Episode Transcript
[00:00:00] Speaker A: SA.
[00:00:30] Speaker B: Welcome to Balancing Acts, your guide to grow profit and scale. I'm your host, Linda Hamilton, a CPA certified exit planning advisor and a systemologist.
Balancing acts. On balancing acts, we know the numbers matter.
You're balancing your books, you're balancing your cash flow, your profitability. There are a lot of things you're balancing, but the story behind your numbers also matters. It's equally important.
Today I have my partner on Alana McNicoll, the tax director in our CPA firm.
This episode is dedicated to giving you an edge. We want to give owners an edge in operations and profitability, cash flow planning, taxes. We're going to talk about current trends, tax deductions since we are in tax season, and all the things that you need to think about in terms of both strategy and tactics to get you through 2025 and to have a good year. Alana, welcome.
[00:01:33] Speaker A: Thank you so much for having me. Linda, pleasure to be back on the show.
[00:01:37] Speaker B: Well, let's start with trends. What are you seeing this tax season that you think business owners should be aware of? Because, you know, taxes are very stressful for, for business owners, no matter how much we try to put their minds at ease.
[00:01:55] Speaker A: The taxes are just stressful. No matter who you are, no matter how much money you're making.
You know, the conversations that I have start at a point of, of stress. I think the tax code is very complicated. People don't really understand it. And, and so it's my job to really make you feel as comfortable as you can feel. But I think 2025, a lot of what I'm hearing clients worry about is actually what's going on with the IRS and what's going on with the government. I'm hearing a lot more of, are you sure I should put my bank account number onto my forms and, you know, just concerns about data integrity and, and what's going on in the, in the irs. And I think, I mean, I have a long view, right? I've been practicing for many years at this point. And I think there's a tendency to sort of panic at every tax season of there's something new, there's something different. I'm worried about X, Y and Z. And the truth is that every tax season is going to come around again. Whatever changes are there.
Your panic is not going to do anything.
[00:03:04] Speaker C: Right?
[00:03:05] Speaker A: So take a breath before you have that conversation with your accountant, before you look at those dollars, before you write those checks. Take a breather. Taxes are a part of life just like everything else. Is that being said, I do Think we're at a very interesting point right now in terms of enforcement and funding.
[00:03:23] Speaker C: Right.
[00:03:24] Speaker A: So the previous administration, there was a significant addition to the budget around IRS funding. And what that means is that the IRS significantly upgraded their technology.
You know, it's, it's not a, an antiquated, siloed system anymore. The IRS systems are talking to, the banking systems, are talking to the FinCEN systems. There's a lot of integration going on in our government in very dramatically different ways. And regardless of where funding goes and who's getting fired and etcetera, the tech that the IRS has in place is a lot different now than it was. And what does that mean for you as a business owner? It means a couple of things. One is you better, you better keep yourself as audit proof as possible, because the reality is, is that if you do get audited, you are going to be fighting with a machine and fighting with a computer in a way that you've never had to in the past. Right. We're looking at a significant decrease in the amount of people that you can interface with and a increase in the amount of computers spitting notices at us. So please don't, don't put the notice in a drawer. Don't decide you're going to deal with it later. Most important is to get in front of it, get something back in the government's hands that says, hey, I saw this, I'm working on it.
And I think one of the really interesting things that's going on right now, Linda, is that we're in such a virtual environment where there are so many different ways that you can pay and get paid. And the IRS tech now has access to, you know, Venmo and Zelle and PayPal and all of these other platforms.
And we're seeing things like emoji audits, for example, where if your emoji is a slice of pizza and the dollar amount is five grand. Oh, is that a red flag?
Are we funneling money somewhere we shouldn't? Perhaps. So do think about what messages, that tech, that casual payment that you're using.
[00:05:40] Speaker B: I have to stop you for a minute on that. Okay, so tell me how the IRS is going to see that pizza emoji next to your expense.
[00:05:49] Speaker A: Isn't that wild? Yeah. And it's. I mean, this is a real thing. This is happening right now.
[00:05:55] Speaker B: So does that mean they're reading social media? Where are they? Or is it in Venmo, where are they able to see these things?
[00:06:03] Speaker A: Yep. So in Venmo, for example, you know, when you initiate A transaction, you can put some text in there, right? So you, if you're smart, you're going to say like, oh, this is for my business. This was, you know, contractor payment for blah, blah, blah.
[00:06:18] Speaker C: Right.
