Your Roadmap to Tax Savviness w/Tyler Russell
In this insightful episode of the Wealth Witches Podcast, host Katelyn Magnuson sits down with Tyler Russell, a seasoned tax strategist, to explore the essential steps toward achieving tax savviness. Together, they dive deep into key strategies every entrepreneur and small business owner should know. The conversation begins with practical tips on maximizing mileage deductions, ensuring listeners are well-equipped to claim the most from their business travel expenses—a straightforward yet effective way to cut down on taxes.
As the discussion continues, they explore the complexities of health insurance for the self-employed, highlighting crucial deductions that are often overlooked. Tyler also offers expert advice on making smart retirement contributions, helping you navigate the long-term benefits of various retirement plans, and ensuring you’re on the right path to financial security.
A special focus is given to the Augusta Rule, where Tyler explains how business owners can rent out their homes to their businesses for up to 14 days a year without paying taxes on the income—a powerful tax-saving tool when used correctly. Throughout the episode, Katelyn and Tyler provide actionable insights and clarify common misconceptions, making this a must-listen for anyone looking to optimize their tax strategy and enhance their financial well-being.
Key Takeaways
- Learn how accurately tracking and claiming business mileage can greatly reduce your tax bill.
- Discover how self-employed individuals can access health insurance tax deductions and why eligibility is key.
- Find out how smart retirement contributions can ensure long-term financial security and tax benefits.
- Learn how the Augusta Rule allows business owners to rent their homes to their businesses for up to 14 days tax-free.
- Understand how choosing the right business entity, like an S Corporation, can lead to significant tax savings.
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Music credit: Neon Fairies by Wolves
Transcript
Hello, and welcome magical creatures to the Wealth Witches podcast.
Speaker:This is the place where we brew up financial empowerment and mix in a little
Speaker:sprinkle of magic. I'm Caitlin Magnuson, your guide on this
Speaker:enchanted journey to financial enlightenment. Here, we honor all
Speaker:identities and invoke our inner witches to create holistic wealth and prosperity.
Speaker:So grab your crystals, open your minds, and let's get ready to conjure some
Speaker:financial clarity clarity.
Speaker:Hi, and welcome back to the Wealth Witches podcast. I'm your host, Caitlin Magnuson. And
Speaker:today we have a very special guest, Tyler Russell from TF
Speaker:CFO. Tyler, welcome. Hi, y'all. A little
Speaker:bit about Tyler. He's a tax strategist and a problem solver. With over a decade
Speaker:of experience in tax planning and financial strategy, Tyler brings a wealth of
Speaker:knowledge and a knack simplifying complex tax issues. His approach is all about
Speaker:empowering entrepreneurs and individuals to make informed financial decisions.
Speaker:Tyler's expertise lies in uncovering hidden tax saving opportunities and
Speaker:translating them into actionable strategies for his clients.
Speaker:Okay, Tyler, today, we're gonna be talking all about your roadmap to tax
Speaker:savviness, and that includes a few
Speaker:things to do and to not do potentially. Right. So we're gonna be
Speaker:covering maximizing your mileage deduction, health insurance for the self
Speaker:employed smart retirement contributions, choosing the best
Speaker:business entity and navigating the Augusta rule, which is
Speaker:something that's been coming up pretty frequently for us in the last couple of years
Speaker:with our clients and with TikTok. So Tyler, tell us a little
Speaker:bit more about the mileage deduction side of things. Like what
Speaker:are things that listeners here should be paying attention to if they're business
Speaker:owners? If you're gonna be using your vehicles
Speaker:for business, The first and most important thing that you do
Speaker:is track the miles that you drive for business
Speaker:purposes. This could be driving to meet potential clients,
Speaker:driving to a job site, driving to the store to get
Speaker:supplies. It does not include commuting
Speaker:to your principal place of business from your household. And
Speaker:this becomes very important. If you have a vehicle that you use
Speaker:for both personal and business use. As
Speaker:a sole proprietor or a partner in a partnership,
Speaker:you can deduct auto expenses for business based upon
Speaker:a standard mileage rate set by the IRS every year, which
Speaker:is normally increased for inflation. And most of our clients take
Speaker:the standard mileage rate. The alternative being you can take
Speaker:actual vehicle expenses in proportion to the
Speaker:business use of that vehicle based upon the
Speaker:business mileage driven for the year over the total mile.
Speaker:That's why it's so important even if you take actual or the
Speaker:standard mileage rate to track your mileage.
Speaker:And the more miles you track, the better you are at this bigger
Speaker:deduction you'll receive. There's a lot of rules around
Speaker:deducting auto expenses that people get confused
Speaker:upon, especially watching short videos on social
Speaker:media that sensationalize being able to expense
Speaker:your car. Or if you buy a luxury vehicle above a certain
Speaker:weight, you can write it all off. Sure. In certain situations, you
Speaker:can do that. But that doesn't mean that the best strategy
Speaker:for you, if you are taxed as a corporation and you're taking the mileage
Speaker:rate, that is actually a employee reimbursement
Speaker:because corporations have to use the actual
Speaker:vehicle expenses. So this is an important thing
Speaker:to note because only individuals
Speaker:can take the mileage rate. Most of our clients take the standard mileage
Speaker:rate. And over the life of the vehicle,
Speaker:that generally results in that greatest deduction.
Speaker:It also makes tracking way easier. Because when you
Speaker:take actual expenses, it's incumbent upon you to track all of
Speaker:your gas, all of your repairs, all of your maintenance that goes into your vehicle,
Speaker:you know, on top of your models. And a lot of small business owners just
Speaker:don't have the desire to be as thorough as they should be if
Speaker:they want to optimize the actual vehicle expense
Speaker:deduction. So when it comes to tracking miles, because
Speaker:regardless of whether you're taking actual or you're doing the mileage rate,
Speaker:what are the best ways to track or, like, what would recommendations be that you
Speaker:would have potentially for someone that's like, I'm a business owner. I haven't been tracking
Speaker:my mileage. What do I need to be doing? What kind of proof do I
Speaker:need to have? You can either use an app or
Speaker:you can have paper in your car or add up the miles at
Speaker:year end. I always advise people to look at their odometer
Speaker:beginning of the year and the end of the year. And that gives you your
Speaker:total miles. And then all you really gotta track is your business mile.
