’ll still take it because the potential is there for you to earn revenue. In other words, you were talking to a bonafide customer. A lot of people, they’ll take a vacation and then they’ll drive by a piece of property or they’ll take a tour of a manufacturing facility or something like that, but they don’t end up actually talking to someone that could produce revenue, if that makes sense.
That’s the criteria – ordinary and necessary; and it was ordinary and necessary for you to be in St. George. This is the thought: you only get to take the expense going down and coming back; you do not get to take any meals or motel or anything like that. And the reason for that is this: that you didn’t spend enough time in a particular day to warrant meeting that. You could have driven down seeing him and come back the same day, and that’s what the IRS looks out.
CHUCK: Okay, so if later on I call him up and I say “Hi, I got your phone number from so and so. She said I need to talk to you about doing an iPhone app”, and they say “Why don’t you come down and do a presentation?” So then I go down and do the presentation, the presentation is like nothing to date towards not reasonable for me to drive back, then I can do all the other stuff to claim –
SCOTT: Yeah. Then you can take — then you get the motel stay and you get the meal.
CHUCK: Okay.
SCOTT: And they’ll give you $58 for your meals, whether or not you spent that much.
CHUCK: Okay, so you just claim the pro-diem, you don’t actually expense the meals?
SCOTT: Yup! That’s correct.
ERIC: Yeah and that’s kind of like the trip that I did. I went up to Seattle to see a client, that was actually already a client, and due to date wanted me to come up there as part of the project (and) all that. I’m basically going to write off the flight, the taxi, the meals, I was only there for the day so I didn’t have hotel. But because it was a business trip for the client and it was also I think greater than 50 miles or whatever, it falls under like a lot more deductions than if I just drove somewhere locally.
SCOTT: Exactly, because you get the — well you didn’t have an overnight stay, but your trip up and back is all deductible. That’s an ordinary and necessary expense for you to run your business.
CHUCK: And since he was long enough there or he was travelling long enough to need to eat, is that included then?
SCOTT: Yeah! Absolutely. And the thing is this, you can actually deduct a weekend days as well if your business requires you to be there on a Friday and then stay over the weekend to Monday. That doesn’t happen very often, but if it does happen, they allow you to take the hotel for the Saturday and Sunday nights.
CHUCK: Alright so I’ve got another question for you. I went and spoke at Aloha Ruby Conference in October. Obviously, there were somebody who was not happy with the idea of me going by myself to Hawaii.
SCOTT: Oh…yes.
CHUCK: So I took my wife.
ERIC: Was that your CFO or –
CHUCK: Yeah, my CFO [laughs]. I guess you could call her that. So I took my wife. So what parts of the expenses can I write off by taking my wife? Or does that cause any problems like writing off the hotel room we shared?
SCOTT: It depends on whether — how much your wife participates in your business?
CHUCK: Almost none.
SCOTT: Okay. Then no, you can’t take anything for her. If a wife is actively involved in the business, then obviously you can take it for her as well.
CHUCK: Right.
SCOTT: But if she’s not actively involved in a business, then they’re pretty much ticklers on not allowing that expense.
CHUCK: Okay, so I can’t claim her food, I can’t claim her airfare. What about hotel room? Because we shared the hotel room, but I would have to get it anyway.
SCOTT: Yes you get the whole hotel room.
CHUCK: Okay. I’m just trying to figure out where the line is.
SCOTT: Well, the line is this: What expense would you have incurred had she not come?
CHUCK: So basically my food, my airfare, my hotel room…
SCOTT: Yup!
CHUCK: Right.
SCOTT: Allowed all transportation.
CHUCK: Right. So the taxi to or from the airport, that kind of stuff?
SCOTT: Yup, all that.
CHUCK: So the other thing I was going to ask is, we stayed an extra what, two days…so that we could go up and we could see the Polynesian Cultural Center, and stuff like that; we rented a car to do that. Can we not write off those days?
SCOTT: You can not write those days off.
CHUCK: Including the hotel?
SCOTT: Including the hotel.
