[00:00:32] Speaker A: Welcome to another episode of Balancing Acts, the show that helps you look at your numbers and the story behind your numbers while still balancing your personal life. I'm Linda Hamilton, your host, a CPA certified exit planning advisor, and a systemologist. Today's topic is at this time of year is about tax planning and year end tax tips. And I'm really happy to have with us Alana McNicoll, who is a CPA with over 15 years of experience in the accounting industry. And she she is the tax director for my firm, Linda Hamilton, cpa, llc. Alana has extensive experience in tax preparation and planning for small businesses and individuals. She also manages Accounts Payable and Accounts Receivable and provides business consulting and accounting services to nonprofits. Alana is proficient in accounting cloud technology and works across multiple tax and accounting platforms. She's a member of the national association of Tax Professionals and New York State Society of CPAs. Her favorite show is Buffy the Vampire Slayer and her favorite quote is enjoy the little things in life because one day you'll look back and realize they were the big things. Kurt Vonnegut, Welcome, Alana.
[00:01:53] Speaker B: Thank you, Linda. So nice to be here.
[00:01:56] Speaker A: So let's talk about year end tax tips, everybody's favorite subject at this time of year. First, let's start with accounting. You know, there are two methods of accounting, accrual basis and tax basis. And many small businesses do use the cash basis. Can you talk about that?
[00:02:15] Speaker B: Sure. So cash versus accrual. What we're really talking about here is how do you account for your income when you are a cash basis taxpayer? You report income when you actually get cash into your bank account in the door and you report your expenses when you actually pay them, whether that's through writing a check or on a credit card.
However, accrual basis taxpayers report income when they provide the services that they're being paid for, whether that's the terms of a contract or just when performance happens, regardless of whether or not they bill their clients or get paid for the work that they've done. And then on the expenses side, accrual basis means that, excuse me, you, you recognize your expenses when you incur them, whether or not you've actually paid for them. So those are pretty significant distinctions. And whether you are a cash or accrual basis dramatically impacts your bottom line as a small business owner. When you're talking about tax liability, and.
[00:03:23] Speaker A: I'm glad you said that, and I would say for our listeners, a lot of times when I ask this question, what method do you use of business owners who take my workshops, they don't know. So it is something you want to know. It's a good time of year to ask your accountant, how do you file your taxes? Cash basis or accrual basis? What are some strategies for cash basis taxpayers?
[00:03:48] Speaker B: Yeah, so I find that the majority of small business payers are cash basis, Right. I would say that's a lot more common from what I see for small businesses. And in a lot of ways that's good because you have more control over when you are receiving money and when you're spending money.
So the first thing I will say here is that income taxes are only one consideration. We talk a lot with business owners who don't want to recognize a profit and don't want to pay taxes. But if you turn around next year and you need a business loan and your strategy was to defer income or take a lot of expenses, that tax return is going to show a loss and it's going to give you a problem. So please just no. Taxes are one consideration. They're not the only one.
So that being said, a cash based taxpayer, I would say the number one strategy here, which is very simple, is to just stop billing, right? So you're, you hit December 1st, you've got some clients to invoice, you look at where your numbers are and you decide, okay, I'm going to put billing down and pick it up January 1st.
Conversely, what you cannot do here is hold checks in your drawer and not deposit them. Right? If the money comes in you in your door, you've got to deposit it. Now Linda, I know you and I have never seen anybody do that before.
[00:05:12] Speaker A: Well, we teach them not to. So our clients were taught right from the beginning, don't hold checks in your drawer because they're going on your 1099 anyway. So there really is no point to doing that.
You know, kind of as we talk about this cash basis, one of the problems with cash basis can be you have money that came in in December. So you know, you could look at two ways. One is you're trying to spend down your cash or you have lost profit. Well, that means you might not have enough money to pay your bills in the beginning of January. If you stop billing you bill in January again, your customers may not pay as quickly. So you have to be careful, as you said, balancing both the tax and the non tax reasons for actually running your business. And that's part of the issue of balancing acts for every small business. How about paying expenses in advance? How does it work? If you use a Credit card?
