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small business

Taxes and Investing

The Sweet Spot of Non-Cash Deductions

There is an old Looney Tunes cartoon where Daffy Duck is portraying Sherlock Holmes. Daffy is seated at a desk stacked with papers vigorously working the calculator. Porky Pig, portraying Watson, walks in and asks, “Whatever are you doing, Holmes.” “Deducting, my dear Watson. Deducting,” came the frantic reply.

Deductions come in a variety of flavors. We are all familiar with deductions matched with an expense. Donations to charity are deductible on Schedule A. Business owners deduct marketing expenses dollar for dollar.

There is another elusive deduction taxpayers only dream about: the non-cash deduction. The appeal of the non-cash deduction is the large write-off without a matching real world expense. Capitalizing on non-cash deductions can supercharge your retirement or debt reduction plans. The list of non-cash deductions is long. We will explore several ways you can reduce your taxes without spending a penny or taking a deduction significantly higher than the actual expense and stay out of jail in the process.




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Early Retirement, Lifestyle, Small Business

Fighting the Profit Train

One of the mantras of the FIRE (financial independence, retire early) community is the owning of income property. With rare exception, investors do it all wrong, taking on extraordinary risk for no reason.

Side gigs are handled the same way. Whether you run a full-fledged business or a side gig, you probably make the same mistake real estate investor’s do.

Americans love to invest at home. There is a tendency for people from all countries to focus their investment dollars in the domestic market. The comfort of understanding the local business climate clouds the investor’s judgment. American’s are the worst. For decades I have recommended 70% S&P 500 index fund/ total market index fund and 30% international index funds for my American clients. This is still weighted heavily toward U.S. companies. The diversification in broad-based index funds with a third of the portfolio in international is a good mix in my opinion. Small business owners and real estate investors rarely make such a sound decision.




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Early Retirement, Lifestyle

Crime and Punishment

Tax season is racing toward the finish line. There are 5 days left, including today. I’ll work every day, even Easter Sunday to get as many returns out before the due date.

The stack of tax returns on my desk is taller than I hoped by this time. Incomplete files are put to the side until all documents are in. All too often clients piecemeal information. This forces me to put these accounts at the bottom of the stack so I can focus on files with all their documents. Every time I open a file I review all the prior work done to ensure nothing is missed. Dribbling in data wastes a lot of time.

The good news is that every return with complete data in the office by April 1st will be done by the due date. In fact, most returns in the office by April 10th will be done on time. There will be the rare exception due to required research.

The days are long and I am beyond exhausted. There is a place past the “second wind” where motivation is based on sheer willpower. That is where I am now. I live for this last week like an addict anticipating her fix. Each year as the New Year approaches the taste coats my mouth. I lick my lips in anticipation. The game is on.

The number of tax returns prepared some days sometimes boggles the mind. There have been a few days where the number claws close to 20. Complex returns slow the pace down to a crawl with some days only moving one, two or three returns from the stack. I hate those days. I want to serve as many clients as possible.

Preparing so many returns takes a team effort. Many returns have the bulk of the data already entered for me. I review most returns before they leave my office. You would not believe the shine a man with 30 plus years experience can put on a tax return.

I am too tired and exhausted to write a high quality blog post today. The well is empty. Monday another post is due and I am not sure what will be left to write. My mind is too focused on real tax returns to waste any speck of energy on a random idea in a blog post. Tuesday the race is over. I will take a day to relax and work around the farm. I’ll get a better post out later on Wednesday as I will have time to think and reflect.




After tax season I have a podcast to prepare for. Around May 1st I meet Jim Collins as he visits the fine State of Wisconsin.  In late May I am in Seattle speaking at Camp Mustache 4. I might have two sessions I speak at: one on anti-Mustachiamism (I didn’t know so many people would be interested in that) and a second as a comedy skit. We’ll see how my preparations go before the final commitment is made. Standup comedy is a lot more work than you can imagine.

Rather than keep rambling, I encourage you to read a few posts appropriate for this time of year for those of you going through withdrawal symptoms. (Gawd, that Wealthy Accountant guy can sure spin a fine tale.) (Note: I am not conceited. Just tired as hell and getting a bit punchy.)

Knowing When Not to do it Yourself is a good start. Here is a post on filing an extension to pay and/or file your taxes. A word of warning: When tax season reached its conclusion last year and I wrote, egads, about tax stuff, I received a very nasty letter telling me how much I suck and that used to be such a great writer but now suck completely. I think the guy left a comment too. Go check it out.

For five days sleep will come in fits. The taste coats my dry mouth. The release when it is over is like nothing else you can experience.

Don’t cry for me, however. I am doing exactly what I love doing. This is what I want; this is what makes me feel alive. The numbers. The game. Some people desire retirement so they can travel, fish or golf. Except for that year I spent as a janitor, ah, custodian, I have never worked a day in my life. It isn’t work when you have this much fun.

Tired is a good feeling. Then the anticipation builds slowly all year until the holidays arrive. Then the sickness sets in hard again. The addict is ready for his next fix.



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Lifestyle, Small Business, Taxes and Investing

It Pays to Have a Hobby

The demographic reading this blog does the things necessary to retire early. The same demographic believes in a side hustle to retire even earlier or to fill time once work becomes an elective. These facts make hobby rules an important consideration. The tax law has a massive loophole few use.