Speaker:So many of our clients use MileIQ. Many
Speaker:use tracking miles through QuickBooks. What was very important
Speaker:here is establishing where your principal place of
Speaker:business is. Because commuting is
Speaker:not business mileage. So if you
Speaker:conduct and manage your business primarily from your
Speaker:home, your home is your principal place of business. And this
Speaker:is a big tax advantage because then
Speaker:your business mileage starts when you leave your house to when you
Speaker:come back to your house minus any ancillary personal
Speaker:trips that you might take on that journey.
Speaker:Whereas if you have an office outside of your home that you
Speaker:rent or somewhere else that you drive to on a
Speaker:regular basis, and that's where you manage and connect your business, That would be your
Speaker:principal license business and driving there and back from your
Speaker:home is not business mileage. Another thing I'd like to touch
Speaker:upon is section 179 and bonus depreciation
Speaker:on vehicle. There's various limits that apply
Speaker:to different classes of vehicle generally based upon their
Speaker:GBW. But then also bonus depreciation
Speaker:is changing year by year.
Speaker:So, whereas in 2022, I believe you could
Speaker:deduct a 100% of a vehicle with bonus depreciation. I believe
Speaker:in 23, that was 80% and it's being reduced.
Speaker:But taking section 179 or bonus depreciation, which I believe is
Speaker:section 168, allows you to accelerate
Speaker:the depreciation on your vehicle if you're taking actual expenses
Speaker:on your vehicle into the 1st year that you place it in
Speaker:service, which is great. If you have a high income
Speaker:in that year, you can get a big deduction from your vehicle.
Speaker:And that's what people are attracted to. But the drawback of doing
Speaker:that is you lose the ability to take depreciation.
Speaker:In future years, you lose the ability to ever use the standard
Speaker:mileage rate in the future. And if
Speaker:your business use of that vehicle ever drops below 50, there's a good chance
Speaker:you'll have to recapture that accelerated depreciation as income in that
Speaker:year when the vehicle's use drops below 50%.
Speaker:So it's great that you get a large depreciation
Speaker:deduction in the 1st year, but you definitely need to be aware
Speaker:that in future years, you are stuck using the actual
Speaker:expenses. You can never use the mileage rate again, the
Speaker:standard mileage rate. And your deductions may
Speaker:be quite limited apart from that 1st year that you placed
Speaker:the vehicle in service. And you definitely wanna be sure that you're gonna use
Speaker:that vehicle more than 50% for business use
Speaker:over at least the next 5 years. And then also, if
Speaker:you are going to accelerate depreciation on a vehicle, you
Speaker:need to be prepared to track all of your vehicle
Speaker:expenses to maximize your vehicle
Speaker:deductions in the future. What happens too if you were to sell that
Speaker:vehicle? Let's say you were to use section 179, and then 2 years later, you
Speaker:were to sell that vehicle and you take in most depreciation on it.
Speaker:What happens from the business standpoint with expenses? If you sell the
Speaker:vehicle at a gain, you pay capital gains
Speaker:tax on that. And it depends on the type of
Speaker:property, but I believe it would be there may be some sort of depreciation
Speaker:recapture at your ordinary income rates. And then
Speaker:if you do have capital gains, that might be taxed at a lower
Speaker:rate. Depending on your household income and yeah. But
Speaker:so if you purchase a vehicle and you take 50,000 of depreciation on
Speaker:it and your cost basis in that car is 0, and then you turn it
Speaker:around for $50,000 and see sell it for $30,000 2
Speaker:years later. You're gonna have to pay tax
Speaker:on that $30,000 as income because you have no basis in the vehicle. And that
Speaker:would all be a depreciation recapture, which is taxed
Speaker:at ordinary income rates. What about with rental vehicles? So I know that
Speaker:when we're chatting with clients, a lot of times, they might get confused around, like,
Speaker:what the requirements are. We're like, if you fly somewhere for a
Speaker:conference and you rent a vehicle, are you supposed to be tracking mileage
Speaker:for that? It's not a bad idea. The only time where you really
Speaker:would need to track mileage for that is if you were running that car and
Speaker:using it for both business and personal purposes on
Speaker:that trip. If it's a mix business personal vacation,
Speaker:you better be tracking that. But otherwise, if it's a strictly business
Speaker:trip, the car rental, I would just sit out to this. Perfect. I think
Speaker:that's great. So moving on to our next topic,
Speaker:talking all about health insurance. So, Tyler, when it comes to
Speaker:health insurance as a self employed individual, I know that we get a ton of
Speaker:questions, and we're not health insurance brokers. We're not here to advise you on
Speaker:what sort of plans you can or cannot get into. Something definitely worth
Speaker:looking at. But in terms of what our
Speaker:clients are looking at and what we've been helping them with the last couple of
Speaker:years, what are some tax deductions for self employed individuals when it comes
Speaker:to health insurance? Generally speaking, as a self
Speaker:employed person, you are eligible to take a deduction for the
Speaker:premiums that you pay out of pocket
Speaker:that are in excess of any credits that you might receive, you know, if
Speaker:you have a premium tax credit. But there are limitations to this. If
Speaker:you're married and you're eligible to participate in your spouse's health
Speaker:insurance plan through their employer, you are not eligible to deduct
Speaker:self employed health insurance. Or if you are
Speaker:eligible to have health insurance through another employer, you're
Speaker:not eligible to deduct. If you're a sole
Speaker:proprietor or a partner and they're up entity taxes a
Speaker:partnership, then you can take the deduction
Speaker:on your 10.40. If you are a
Speaker:greater than 2% shareholder of an s corp, there's
Speaker:specific rules that the s corp can either
Speaker:reimburse you for the health insurance that you pay out upon it,
Speaker:the health insurance premiums, or the s corp can pay the health
Speaker:insurance premiums directly for greater than 2%
Speaker:shareholders of an s corp. Those health insurance premiums have to be
Speaker:reported as wages on box 1 of the w two,
Speaker:meaning that they're subject to income tax withholding, but they're
Speaker:not in box 35, which is Medicare and
Speaker:social security. So they're not subject to Medicare and Social
Speaker:Security withholdings. And then what happens is your s
Speaker:corp will deduct the premiums they pay on your
Speaker:behalf as a salary deduction on the 11 20
Speaker:s. And then the weight it'll be included in your income as wages on your
Speaker:10 40 and then deducted as an above the line adjustment
Speaker:against income taxes on your 10 40. But if
Speaker:the premiums are not on your w two, you can take a
Speaker:deduction for them, which is often missed. And
Speaker:then if you have health insurance through the marketplace and you're
Speaker:receiving a premium, there's a calculation that has to be done on,
Speaker:I think it's form 72 203 on your personal return
Speaker:to calculate the amount of premiums that would qualify for the self employed
Speaker:health insurance deduction. I do think that this is a really good point to have
Speaker:brought up though, because especially if you're needing to edit a w two or add
Speaker:this information in there, a lot of our listeners that might have salaries or are
Speaker:managing their own payroll may not know that they even need to be adding this
Speaker:to box 1. So this is definitely a reason that you should be checking in
Speaker:whether it's with our firm, whether it's with another firm about your
Speaker:individual tax situation to make sure that you're not missing out on potential
Speaker:deductions here and to have time to make corrections to your w
Speaker:two before the end of the year that you're in.