[00:06:18] Speaker A: But a great way to, to try and game the system or do some fraud is to put something like, you know, dinner, pizza, emoji and then the transaction doesn't match up the dollar amount. Right. And things like Venmo are in a database now that the IRS can actually access.
And part of that is because there's a higher compliance portion to that kind of reporting that's going on in our systems right now. Not a lot of self employed people know about this. There's a form called a 1099 K.
Basically that form is generated by a third party payment network like Venmo if you've been paid over a certain dollar amount. So let's say you are using Venmo for your business and you know you've gotten $50,000 worth of, worth of income through Venmo over the course of the year.
Venmo is going to issue a form that says whoever's name is on the account, your name, your social, your business name, social tax ID number, and, and it's going to say, hey, Alana McNichol, CPA, received $50,000 through Venmo.
[00:07:32] Speaker C: Right.
[00:07:33] Speaker A: That document is going to the IRS. So all of these systems are sort of talking to each other now in a way that really haven't before. And you know, emoji audits, I heard that directly from the mouth of a, of an IRS vendor. So it sounds fake, but it's, but it's really happening.
That's you have a digital footprint, right?
[00:07:54] Speaker B: Right. Everybody does have a digital footprint. And so I think the key takeaway from this is to be prepared, right. To plan, make sure you're keeping track of what you're spending money on because you do have to substantiate these things to be able to take tax deductions. Not everything is deductible. And so the point is to do some planning, not to frighten you with this information, but because knowledge is power and being informed of what you can do and can't do is important. I wanted to say something else about technology, something I have noticed. In our accounting platform we use Xero.
We also are QuickBooks vendors. We are kind of agnostic when it comes to software. Alana and I believe there's no one size fits all. But I have noticed that when you connect your bank account to your accounting platform and so the transaction you spend, let's say you spent a thousand dollars on something and it drops in. XYZ Corporation, the bank feed, when it comes in, puts a description and even American Express will do that. They put you in a category. I have noticed recently the categories are wrong. They will say clothing. It has nothing to do with that. Like, it's like so far off, it's not funny.
So my point in that is I would put in a memo to clarify what it is. And so you may want to. Business owners listening to this, or bookkeepers, if you're listening, or accountants actually put the correct expense so that it goes into your ledger that way, because you don't have to accept what the description is from this computer software, you can instead write what the transaction is. So this is the education you need to be able to one also know yourself what you spent money on and that if you have an audit, you will have all that information you need because it could be years after the expense. What else are you hearing this year from taxpayers as they come in?
[00:10:11] Speaker A: Yeah, I think taxpayers are definitely.
They're worried about ballooning costs. Everybody that I talk to has a business where expenses have just gone up.
[00:10:27] Speaker C: Right.
[00:10:27] Speaker A: I mean, I think that's sort of the environment that we're in right now. And I think we're also in an environment where people aren't sure that they're spending money on the right things.
[00:10:41] Speaker C: Right.
[00:10:41] Speaker A: So, you know, I'm, I'm coming in and I'm reviewing something on your, on your profit and loss statement, right. And I, I'll say to a business owner, you know, gee, I see that your, your marketing spend was, was 25% higher than it was last year. And they'll sort of just shrug and say, yeah, that fee went up, but they don't have a sense of whether that's moved their own needle.
[00:11:07] Speaker C: Right.
[00:11:08] Speaker A: So I think it's a good time right now.
You know, we're in. First quarter has come and gone.
[00:11:14] Speaker C: Right.
[00:11:14] Speaker A: Take a look at, take a look at your ongoing spends. Take a look at those auto charges and try to see what data is available in your existing systems to give you some information. You know, are you getting the clicks from that marketing spend? Whatever data is currently available to you may be really valuable. And I think it's very easy. We've all done this, right? Well, it auto renewed and the charges went through and you just. A lot of, a lot of your vendors are on sort of a set it and forget it. And I think that now is really, when you look at those bottom line numbers. When you see the tax checks you're cutting right now, you know, was, was the spend right. Any tips you you have, Linda, about how to evaluate those kind of things?
[00:12:03] Speaker B: Yeah. And I think we're going to continue. I hope people will stay with us after the break because we're going to talk some more about maybe using your 2024 tax return as a roadmap to plan for 2025. And we'll also get into some deductions. Stay with us. We'll be right back in a moment.
Welcome back to BALANCING acts. I'm your host Linda Hamilton. This is your guide to grow profit and scale. And we're talking with Alana McNicoll, CPA and tax practice director in Linda A. Hamilton CPA firm in New York City.