[00:06:12] Speaker B: Yeah, great question, because the rules can be a little bit tricky to follow. So if you have a credit card that is in the name of your business, you can charge expenses on that credit card and when the charge goes through, that expense is considered deductible. However, if you are using a personal card to pay business expenses and then reimbursing yourself, you must, as the business, you must make that reimbursement in order for that charge to be deductible to you. So be very careful towards the end of the year in how you're structuring these things.
And as far as expenses will go. I will say the other thing to note is if you are buying something like equipment that has to be depreciated over time, you have to make sure that that equipment is put into place. Placed in service is the term we use before the end of the year. So you order a new high quality printer and it doesn't get delivered to your office until January 2nd. Unfortunately, that's going to be a 2020.
What year is it? A 2025 tax deduction.
[00:07:29] Speaker A: Exactly right.
So often people talk about in the tax world we call it Section 179 expense deduction, but it basically means that you can take the full expense. So why don't you talk a little bit about that for people who are buying maybe computers or other types of equipment?
[00:07:48] Speaker B: Yeah, great question. And again, the rules are complex and they do change year over year. So this is really something you want to get in front of your accountant now to understand what strategies you want to put in place around equipment. So the general rule here is that any purchase that you are making of an asset that's going to have a life of longer than one year, one tax year basically means you need to record it as an asset and take depreciation or a portion of your purchase price over what's called the life of that equipment. However, the tax code has some great juicy bonuses for us. Bonus depreciation and section 179, which basically means you can make an election to deduct more than just a portion of the depreciation that you would be calculating in the current tax year. These types of provisions do vary year to year. Some of them may be sunsetting in the next couple of years. So you need to understand this strategy. But it really can be an excellent one year end when you're looking at I've got to, I've got to try and spend some money.
[00:08:58] Speaker A: Great. So now we say, okay, there's going to be a profit at the end of the year, what do we do or how do we plan for the cash needed for estimated taxes?
[00:09:10] Speaker B: Yeah, this is definitely a time where people loathe to pull out the checkbooks. But the truth is we want our businesses to be profitable. Right. A profit is a good thing at the end of the day.
And here it's, it's really important to understand those numbers now because I think the worst thing in the world as a self employed individual, as a small business owner is to get that surprise in March or April. And you've done all this work in order to get your profit where you want it to be. You've spent, you've delayed billing, whatever else it is. But if we don't know exactly what that tax number is going to be or at least close, we can get surprised in the spring. And that's never a good thing.
So as far as estimated taxes go, generally you are required to pay what's called the safe harbor, which is 110% of last year's taxes in the current year. However, as business owners, we know that those numbers can vary wildly. So often my clients don't like to pay based on last year. They want the realistic number of what's going on today.
And so that means you have to look at this quarterly, you need to get in front of your accountant quarterly and say, hey, it's time to make that, that payment. Here's where I am now. Let's have a conversation.
[00:10:27] Speaker A: Right?
[00:10:28] Speaker B: This is, I feel like really critical right now because interest rates are so high. You want to be sure you can avoid paying any interest on paying late or paying paying penalties on paying late. So you are definitely better off looking at this quarterly rather than maybe waiting until the last minute.
[00:10:46] Speaker A: And that's one way of avoiding penalties for not paying the IRS quarterly. And some business owners can use 100% of last year if they make under a certain amount. And you also mentioned 110% of last year. So really you have to just see what last year's tax numbers were to decide which one works best for you.
We're going to take a commercial break. What I got out of this is I hope you will know, you know, take a look at if you're going to use credit cards to make sure that we'll qualify if you want the deduction. And you can visit our firm, Alana and I, at www.lahcpas.com. and we'll be back after a commercial break.