CHUCK: Okay. And if we paid for that on the business credit card, then I just reimburse the business? I just write a check to the business and paid it off?
SCOTT: Correct! Yes, that is the very best way of doing it.
CHUCK: Okay.
ERIC: Another thing you could do is like you stayed two days “on”. If you kind of plan some business luncheons with some other attendees, or maybe you try to meet some potential clients, or try do other business work, I know you could like write off like the lunch, at that point. And depending on how much you do, you might be able to write off those other days as kind of the “more marketing and prospecting” side of the business.
SCOTT: They want about 4 hours to be able to say that it was a business day.
CHUCK: Okay.
SCOTT: So, if you have a 2-hour lunch and then you go back to their office for some meetings or whatever or, I don’t know, or if you even just play with the client, let’s say you go surfing with them or something like that, and you spent 4 hours with them, then that’s a business day.
CHUCK: Okay. That makes sense.
SCOTT: The “entertaining clients” is a ordinary and necessary expense, especially on your industry.
CHUCK: Yeah that makes sense. I mean it’s a reasonable part of the sales process.
SCOTT: Yeah! Absolutely. Taking somebody to the jazz to see them play, that’s very important.
CHUCK: Absolutely!
ERIC: Now, here’s the question, though. So say you have like a 2-hour business lunch with someone and then you end up having to do some work for a different client — and because we’re software developers we can work remotely, so we kind of go to the beach or downstairs out of the hotel and work on a laptop for 2 or 3 hours, so we ended at still doing a 4 or 5 hour workday, would that be considered kind of a business day, too?
SCOTT: I think you could get away with that. I’m pretty aggressive, but I would think you’d get away with that. One of the things about tax law, I like to compare it to a football field, and one end is white – the end zone is white, the other end zone is black. The white end zone means that it’s so clear that nobody is ever going to question what you’re doing, and black because it’s so clear that there’s no way you could do what you want to do. A hundred yards in between is all gray, and it just depends (on) how close you want to play to that black end zone. What you’ve just described, you’re down on the 25, an auto guard could disallow that.
But I’m of the mind to say “No, go ahead let’s take that” because you did work that day. And you had to be in Hawaii to do that – to have the 2-hour lunch. Then you decide “Well, I need to do some other work, I can’t go back to my office so I’ll just do it here”. But they could say “Well, you’re not working for the client, you didn’t need be in Hawaii to do that”, then I’d argue back “Well, what’s you’re going to do? I can’t go back to his office”, but it worked. And that’s the whole thing – that you have to look at tax law, it’s being gray.
CHUCK: Yup. By the way, that reminds me. I did want to disclaim at the beginning of the show and I totally forgot, Scott is a tax professional, Eric and I are not. Anything that Scott or either of us say, is purely our opinions and you should go talk to a tax professional, preferably your tax professional, in order to do that. If you don’t have one, Scott’s a good one. But until you talk to your tax professional and they say “do this” or “don’t do this”, we’re not liable for whatever you decide to do on your own. (There you go.) I don’t know if that covers this, but that’s kind of how I feel anyway.
The other thing I want to get into with some of these expenses, and we’re talking about like 2-hour lunches and things like that is, sometimes I just get together with other programmers HERE. Sometimes I’m talking to them about getting leads or things like that, or they’re giving me pointers on marketing or things for my business, sometimes we’re talking about programming. I figure I can write those lunches off because it really does add value to my business –
SCOTT: Absolutely.
CHUCK: But sometimes I’m — I understand that it’s easier to write those off if you have like 2 or 3 meals on ticket so you can say “I bought them lunch, they advised me” kind of thing. What if I just bought my lunch and they bought their lunch, how do I make that stick so that they don’t challenge me on “well, you could have just gone to Burger King on your own”?
SCOTT: Well what you do is you write on the receipt who you met with and a very brief description of things that you discussed.
CHUCK: Okay.
SCOTT: And they have to accept that.
CHUCK: Okay. Is it acceptable for me? Because I usually just take a picture of it with my phone and then in the file name, I put in the date and lunch with. Like I went to lunch with David Brady a couple of days ago, so I put “Lunch with David Brady” or “David and Liz Brady”, is that enough?