Speaker:Retirement, my favorite topic, I think, to chat about. I get
Speaker:really excited. So I feel personally, Tyler, it'll be interesting to hear your thoughts on
Speaker:this, but I feel like retirement is something that has really slept on because
Speaker:especially coming into q 4, I know we get bombarded with
Speaker:the question of, do I need to spend more to save on my tax?
Speaker:And the answer to that is generally a no in my opinion, unless there's, like,
Speaker:really specific situations. You have a high end of year. There's things you actually need
Speaker:to buy. We're not just frivolously spending because you're not getting a one to one
Speaker:return on the money out versus tax saving. However,
Speaker:if you do have money to burn or extra funds, you feel really
Speaker:confident that you have enough save for taxes, I think that retirement is one of
Speaker:the best things that you can be spending on to save yourself tax
Speaker:money if you do have extra cash available. But in general, I
Speaker:think it's a really good thing to be setting up and contributing to even if
Speaker:it's a really small amount for now. So I'll hand you the floor here, Tyler,
Speaker:but let's chat retirement. Generally speaking,
Speaker:there's limits as to how much an employee can
Speaker:contribute to an employer sponsored plan and then limits to how
Speaker:much an individual contribute to an individual retirement.
Speaker:Based upon the plan, there are limits to the amounts that
Speaker:employers can contribute to the employee's retirement
Speaker:account. And there's so many different types of retirement accounts. But
Speaker:broadly speaking, you have employer sponsored plans. You have individual
Speaker:plans. Then for employer sponsored plans, you have employer
Speaker:contributions and employee contribution, which would be
Speaker:a salary deferral for the employer sponsored plan. That's an
Speaker:employee contribution. Then there's
Speaker:generally 2 types of retirement accounts being
Speaker:traditional and Roth. And the idea is that
Speaker:traditional retirement accounts are tax deferred,
Speaker:meaning you contribute the money. And in the year that you make the
Speaker:contribution, you get a deduction on your tax return or
Speaker:a reduction of your income subject to income tax.
Speaker:Whereas a Roth, you make
Speaker:contributions with after tax money, but then
Speaker:you take withdrawals that are tax free. And,
Speaker:generally, the idea with traditional tax deferred
Speaker:retirement accounts is that if your
Speaker:marginal tax rate is greater now than it will be when you're
Speaker:taking distributions in retirement, you'll get more tax savings now
Speaker:than you would receive with a Roth IRA. Because with a
Speaker:traditional tax deferred retirement account, distributions
Speaker:are taxed as income when you're retired and taking
Speaker:distributions from the account. Then for a
Speaker:Roth IRA, those are more advantageous for people
Speaker:in lower income tax brackets now. The idea being
Speaker:that your tax marginal tax rate will probably be higher
Speaker:when you're in retirement than it will be now. And a lot of that
Speaker:has to do with the uncertainty of what future tax rates will
Speaker:be, but that's the general idea. And
Speaker:then the big benefit of these accounts besides tax savings on either
Speaker:the now or later on the contribution of the distribution
Speaker:is that your returns grow tax free. Your investment
Speaker:returns grow tax free in the account. It's also
Speaker:important to be aware that there are situations where you can take
Speaker:early distribution. Normally, with a traditional
Speaker:tax deferred retirement account, you cannot take distributions until I believe you're
Speaker:59 and a half without a penalty, without a 10%
Speaker:penalty. You can always take your money out of the account. But if you just
Speaker:take your money out of a traditional retirement account with no that
Speaker:has does not qualify for any exceptions before your age
Speaker:59, say, you're gonna be assessed at 10% penalty and
Speaker:pay income. For Roth IRAs, you can put money in.
Speaker:You've already paid the tax on that money, and you could take your basis out.
Speaker:The amount of contributions that you put in, you could take that out in time
Speaker:without paying tax on it or without without paying any
Speaker:penalties. So I really like Roth IRAs. If you think you might want that
Speaker:money before you're 59, because then you can put the money into the
Speaker:account. It'll grow investment income. You won't pay any tax
Speaker:on that. As long as you don't take the investment income amount, you can still
Speaker:access that money. Because I think a lot of times people may
Speaker:not want to contribute to traditional IRA because maybe
Speaker:they want that money to buy a house on the future or
Speaker:other purposes. Maybe they just want access to it
Speaker:before they're 59, which fair enough.