Welcome back to BALANCING acts. I'm your host, Linda Hamilton, a CPA certified exit planning advisor and systemologist. We're talking with Alana McNicol, also a CPA and tax director of Linda A. Hamilton CPA LLC based in New York City. Alana, we were just talking about some different strategies for year end planning, but now I think what we want to go over is like how do we get ready for January? There's only pretty much a month left. We're really coming up after Thanksgiving is going to go fast. So what are some of the things that business owners should be looking at to get ready?
[00:12:44] Speaker B: Yeah, great question. I think the first one that I bring up, which is something that you and I have talked about on our show before, but it seems to be on nobody's radar, is the beneficial ownership filing.
So the beneficial ownership filing is a financial crimes enforcement network one time filing to report the people who own or control business entities.
And on the space of it, it's very simple. Many small businesses. This will be an easy answer. I own the business, here's my information, end of story. But as of the beginning of the November, FinCEN says only 20% of reporting entities have filed this document, which is due on December 31st. So please, small business owners out there, take a look at this and make it happen for yourself.
[00:13:38] Speaker A: That's a really good point. And we, I don't think we can say this on enough shows. It's out. A lot of accountants and lawyers are talking about it, but the penalties are what, 500, $600?
I don't know, is it, is it a month, a day? How do those penalties work? So it's something they want to get in front of?
[00:13:58] Speaker B: Yeah, it's $500 a day and it can include jail time. I mean, they're really aggressive with this and, and that's just kind of the way it goes. You've, you've got to get this done.
I think the other thing that companies are not aware of or aren't really planning around is it's a one time filing. Right. Only once you have to report who owns your business entity. Right. And of course, being the government, there's something gray here. Ownership. There's also a concept called substantial control. Right. If you have people, senior officers, other decision makers who can be construed to own that, they need to be included. But the other kind of gotcha here is that updates or corrections have to be filed within 30 days of the change. And that change can include somebody getting hired, somebody getting fired, somebody dying, a new investor, or even if one of these beneficial owners moves or changes their name. So you definitely need to just sort of keep it on your radar. Who's a beneficial owner and when do I need to refile something?
[00:15:07] Speaker A: Wow, that's. There's a lot to think about. So who can help business owners with this?
[00:15:14] Speaker B: Yeah, it's a great question.
I'm not necessarily one to say do it yourself. I will say that FinCEN does have an E filing platform on their website. Some of my clients who it's pretty simple, there's one owner, have been doing it themselves in my world, in your world as a cpa, this is what we are being considered as a legal filing rather than a tax filing. So we are not filing these for our clients, but there are a lot of third party services that do it for you and that will do it for you. For a nominal fee, we refer clients to one or two, they're paying, you know, $150. Again, it is a one time filing. Unless something changes and there's no taxes to be paid, you're not paying a fee to the government. All you're doing is filing this right.
[00:16:03] Speaker A: So it's a small fee to get things taken care of. I mean the name FinCEN, but it's something that you just want to get it done. And because it's not a tax filing, it's not on anybody's radar. So people are thinking, oh, my accountant will take care of it. And your accountant's not going to take care of it. It's filed, it's not, it's not going to the irs. So let's, let's get that done.
Are there any talk about 1099? Everybody else's favorite subject is getting ready for January when we really have a very short time. They're due when? January 31st. So what's the first thing people should be thinking about in advance in 2024 before we have to file them in 2025?
[00:16:49] Speaker B: Yeah, that's right. The window of compliance is very small here. Right. You're not going to know what you paid eligible vendors until the end of December until you basically close your books in January. And these forms are due on January 31st. So it's a very small window. And filing them late can come with penalties. So you really do want to make sure you have your ducks in a row well in advance here. So the first thing I want to do is just clarify who's got to file 1099.
So if you operate a trade or business and you pay $600 or more in services to non employee individuals, LLCs, LLPs, other types of business entities. Basically anything except a corporation. Oh wait, I've got some gotchas for the corporations too. You've got to file a 1099. So this is services. It's rents, royalties, prizes, certain medical payments, dividends. It is a pretty comprehensive list. So take a look and then my, my gotchas. As I mentioned, if you are paying 600 or more in legal fees, it doesn't matter whether you're paying a corporation or another type of entity. Those have to be reported. So again, take a look now and start to think about, okay, who's on that list and. And what do I have to do?