SCOTT: That’s enough! They’d say “What was the business purpose?”; they want that as part of the [inaudible]. And that’s why I say “very brief description of things that you discussed”.
CHUCK: So just jot that at the top of the receipt and then take a picture of it?
SCOTT: Yup!
CHUCK: Okay.
SCOTT: And they have to accept that. In my mind, you’ve met all of the requirements of the rules, and you’re playing in the white end zone of that.
CHUCK: Okay.
SCOTT: It’s just this clear as it can get to me.
CHUCK: And as far as travelling over there, I mean obviously I’m not paying for airfare or anything, do I just track the miles to get there and get back?
SCOTT: Absolutely! Yes.
CHUCK: And then I just tell you I travelled so many miles, or whatever?
SCOTT: Yes.
CHUCK: And will they challenge that if I don’t have a mileage lock in my car?
SCOTT: Yes.
CHUCK: Okay.
SCOTT: If you don’t keep a mileage log, they will challenge.
CHUCK: Okay.
SCOTT: Now, depending on the auditor, they as to just how they’ll disallow. If you have a mileage log, you’re playing in the white-end zone.
CHUCK: Okay.
SCOTT: I had a client, he had some sort of program where he could tap in his beginning odometer reading, and then tap in what he did, and then tap in his ending odometer reading each day. I handed that to the auditor, and she looked at it and went “Oh! Okay”.
[Chuck laughs]
SCOTT: She couldn’t say a thing!
CHUCK: Yup.
SCOTT: And (I) had to give the miles because all of the documentation required by the code was sitting in that little device, and I was impressed! I was impressed anyway and take the time to do that, but –
CHUCK: Yeah it makes sense.
ERIC: Yeah pretty [inaudible] our cars will tell a buttoned use say it’s a personal or business trip and they’ll track it for us.
CHUCK: [laughs] There you go. I like that.
SCOTT: Well somewhat what I’m seeing on the ads, it verifies that because they’re talking about having an iPad and the driver’s console. So –
ERIC: Yeah that has caused me problems; I played too many racing games.
[laughter]
CHUCK: So the other question I have is, in July my wife and I are talking about driving down to Texas. And the reason being is that they have LoneStar Ruby Conference, and we’re doing a live podcast episode there for Ruby Rogues. And my sister and her brother both live just outside of Dallas, and the conference is in Austin. So I would effectively drive down and just drop them off in Dallas. So I can claim all those miles, I’m assuming, because I’m driving to a conference, it just happens to be my family in the car with me.
SCOTT: That’s not a problem.
CHUCK: Do I claim the miles? Or do I expense the gas?
SCOTT: Claim the miles will come out a lot farther ahead. You’re going to get 55 1/2 cents a mile; and I guarantee you, you’re not going to get that much if you just report the gas. And the other thing by only reporting gas is you’re not taking into account the oil changes, the repairs, the tires, the depreciation on the vehicle.
CHUCK: Okay.
SCOTT: Registration, insurance, all of that doesn’t come in to that. The mileage amount covers that. Now, if you want to keep track of all those items and report actual, you can do that. But, that’s a lot of bookkeeping; a lot of receipts to save and so forth. That’s why a lot of people just use mileage.
CHUCK: Okay.
SCOTT: (But) then again, you got to have a mileage log. You got to have a mileage log even if you do actual. They want you to prove the ordinary and necessary expense of mileage; where did you go, what did you do.
CHUCK: Okay. I’m going and speaking at a conference is again ordinary and necessary.
SCOTT: Oh, absolutely! No question about it.
CHUCK: Yeah.
SCOTT: And if you stay at your relative’s house, then again getting close to the black end zone, but I don’t think it’s unreasonable to have the family write you up an invoice for staying there.
CHUCK: That’s an interesting thought. I’m probably going to drop them off and go down to Austin and stay in the hotel anyway, but that is an interesting angle on that.