Speaker:When self employed individuals are looking, so we have a lot of businesses that are
Speaker:by making under a $150,000 a year. Right? And they come in and
Speaker:they haven't been prioritizing retirement. Maybe they've never been traditionally employed or maybe they
Speaker:were traditionally employed for a few years, but they've been doing their business now.
Speaker:What is one of the easiest ways? Like, if they come to you and they're
Speaker:like, Tyler, I have an extra $200 a month. I really wanna be doing
Speaker:something with it for my future. Like, where do I even look at starting? If
Speaker:you're a high income earner, okay, you're probably gonna wanna do a
Speaker:traditional retirement account. And I would say
Speaker:maximize your personal retirement account if you're
Speaker:below the threshold phase out. Because once your income gets too
Speaker:high and you don't have to be that high of an income or I'm not
Speaker:sure what the phase out limit is right now. But above a certain income,
Speaker:you're unable to take deductions for contributions to a traditional
Speaker:IRA, and you're unable to contribute to a Roth IRA. So
Speaker:if you're a high income earner, your best bet is an employer sponsored plan. If
Speaker:you're self employed, it's through your business. If you're an employee, max out
Speaker:your 401 k. And if you're self employed, we like SEP
Speaker:IRAs, especially if it's like late in the year. It's
Speaker:August 2024. If you wanna contribute to
Speaker:an employer sponsored retirement account through your business, Sep
Speaker:IRAs are easy to set up. It's an employer only
Speaker:contribution plan, and you can contribute to that Sep
Speaker:IRA and take a deduction up until the
Speaker:deadline of the filing of that corporate tax return, including
Speaker:extensions. So if you extended your corporate tax return, you could make
Speaker:a contribution to a SEP IRA for 2024 up until
Speaker:September 15, 2025. And the limit
Speaker:there would be up to 25% of your w two
Speaker:wages. We also like really the solo
Speaker:401ks, which go by many names, I four zero one ks, individual
Speaker:401ks, one purchase 401ks because those allow the same
Speaker:employer contribution as the SEP IRA
Speaker:being up to a quarter of the employee's w
Speaker:two wages. But in addition, that
Speaker:employee being the business owner, the shareholder, can
Speaker:contribute up to the 401 k limits, which I think is, like, $24,000
Speaker:in 2024. So with both the SEP and the I
Speaker:four zero one k's, if your wages are higher, you can contribute a lot
Speaker:of money to your retirement account. I think it's maxed out, like, 60 some
Speaker:$1,000 for an IFO one k between employer and employee
Speaker:contributions for 2024. So if you're a high end income
Speaker:earner that can't contribute to an individual retirement account,
Speaker:that's the best option for just putting away money for
Speaker:retirement. The caveat to the I four zero one k is that it
Speaker:has to be a business with 1 shareholder, one owner.
Speaker:And that so only it's only 1 participant in 401 k. No other
Speaker:employees, one owner, one employee. That's an I 401
Speaker:ks. There is one exception where if it's a
Speaker:business where there's one owner and it's, 2
Speaker:spouses. Then 2 spouses can have
Speaker:an individual 401 k. There might be other
Speaker:modifications, but That's the most common Yeah. Exception. I
Speaker:do think I so I love the I four zero one k is for our
Speaker:clients. It's a really good fit for, but I feel like it's a really good
Speaker:fit for such a smaller group of clients. Because 1, you need to have the
Speaker:disposable income to actually be able to contribute.
Speaker:And 2, you do need to have payroll. Like, it it needs to be
Speaker:refined through payroll, and you need to be contributing in the calendar year just
Speaker:like a regular 401 k. Whereas with the SAP, you have so much more
Speaker:flexibility with being able to contribute up until you file that corporate return, like Tyler
Speaker:said, including the extension deadline. So with the I four zero one
Speaker:k, and I'll give you an example of this year, we're chatting with a client
Speaker:that wants to start prioritizing retirement. It's already almost q
Speaker:4 in the year, and they wouldn't be able to get all the contributions
Speaker:we'd like to see if they did an I four zero one k this year.
Speaker:However, what we thought that they should probably do this year is do a sub
Speaker:IRA. And then in 2024 or 2025, look
Speaker:at either an I four zero one k or a simple IRA. And, again, that
Speaker:falls because they're not spouses. We're looking at some different options for them. So most
Speaker:likely, it'll be a simple IRA in their case. But, again, you're making
Speaker:contributions as you go throughout the year with those versus the SEP IRA.
Speaker:You can make contributions throughout the year, and then you can also lump sum it
Speaker:before your taxes are filed. And then also, you receive
Speaker:that same benefit for individual accounts so that you can make that
Speaker:contribution to that account up until the tax filing deadline of your
Speaker:personal return. So if it's April 1st and you wanna get your tax bill down,
Speaker:you can contribute to a traditional IRA. I think it's fun too because we'll have
Speaker:clients that contribute to SAP search of traditionals and, you know, they're kind of looking
Speaker:for a magic number. Like, maybe they have $10,000 set aside for their tax
Speaker:savings. Maybe their taxes came out to $8,000, and so they wanna see, you know,
Speaker:hey. Of this pocket of money that I have, what does it look like if
Speaker:I put $3,000 into a SAP or into a traditional? What does that change by
Speaker:tax bill by? And so that's something that we're able to look at for some
Speaker:of our clients too so that they can make an informed decision when it comes
Speaker:to their contributions because that's another fear that comes up. It's like, what if I
Speaker:need this money at the end of the year? I wanna be contributing throughout the
Speaker:year. I recommend just setting it aside into a savings
Speaker:account, and that way you have that at the end of the year. And you
Speaker:should know, hopefully, what your quarterly estimates are looking like, what your
Speaker:potential tax liability is looking so that you can be planning accordingly for both
Speaker:retirement and your taxes. Another thing I find to
Speaker:be very advantageous is currently qualified
Speaker:dividend and long term capital gains rates are
Speaker:essentially 0 for
Speaker:low income earners. So if you're making, like, below $65,000
Speaker:a year in total, you can get qualified dividends
Speaker:and have long term capital gains and pay zero income tax on
Speaker:it. Meaning, what's the point of even putting money into a
Speaker:retirement account? Also, if if your income tax
Speaker:rate is low, then there's not much tax
Speaker:savings benefit anyway because your investment income is not
Speaker:being taxed and you're not getting much of a deduction by
Speaker:putting the money in to the retirement account. So that point
Speaker:would potentially be looking at, like, a taxable brokerage account. Yeah. Yeah. And making contributions
Speaker:to there, which you can then pull out at any point in time, and there's
Speaker:not the restrictions on that there can be with retirement account. I do think
Speaker:that regardless of what account type you look at moving forward with,
Speaker:that starting small and automating what you're able to, whether that's with a Roth or
Speaker:traditional or a SAP, a lot of times we make the recommendation that,
Speaker:like, hey. Take something that you wouldn't miss. Right? Maybe you can go spend
Speaker:$25 on something frivolous, and it's not a big deal for you.