[00:18:12] Speaker A: So there's a whole series of 1099s as you mentioned. There's a 1099 dividend. There's a 1099 interest, if you paid yourself interest or someone else in your family interest on a loan. And then you've got the 1099 miscellaneous, which used to be for services, but now is no longer for services. Right now we use the NEC form. Can you talk about how do they figure out what, which form is the right form to use?
[00:18:41] Speaker B: Yeah, so I would say as a small business owner, the 1099 NEC is going to be the most common one for your business. Nec, non employee compensation business. Basically any vendor you're paying for services who's not a W2 employee. And I also want to say, I'm saying paying for services, right? So that doesn't mean you're buying merchandise from a vendor or you know, you're paying for freight, things like that. However, I do want to say that a lot of vendors that we pay for services, they are also billing us for expenses.
And so what we find is a best practice here is that you include everything on that 1099, whether it's for services, for parts, for travel, etc. And of course, these vendors may come back to you and say, hey, why is this taxable? And what we find is that we've got to let these vendors know, hey, we're going to 1099 everything, and it's up to you to deduct your expenses from that statement. I think it simplifies compliance for a lot of small business owners in that sense.
[00:19:49] Speaker A: Well, that's a protective thing as well, because if your vendors, for instance, did not give you receipts for all their expenses, that's what's called an accountable plan. That can be a problem for you in terms of the type of deduction. So one of the safest things for the business owner is to file everything as you said on the 1099. And your vendor, your supplier can deduct their own expenses off of that as long as they have the right expenses there. So moving on, the W9s, you know, there's people file W4s, right? Say how much tax I want out of my paycheck. But W9 is something. Many of us have been asked to fill one out when we get paid for something. So how does that work? And do we have. Does the business owner have to keep them on file? How critical is it to have a W9 from your supplier, contractor, service provider, et cetera?
[00:20:48] Speaker B: I would say it's mission critical. So a W9 basically says, here's my tax ID number, here's the name of my business, here's the address of my business, and here's the type of business entity I am. And that is the document that you will need to use to determine whether or not you need to issue a 1099 to that vendor.
So you should absolutely get a W9, frankly, before you pay any new vendor, make it part of your policy. Let your vendors know, hey, sorry, we w. We. We won't issue a check until we get a W9 from you. And that means you'll have the information on file, and you'll be ready to go from January 1st.
And I think I have seen in particular instances where people haven't gotten a W9, it's come to be tax time, and that vendor is mia don't want to provide the information. And then you end up in a position where you have to pick up the pieces and try to do the best you can with the information you have.
And that means you've got to file that form anyway.
You've got to mark a box saying you don't have that information.
You'll probably get a love letter from the irs, and so will they. And the next step would just be to let the IRS know that you weren't able to get the information. And more importantly, stop paying that vendor. If that vendor will not provide you with that information, you should not continue to do business with them. And I think easier said than done in some cases. But once again, the penalties are going to come back to you as a business owner. You've just got to make this happen, right?
[00:22:25] Speaker A: And you don't want to lose deductions for something you didn't get it. And I often find blame accounting. You can say, oh, my accountant says I have to get this W9 before I can write any checks or pay any bill.
And that way you're you're, you're protected because it's protecting you. Your vendor has to pay tax as well. Everyone has to pay tax.
One thing is, do you have to do a 1099 if you paid by credit card?
[00:22:53] Speaker B: Yeah. Great question. And there's some nuance here that's come out over the past few years that I think maybe people aren't aware of or aren't prepared for.
You can avoid 1099 compliance altogether by paying all of your bills with credit card or Zelle or PayPal or Venmo. There are what are what are known as third party networks, and that means that they are required to send 1099ks to those people who are getting payments through the PayPal, the Zelle, the credit card networks. So that means that instead of you sending a 1099 to your vendor who did some comp, some work for you, PayPal will send a 1099 to your vendor saying, hey, here's much money you got paid via PayPal. So it's, it's definitely makes things easier for you in some senses.