SCOTT: Because if they give you an invoice and then you pay them, they can give to you back the money, but you can take that as a deduction because you would spend that money on a hotel if you didn’t have the family.
CHUCK: Right.
SCOTT: But you have to get an invoice; you got to have some sort of documentation. And there you go!
ERIC: Yeah and if you do that, you’d probably want to keep it under (what is this) $600, so you don’t have to send them a 1099 at the end of the year to all that.
SCOTT: There you go. Yes, very much so.
CHUCK: That’s another thing I wanted to ask about. So 1099s, if I’m working with somebody and they have their own corporation and the corporation is the one that’s invoicing me, do I have to give them a 1099?
SCOTT: If it is a corporation, either S or C; if it’s an LLC or a partnership or a sole proprietorship, then you have to give them a 1099. And a lot of people think that their LLC is a corporation, then that’s not true.
CHUCK: Okay.
SCOTT: The IRS considers it a partnership.
CHUCK: Okay, that’s good to know.
ERIC: Yeah. I don’t remember the form number, but there’s that form that you give a contractor that basically is asking for either social security number or their employer ID. And on there, if I remember (it) right, it has little box that you check off what are you, if you’re like an LLC and if you’re in partnership style LLC or a pass-through LLC. Based on that, I think that’s what she used to figure out if you should send them a 1099.
SCOTT: Yes. And that form is called the “W9″.
CHUCK: Yup. I’ve got those for my subcontractors, and sent them 1099s. But I was just wondering because I had somebody tell me “Well, I have a corporation so you don’t have to send me a 1099″.
SCOTT: Yes and I’m a corporation, you don’t have to send me a 1099.
CHUCK: Right, because you’re an S corp or a C corp.
SCOTT: That’s correct.
CHUCK: And how do you know that? By looking at the 1099, like Eric said I guess.
SCOTT: No! You should have everybody fill out a W9. If they indicated they’re corporation, then you’ve got that as documentation.
CHUCK: Oh okay. So then if the IRS comes and kicks me in the head, I’d say “No, they said they were corporation so I didn’t send them one”.
SCOTT: And that’s exactly right. And if they’re not a corporation, you’ve got documentations saying that they told you they were, and then you’re out of it; there’s no problem. And then they have the problem with the IRS.
CHUCK: Okay.
SCOTT: So that’s what I would recommend as you get it — everybody, they’d chip anything to you to get a W9 form.
CHUCK: That makes sense.
ERIC: And the reason is, if you think about it, if you had a sent 1099 as a corporation, then you’re going to have to send it to Staples, to the post office, to your electric company, everyone would have to be sending out. I think there are some laws that didn’t go through, but people were talking about how it all corporations would have to send that and how much of like a burden on the economy would be just to deal with that paperwork. But that’s kind of the logistics behind that.
SCOTT: Exactly.
CHUCK: Yup.
SCOTT: And that idea did by the dust, and I don’t think it’ll get resurrected. I think what they’re after is the small corporations. So if it does come back, it will be — if your revenue is under a million bucks or something, then you’ve got to issue 1099. But it makes no sense to be issuing 1099s to Staples and Questar and all these folks.
CHUCK: Yeah that seems a little silly to me, too. Are there any other types of expenses that we haven’t talked about?
SCOTT: Well I think an important one is the Health Insurance especially in this day and age where it’s so expensive. Health insurance, you can write that off through your business up to the amount that you’re paying self-employment tax on. So in other words — let’s just take my business as an S corp for instance — if I pay $10,000 a year in health insurance and I take a $40,000 W2, and I make a total of $80,000 (these numbers aren’t real so I’m not giving away anything), but I don’t pay self-employment tax on my full process — I think everybody knows that — but I’m only paying them about half. So if I pay, if I take a W2 for $40,00, then my $10,000 of health insurance premiums becomes an expense to my S corp – that’s a significant expense. The thing I like about that is that it adjusts my adjusted gross income down, which is important factor in tax code law, etcetera, and I’m not having to report it on my Schedule A, which is the itemized deductions, and they’re subject to 7 1/2% of the adjusted gross income. So I’m getting the full deduction rather than just partial.