Last segment, we were talking about trends, things that taxpayers are talking about as they come in to get their taxes done. And we left that on some concerns in general about expenses, about everything going up. And you probably can't look at anything on the Internet and not hear that because it's across the country. Right. So, Alana, let's talk some more about how you can use your 2024 tax return as a roadmap to plan for 2025. How do things work out differently? You kind of need a system for that.
[00:13:58] Speaker C: Right.
[00:13:58] Speaker B: Because otherwise if you don't have kind of a system for comparing expenses, tracking expenses, doing things differently, the year is over and nothing has really changed. And when expenses are rising, it's even more critical.
So let's start with what is one category you might start with in particular that they should maybe compare current year, last year, maybe even looking at a three year average.
[00:14:27] Speaker A: Yeah. I mean, I think big picture, there is too much surprise when people pick up their own tax returns. I owe what I made, what you know, and that's if you're a business owner, if you're an individual, investment income, whatever the category is.
[00:14:47] Speaker C: Right.
[00:14:47] Speaker A: I think there's a big disconnect between the day to day operations, what's going on in your business and income taxes, period. So step one is understand how you're taxed. What are the brackets you're looking at? Is it flowing through to your business, to your personal return or is your business paying separate income taxes?
[00:15:05] Speaker C: Right.
[00:15:05] Speaker A: All of these things make a material difference to, to the kind of checks that you may be cutting.
And then, yeah, looking at averages, I love the idea of a three year average, Linda, because trends year over year maybe can be hard to spot. But when you're Looking big picture, multi years, you can sort of see the logic to some of the way that things are moving. So I think ultimately, let's start it. Let's start at the top, right? Let's talk about gross receipts. One thing that I will say it's important to do, and I have come across this a few different times in my career, is to have your gross receipts at a gross number. Because a lot of states calculate minimum filing fees and that kind of things based on sales, right? Not net of returns, but truly that gross number. So make sure you understand what is the actual gross number before we're discounting, before we have returns, you know, anything like that. Because I think people often get caught up in the net. But the gross can tell you something, right? What's in that gross? How many customers are in there? Do you know that you have retention in there? Why is that gross increasing or decreasing? Well, did you, did you increase your, your pricing?
Anything else you can, you can throw out on, on gross revenue, Linda, because I, I feel like it can often be a vanity number.
Want to see that number be as big as possible? But there is data in there.
[00:16:40] Speaker B: Yeah, that's a great point. And I do often say revenue is vanity, profit is sanity, and cash is king or queen.
You know, looking at revenue trends is important because let's say revenue last year was higher, was it because you didn't get your invoices out? You know, there could be different reasons for that, but there is a story there. And what is that story? And by looking at it, you will, you know, you'll know one were the mistakes. Who does your billing? Is it your bookkeeper? Did they forget to get something out? Where's their customer who wasn't invoiced yet? So that's important.
If sales are lower because you weren't able to close, maybe that's, you know, that could be another matter. Is it your sales team not bringing something in, or did you sell something maybe lower than you should have because you wanted to make the deal Like a sales team, often they want to close the sale and they might not necessarily be looking at whether it's a profitable sale or not. So I think owners have to be kind of in touch with asking questions about what changed and why it changed. So I think revenue is a great place to start. One thing on returns, you know, a chargeback might not be a return. So that one, you might. That's actually a sale that didn't happen at all. So great distinction might distinguish between that. These are the kinds of Things that if they impact a tax number, you want to know how to reflect them accurately in your book so that they help you with your decisions. What about if we move down to expenses? What's another type of expense? Because expenses often rise more quickly than revenue does.
[00:18:30] Speaker A: Yeah. So I think let's, let's start with direct expenses or cost of goods sold.
[00:18:35] Speaker C: Right.
[00:18:36] Speaker A: Because I think that almost more than any other number is the number that needs to drive your pricing. And that is where I think a lot of business owners get into trouble, where it's just kind of all the contractors are being thrown into cost of goods sold and we're not really thinking about the margin.
[00:18:54] Speaker C: Right.
[00:18:55] Speaker A: So on a tax return, if you're, if you've got direct expenses, usually there will be a place on your return. If you're, if you're an inventory based business, you know, it'll list out your purchases and you know, other costs of sale. If you're service based, some taxpayers report it as cost of goods sold and some have all their expenses kind of below the line as expenses.