Speaker:Let let's just take $25 and set up something that's automated. You know, you're contributing
Speaker:to something, whether it's a taxable brokerage account, you know, your sub IRA, your
Speaker:Roth IRA, and then review that every 3 to 6 months.
Speaker:Increase it as you want or as it aligns with your financial goals. But the
Speaker:other really big mistake that I see happen is people that
Speaker:have been managing their retirement or their investment accounts on their own,
Speaker:generally, that money just goes into a holding account when you transfer it from
Speaker:your checking or savings account into, let's say, Schwab or
Speaker:Betterment or Vanguard. Those funds need to
Speaker:be invested. And actually, as recently as 2 years ago, we were working
Speaker:with a client and she was like, hey. I wanna really prioritize my retirement.
Speaker:Can you guys take a look at where we're at? And I went and looked
Speaker:at it. I was like, oh, none of your funds have been invested. They've been
Speaker:sitting here for 5 years in this holding account earning a a nominal
Speaker:amount of interest, but not having the gains that they could have by
Speaker:being invested in the market. And that's something that I feel like is not talked
Speaker:about enough. So make sure that you're either checking in with a fiduciary or a
Speaker:financial adviser. You're doing your research. You're I mean, even asking your
Speaker:accounting firm to take a look at it. We're not here to advise on your
Speaker:investments, but we can say, like, yes, it looks like everything's invested. You know,
Speaker:continue whatever your strategy is there. I also
Speaker:wanna make the point that it's important to know what
Speaker:you're investing in because a lot of mutual funds or
Speaker:managed funds have a hefty management fee associated with
Speaker:them. So the return that they might be advertising
Speaker:might be exaggerated because it's not being
Speaker:reduced by the management fee. Oftentimes, you get a better rate by
Speaker:just investing in an index fund, something with that gives you
Speaker:diversification with a low administrative fee. Mhmm. And
Speaker:then also it's important to know if you're if you're an employee
Speaker:and the options for investments
Speaker:when your employer sponsored retirement account might be limited. And
Speaker:they might be limited to these managed funds that take large
Speaker:management fees. So oftentimes, especially if you're an employee,
Speaker:you'll have better options for better
Speaker:investment options in an individual retirement account
Speaker:than you can invest in through your employer sponsored account.
Speaker:But it's always best to at least take the employer map if you're an
Speaker:employee. Absolutely. Okay. This is another
Speaker:hefty one. So entity selection. So
Speaker:many of our clients aren't even aware of what entities are
Speaker:potentially available to them, or they've seen something on TikTok or
Speaker:Instagram reels, and they pop in and maybe they have an s
Speaker:corp election and they shouldn't be. They're not even turning a profit yet, or maybe
Speaker:they're making a $150,000 a year in profit and are a great
Speaker:candidate, but had no idea that it even existed. So how
Speaker:does business structure I mean, this is a very broad term. We're not gonna go
Speaker:super deep into it, but how does business structure impact your taxes?
Speaker:Yeah. That is a complicated question. Okay. So by default, if
Speaker:you're someone who's in business for yourself, it can be a side hustle or it
Speaker:can be your full time thing, but you're gonna be classified as
Speaker:a sole proprietor. Your your tax entity. It
Speaker:it's important to realize that there's legal entities and there's tax
Speaker:entities, and they can be different things. The default for
Speaker:someone who's self employed is to be taxed as sole proprietorship, which files a
Speaker:schedule c to report their income and expenses. And that's goes
Speaker:with their personal tax term, their form 1048. Then
Speaker:if 2 people are in business together with
Speaker:or without a legal entity, they are tasked
Speaker:as a partnership by default. And
Speaker:we really like, and most people do, LLCs,
Speaker:especially for small business owners because LLCs are
Speaker:a legal entity, which are organized at the state level.
Speaker:And every state has different rules around their LLC.
Speaker:LLCs have the advantage that they can elect to be
Speaker:classified as an S Corp or a C Corp for
Speaker:tax purposes. Or if they're a multi member LLC,
Speaker:be taxed as a partnership. And,
Speaker:there's different tax advantages to being an s corp, being a c corp, or
Speaker:being a partnership, depending upon your ownership structure,
Speaker:your business operations, the type of partners
Speaker:or investors that you have. And so it's really
Speaker:can be endless, but just single member LLCs, if someone if you set up a
Speaker:single member LLC for liability protection,
Speaker:for tax purposes, that's a disregarded entity. And
Speaker:it's you're just a sole proprietor. Your taxes is a sole proprietorship.
Speaker:But we recommend setting up LLCs even if you're gonna be taxed as sole proprietorship
Speaker:and getting an EIN because that allows you
Speaker:the opportunity to elect to be taxed as something different in
Speaker:future. Most often an S Corp and it
Speaker:allows you to make late S Corp elections. If you
Speaker:your income's higher than you think, or you find out about s corp elections
Speaker:after the initial deadline, you can still be eligible
Speaker:for that late election, which is never guaranteed, but
Speaker:is often approved. Absolutely. I think that with s corps too,
Speaker:Tyler, a lot of clients aren't sure what it even makes sense. And I know
Speaker:that this varies dramatically by how much work they're putting into the
Speaker:business, what their, cost of living is, what their industry is.
