Topic: Member Workshop: Frequently Missed Business Deductions
Host: dkennedycpa Date: Wednesday 08/13 Time: 10:00 a.m. to 11:00 a.m. Pacific time Location: Workshop Board
Description: If you’ve started a new eBay business this year, this is one workshop you won’t want to miss. Most new business owners are so busy setting up his or her new business that deductions gets missed. Please join best selling-author and CPA Diane Kennedy to learn about the 10 items that most people forget, helping to ensure you get the most deductions possible.
Hello. My name is Diane Kennedy. I’ve been a CPA and Tax Strategist for over 25 years. My specialty is working with small business owners and real estate investors. My tax education company, Tax Loopholes, LLC, teaches people through books like Tax Loopholes for eBay Sellers, tapes and seminars on how to take advantage of the legal tax-reduction strategies that available to everyone. Please remember that laws and practices vary from state to state and if tax, accounting, legal and other specific expert advice is required, the services of a professional should be obtained. Diane Kennedy, CPA www.taxloopholes.com
When the government wants to promote a specific public policy it often uses tax breaks to get the public interested. After all, who doesn't want to pay less taxes? There are two things that the government wants you to do: (1) Start a business and (2) Invest in real estate. So, to encourage you, the government offers all kinds of tax breaks. Because these tax breaks are sponsored and created by the government, they're safe, legal, and meant to be used. Diane Kennedy, CPA www.taxloopholes.com
eBay has generously set aside time for us to present these business-related sessions designed to help you make more and keep more money. We have a new workshop every month. Mark your calendars! Diane Kennedy, CPA www.taxloopholes.com
Today we're talking about one of my favorite topics: What is a deduction? I love to play the game “Can I Write That Off?” at seminars for a couple of reasons. First, because participants have a ball shouting out the names of all manner of things that we then group-think our way through. The second reason I love playing the game is that it usually energizes seminar participants into approaching the idea differently. Instead of asking “Can I write this off?” we move into the more powerful question of “How can I write this off?” Diane Kennedy, CPA www.taxloopholes.com
Think about it for a minute. What’s the easiest answer for someone to give when you say “Can I …?” If you're like me, it’s probably “no” (especially when it concerns your kids, the roof and a new car). Now, if someone was to come to you and ask, “How can I?” the message changes. Instead of asking permission, you’re now asking for a solution. Try this around your house, and see if you notice a difference. Then, try it on the professionals and other people you do business with. (But don’t tell your teenagers, they’ll drive you crazy with this one.) Diane Kennedy, CPA www.taxloopholes.com
Just before we get started, I want to tell you about this month's free offer. The first 10 people who post on this workshop will be entitled to receive a free copy of our audio download, 100 Loopholes in 100 Minutes. We'll be tracking posts throughout the workshop and will announce the recipients at the end, together with instructions on how to get your free download. Diane Kennedy, CPA www.taxloopholes.com
When it comes to deductions, there are a couple of rules to keep in mind. The expenses must be “ordinary and necessary to the production of income.” The door is wide, and it’s that way for a reason. The IRS has plenty to do already, and rather than us having to go to the IRS and say “Can I …” millions of times a year, they’ve chosen to let us ask ourselves, or our CPAs, “How can I …” (and then decide if they like our answer). Diane Kennedy, CPA www.taxloopholes.com
Something else to remember is that many business deductions, especially when you’re self-employed or a business owner, can easily cross over into your personal expenses, and vice versa. Personal expenses are paid for with after-tax dollars, but if those same expenses can be recategorized, in whole or in part, as business-related, they move “above the line” and become pre-tax expenses. Yes – you still have that bill to pay each month. But when you pay that expense with pre-tax dollars, you reduce the business’s taxable income, which results in lower taxes for the business (which will pass through to you). At the same time, you increase your own income, because every dollar you don’t pay to the taxman winds up in your pocket. Diane Kennedy, CPA www.taxloopholes.com
One of my favorite stories about how to turn an after tax expense into a before tax deduction comes from a colleague of mine. I wish it was my story, but it’s not! Diane Kennedy, CPA www.taxloopholes.com
One day one of his clients came to see him. “How can I write off a yacht?” he asked. “Well you can’t,” his CPA said. That’s because the client owned a manufacturing plant and there was no way that they could justify a yacht purchase for a manufacturing plant. It’s not like they were handling the shipping via luxury yachts. Diane Kennedy, CPA www.taxloopholes.com
His client persevered. “No, I want to do this. How CAN I?” The CPA then told him what it would take. He’d have to have a business purpose for the yacht. In fact, probably the best thing he could do was actually have a yacht business. He could sell yachts and use the one yacht as a demonstration of what it’s like to have this wonderful way to relax. Diane Kennedy, CPA www.taxloopholes.com
His client said, “I’ll do it.” Now the CPA was worried. He stressed that his client would have to have a legitimate business. He’d have to have sales people and actually sell yachts. “No problem,” was the response. Diane Kennedy, CPA www.taxloopholes.com
And his client went on to buy the yacht and start a yacht business. He did so well, probably because he was passionate about it, that he ended up selling the manufacturing company and just selling yachts for a living.