But either way, do you know your margin? Even if your tax return isn't telling you your margin, do you know it? Are you using that data to look hard at your pricing? I mean, Linda, you and I could talk all day about pricing, but I do think that knowing that, that net above the line, knowing what, what it truly costs to deliver every dollar of gross income you have is, is so mission critical. And I think a tax return is a great place to start because kind of it's out there, right. Once it's been filed with the government, unless you decide to amend or you find an error, it's somewhat fixed.
[00:19:58] Speaker C: Right.
[00:19:59] Speaker A: So it's a good place to really dive into those numbers. Any thoughts, Linda, about pricing in particular and maybe how business owners decide what's a direct cost and what's an indirect cost?
[00:20:14] Speaker B: So we often think cost of goods sold is, you know, it's traditional to. You sell products and so you have inventory, you're not allowed to take a deduction right away necessarily. And so as you sell it, the cost varies with the sale. That gets a little harder in service businesses when your largest cost might be labor, what you're paying others for that you still want to know how close it is, you might not have a steady margin percentage. Let's say every project you do is kind of different. Sometimes business owners will say to me, well, I don't know what the percentage of profit I make on a job, because one job could take months and Another job could be very simple, but it's still very important to segregate that. Why? Because the money left over, what you sell the job for, if you pay a lot of that to a contractor, what's left over for you to cover your overhead, your rent, your bookkeeper, your assistant, your own salary. So it's very critical. The only way to change costs is either to change your profit is either to raise your prices, which can be hard to do in uncertain times, or to lower your cost. So if you need to raise prices, just raise them a little bit if necessary. If you're afraid to just add a little bit, 1% can make a difference. 2%, 3%. Oftentimes it's not even noticed. So that would be really important.
And that leads us to the expenses that are not direct, right? They're somewhat fixed. That's a little strange. It doesn't mean necessarily the amount is always fixed, but it does mean that unless you fire all your employees, it's fixed whether you have sales or not. You have to cover the payroll or whether you have sales or not. You have to, you have to pay rent if you have a lease. So when you meet with your taxpayers that are filing, do you talk about that, some of those expenses that. Ways that they can improve that in 2025 at least?
[00:22:20] Speaker A: Yeah, definitely. I mean, it's interesting that you mentioned salaries, because I think salaries are one of those expense areas where a lot of business owners look at it as an indirect cost. But actually, your salaries are often directly tied to delivering whatever it is you're selling, right? So ultimately, if, if your sale is for $2 and you played your employee $1 to deliver what you sold, right. It, it ends up sort of being a bit of a direct cost. So I think it's important to understand who's on your payroll and what are they doing, right? What is actually tied to service delivery, what's tied to sales, what is true overhead? Because I think, hey, listen, if you're, if you're looking at your, your tax return and, and the net number is, is low, and you're thinking to yourself, where did that go? Well, the breakdown of a salary, you know, can be, can become really quite meaningful. I think the other thing to think about when you're, when you're a business owner is oftentimes small business owners will have a lot running through their bookkeeping that is not necessarily deductible for tax purposes. So they will be looking at their own financials in their QuickBooks file and things like, you know, their Car lease will be sitting in the profit and loss. And I will pick up that profit and loss and I'll say, okay, you're paying your car lease through your business. Is it a business car? And the answer is often no. And so the next question is, okay, is it deductible? The answer is often no.
[00:24:00] Speaker C: Right.
[00:24:00] Speaker A: You've got to have airtight documentation for something like an automobile lease to be deductible. So business owners looking at their profit and loss thinking, oh, yeah, the profit's not that much. I'm not going to pay any taxes.
But of course, what's deductible for tax purposes and what is sitting on a financial statement are often not the same. So I think that's a really important thing to be aware of.
That's a really differences between book and tax.
[00:24:27] Speaker B: Exactly. And, and I, I want to, I'm going to ask us to hold that and carry it over to the next segment because in particular, you often hear people say, oh, put your car in your business and, and that will be fine, but it can create other, other issues for you as well. So you want to know the rules around this and then make your own decision. I hope you'll stay with us. We're going to talk some more about business deductions in particular cruises and other types of travel like the car we just talked about, so that you know what is appropriate for your business. Stay with us. We'll be right back.
Welcome back to Balancing Acts. I'm your host, Linda Hamilton, and I'm talking with Alana McNicoll, CPA and MBA of Linda A. Hamilton, CPA, LLC. This whole show has been dedicated to giving owners an edge on understanding their expenses, their operations, some systems and taxes in particular.
So, Alana, we were just talking in our last segment about people having their car leases in their business.