[00:23:48] Speaker A: Right. So you just want to keep that in mind. We have to take a commercial break.
You can find more at www.lahcpas.com. and we'll be back after a welcome back to Balancing acts. I'm your host, Linda Hamilton, a CPA certified exit planning advisor and systemologist. And we're talking with Alana McNicol, another CPA in our firm. And we are we've been talking about businesses, but now we're going to switch gears a little and talk about itemized deductions and some things that are important to individuals on their personal tax returns. So, Alana, we what can an individual deduct on their tax returns that they might consider prepaying, et cetera?
[00:25:08] Speaker B: Sure. So when we say individual, what we're looking at is what's on your 1040, right, as opposed to your business return. And I think it's important to understand the distinction here between standard deduction and itemized deduction. So a majority of taxpayers actually take the standard deduction, which is a fixed dollar amount.
This changes year over year. This year we've got a standard deduction of $14,600 if you're single, $21,900 if you're filing head of household, and $29,200 if you are filing married, filing jointly. So this is a conversation that you would have with your accountant probably annually to decide which is better for me. Is it standard or is it itemized? So if the total of your itemized deductions doesn't rise to those thresholds I just mentioned, then you will take the standard deduction. And so there's nothing for you to really think about as far as the kind of deductible expenses. Although I will say that this is an annual decision. So keep in mind what these categories are. And if you have a year where something changes, your out of pocket expenses for one of these categories that we're going to talk about is higher, that would be the time to start to look at what is required, required here.
[00:26:30] Speaker A: Right.
So what about charitable contributions? How does that work?
[00:26:35] Speaker B: Yeah, so charitable contributions are definitely one of the biggest areas under the current tax law where taxpayers can see a benefit.
So I find that taxpayers don't really plan around charitable deductions as much as maybe they could. I think because of the way the tax law is written right now, it may be beneficial for taxpayers to choose a tax year to make a larger charitable contribution if that's a goal that they have. We call this bunching and it means thinking about your overall gifting strategy and deciding when, when you want to donate and if it makes sense to do it in the current tax year. A strategy here that I see a lot is if you have appreciated stock in your portfolio. Portfolio, I will find taxpayers donate stock rather than sell the stock and recognize capital gains.
And I also want to ask that you consider the restriction and compliance around charitable contributions. So I have seen charitable contribution audit in the past and you really need to be careful that you do your substantiation here. So if you're giving over, I think the threshold is $250, you've got to have a letter that has very specific information in it.
And you also need to be aware of non cash contributions. A lot of people are doing spring cleaning, they're moving, they're getting rid of household goods. And there's a lot of restrictions around how you value those items and whether or not they are deductible.
[00:28:25] Speaker A: So and let me add something about the, the substantiation, the letter, so to speak. You know, people make a contribution and they get an email thank you for your donation, or they, they get a letter in the mail thank you for your donation. So there has to be two things on there. And there's a specific case that came up where, where a taxpayer made significant donations to their church and they paid them by check. And the letter did not say that. It said thank you, but it didn't say that the taxpayer didn't get anything from the church in return and that the IRS denied it and it was upheld by the court over a simple missing statement. The charity didn't wreck. The church didn't realize that. So when you get your letters each year, you want to look at it. One, make sure it says, you know, the amount of the gift that you made, and two, that you want to say, I didn't get anything return for making this gift. Like, I didn't get a ticket to the ball game or a magazine subscription. And that's what trips people up. So if that's something you're doing, you want to make sure you have that, which is what you were just talking about. Alana, what about valuations? Do you have to. How do you value larger donations? Can you do it yourself?
Are there any rules around that?