Speaker:But as a very general rule of thumb for something to sort of
Speaker:look at inquiring into further, let's say I come to you and I'm a single
Speaker:member LLC, so it's just myself. I am a disregarded entity. It's
Speaker:been relatively straightforward. My, you know, taxes have been on a schedule c.
Speaker:And I come to you and I'm like, you know, Tyler, I keep hearing about
Speaker:these s corps, these s corps, elections. Like, what when should
Speaker:I be looking at that? When does it apply to me? I know that our
Speaker:plans are really conflicting information for when they should even have that on their
Speaker:radar. So what's your kind of general rule of thumb for when they should look
Speaker:into it further? Loosely speaking, if your
Speaker:net profit after expenses is around 50
Speaker:to 60 k, you could probably benefit from
Speaker:an SL action. It it depends on
Speaker:really what reasonable compensation you would have to pay yourself
Speaker:as an officer employee of your business. So what
Speaker:happens is when your LLC, if your single member
Speaker:LLC makes an S Corp election, your LLC is
Speaker:going from being a disregarded entity to being
Speaker:taxed as an s corp. So you're setting up a tax entity, which is
Speaker:corporation. And whereas before the
Speaker:election, there was no separate entity for tax
Speaker:purposes. Now there is a separate entity for tax purposes, and
Speaker:you need to think of it that way. And as a
Speaker:shareholder of an S corporation, you were
Speaker:required to pay yourself reasonable compensation for the services
Speaker:that you provide as an employee of your s corp.
Speaker:And reasonable compensation is generally based upon what is the
Speaker:market rate for the services that you're providing. So what kind of work
Speaker:are you doing and how much work are you doing and
Speaker:what would it cost to replace yourself? That
Speaker:was what would be considered reasonable. And that generally
Speaker:involves having an idea of how much time you're
Speaker:working and what sort of tasks you're doing and what it would cost in your
Speaker:area to hire someone. And so that can be
Speaker:a pretty complicated analysis. The the best
Speaker:practice would be to do some sort of reasonable compensation study. And if
Speaker:you have a reasonable compensation study and our audit hit
Speaker:our your s corp is audited and the IRS wants to look at how did
Speaker:you determine reasonable compensation, that's what you provide to them. And that's what
Speaker:they would be looking for. So the tax
Speaker:reduction that comes from being classified
Speaker:as an s corporation is not a reduction in income taxes, but it
Speaker:is a reduction in employment tax. So as a sole
Speaker:proprietor, all of your business profits will be
Speaker:subject to self employment tax. That's the money that goes into
Speaker:Social Security Medicare. So, ultimately, the idea is you're still gonna
Speaker:get that money back. But I'd
Speaker:rather have the money now invested if it was me than
Speaker:rely on the government to invest it on my behalf. So
Speaker:the tax savings of the s corp come from the
Speaker:profits that come through the s corp after you've paid
Speaker:yourself officer's compensation in an amount that's
Speaker:reasonable. So, basically, you get about 15%
Speaker:reduction in self employment taxes on that portion
Speaker:of s corp profit after your salary.
Speaker:So to give a real world example, right, using your $60,000 in profit
Speaker:and, again, when you say it's time to kind of start potentially looking at an
Speaker:s election when you're around the 50 or $60,000 mark,
Speaker:it's income minus expenses. Expenses do not, at that point, include what you pay
Speaker:yourself when we're looking at profit. Correct. I think a lot of small business owners
Speaker:factor their owner's draw, their owner's compensation into that
Speaker:number. So if we have $60,000 after expenses,
Speaker:and let's say that you do a reasonable compensation study and that reasonable compensation
Speaker:study, you feel really confident that $36,000 a year for
Speaker:your salary is realistic. So that would leave the
Speaker:additional $24,000 of that $60,000
Speaker:to be passed through to you as profit. So that
Speaker:$24,000 would not be subject to the
Speaker:15.3%. Percent.3. Self employment
Speaker:taxes that it would have been subject to had you remain taxed as a sole
Speaker:proprietorship. So quick numbers, 15%
Speaker:of 24,000 is $36100 So that would
Speaker:basically be your tax savings, your tax reduction
Speaker:of the employment taxes in the situation where you're a single member LLC
Speaker:electing to be taxed as an s corporation with profits of
Speaker:60,000 that they're then reduced by $36,000
Speaker:of reasonable compensation. So that $36100 of
Speaker:tax savings that you realize then
Speaker:also comes with the added responsibility of
Speaker:filing a S Corp tax return and running payroll,
Speaker:which comes with additional expenses. That's why there's a
Speaker:certain threshold at which it becomes a
Speaker:net positive to make an S Corp election when the
Speaker:tax savings exceed the hassle and added
Speaker:expenses, basically. The hassle and the added expenses of
Speaker:filing payroll and filing an s corp tax return.
Speaker:That's why it's kind of dependent ultimately on what is your
Speaker:reasonable compensation so we can determine what are your tax savings gonna
Speaker:be after that amount is paid. Right. Because we don't want and I
Speaker:I know we've seen it before, but we've seen businesses come to us that are
Speaker:you know, we're single member LLCs. They have an s selection, and they're not
Speaker:even turning a profit yet. And so you're having all of these extra
Speaker:costs and requirements that don't necessarily make sense to your business
Speaker:yet because either they thought that they needed to be. They, again, saw something on
Speaker:TikTok somewhere that wasn't applicable to their business yet. So I do think
Speaker:it's really important to be having a conversation with someone that knows
Speaker:your financial situation, whether it's your accountant or
Speaker:your bookkeeper or your tax preparer. You need to be chatting about what this
Speaker:looks like in your business before just jumping into it. And, also,
Speaker:I know that, like, we both go through and we wanna make sure that you're
Speaker:going to be saving money because I don't want you making an s election
Speaker:if you need to be paying yourself an $80,000 a year w two
Speaker:compensation for it to be reasonable, and you're making $80,000 a year in
Speaker:profit right now. All of your profit would be swallowed up by that. You'd have
Speaker:some extra requirements, and it really doesn't make sense at that point. Again, super
Speaker:general guidelines that you want to be having a bigger conversation
Speaker:with a professional when you do get to the point that you think it might
Speaker:be worth it. You also need to be ready
Speaker:and willing to make sure to stay on top of your accounting
Speaker:records and do the necessary bookkeeping
Speaker:and running payroll. So you're able to prepare
Speaker:the s corp return. It's more responsibility.