So that leads me to want to open up the topic of travel expenses and transportation expenses in general. And I like to say, are you cruising for a deduction? What business owners need to know, because I recently saw a post in one of the business groups I'm in where someone said, oh, I'm taking a cruise and I'm networking. Oh, and it's fully deductible. And I thought, oh, I think I need to cover something on cruises because it's not so black and white, is it? So where can we start with whether or not taking a cruise is tax deductible?
[00:27:01] Speaker A: Yeah, I feel like I could, I could spin out on tne for hours. I think it's a, it's an area of deep interest for business owners.
[00:27:11] Speaker C: Right.
[00:27:11] Speaker A: Because the tax code does let you take deductions for travel and the tax code does that you should take deductions for traveling someplace nice. Right. So it's, it's our instinct as business owners to just say, like, great, let's go. It's deductible, right? Take, take the, it's deductible and run with it. And I, you know, I think there are a couple of different standards of. At play here. The first thing I want to do is talk about the cruises in particular.
We've got a specific dollar amount threshold here, which is $2,000 a year for a cruise.
And that has to be documentable as a, a convention, a seminar, some kind of meeting tied to, tied to your business. Right.
And then you do also have some other gacha moments in here.
The IRS is, is super paranoid about vacation scams.
[00:28:12] Speaker C: Right?
[00:28:12] Speaker A: I mean, it, it's oh, ticket to Bermuda.
So I think you've got to make sure that you've got proof.
How long was the trip? How many hours did you spend on business?
Something, something from the, the company that's putting on the seminar or what have you saying that, you know, it's, it's legit.
It's, it's not just a matter of like, buy the ticket, take the ride here.
[00:28:43] Speaker B: Well, there's, you know, let's go a little deeper. In 1982, the. A law was put on the bus. Congress passed a law to protect the U.S. cruise industry, essentially U.S. cruise. And they said that conventions and seminars on cruise ships that are not registered in the United States, they're actually registered. Many cruise ships are actually registered in other countries outside the United States that those deductions for the seminars, conventions, et cetera, are not deductible. That law is still on the books. So what we're talking about is actually cruising as a transportation expense because they don't really distinguish between flying to something, driving to something, or taking cruises. Transportation. So one thing to make it deductible, be fully deductible, the conference would be to make sure you're on a US Registered cruise ship. And apparently they might be a little hard to find. There's probably tax reasons for that as well.
But if you're going outside of the US Then there's some other rules to pay attention to. You know, this, this episode is not about telling you everything you can't do because there are things you can do. What we want to give you is a roadmap to be able to substantiate something. Because what we don't want is for you to have an audit and lose the expenses, especially if they amount to a lot. If you deducted $2,000 and you're, you know, not in a significant tax bracket, maybe the tax effect isn't great. But you have to look at your return as a whole, and we don't want you to take chances. We don't want you to play the audit lottery, per se, in deducting your expenses, because that's only fine unless you're audited. So let's go into this saying, how can we spend money? What's the best way to spend it? Because taxes are a significant cash outlay. So what else would you say are the rules around maybe taking a cruise outside the country? There are a coup. There are, I think, two different rules for that, Alana.
One has to do with if it's less than a week, and the other if it's more than a week, and I think that's in general, less than a week, then you can deduct 100% of your cruise tip. So you're really counting days, right? You're counting days. Days on the ship.
You're counting for less than a week, excluding the day of departure and.
[00:31:21] Speaker A: Right.
[00:31:22] Speaker B: More than a week. Now you have to look at business activities. How do you know if a business activity is personal or business when you're on a ship?
[00:31:29] Speaker A: Oh, gosh. I mean, there's, there's some gray areas here, right? I mean, the overarching standard that you have to meet for any business deduction at all is that it's ordinary and necessary.
[00:31:45] Speaker C: Right.
[00:31:46] Speaker A: So, so take the step into the, the, the shoes of the auditor and say, okay, was this cruise ordinary and necessary? Well, if you can back that up with, with an itinerary with, you know, some, something substantial that says like, oh, actually, yes, this is a business expense and it was ordinary, necessary. It makes sense, I think, you know, if the cruise is three days of sun and fun and, and two of, of, you know, conference center, PowerPoint time, think, think about through whether or not it's actually logical. Now, Linda, I won't pretend I have all the tax code memorized when it comes to cruises in particular, but I think the ordinary and necessary standard is one that should be sort of wrote when you're a business owner, right. That it's. There's a ton of different kinds of travel, kinds of kinds of expenses out there that I think.
I don't know if anybody watches Schitt's Creek. But there was an episode where just the answer was, it's a write off. It's a write off. It's write off.