Oh, and yes, he got to write off the yacht. Diane Kennedy, CPA www.taxloopholes.com
In a lot of my live seminars I tell that story and then ask people to tell me what their biggest personal expenses are that they would love to write off.
But there is a warning - Once I did a seminar in Reno, NV and a man in the front row shouted out, “My bed.”
“Huh?” I replied, not so eloquently. Diane Kennedy, CPA www.taxloopholes.com
He went on to explain that he had bought one of those expensive fully adjustable beds and now wanted to write it off. We were in Nevada, but still I just didn’t think we needed to go into discussing possible business purpose applications and just told him that some things you just can’t write off. Diane Kennedy, CPA www.taxloopholes.com
With all of this in mind, don’t be afraid to get creative! Read through the workshop material, and then start throwing out your own suggestions. What are you spending lots of money on each month, and would you be interested in knowing how to write it off?
Here are some easy ones: Diane Kennedy, CPA www.taxloopholes.com
Computer. We’ve all got one, or two (or eight) computers kicking around. And, there’s no denying that a computer is an essential part of your business. After all, we wouldn’t be having this conversation if it wasn’t. So, your computer is deductible. Diane Kennedy, CPA www.taxloopholes.com
Does that mean you have to use it only for business? No! Does that mean you have to buy a “bare-bones” model, that doesn’t do more than surf the web? Again, no! It’s okay to buy a quality computer, and to use it outside of work. However, if you were to go out and buy the most amp’d-up gaming machine ever, load it to the gills with RPG software, and use it for game-playing 95% of the time, you may potentially have an argument with the IRS. If you are a heavy gamer, you may want to buy some of the hardware upgrades with personal money, rather than business money. Diane Kennedy, CPA www.taxloopholes.com
OR …… you can begin to think outside the box and ask “How can I buy the most amp’d-up machine ever, load it to the gills with RPG software, and use it for game-playing 95% of the time.” In THAT case, you would need to come up with a business purpose for the additional hardware and software costs. How about writing video game reviews for your local paper? How about creating a blog where you review video games? Drop in some affiliate marketing ads, for gaming-related businesses, and you have a profit-motive. How about starting a forum where gamers can get together and talk about gaming? Diane Kennedy, CPA www.taxloopholes.com
How about contacting your local video-games store and asking if you can post reviews in the store somehow? How about offering your services around your neighborhood as a “game coach” who can coach younger players into the proper use of their controller (or perhaps prevent their parents from hurling the Wii controllers through the TV screen while playing video bowling). All of these ideas could lead you to a real, honest-to-goodness business venture … and allow you to write off not only your amp’d-up computer … but all of the software, too. Diane Kennedy, CPA www.taxloopholes.com
Cell Phone. This is another item that most of us believe is a “must have.” (Yes, I know it’s not all of you, but for the sake of argument, play along for a few minutes). Having the ability to communicate with the outside world is another essential feature of a business. A cellphone is a perfectly legitimate business expense, for you. If your spouse, friends, children, parents, etc., help you in your business, then it’s also perfectly reasonable for you to need to stay in communication with them – meaning they can have a cellphone, too. Diane Kennedy, CPA www.taxloopholes.com
I’ve had plenty of people ask me whether you should track your business to personal use and only take a portion of your monthly bill as a deduction. That’s actually an interesting question. If you buy a monthly plan, you have XXX minutes that you pay for, whether or not you use them. One argument says that as you’re going to pay for the minutes anyways, you might as well use it. Diane Kennedy, CPA www.taxloopholes.com
Another argument says that if your daughter spends 10% of her time on business-related calls and 90% of her time sending out 2,000 text messages to her friends each month, you might want to have her pay for the text-messaging add-on personally. Diane Kennedy, CPA www.taxloopholes.com