Speaker:Absolutely. And if you don't wanna do the bookkeeping, you don't wanna hire someone
Speaker:to do the bookkeeping, even if the s corp election could save you
Speaker:tax money, it might be more of a headache than it is.
Speaker:Absolutely. I think that's great, Tyler. Thank you. Last but
Speaker:not least, the Augusta rule. And this is something
Speaker:that you and I had chatted about quite a bit over the last year and
Speaker:some change. So the Augusta rule, I know I've seen
Speaker:touted all over TikTok as one of those Tyler, you've shared
Speaker:that reel with me forever ago. It was like, hey. How did I write this
Speaker:off? How did I write that off? How did I write my house off? It
Speaker:was tax fraud. And the Augusta rule, I feel like, is an absolutely legitimate
Speaker:option, but it can fall into one of those things that can feel too good
Speaker:to be true and can be really misused because I think there's misinformation around
Speaker:it. So can you tell our listeners a little bit more about the Augusta rule
Speaker:and potentially who it could apply to? And, also, a lot of our business
Speaker:owners, I don't think it's applicable for. So who does it not apply to?
Speaker:Let me give some background. The Augusta rule comes from
Speaker:Augusta, Georgia, and the Masters Golf Championship.
Speaker:That's where the lobbying generated this rule,
Speaker:but basically you can rent out a
Speaker:residence for up to 14 days a year and
Speaker:not pay any income tax on the rental lease.
Speaker:But if you rent out 1, a residential property that you
Speaker:have for more than 14 days, you cannot qualify.
Speaker:So, you know, that that can be, if you have a vacation
Speaker:home, you can rent it out for 14 days, take the income
Speaker:from it and not pay any income tax on it. You still have to report
Speaker:the income on schedule leave your personal return. Or if you hold it in
Speaker:an LLC, you still gotta put the income on the schedule E.
Speaker:You still have to report the income, but then you can take a deduction. And
Speaker:that's where you get the Augusta rule exclusion. Business
Speaker:owners also. So you can rent out your house to any up to
Speaker:14 days and not pay any income tax on the
Speaker:rental. And it doesn't have to be consecutive, right? A 100 days, any calendar year.
Speaker:If you rent it out more than 14 days, you cannot qualify for the EHUS.
Speaker:Now if you're a business owner and many business owners do this,
Speaker:if you own if you're a primary residence, if you own your
Speaker:primary residence or you own a vacation that is
Speaker:not rented out more than 14 days a year and
Speaker:is not your principal place of business, you can rent out your primary
Speaker:residence or your vacation property for up
Speaker:to 14 days to your corporation
Speaker:and qualify for the same rule. If your home is your principal place of
Speaker:business, you cannot rent it out and qualify for the Augusta. If you could have
Speaker:a home office and then also have a vacation property and
Speaker:take the Augusta rule on the vacation property. Say for instance,
Speaker:you have one house, you own your primary residence. It is not your
Speaker:principal place of business, meaning you have another place where you
Speaker:commute to on the daily and conduct your business.
Speaker:Your business could rent out your home at a fair market
Speaker:value, meaning pull comps from Airbnb. Up
Speaker:to 14 days, use your home for legitimate business
Speaker:reasons. All of that should be documented. The comps, the
Speaker:business use of your own and your business, your
Speaker:corporation can pay you. Fair market
Speaker:value rent for 4 up to 14 days. And there should be an
Speaker:actual cut check cut corporation to you as an
Speaker:individual. You should invoice your corporation.
Speaker:And then that amount of rent that your corporation pays you to
Speaker:rent your home can be excluded. So you still have to put the
Speaker:income on Schedule E, but then you could take the deduction, the the
Speaker:Augusta rule exclusion on Schedule E and
Speaker:0 out the income, essentially. And that's the Augusta rule.
Speaker:But if your home is your principal place of business,
Speaker:you do not qualify to take the Augusta rule on your house
Speaker:if paying from your business. But you qualify for the home office deduction,
Speaker:which is also fantastic. And the other benefits of the home office deduction is
Speaker:that your home being your principal place of business is your
Speaker:mileage, your business mileage. Accrues from when you leave your
Speaker:house to when you get back for business purposes, which is a bid
Speaker:deduction in and of itself. And owned that office deductions can be pretty
Speaker:lucrative as well. They seem less sexy than the Augusta
Speaker:rule, but they're way more functional. I think that's so much
Speaker:of taxes and accounting. Like, the sexy quick fixes generally aren't the sexy
Speaker:quick fixes. It's more being consistent over time or the
Speaker:documentation required because, like, let's say you can do the Augusta rule because you have
Speaker:a situation that works. You need to have documentation. You're not gonna be if you
Speaker:have a 2 bedroom house, you're not gonna be running it out to yourself for
Speaker:$8,000 a night unless that's what the actual market comps look like or you're
Speaker:doing it during the era's tour or doing, you know, there's a Super Bowl there.
Speaker:Like, you can plan things strategically. But, again, you have to have documentation to
Speaker:back it up for why you're doing this. And I think the documentation
Speaker:is sorely lacking for a lot of individuals because they just don't know that they
Speaker:even need to have it. You know, they're they find some information somewhere and run
Speaker:with it. If you wanna use the gastro, you need to
Speaker:plan ahead of time and follow through with that
Speaker:plan. You can't just look back and take the Augusta rule.