[00:32:50] Speaker C: Right.
[00:32:51] Speaker A: And you know, look, be logical, be reasonable.
[00:32:57] Speaker B: Right?
[00:32:58] Speaker A: If you are audited, you're going to be talking to a human being. There is a case to be made for taking your cruise and having a VA business deduction. Don't get us wrong.
[00:33:06] Speaker C: Right.
[00:33:06] Speaker A: But I mean, I think the point is that you need, you need to understand those standards that are in place that are sort of the guiding force in, in any expenditure you have, especially.
[00:33:18] Speaker B: On paying for like the, if you're paying for a conference to be on a ship and it's not a US registered ship, that could be a, a big expense. And the promoters will tell you, oh, it's fully deductible. But promoters don't necessarily know the law. So let's talk a bit about, you said T and E. We could talk about travel and entertainment. I think most business owners for a very long time lump all that together in Quickbooks. Bookkeepers lump it together. You know, it's just travel and entertainment, one line item. But there's reasons to separate that on your books to make it easier to find the deduction. So your accountant just doesn't say, oh, not deductible or it's 50% deductible. So what are the rules around entertainment and are they the same as travel?
[00:34:06] Speaker A: Yeah, there are a lot of different subcategories around this with very specific and very different tax rules.
[00:34:13] Speaker C: Right.
[00:34:14] Speaker A: So more recent legislation has gotten rid of entertainment completely. So you need to be very careful. If you're taking out clients and you're going to see a Yankees game, the tickets are no longer tax deductible at all. Right. And that's, that's just sort of. You've got to view that as a business expense. If you need to take your clients to a Yankees game, you need to take your clients to a Yankees game. But just quote, unquote, entertainment alone is no longer deductible. However, when you're at that Yankees game and you buy everybody a round of hot dogs, I don't know, what do you eat at the Yankees game?
Make sure you get a separate receipt for that specifically because that is a meal expense. You're there with your clients. Clearly there's a business purpose. Meals are not considered entertainment.
[00:35:12] Speaker C: Right.
[00:35:12] Speaker A: So a meal, if there's a business purpose, is a deductible item. Now, you only get to deduct 50% of it. But make sure that you do get that sort of itemized separately. Keep your receipt, write down asap who you were with, what were you were doing, what business you were talking about. Because that is definitely an area where deductions can be significant, right. Depending on what industry you're in, you, meals can be a significant business expense for you. And it's also an area that it's very easy to have those deductions denied because there are specific rules in place about, about the kind of documentation that you have to have.
[00:35:57] Speaker B: So the record keeping is like if you have zero records, no receipts, no anything, they just deny 100%, period. They don't care what you want to talk about. Right? So, so the key is every year in January, have a system, right? To be able to stick an envelope in your car and throw all the receipts in there every time you get in your car, either write down the mileage when you're taking a business trip and record it at the end of the trip so that you can separate business and personal travel. There are ways to do this and there are apps as well that will track your mileage. But entertainment and travel in particular do have very specific documentation roles. And not having them means you get zero deduction. Right? So, and that's such an easy audit. They just come in and right away that's the first two things they're going to ask. Or give me your entertainment receipts and your travel receipts because so many people don't bother.
[00:36:54] Speaker A: Bank statements don't credit, credit card statements don't cut it.
[00:36:57] Speaker C: Right. It's.
[00:36:58] Speaker A: They are, they are looking for things that are very specific. I think on the travel. A lot of business owners don't understand that commuting is not tax deductible. Right. If you are driving to your office and driving home every day, you don't get a tax break for that. Right. It's it that that's not a deductible travel expense. Just like, you know, a W2 employee doesn't get to deduct their, their train ticket when they're going to the office every day.
[00:37:22] Speaker C: Right.
[00:37:22] Speaker A: The same is true for business owners. So if you have other travel expenses, if you're going from your office to a client, from your client back to your office, that trip is deduct.
[00:37:34] Speaker B: Right.
[00:37:34] Speaker A: So you need to start to be thinking strategically about, okay, where are those, where are those mileage clips?
You know, make sure that you're buying the train ticket on the business credit card. Again, same thing, get that receipt, write it down. If you're doing mileage Keep a log.
I had a business owner complain to me in January when I told them how to set up their mileage log. Oh, that seems like more trouble than it's worth.
[00:38:01] Speaker B: Exactly. Exactly. Do it. That's how you have to track it. We're going to take a break and we're going to come back and talk and close it out with a few more tax deductions, self employed, health insurance, retirement expenses, different things to give you an edge in your business. Stay with us.