Following the same logic as with computers, you don’t have to buy the cheapest phone, or have a plan with few or no features. I have a friend who made a living for a year or so by haunting pawnshops and selling his finds. In his case it was perfectly reasonable to have an advanced phone, with the fastest web browser possible, so he could look up items he found to see if there was a market for them BEFORE buying them. He recently bought a new iPhone and was astonished at how much faster the web browser was. Diane Kennedy, CPA www.taxloopholes.com
A Home Office. Most of you who are regulars know that you can take a home office deduction if you have a dedicated space in your home (preferably a spare room, or something with a door) that you use primarily for business. The deduction is a pro-rata amount (the ratio of the square footage of your home office to your overall home, i.e, a100 sq ft room in a 1000 sq ft house would be 10%) of the expenses associated with the home. That means property taxes, mortgage interest, homeowners insurance, garbage and water bills, heating, electricity, 10% of the costs to put a new roof on, 10% of the costs to have the lawn kept up, 10% of the cost to resurface the driveway, etc. Diane Kennedy, CPA www.taxloopholes.com
I still can’t believe how many people tell me their CPA or tax preparer has told them a home office deduction is an audit red flag. That rule changed 11 years ago, and in fact, Congress is now considering a change to the rules to allow everyone who has a home office to take a standard $1,500/year deduction. That’s how serious the government is about encouraging its citizens to begin businesses. Diane Kennedy, CPA www.taxloopholes.com
Inventory Storage. Here’s something extra relating to your home office. You are also allowed a space for inventory storage. This is a nice little loophole for sellers. Unlike your home office, inventory storage space doesn’t have to be exclusive use. So, you could store inventory in your family room, a spare bedroom, part of your garage, and so on. Measure the space your inventory storage takes up, and add it to your home office space, to increase your deduction. Remember to write off any shelving, too! Diane Kennedy, CPA www.taxloopholes.com
Remodeling. If you need to remodel a room to create an effective home office space, you can deduct those costs. So if you want some shelving, or a computer desk alcove (closets make GREAT spots to create a permanent computer desk) you can deduct all of those costs. You can even deduct the costs to decorate the office – paint, wallpaper, carpet, flooring, furniture – even the art you hang on the walls can be a deduction. If you love art, the question, “How can I write off pieces of art?” just got answered. Diane Kennedy, CPA www.taxloopholes.com
Gas. At $4.xx per gallon, no matter where you live, you’re probably looking for ways to write off your gas. Well, as a business owner, only the first commute of the day is not deductible. If you have a home office, that commute can be you walking down the hall. Once you leave the house for your regular office, you’re able to track your mileage and deduct it as a business expense. Even better, you can reimburse yourself for the miles (if you’re using your own vehicle), and the money comes to you as non-reportable, tax-free income. Diane Kennedy, CPA www.taxloopholes.com
The current reimbursement rate is 58.5 cents per mile. We worked it out on my Forum, over at TaxLoopholes.com – as long as your vehicle gets more than about 8-10 miles per gallon, you will make a profit by driving! A commute of 25 miles per day will give you a deduction of $500 per month. Diane Kennedy, CPA www.taxloopholes.com
Even if you have a W-2 job, and commute from your home, there may still be ways to write off your travel. Consider this: You own a home business. You also commute to work you're your employer) every day. To promote/advertise your home business you have “drop cards” printed. A drop card is a business card sized ad with information, a link to your website, and voice mail. You bundle 10 of these cards in a baggie. You have tape in your car. Diane Kennedy, CPA www.taxloopholes.com
On the way to work, you stop at a popular coffee shop, and tape a baggie (your promotional kit) on an outside newsstand. You’re hoping people spot your ad, and take a card for later review. Or, perhaps, you create a route where you drop single cards on the way to work. Phone booths, gas pumps, etc. Or, perhaps you’ve made a deal with local merchants to put a stack of your cards on the counter, and you stop to restock. Now, you have a business purpose for those miles (in addition to taking you to work). Will it take you longer to get to work each day? Sure! Is it worth getting up a bit earlier to get an extra $500 or so each month? Depends on you, I guess ☺ Diane Kennedy, CPA www.taxloopholes.com