[00:29:46] Speaker B: Yeah, great question. And of course, the things that we donate can value wildly, right? You may think something is worth something that the IRS disagrees with you on. So, for example, I have clients who donate unused, expensive clothing, and they think to themselves, oh, yeah, this is worth worth $250. The IRS will look at you and say, it's not about what it's worth to you. It's about what the charity can sell it for. So that is a very important distinction that you just want to keep in the back of your mind when you are donating things like household goods.
If it is an item or a series of items that is worth $5,000 or more, you must have it appraised, and the appraisal must be within 60 days of that donation. So if you've got a RA collection, a nice piece of artwork, something else that you're thinking about donating, spend the time and the money to get it valued and make sure that donation is airtight. And when I say grouping of things, let's say you're selling your home and you've got a ton of furniture that you're donating, and you donate it in bits and pieces as you're moving out, if the cumulative value of all of that furniture hits $5,000, you are supposed to have that valuation done. So please do look carefully at the kinds of things you are donating and where they fall into those categories.
[00:31:17] Speaker A: Right. So you might need an appraisal. How about medical expenses? How do those work?
[00:31:23] Speaker B: Yeah, medical is definitely one of the other big areas. As far as itemized deductions go, there is a fairly high limit in terms of when medical deductions can actually be deductible for income tax purposes, which is right now 7.5% of your adjusted gross income. So we find that often an individual taxpayer is not going to get a benefit here unless they've had a bad year. That being said, there are a ton of different kinds of medical deductions. We're talking health insurance premiums, co pays, medical expenses, prescriptions. So it's not a bad idea to have your receipts in line in case it ends up being deductible for you in any one given tax year.
[00:32:12] Speaker A: Great.
What about self employed people? Are self employed? Are their medical expenses treated any differently?
[00:32:20] Speaker B: Some of them can be. So I want to just come back to my previous point because I forgot to mention an excellent IRS publication that will give you information about whether or not something is a deductible medical expense. And the list is actually quite long of things that you can deduct. So please take some time. It's great bedtime reading. If you need something to put you to bed, read that publication. Understand things like eyeglasses are deductible.
The one that I get asked about a lot is gym memberships. No, a gym membership is not deductible. However, if your doctor has diagnosed you with something and weight loss is a prescription for that something, you may be able to deduct certain weight loss program fees. So, so do some digging and, and see what's there for you. Now Linda, you asked me about self employed medical expenses and the answer to that is yes, there is what's called a self employed health insurance deduction, which is more beneficial than the itemized deduction that I just talked about. So this is for health insurance premiums only, but when you're self employed it reduces your adjusted gross income. So it's very important that you separate that dollar amount out from any other medical deductions that you're looking at. And I think what a lot of taxpayers also don't know is let's say you're semi retired, doing some consulting and also drawing on Social Security. The medical portion of the Social Security you receive can count towards the self employed health insurance deduction. So don't forget about that. It's in there.
[00:34:01] Speaker A: Okay. And just to end up with, there are credits that are available for some of our audience, maybe child care credits or there might be other things, energy credits, anything you want to say about where they can find more information about that? That.
[00:34:19] Speaker B: Yeah, that's a great point. So credits are often more valuable than itemized deductions and the IRS is incentivizing certain things. Right. So child care credits, if you are working and you are paying for child care while you work there is tax credit available for you there. So definitely discuss that one with your accountant. You do have to report specific information about the business, who you're paying to watch your your child.
And then yes, energy credit, it's buying a electric vehicle, making modifications to your home to make it more energy efficient. That can be significant dollars. So it's definitely something to look at.
[00:34:59] Speaker A: Right. Okay. And how can people find your website if they want to find more about some of these services?
[00:35:09] Speaker B: Yes, definitely. Always happy to talk about tax is my favorite subject. You can find our
[email protected] CPAF.
I am also on LinkedIn. Alon McNichol, happy to connect with you wherever you are online.
[00:35:28] Speaker A: All right. We're going to take a commercial break and then we're going to come back for one more segment. We're going to talk about some of the hot topics that are on IRS's radar for this year to make sure you can be on top of things in advance and protect yourself. We'll be right back.