Welcome back to Balancing Hope Acts. I'm your host, Linda Hamilton, a CPA and certified exit planning advisor. And we're talking with Alana McNicoll, also a CPA and the tax practice director of Linda A. Hamilton CPA LLC in New York City City. Alana, we've talked so much this whole episode about cash flow, about owners having a system for tracking expenses and giving them an edge to be able to minimize taxes as well as support the deductions that they do take so that they don't, you know, lose those deductions in the future in case they are audited. Let's talk now about, how about business gifts? Business gifts, they always annoy me. Right? The, the deduction for business gifts is a pet peeve of mine because of the amount. Why don't you tell our audience a little bit about that deduction and how long it's been around.
[00:40:02] Speaker A: Oh, the tax code is so stingy around business, Gibbs. It is an area that has not kept up with inflation. I mean, you will fall out of your chair when you hear this number. Because a business gift is limited to $25 per client. That's it. Flat, nothing else. Now, how many gifts can we even buy today that are $25? I mean, you know, if you're in an industry like mine, it doesn't work out that way. You, you, we don't get by with, with giving clients cheap gifts.
[00:40:35] Speaker B: Right?
[00:40:35] Speaker A: I mean, that, that's, that's not our brand and it's probably not yours either. So, you know, number one is to be aware of what this limitation is and just sort of factor it into your, your thinking about where your dollars are going in the year.
[00:40:48] Speaker C: Right.
[00:40:49] Speaker A: I mean, I think unfortunately, the tax code incentivizes some things and limits others. And for whatever, whatever wonderful congressionally led reason gifts are, are pretty stingy.
[00:41:04] Speaker B: Well, I can give you a little, a little background on that. Since I've been practicing more than 30 years, that number hasn't changed as long as I'm practicing. And they used to talk about it where employees used to give away, like a turkey.
[00:41:16] Speaker C: Right.
[00:41:16] Speaker B: And turkeys didn't cost. You can't buy a Turkey now for $25. I think they're $60. Right. So it came about originally one for employees and the other for other gifts. But what about when you give flowers, like you send bereavement flowers or, you know, sympathy flowers or birthday flowers as a gift? Does that fall under the same rule?
I think.
[00:41:44] Speaker A: I do think it does. I mean, look, a lot of this is.
I hate the word gray, but a lot. A lot of it is sort of not open to interpretation. But you need to know the law, and you need to push it as far as you can push it and get. And get the deductions that you're entitled to. I think it's really important to strategize the spend. Right. If you can do something like pay for shipping separately or, you know, figure out different ways that you can itemize receipts and put them in different categories to get around that cap, you know, that's definitely something to think about. Right. And, you know, does it mean that the gift turns into the gift of time? Right. Do you decide, well, okay, I'd rather start taking people out to dinner.
[00:42:39] Speaker B: Maybe it has no limit. There you go. As long as there's a business discussion, and that's what you're talking about, strategy. When you are informed about these things, you can make other decisions. And I think what you just said, the gray is not necessarily the law, but it's ordinary and necessary, and it's facts and circumstances. What are the facts around your business? And you won't know if you don't ask these questions or look at them to, to give you some idea of. I love what you just said. How you spend your money, whether it's an actual gift or a business dinner, as long as you talk about business while you're at the. At the dinner or lunch.
[00:43:20] Speaker A: Yeah. And I, you know, I think it's.
We're in a. We're in a place economically where people do end up valuing time rather than stuff. I think that is a trend that I'm seeing. You know, we're in a. A more remote world than we ever have been. And so people do find that the face to face is a lot more impactful, I think, now, than it ever. It ever has been. So, you know, business gifts, is that a return in an investment in the same way that giving somebody some of your time can be. I'm not sure, you know, there's no right answer here, but I I do think it's just, it's worth thinking about behind, you know, whatever the standard gift is that you've been doing for, for years. Right.
[00:44:12] Speaker B: And some businesses probably do more gifting than others. It depends on the type of business you're in. Right. But there's always that year end holiday gifts. Gratuities are technically gifts unless they are considered a bonus. And if they're a bonus, then you give a 1099 for it. But you as a business owner have to think about your own cash. It's wonderful to give someone a gift, but if it's significant enough, then perhaps it really is a bonus and it should be taxable to the other person because you don't want to be harmed by your generosity. So you really want to talk to your accountant about that before you record it and before the year is over so you know what to do about it.
[00:44:56] Speaker A: Well, and employee gifts are another area.
