Well, I’m thrilled. Taxes are not necessarily people’s favorite subject, but it is an important subject, and you’re so great about how you share this stuff, that people are just going to love getting all the information that you are going to share with us today.
Well, saving taxes gets me excited.
Absolutely. And it should get all of us excited, right?
That’s right. Keep more of what you make.
Exactly. Let’s talk about the types of tax write-offs that business owners should be looking at.
Well, they should be looking at basically anything that they do in relation to the business that’s going to be generating revenue, they should be carefully looking at to make sure that it is an actual deduction, and that they’re not overlooking anything. The best way to do this is to be communicating with your CPA or accountant on a regular basis.
Because face it, if you’re in business, you should really be making your money doing what your business does, and there are certain things that are probably less of value things that you can outsource to somebody, and the accounting is probably something that you should not be doing for a lot of different reasons.
If you communicate with your CPA, you’ll both figure out what you should be deducting and what you should not be deducting.
Okay. I think that is great advice, because it feels like this stuff changes so often that it would be a full time job just trying to keep up with what’s allowed, what isn’t allowed, what’s new, what’s gone.
Exactly. In my office, I have a bone saw so if I wanted to do an amputation I probably could. Would I do it right? No. Just because you can do it and just because you can buy it on Amazon doesn’t make it a good idea.
Well, that is for sure, and I’m not even going to ask you why you would have that. Let’s talk about red flags, because I think this is something that really trips people up. They don’t want to do things that are going to cause red flags, but they’re not really sure what those things are, so what do we do to make sure we’re not sending flairs to the IRS that we want to be audited?
Here’s the thing, nobody wants to be audited, right?
So what you should do is you should document what you’re doing. When you’re writing something off, you should obviously document that it is a business expense, but you should not be scared to take a deduction if it’s a legitimate deduction and you’ve documented it, just because you’re worried that the IRS is going to audit you.
That being said, if you make $20,000 a year and you say you’re donating $15,000 a year, that’s probably a red flag. But most people when they think of red flags, they’re not thinking about stuff like that. They’re thinking about, “Oh, my God, I can’t take a home office deduction because it’s a red flag,” because they read that, I don’t know where, many, many years ago.
If you do it and it is a business expense and you document that it is a business expense, communicate with your accountant, and don’t worry about it. Because most people aren’t doing those glaring things that are going to jump out and provoke an audit.
Right, but let me ask you a question about having a home office. Is it that you actually have to have an office in your home?
Yes. What you need to have is you need to have a space that’s not used for anything else, but a principal activity of your business. That activity can be answering emails, it can be paying bills, it can be making phone calls, and you have to spend about 15 hours a week doing that out of your home office. Most business owners that I know spend more than that working from home. They probably spend an average of two hours a morning most people, just answering emails and doing different things. As long as you document it, and you use that space for nothing else, you’re okay. Now-
Okay, so it couldn’t be your dining room table?
Exactly. It’s not little Johnny’s bedroom. It’s got to be a space that you don’t use for anything else.
Okay. Thanks for that, because that really trips people up.
Yeah, and that opens up a lot of opportunities. In the past, it opened up the opportunity for a home athletic facility, which is gone. As of the new tax rule, that’s out the window, which was interesting, you could have a pool which was your home athletic facility, or your home gym. For some reason the government decided to do away with that, but that’s okay. They gave us-
They also gave us some other things, so that’s good. Let’s just say your office is 5% of your home, then you get to deduct 5% of your home interest, 5% of your real estate taxes, 5% of your utilities, your repairs, your maintenance, and stuff like that. Which may not be a big number, but it also opens up the opportunity for now what was once a commute is no longer a commute. It’s one location to another location.
Also, under the new tax bill, with the limitations on real estate taxes and state income taxes deductibility, you may now move some of those taxes to the business expense side where you are going to lose them. Like I said, that’s not something that’s going to save someone $20,000 a year in taxes, but it might be a start.
Right. Okay, you mentioned interest on mortgage, right?
Okay. So, talk to me some about interest on all kinds of loans. Can you write it all off?
No. We have personal interest, which is non-deductible. Then we have our home mortgage interest, which is deductible, and it used to be up to a million dollars of initial, what they could indebtedness, and then another $100,000 from home equity loan. But they did away with that. Now they’ve said it’s, for new loans, for mortgages, it’s $750,000 is the limitation. Home equity loans are now no longer part of it, but what the bank calls a home equity loan, and what the IRS considers home equity are two different things.
If you take out a second mortgage which the bank calls a home equity loan and you use those funds to rehabilitate or substantially improve your home, the IRS considers that initial indebtedness and it is deductible up until the point you hit $750,000 of mortgage. On a business side, there was a lot of talk about interest not being deductible anymore, which is true.
But it mostly affects super large companies, so the typical small business is not going to be affected. They’re going to be able to operate and deduct the interest expenses that they have associated with different various business loans. For the most part, people will not be affected by that unless they’re a super big corporation, and all they need to do is communicate with their CPA and they can figure it out.
Okay. You said a second ago, or a minute ago, about new mortgage loans. Does that include refinancing or not?
We haven’t seen, at least I have not seen, the revenue procedures related to that. But yes, that’s what we believe, if it’s a new mortgage, and it’s refinanced, but that’s something that I haven’t seen the final regulations be published by the IRS.
Okay, great. Thank you.
If that comes up, I would definitely communicate with your CPA to make sure.
Okay. Now, you said before about you’re just making sure that you document it, so what are the kinds of documentation that a business owner needs to be able to provide?
Let’s talk about the home office. How about pictures of the space? And then, how often are you using it? I mean, it’s easy to log into the internet from your home, so that’s documented in itself, that you’re doing work from home. If you’re doing, let’s just say leasehold improvements you want to show in your office, or maybe your principal other place of business, you want to make sure that you’re documenting what you’re doing there.
If you’re spending money on marketing, obviously you want to have your invoices to document that, and the payments, whether it’s credit card or a check. That’s like normal course of the day for a business owner. Take those receipts, if you don’t have a bookkeeper, create a big envelope and stick ’em in there.
Okay. That’s great.
You need to keep books and records, which means somebody needs to be doing the bookkeeping. They should be doing that throughout the year, and there’s a lot of reasons for that. Number one, it’s a great way to run your business so you can compare what you’re doing month to month and year to year.
Exactly. I keep stuff by month, because otherwise it’s just a whole bunch of stuff.
Right, and ultimately if you’re talking about documentation, yeah, that’s great. Some people can’t do that. They stick it in an envelope, but as long as they’re writing their bills, and they’re keeping their books updated on a regular basis, like monthly, that gives them a lot of insight to what’s going on in the business. Because they may think they’re doing great, and it turns out they’re not doing as good as they thought. Maybe there’s a lot of cash coming in, but they have a lot of expenses that they haven’t paid yet.
Yep, exactly. It really does give you that picture of really where you are.
It’s the old saying, knowledge is power.
Right, and you don’t want to get three quarters of the way through the year and discover that you’re nowhere near where you thought you wanted to be, or were going to be, and now it’s sort of late in the day.
Exactly, and if you have goals and whether they’re revenue goals or net income goals, or whatever those goals are, if you’re tracking your business income and expenses, that’ll give you a better idea of where you are compared to where your goals are.
Yep, exactly. Okay, thanks for saying that, because I really believe in this 30 day monitoring thing.
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