Welcome back to BALANCING acts. We're talking about year end tax tips and all things that you need to know to prepare for January. I'm your host, Linda Hamilton, a CPA certified exit planning advisor and systemologist. And we're talking with Alana McNicoll, a CPA and MBA and the tax director of Linda A. Hamilton, CPA LLC. Alana, I think we've talked about a lot of things that people can use to get ready for next year. But let's talk about what's on the IRS's mind. What are some hot topics, maybe audit issues, hot buttons, so to speak, that people should be aware of?
[00:36:57] Speaker B: Yeah, it's a great question. And I think none of this is to scare you, right? We want you to know this information and help you be in compliance. But the truth of the matter is is the IRS has gotten a significant amount of funding over the past three, three years and they're putting those dollars to work to try and close the tax gap. And that simply means that they have more tech available, they have more information available, they've got real time systems.
And so what you need to do as a business owner is make sure you're audit proof, be prepared for whatever the IRS might throw at you.
I think one of the funniest things that I've heard about this year is what are called emoji audits, which is where the IRS has access to your Venmo, for example, okay, they see a pizza emoji and a $20 transaction. Yeah, it looks like someone who's paying for pizza, they see a pizza emoji and a two thousand dollar transaction. Is that really pizza? Are you raising some eyebrows? So be cognizant that this information is out there.
It tickled me, but it's true.
Hot topics as far as audits go. Well, one that you and I have talked about, Linda, and one that comes up fairly frequently is S corporation compensation. So basically, if you have an S corporation, you are required to pay yourself reasonable compensation in W2 format. And reasonable compensation is a tricky question. You must spend time carefully determining what you would pay an employee to do the job that you are doing as a business owner.
[00:38:44] Speaker A: And how much you would pay for employees to do the job. When you wear that many hats in doing your business, and some of those are maybe lower. So the reasonable compensation is. It becomes important when you take things out of your business that you didn't put through payroll. So let's say, you know, people say, well, I couldn't afford to pay myself, but you're still, you took out $2,000 draw for this or a $3,000 draw. And you're just taking money out and not taking taxes out. That's how you get in trouble because the IRS says you cannot take any money out for personal expenses or what they call distributions or draws until you've paid yourself reasonable salary. So you want to make sure that you have that. We've done other episodes on this and you can find out more if you get in touch with us as well. Very important. Any other hot topics that IRS has on its radar?
[00:39:42] Speaker B: I mean, I think historically one of the hottest ones that's never going to change is travel and entertainment. So this is a hot topic because the documentation requirements around travel, meals, entertainment are pretty strict. And we know that they're just not being followed. IRS knows that. So it's, it's an audit win for them, basically.
So let's talk about a few things here. The first is auto.
By nature, an automobile is either personal or business. And you've got to keep track of whether it is personal or business business. You've got to have airtight records that will enable you to prove what miles you drove for business purposes or what expenses you incurred for business purposes, depending on how you're accounting for that.
And that usually means contemporaneous records. And I think a lot of people will sort of estimate this number at year end. And even if it's a common way to do things, it's not going to hold up under Audit. So be really careful with auto. So it's a very common expense. Right. When you're self employed, but the traps are there for sure.
And then the other big one is business meals. So business meals have very specific requirements around when is a meal actually tax deductible?
And you've got to have a receipt that substantiates the business purpose of that meal. And so is it you're meeting with a vendor, a client, a prospect, whatever it is, you've got to have those records and they've got to be very specific.
[00:41:29] Speaker A: So you mentioned the word contemporaneous. Why don't you explain what that means?
[00:41:34] Speaker B: Sure. Contemporaneous basically means you're documenting expenses as they are incurred rather than at year end coming up with a log or, you know, combing through your calendar. Doubt it's not to say that you will be denied a deduction because you put together your records after the fact, but how much harder is it to do that? I mean, who wants to sit down in January and look back at all the trips they've taken? Is it even possible to do that? It's far easier and actually doesn't take a lot of time to do this kind of documentation up front as you go. There are apps out there that will let you track mileage. There are free apps out there that will let you track mileage. So the tech is there, the tools are there, just use them.