Accountants in the room will understand what I say next. A client walks in the door and his hobby finally turned a few dollars of revenue. No worries, the client says, I can lose money in my business for three years before I have to shut it down and start over. The client actually thinks there is a rule saying you must make a profit 2 out of every five years. By this yardstick, Tesla, a publically traded company, would have to shut down. (Tesla has a decade of loses as I write this.)

The rule people think applies to small businesses actually is a hobby rule meant to serve the IRS, not you. If the rule wasn’t there, people like me would have a field day. Self-employment tax would be a thing you only read about.

People want to be a business when they lose money and a hobby (if they knew the rules) when they have a profit. Race car drivers want to write-off $48,721 of expenses because they won $2,100 of prize money racing. Sorry, it doesn’t work that way.

But there is a strategy here you can use to seriously reduce your tax burden.




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Small Business, Taxes and Investing

Applying Cost Segregation on a Tax Return

A few weeks ago I wrote about the massive tax benefits to investment property owners and business owners who also own commercial real estate using a cost segregation study. Some of you took me up on the offer and now are up for a significant tax reduction. Then the problems started. I didn’t anticipate the large number of tax professionals who didn’t know how to handle cost segregation studies on a tax return.

Before you call your tax preparer bad names, know most tax professionals rarely, if ever, see a cost segregation study in their office. When the rules changed a few years back I doubt 1 in 100 accountants handled their client tax returns correctly as it pertained to the repair regs and tangible property rules. The good news is the changes only required certain actions in the first year of accounting method changes. The bad news is that most tax professionals don’t know how to handle a cost segregation study on the actual tax return when a client comes in with one. Not to worry. Your favorite accountant will spill the beans on how to get it done right.  No picking on your accountant either. This is advanced tax planning and tax law can be miles from tax application at times.

Tax professionals will find this helpful; taxpayers should find value, too. Knowing of a tax advantage is only worth something if you can apply it. There are two major issues surrounding cost segregation studies: tracking the components/elements listed by the study and taking full advantage of the additional depreciation allowed.

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Small Business, Taxes and Investing

Stop Paying Your Quarterly Estimated Taxes!

 

When life is good the revenuers have a way of raining on the parade. A large year-end bonus, mutual fund distribution, or large year-end sale at your business can crimp your tax situation in more than one way. A quick call to your accountant gives you the answer: Make an estimated tax payment.

But making an estimated tax payment can hurt you! A quick payment at the end of the year to eliminate a tax liability still subjects you to an interest penalty in many cases. What you need is a quick and dirty guide on estimated tax payments to avoid nasty surprises, and even better, a way to game the system. (Who doesn’t like gaming the tax system? It’s this accountant’s favorite pastime.)

Our goal today is to pay as little as possible for as long as possible. There are two reasons for this: 1.) The longer you keep your money the longer it keeps working for you earning interest, and 2.) When you know you owe money you start thinking of ways to reduce the liability you have to eventually pay. I understand interest rates are very low as I write this. Still, keeping you money invested longer in your account is better than paying the government. If you are in the “digging out of debt” phase of your wealth building, keeping your money longer means less debt for longer. Since debt interest is significant, the later you pay the better for you.Continue reading

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Why Trade Wars Never Work

An old nemesis has returned to the United States and other nations around the planet: protectionism. These leaders, and the voters who bought their snake oil, falsely believe protecting their borders by building walls, taxing imports, claiming currency manipulation and threatening to dissolve trade agreements will bring jobs back home. They’re wrong.

What these well-intentioned people forget are the lessons of history. They forget about The Tariff Act of 1930, also known as the Smoot-Hawley Tariff, the one piece of legislation that hastened, accelerated and prolonged The Great Depression. People forget about the jobs created that did not exist before due to current trade agreements and the lower prices consumers paid for goods and services.

The misguided perception that jobs will be created for nations with trade deficits by preventing trade does not work. And we are dangerously close to poking the sleeping giant again. Once a trade war begins it is hard to stop the cascading effects. The damage is swift and painful with few options available less painful. Best to leave the sleeping beast where she is. But politicians sometimes have an agenda we all pay the price for.

But why do trade barriers cause job loss? If the U.S. has a massive trade imbalance, curtailing imports should bring the jobs home to create those products, right? It’s not that simple. Today we will explore why curtailing trade destroys jobs in all countries involved. Open trade is beneficial to everyone.




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Lifestyle

Preparing for Growth at The Wealthy Accountant

TWA was turning into a turkey without some updates.

The Wealthy Accountant is growing and with growth comes growing pains. A local web designer was hired to bring this blog to life. But blogs are different from static web pages most small businesses use. A blog lives and breathes change every day as people read and interact with it. The writer provides a steady stream of information until the amount of data contained is immense.

This is the 202nd post here. Close to 350,000 words of information and storytelling are contained within. This is the equivalent of four fairly long novels. It is hard to believe The Wealthy Accountant reached these levels only after slightly more than a year in existence.

Traffic continues to grow as well. More people are reading more material. Requests to bring order to the large number of posts and subjects has been steady. This past weekend some of these changes were implemented.

The Wealthy Accountant changed hosting services this past weekend. There were a few unscheduled service failures. It was necessary. The page loading speed was slow and getting slower. The new system installed will allow me to scale this blog to greater heights while providing a better user experience.

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