You can do those same thing through an LLC or as a sole proprietor, depending on how much you take and pay self-employment tax on. The LLC, which will end up doing as just reporting it on a different place on your personal tax return. But it is a very good deduction for the entrepreneur.
CHUCK: So my question then is, both my wife and I have — well she’s on the family plan with the kids and I’m on my own health insurance plan because of my health problems, I’m diabetic — so can I pay both of those out of the business?
SCOTT: Yes absolutely!
CHUCK: Even though the policies are in our names and not in the business?
SCOTT: No, you’re going to have to move them to the business name. Your business is going to have to buy the health insurance. And you may want to look into that because if the business buys it, you may get a better rate than if you buy it personally.
CHUCK: Wouldn’t I need to get a group policy at that point, though? So we’d still be in the same boat, buying two policies, one for me and one for them.
SCOTT: I’m not sure about that. I don’t think so. I think you can have two policies, and you don’t have to form a group.
CHUCK: Okay.
SCOTT: And that’s a question for you insurance company.
CHUCK: Okay.
SCOTT: But Chuck, I would strongly advise you to get a whole of an insurance guy or whoever has helped and sold you these two policies and tell them what I just told you because there’s a lot of tax savings with it.
CHUCK: Okay. I’ll look into that. And yeah, we’ll see what we can work out and then maybe I’ll just come back to you and say “They say that it’ll cost me this much. How much of that save me on my taxes?” and we can figure out if it’s worth doing.
SCOTT: Right. But I have found that business policies are cheaper than individuals.
CHUCK: That makes sense.
SCOTT: So let’s see how it comes out for you. But the bottom line is this: once the business buys fully insurance or pays the insurance premiums, then you get to take that as an expense within the company and not on your itemized deductions.
Now, another one that people can take is what’s known as “business use of the home”, where you look at the square footage that you’re using for the production of your income. If it’s just a bedroom, then you just take the dimensions of that bedroom. I have a client that uses his entire basement for his business, and he does all his production down there; he produces jewelry. And you take the total square footage as being used for the business against the total square footage of the house, and come up with the percentage. Then you’re able to take that percentage of your mortgage interest, property tax, insurance on the house, and utilities, as an expense in your business. That reduces then the amount of profit that you generate, reduces self-employment tax, reduces overall income tax.
CHUCK: So for the utilities and everything else, how do we work that out? Does the business just cut a check for that? Or do we just itemize it on our taxes?
SCOTT: No. There’s a form called an 8829 and you just report on that form what your mortgage interest was, what your property tax was, what your utilities were, and then the form takes the percentage and applies it. That’s all you have to do; you do not have to reimburse yourself for any of this.
CHUCK: Okay.
ERIC: And you can also get some utilities, too.
SCOTT: Pardon me?
ERIC: You can also, at least an orging, get some utilities to like say my office is 10% of the house, then 10% of the internet, and of water and all that, we can also write off.
SCOTT: Exactly. Yeah.
CHUCK: So the other utility I guess that we use that’s not tied into the house is my cell phone?
SCOTT: Yes. And the cell phone, generally you can expense all of it except for what you do for personal use on the cell phone. And the audits I’ve been in, generally they say at least 10% of what you do is personal, and I would tend to agree with that. Unless you’re carrying a separate cell phone for your personal use…
CHUCK: Oh no [laughs]. That just sounds like a asshole to me.
SCOTT: You just cannot get away from taking personal call.
CHUCK: Right.
ERIC: Well what I do is, I have a business line, it’s a voice over IP. So all of that, I basically pay for on my business, and I have a phone here. So the hardware is for my business. And then on my cell phone is I have an app that lets me log into that account. So if I get a business call, it comes through that app like a second line, and so I actually have it completely isolated. So I can write off all of that phone usage, but I don’t write off my actual cell phone line because that’s just purely personal. And so, I have it separated like that so it was pretty easy to bill.
SCOTT: Wow! That’s fantastic!