[00:42:20] Speaker A: That's really great advice. And I would say, you know, one of the risks of waiting till year over is if you had an audit, they might challenge you and say, because you can tell maybe when you created it if it's not in pencil or.
And they might say, well, how did you remember that you did that? Because what their challenge is is they're going to say, how do you know you're right the closer you are to when it happened? So one of the easy ways to do might be you could take your Google Calendar or your Apple calendar or your Outlook calendar and maybe write a note right in there when you made the appointment about what you're going to talk about at that meeting and who it's with. That would be a great way for at least documenting the business meals to get that done. Because we know business owners are so busy. That's even why IRS knows it doesn't get done is because there's just tons of things we have to keep, keep up with balance in our lives. And paperwork is generally people's, you know, least favorite subject. So it's document, document, document.
I Don't know. In terms of apps, I guess the apps are there expense apps, too, or tracking meals, or is this only for mileage?
[00:43:31] Speaker B: Oh, wow. We're living in a golden age of technology as far as small business owners go. I mean, there's so much tech out there, and. And what we need is pretty simple, right? For any kind of expense deduction, you need a photo of that receipt. You need a memo field to say what it was for. You need it, ideally, to live in a place for all eternity, right? I mean, there's so much out there. Your credit card company has an app, QuickBooks has an app. You know, Xero has an app. You name it, it's available. So the most important thing is to pick a system, stick with it, and get in the habit, right? I mean, this is all really about repetition. And I think it doesn't have to be complicated, it doesn't have to be expensive. It has to be repeatable. It has to be easy. And it's a muscle memory and a habit just like any other thing.
And as far as compliance goes, another topic that I wanted to bring up, Linda, that you and I talk about a lot is employee classification, contractors versus W2 employees. And I'm bringing this up because a lot has changed recently about the way that the IRS asks you to look at how you classify whether somebody is an employee or a contractor.
So I can't get too into the weeds because these tests are very complicated and very specific. But what I will say to you is, at the end of the day, the government is looking for.
Is looking for you to put people on W2s, right? I mean, that, that. That's really the. The subtext here. So if you have classified somebody as an independent contractor, you have to make sure that they meet that definition. Who's controlling the work? Who is controlling the schedule? Who's supplying the materials for the work, work.
You know, all of these factors really go into determining whether or not somebody is an employee. And the penalties for misclassification can be tremendous.
[00:45:36] Speaker A: And you can even be responsible for paying someone's taxes because the reason IRS wants you to put them on a W2 and payroll is because they get paid more quickly when you take taxes out of their check and there's no deduction. So you want to protect yourself there against. You know, I think you made a valid point. This is not to scare you, but at the same time is nobody likes these things to blow up on them. You're running a business. You want to be successful at your business, so train yourself to document expenses. Train yourself to try to be cautious. It doesn't cost that much more to put people on payroll. Alana, how can people find you on LinkedIn or Facebook? What should people do if they'd like to get in touch with you? And what is your website site?
[00:46:21] Speaker B: Yeah, so our firm website is www.lacpas.com.
you can find us there. We've got a, an email. Hellocpas.com Shoot us a note. It will come to us. I am also on LinkedIn, Alana McNickle, and I'm on Facebook, too. You can find me there.
[00:46:44] Speaker A: Thank you, Alana. I hope you, you got something out of this. You know, in real estate, it's location, location, location and in taxes, it's document, document, document. So we hope that you will do that and that you'll listen to all the segments, take advantage of deductions. You can pay in advance. Look to whether or not you should defer income and meet with your accountant at year before year end. Meet with them in the next week or two. Is there anything you can do to minimize your taxes this year? And we hope you'll come back next week for another episode of Balancing Acts. Thank you.
[00:47:20] Speaker B: This has been a NOW Media Network's feature presentation.
[00:47:23] Speaker A: All rights reserved.