It's, it's not a business gift. An employee gift is almost always compensation. Right, right.
[00:45:06] Speaker B: Except for the turkeys.
[00:45:08] Speaker A: Yeah, sure, if you want a turkey, here, have one. We won't, we won't tax you on that. But I think that is an area that I see come up a lot that in that business owners are surprised that they can't give their W2 employees, you know, a big Visa gift card at the end of the year, year. And it's, that's compensation.
[00:45:30] Speaker B: And that's interesting because when you give gift cards like that, cash cards, they're not even really allowed under the, like a gift, that's more a gift of money that is treated a little bit differently. But one thing I often do is if I want to do a gift is I don't take a tax deduction for it. I let my, I pay, pay the tax on it. And then if I want to make a gift, I'm making a personal gift, not a business gift to employees or others that I really don't want them to have the consequences of it because it's my gratitude. I'm expressing gratitude and thanks for something. What about retirement? A lot of times people think I'm not close to retirement, I don't have enough cash. But small amounts can add up over time. They can compound over time if you get used to it and whether you're doing it for yourself or whether you're doing it for an employee, the IRS does give a very generous deduction. That is the one really safe tax shelter is a retirement plan.
What is one type of retirement plan that you see the most of yeah.
[00:46:44] Speaker A: I mean, I think it's a great point, Linda, that it's muscle memory, right? You don't have to max out your retirement contributions every year, but it's setting the habit. It's sort of starting to get in the habit of at least once a year I'm going to fund some kind of retirement for myself. Right? You're building that muscle with repetition. Just every year. Part of my compensation to myself is funding my retirement plan. I would say the most common one when you're self employed is a self employed retirement plan because for most taxpayers that is based on either net profit or compensation and it's the largest flexibility in terms of the amount that you can contribute and, and how you structure that for sell yourself kind of year to year so that that is greatly incentivized. You are going to save taxes for your contributions. Now I will say that taxpayers often assume that it's a dollar for dollar savings and it's not. You're saving at, at whatever your bracket is, right? So if you put in, if you put in five grand into your retirement account, it's going to save you, you know, two grand in taxes, right? So, so don't get caught up in that like, oh, okay, every dollar that I put away is going to reduce my income tax by a dollar. Right? We're dealing with tax brackets, you know, it's not that simple. That being said, you, you are deferring income, right? You're funding a retirement account that, that does get to grow tax free.
And it is truly, you know, the tax code is, is designed to intensify that. So I think, don't stress about maxing it out every year, but do try to do something because funding your future is one of the most important things that you can do. Anybody, but certainly a business owner, right? You know, it is you, you are the employee. You have to take care of yourself, right?
[00:48:48] Speaker B: Whether, and that's whether, you know there are, there's an ira. So if you don't have a self employed plan, you just whatever is easiest for you to do, but it does grow over time and the interest is not taxable. And once it's out of your, your business and out of your personal account, you won't be as likely to spend it. So you build it over 10 years, 20 years and if you do some calculations online, you can see that that can really add up for a way to be able to take care of yourself in the future. It's not locked up forever if there's an emergency. There are ways to take it out if you know, there might be a penalty. But I think people don't always realize that how much of a benefit that is. And the, the last deduction that is really helpful is self employed health insurance. So if you are self employed, how does that work for taking deductions?
[00:49:45] Speaker A: Oh, if you want to talk inflation, look at your health insurance costs. I mean those are, those are rising every year. The rates are just astronomical at the end of the day. And so self employed health insurance is a specific benefit that's written into the tax code. That's very different for people who are business owners versus for taxpayers who are just on a W2. So when you are self employed, your health insurance, whether it's just for yourself or for you and your family, gets a special deduction called the self employed health insurance deduction, which is much more beneficial than the itemized deduction that somebody who's not self employed gets. That actually, this is a deduction that actually reduces your taxable income, which is very valuable in a dollar for dollar basis.
[00:50:38] Speaker B: And it's above the line. So it's actually quite good. But how can people find you online? We're nearing the end of our time together and I want to make sure if people want to reach out, they can.
[00:50:51] Speaker A: Yes, please do reach out. Our Firm's website is www.lahcpas.com. my name is Alana McNicol. You can find me on LinkedIn.
And please do, please do drop us a line.
[00:51:07] Speaker B: Thank you, Alana. I appreciate this and I hope we have empowered you with knowledge to make the most out of your tax return for 2024 and to use it as a roadmap to plan for 2025. Come back next week for another episode of Balancing Acts.
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