ERIC: And then also my cell phone is actually a mobile device used for testing websites and web applications. So it’s actually a business expense to buy a new cell phone.
SCOTT: Yeah that’s fantastic! And that’s all ordinary and necessary.
CHUCK: Yeah my business paid for my iPhone5 because I’m using it to learn how to write iPhone apps so –
SCOTT: Ordinary and necessary.
CHUCK: Yup. So what you’re saying is, since we have two lines, then — and Verizon will break down like how many minutes my wife used and how many I used — so I can sit down and I can say “Okay, well it looks like I used about 60% of the minutes, and 10-20% of that is [inaudible], I’d like 48%. So 48% of our bill is business?
SCOTT: You got it!
CHUCK: And then, do I need to reimburse myself for that? Or do we claim it at the same way as the house stuff? Or what?
SCOTT: Well, is the Verizon bill in your name or in the business name?
CHUCK: It’s in my name.
SCOTT: Then the way I do it is, I write a check out of my business account. You’ve come up with 48%, so I would write a check out of my business account for 48% of that bill, and then I would write another check out of my personal account for 52% of that bill, put both checks in the same envelope, and mail it. And that makes it easy because now your business has paid for its portion, and your personal has paid for its portion, and you don’t have to do anymore accounting. Writing yourself a check is fine, but then you got to put it in the bank and all that kind of stuff; you do it this other way, then it just — the bill gets paid, and they’re fine.
CHUCK: That makes sense.
ERIC: And it’s also pretty clear trail because Verizon or whatever would encash the check and it would have shown up as Verizon cash it in your business bank account.
SCOTT: Yup!
CHUCK: Can I go online and pay part of the bill with one card, and part of the bill with another card?
SCOTT: Absolutely!
CHUCK: Work the same way?
SCOTT: That’s the new technology. I’m going with the old technology because I’m a little over than you, Chuck.
CHUCK: [laughs] Not that much over, but okay.
[Scott laughs]
SCOTT: But the concept is, pay for the business stuff out of your business account, and pay for the personal stuff out of your personal account. Now you go to Walmart and you buy some office supplies, you got the receipt and you’re going to break out personal from business. And at that point, then yes, the business should reimburse your personal.
CHUCK: Yeah usually when I do that, I just put two piles on the counter. Catering this one up, pay it with the personal card; bring this ones up, pay it with the business card –
SCOTT: Well now that’s even better. I’ve never thought of that. That’s even better.
CHUCK: Yeah well then I don’t have to do anything when I get home except for take care of one receipt.
SCOTT: There you go.
CHUCK: That’s me being lazy.
SCOTT: No, I think that’s being very efficient, in my mind.
CHUCK: Alright. So, I’m trying to think –
SCOTT: I’m going to do that next time, I think.
[laughter]
CHUCK: Yeah. I’m trying to think of anything else. So the internet, I don’t know if there’s a good way of measuring internet as far as how much the business uses versus personal uses.
ERIC: Time.
SCOTT: Yeah you could do time. If you use than 80/20 — it just depends on how much you do use it for personal use — but if you did an 80/20, you’d probably be okay.
CHUCK: 80% business, 20% personal?
SCOTT: Yeah.
CHUCK: Yeah I guess in our line of work, that would be reasonable. I’m only on the internet like all day.
SCOTT: See?
[Chuck laughs]
SCOTT: And you could make an argument if you want to get down on the 25 toward the black end zone. You could make an argument that “I’m going to take all of my internet expense because I have to have the internet for my business. I may use some of it for personal use, but I would have had to buy the internet anyway”.
CHUCK: Yeah.
ERIC: That’s true. And there’s another thing like, as I’ve mentioned in the chat, like I have stuff hooked up. So if it’s 2 am in the morning, then I’m on personal time. If I get a call or whatever, because the server’s down, it immediately goes to business time. And so having that, I have to have the internet there in order to tell me to get up and turn the server on for the business. I could see that also working for devs, which should be do a lot of system administration or dev op type stuff.
CHUCK: Yup. So are there any other categories of things that we need to talk about for taxes?