Speaker:Okay? Whereas the home office deduction, you might have
Speaker:qualified for it and never have planned it and be like,
Speaker:oh, at young age, I have an office in my house. Office. Office
Speaker:space. And I didn't plan that at all. And, hey, I get this
Speaker:deduction. So it's like, home office deduction is way more
Speaker:straightforward. In terms of the home office deduction, there's either the
Speaker:simplified method or the actual
Speaker:expenses. The simplified method is limited to, I believe, 300
Speaker:square feet. You get $5 per square foot. So it's limited to $1500
Speaker:The other way is you take the exclusive business use
Speaker:square footage of your home and over the total square
Speaker:footage of your home. And that exclusive business use square
Speaker:footage can include storage. So if you have a closet corner of a
Speaker:room where you store gear or supplies or equipment that qualifies
Speaker:as part of your own office, business square footage. So you have the business
Speaker:square footage of your home over the total square footage, and then you can
Speaker:take a deduction in that percentage of
Speaker:your mortgage interest, your real estate taxes, your homeowners
Speaker:insurance, your HOA fees, your landscaping expenses, your repairs
Speaker:and maintenance on your home. Am I missing anything? Utilities?
Speaker:Utilities. Yeah. No. That's a big it's yeah. You can also
Speaker:depreciate your home. But if you ever plan
Speaker:on selling that home, you're probably gonna qualify for the homeowner's
Speaker:exclusion of that gain. And if you previously
Speaker:depreciated your home office, you're gonna have to reclaim that income and
Speaker:it's not gonna qualify for the homeowner's exclusion. So I think it's silly
Speaker:for people to depreciate their home 99.9%
Speaker:of the time because they're gonna have to reclaim that deduction as income later when
Speaker:it would have been excluded as a gain when when they sell their house. If
Speaker:you're never gonna sell your house, then depreciate it. What
Speaker:happens if you have a dedicated we have a couple of clients I know that
Speaker:have maybe built a shed in their backyard, and that's their dedicated workspace.
Speaker:Yeah. Yeah. That same. Add that square
Speaker:footage, put it over the total square footage. You're good to
Speaker:go. And when it comes to things like painting that or maintaining
Speaker:it, all of those would then be like dedicated home office expenses at that point.
Speaker:Yes? So then if when you have a home office, that is your
Speaker:principal place of business. Any direct
Speaker:expenses to your home office, furniture, fixtures,
Speaker:repairs, or maintenance of that home office are direct home
Speaker:office expenses. And those are deductible fully. They don't
Speaker:need to be deducted as a portion of your
Speaker:total home base. Now what happens because I this actually came up last
Speaker:year. But what happens if you're you have a dedicated room in your house for
Speaker:your home office, and you have to get a new roof, and
Speaker:you lay out $30,000 on a new roof for a general that they're
Speaker:that cheap. What happens? Do they get to take a portion of that expense? How
Speaker:do they track that? That would fall onto the same as
Speaker:depreciating your home. Mhmm. It would have a class life that you would have
Speaker:to depreciate it over. You would depreciate it in proportion to the square
Speaker:footage of your business, of your home office over the total
Speaker:home. And again, I would Right. Right. So what are other expenses
Speaker:potentially that you've seen pop up that are depreciable like that? I mean, a
Speaker:new bathroom, a new kitchen, you know, you're replacing all the
Speaker:floors in your house, a new HVAC system. Yeah. The
Speaker:big A deck. Yeah. These are not repairs. Yeah.
Speaker:Yeah. These are these are new yeah. New or larger
Speaker:improvements, I would say to the home and the living space on the whole. I
Speaker:mean, in for for businesses, they have the de minimis safe harbor
Speaker:election where if you have audited financial statements, you can elect to
Speaker:expense anything below any expenditure below
Speaker:$5,000. And if you don't have audited financial statements, you can elect to
Speaker:deduct any expenditure below $25100.
Speaker:And they do change that limit with think it was somewhere that they might
Speaker:be increasing it. But I don't know if that would
Speaker:directly apply Mhmm. The diminished safe harbor to the home office,
Speaker:but I think it's a decent enough guideline. If the expenditure is greater than $25100
Speaker:definitely need to consider whether or not it should be capitalized and depreciated.
Speaker:And that's great information. So to wrap everything up here,
Speaker:we've covered how to maximize your mileage deductions, what you need to be tracking there.
Speaker:We've discussed health insurance for self employed individuals,
Speaker:smart retirement contributions, and when those are applicable
Speaker:for you in your business or in your personal life, how to choose the
Speaker:best business entity, and, again, navigating the Augusta
Speaker:rule. So if all of this was helpful for you, I do
Speaker:encourage you to check out the get your finance shit together mastermind.
Speaker:Tyler will be a special guest in there. Oh. Yeah. I know. We're gonna be
Speaker:talking all things taxes, and we will have
Speaker:a lot of sports, a live group program for business owners that are
Speaker:wanting to understand their finances better. We will have a lawyer
Speaker:coming in. We have a fiduciary that will be coming in to chat all about
Speaker:self employed retirement, and we have some other really special guests. This is a
Speaker:10 week program that runs from the week of September 15th until the week
Speaker:before Thanksgiving in the US. And I do encourage you all to take
Speaker:a moment and check out the link in the notes or follow us on Instagram
Speaker:to get more information. Tyler, thank you so much for joining us. I'm really
Speaker:excited for this teaser for what will be covered in the Mastermind.
Speaker:That's a wrap for this episode of the Wealth Witches podcast. I hope our
Speaker:magical money talks have left you feeling empowered and inspired.
Speaker:Remember, wealth isn't just about dollars in the bank, it's about abundance and
Speaker:financial freedom in all aspects of your life. I'm Caitlin Magnuson
Speaker:encouraging you to keep challenging the status quo and embrace your inner witch on
Speaker:this financial journey. Until next time, stay
Speaker:magical.