Eating Out. The longest thread in my Forum began when someone asked “How can I write off the cost of meals? That’s my largest expense.” The answer? How about creating a business where you blog about food? Turn yourself into a food critic. Maybe you create a website that talks about your town, and the good, bad, and ugly restaurants that populate it. How many times have you been in a new place and wondered where to eat? Take pictures of your meals, do regular write-ups and push them up to your site. Add in some affiliate marketing for similar themes – restaurants, recipes, food websites … Diane Kennedy, CPA www.taxloopholes.com
A couple of cautions though. If you eat at the same places all the time, this isn’t going to work. The point of your blog is to showcase new restaurants. And, you’ve also got the 50% or 100% deduction to consider. As you’re essentially eating out “on business,” you could write off the entire cost of your meal. However, the IRS typically allows only a 50% deduction for meals in most other situations. I’d almost be tempted to play it more conservative here, and stick to 50%. I guess it depends on how much you're spending, etc. But definitely you’ll want to show a business purpose right away, so get ads up on your site ASAP! Diane Kennedy, CPA www.taxloopholes.com
Clothing and Shoes. This is a tough one. There are three instances when clothing can be a write-off. (1) If it is something that is advertising your business. So, if you wear a T-Shirt that has the name of your business emblazoned on the front (or back), you’ve probably got a write-off. (2) If it is something that you can only use for business. I know, I know, you really need to wear those Jimmy Choo pumps while you’re emailing. But the fact is, you can also wear them many other places – like the local grocery store. So, no write-off there. (3) The clothing is needed for safety. For example, you might need to wear steel-toed boots in your warehouse. In general, though, most of your clothing is not a deduction UNLESS that is your business. Diane Kennedy, CPA www.taxloopholes.com
However, if you’ve got a passion for fashion, there may be a way to supplement your shopping sprees. What if you started a blog or web-site to teach other people how to shop for bargains or designer wear on the cheap? How about if you uploaded pictures of yourself wearing your finds, and told people where you found them? You’d need multiple outfits to keep the site fresh. Could you find a way to sell your articles off-site, or again do some affiliate marketing for fashion houses and shops on your site? And maybe, you also started a consignment business on the side, to sell off clothes you didn’t want anymore (or you could sell them on eBay). Diane Kennedy, CPA www.taxloopholes.com
My Family! This was one of my favorite posts on the Forum – someone wanted to know how he could write off the costs of his large (5 kids) family. He had been noodling around with the idea of creating a website geared towards other large families, that would review schools, restaurants, entertainment venues, etc., all from the perspective of the parents of large families. Imagine knowing where to go to get a reasonably-priced meal for eight, when you’re visiting Disneyworld. How about finding a clothing store with great deals for toddlers, or a mall with a good, safe on-site babysitting service? How about vehicle reviews for the large family? All of these things need to be tested and investigated. He also wanted to link his site into the faith-based community. Now, how attractive would his website be for advertisers who wanted to attract large families to their store, hotel, resort, school, etc.? Diane Kennedy, CPA www.taxloopholes.com
So, what can you deduct? Well, anything, or maybe nothing. It depends. Now it’s your turn! What do you have as an expense that you’d love to write off? Diane Kennedy, CPA www.taxloopholes.com
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The views expressed in this presentation are those of the presenter and not those of eBay Inc. The presentation of this information at an eBay event does not indicate endorsement or sponsorship by eBay Inc. Participants should consult with their accountants or tax specialists for professional advice.
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