SCOTT: Well the only other thing is on meals. We talked about this a little bit, make sure that you keep — you have the individual’s name and the business purpose. And then remember that you only get half, you only get to take half of that expense.
CHUCK: Okay.
ERIC: Isn’t it half of it like within 50 or 75 miles, but if it’s longer than half like as part of the travel, it goes under a different category?
SCOTT: Okay, that is — what you’re looking at is meals and entertainments; you take the 50% deductions. If you travel, then you use the per diem for those meals which you have to incur because you’re on the road.
ERIC: Ah, okay.
SCOTT: If you entertain somebody while you’re on the road, it’s a 50% deduction. And technically, you should reduce the per diem that you take by the amount of your portion of the meal, say you take somebody out to lunch.
But if you’re having breakfast and dinner by yourself, then the per diem comes into play. But even using the per diem — they only allow 50% — so that by using the per diem if they half that, generally you spend less than that anyway. So the per diem is a pretty good deal.
But I’ve had doctors go to conferences and they’ll spend $100-$150 on a meal and it only allowed to take the per diem, they can’t take the actual on that point.
CHUCK: Okay. So if I am travelling then I want to pay for the meal with my personal card, and then claim the per diem?
SCOTT: I would still pay for it with your business card. And then when we come in to do your taxes, then we will ignore the amount you spent on business meals when you were travelling, and use the per diem.
CHUCK: Okay.
SCOTT: So that accounting gets a little creaky; you have to kind of keep a separate account for meals while you’re away. Now, being away — and this maybe where you’re telling from, Eric — if you’re having to drive more than 50 miles and stay overnight, then that’s all deductible under the normal rules, and we’ve talked about those. But let’s say you’d have to go more than 50 miles and have lunch and then come back, you can take that lunch. Does that make sense?
CHUCK: So you can deduct the entire cost of the lunch? Or just half?
SCOTT: Well if it’s just you, you can deduct the entire cost of the lunch, but you have to be away from home; away from your tax home.
CHUCK: Okay.
SCOTT: And that’s what I comes in. And that’s maybe where Eric was thinking on this 50 miles thing.
ERIC: Yeah. I mean I got a recommendation from someone else who’s freelancing. He basically talked about how, depending on how far you travel, it will change the amounts. If it’s like the same town you’re in versus going 50 miles or 75 miles or whatever, out to go meet someone.
SCOTT: Right.
CHUCK: Alright.
SCOTT: The idea is this: you’ve left your tax home and at that point then, you’re away from home, and the rules change that point and if you’re within the radius.
CHUCK: Alright. Are there any other areas that we should talk about? We’re getting toward the end of our time here, but I want to make sure that we’re thorough.
SCOTT: No, I can’t think of any other — the only other thing that I like to recommend is that you include every expense you can think of, no matter how remote. I have a daughter that teaches piano. Because she’s in the music business, when she buys a CD even though it’s unrelated to her piano teaching, she still can deduct the cost of that CD. And so, what I like is that you’d give me every expense that you can think of, and then let me tell you “No, you can’t take an expense” rather than for me to try and guess what expenses you might have.
CHUCK: Okay.
ERIC: Another example of that that I do is, any business or programming book I buy basically becomes a deduction. I think the actual term in organ is — it’s actually like a reference library that I use for my business.
SCOTT: There you are. I don’t want you subscribed to software that you need (to) pay for or whatever; and it may not be directly related to what you do but it’s in your industry, then you can deduct that. So obviously, you deduct QuickBooks if you bought it. But maybe you want to look at a software, a tax software of some sort, that’s kind of outside the range of what you do but it’s related, then after I would take that.
ERIC: Or like Chuck was mentioning, he is getting into iOS programming for like the iPad, so buying iPad software to see, not only to use it for personal stuff, and maybe to see how the user interfaces, how it works, all that stuff. Would that work?
SCOTT: That’s a better example. Exactly right.
CHUCK: That’s actually what I was going to say is. I buy a game for my iPhone, and sure I’m buying the game because I want to play the game, but conceivably I could be buying it because I want to get ideas for things that I could put into my own iPhone apps.
ERIC: Yeah. So you have a line item for ‘kill a bird’ –
CHUCK: Angry Birds…
ERIC: That one! I don’t even play it!
[Chuck laughs]
ERIC: I just feel the stuff thing is in the story end like “this is funny”.
SCOTT: That example is parallel to what I’m saying about my daughter. She buys that ACDC CD, it doesn’t having to do with her piano teaching, but it is music. So it’s within her business, it’s within the realm of her business.
CHUCK: Well between you, me and the wall, the microphone, and anyone listening to this episode, my iTunes account is actually tied to my business account for that reason.
SCOTT: Okay! There you go.
CHUCK: Alright well, let’s go ahead and wrap this up. Thanks for coming, Scott.
SCOTT: Oh you’re very welcome! Thanks for having me.
CHUCK: (It’s) been some great great discussion and some good rules of thumb for some of the stuff. If people want to hire you to do their taxes or to get financial advice, how do they get a hold of you?
SCOTT: My email address is Scott@CPASweeney, hopefully everybody knows what a CPA is. And Sweeney is spelled S-W-E-E-N-E-Y.com. And my phone number is 801-756-3394, and I am looking for new clients and I’d be happy to discuss with you your situation at no charge, then we can give you an idea how much it might run you to use my services. I have bookkeeping services; I have payroll services, as well as the tax services that we do.
CHUCK: Yeah. And I just want to jump in here and say that I can’t recommend Scott highly enough. He’s really easy to work with, he has explained things to me that I asked about that I may or may not necessarily have needed to know, but just so that I had the peace of mind. And he’s very approachable and he’s super knowledgeable, which obviously otherwise I wouldn’t have brought him on the show. But I just can’t say enough good things about him, so if you’re looking for a tax person, you need somebody who you can deal with and be happy with the service you’re getting, then give Scott a call or email and let him know that you heard about him here.
SCOTT: Well thank you very much, Chuck! I appreciate that endorsement.
CHUCK: Alright. Well let’s get into the picks. Eric, what are your picks?
ERIC: One thing I watched this past week was a TED Talk, it’s called “Agile Programming for Your Family”. It’s a pretty inch talk, I think it’s like an 18-minute one, but if you have a family, if you’re married, dating someone, or you have kids, it’s actually a pretty decent idea; it’s actually stealing some of the Agile Programming Practices and putting into like the family unit and the family dynamics. So I’ll (put) the link in the show notes; it’s interesting. I’m probably going to try it with my family.
CHUCK: Awesome. Alright I’ll go next. The first one I’m going to pick is “App.net”, App.net is kind of a Twitter alternative; up until recently has been a paid-only service. But apparently, they’re giving out invitations to their paid members. So I’m using it and I’m not paying for it because I got this invitation. So if you know somebody who’s using it (and) you want to try it out, then let them know. An App.net is over at App.net.
One other thing I want to pick, I think — let me check and make sure I didn’t pick it last week before I pick it. Yeah I did, it was the “Anker Battery Pack”. But it was so nice to have. So I’ll just reiterate that pick. It was so nice to have it at the Parade of Homes, charged up like 3 different phones throughout the day, and it was still holding half-empty. So I figure I can get away with quite a bit there; charging up my video camera and stuff as I go to different conferences. So I’ll have another link put into the show notes if you want that.
Scott, do you have some picks for us?
SCOTT: Let me say this: I’m not even on Facebook yet, so can that suffice? I’ll pick for the Facebook.
CHUCK: [laughs] Sure!
[Scott laughs]
SCOTT: I’m sorry; I just don’t have anything, thanks! [laughs]
CHUCK: No, it’s fine. Totally fine. I think you’ve given us plenty to think about anyway. Anyway, thanks for coming again!
SCOTT: Alright! You’re very welcome!
CHUCK: We’re going to wrap the show up and we’ll catch everybody next week!
SCOTT: Okay. Thank you!
ERIC: Take care!
SCOTT: Good bye!
CHUCK: Bye!
