Posts Tagged ‘side gig’

Micro Business and Side Gig Tax Guide

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

The reason for starting a side business are legion. Maybe early retirement left you with more free time than you know what to do with. Maybe you took early retirement a bit early with the intentions of earning some side income. Or, personal or family issues limit the hours available for gainful activities.

Micro businesses are a great way to earn more money without a massive expenditure of time. You can enjoy the best of both worlds: reasonable income and freedom.

But there is one factor that causes more headaches than any other: taxes. Micro businesses/side gigs have special tax rules that can cause serious problems, or, if done correctly, virtually eliminate your tax bill.

I’ve published on this in the past, but new tax rules require I provide an entirely new guide. Several notable changes require your attention. A misstep will cost you hard-earned tax dollars; a well thought out plan allows you to keep most or all of your side gig income.

 




Highlights of the Changes

First we need to define what I mean by a micro business or side gig. For this discussion I consider a business micro if profits (not revenue!) are less than $30,000 annually and are expected to remain so in the future. This profit level is confined by economic and personal factors. You still have a micro business if you elect to remain small.

By eliminating businesses with over $30,000 of profits we also limit the choices when we plan for taxes. That allows for a detailed analysis of the issues without concerns for larger side gigs.

One of the large changes to the micro business environment involves hobbies. In the past (2017 and prior) hobby income was reported on the front page of Form 1040 with expenses deducted on Schedule A as an itemized deduction. Hobby expenses could not exceed reported income from Form 1040 and the expenses were combined with multiple other deductible items (job search expenses, safe deposit boxes, tax preparations fees, et cetera) and then 2% of adjusted gross income was subtracted.

Starting in 2018 hobby expenses are no longer deductible in any amount while income is still required to be reported. The revamped Form 1040 also means you need Schedule 1 to report hobby income (see inset).

Where to report hobby income on a tax return.

Where to report hobby income on a tax return.

 

The other big change for micro businesses comes from §199A, the Qualified Business Income Deduction. This new animal allows for a 20% deduction on certain business income (profits) without an out-of-pocket expense. We don’t have to worry about limitations since we are focused on businesses/side gigs with under $30,000 of annual profits.

 

While tax code changes didn’t affect LLCs, S corporations or regular corporations (the C corporation), there are considerations for micro businesses when it comes to entity formation.

 

The Hobby Decision Tree

Even without the possibility of deducting any hobby expenses, there are times being a hobby might be advantageous. Before we begin this part of the discussion you should review this article to refresh your memory of who can and cannot report income as a hobby.

Why would anyone want to report income as a hobby? First, you may actually have a hobby rather than a sole proprietorship (a small business for tax purposes). Second, there is still a possible tax advantage to hobby income over small business income.

Hobby income does NOT incur self-employment tax on the income. A hobby with few expenses will be taxed less as a hobby than over a sole proprietorship.

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

Example: Fred has a hobby building model ships. He sells a ship every 4 or 5 years without a profit motive; he just likes building model ships in his free time. He meets all the criteria of a hobby. If Fred sells a model ship for $5,000 and reports it as business income he will face income tax at ordinary rates (determined by his income level), plus a 15.3% self-employment tax. Reported as a hobby Fred would not pay around $750 in SE tax. He would still pay income taxes on the hobby income at ordinary rates.

Once the self-employment tax issue is understood (or experienced), smart taxpayers start pushing their tax professional to list income as hobby versus small business income. However, you are automatically considered a business by the IRS anytime you turn a profit in 3 of any 5 year period. 

There are ways around every problem. First, you don’t have to conduct the same hobby every year. If you report hobby income every year, but from significantly different hobbies you should be prepared to explain to Revenue your position. (I would actually explain it with an attachment to your tax return every year you report hobby income in 3 or more of any 5 years.)

Second, you can enjoy your hobby like Fred. Fred loved the process of fleshing out a detailed ship from times past. He would spend a year or more on each masterpiece. Fred doesn’t have to sell a ship every year. He can sell his growing cache once every 4 or 5 years. (His wife might require Fred to divest in his some of with hobby creations due to space limitations. She might get sick of cleaning the growing horde of ships decorating every corner of the house.)

Because Fred has few expenses (perhaps $500 or less per ship) most of his income from the sale is profit. However, since he is a hobby he avoids paying self-employment tax on top of income taxes.

How do new tax rules affect your hobby decision? While avoiding self-employment tax can be enviable, hobby expenses are no longer deductible, meaning your income tax will almost certainly be higher. Your other income determines your tax bracket. High earners might be better off as a business than a hobby once expenses are considered.

Finally, don’t succumb to temptation to cheat. The IRS watches hobby income and gets irritable when the line is crossed. Yes, if Fred had a model ship hobby where he completed and sold a ship every 5 or for more years for $80,000 he could avoid SE tax. But he better be prepared to explain why he isn’t really a business. Be sure to read the article from the link about to gather a better understanding of where the line is if you plan on reporting income from a hobby.

 




Business Deductions

Business deductions that are “ordinary and necessary” and that are reasonable are allowed. This is a very wide road to travel.

Your business structure doesn’t change what can be deducted. A sole proprietorship, regular corporation, S corporation and partnership can all deduct reasonable ordinary and necessary business expenses.

Let’s talk about common deductions first. Anything related to your business is usually deductible. Advertising, rent, utilities, office supplies and bank fees are just a start. A painting to decorate a wall at your business or home office is ordinary and necessary because it creates a better profit producing environment. (A Picasso would not be reasonable and would be disallowed for all but the largest of businesses and even then might be a problem. Remember the expense needs to be reasonable.) Desks, computers, chairs are also business expenses, though they may need to be depreciated over a number of years.

There is a sweet spot in business deductions, too! While cash going out is easy to record and deduct, non-cash deductions are easily forgotten. You may qualify for an office in the home. With the standard deduction much higher now the office in the home might be a way to benefit from some of your mortgage interest and property tax expenses.

Explore all the tax benefits of a side hustle with this Micro Business and Side Gig Tax Guide.

Explore all the tax benefits of a side hustle with this Micro Business and Side Gig Tax Guide.

Mileage is another expense without an easy correlation. The mileage deduction can exceed actual cost, creating an additional non-cash deduction.

Meals and entertainment offers a choice when traveling. You can use actual expense or a per diem. The per diem can exceed your actual outlay providing another non-cash deduction. The beauty of this method is that you can choose which method you use for each business trip. High meal expense trips can use actual expense and low meal expense business trips can use the per diem.

Bonus depreciation is 100% this year for most new assets. The de minimis election to deduct rather than capitalize tangible property with a class life of 20 years or less and with an initial cost of $2,500 or less also allows for faster expensing of most business assets purchased.

You can even estimate some expenses! If receipts are lost or destroyed you can use reasonable numbers for expenses, except for meals & entertainment, travel, auto expenses and listed property. Advertising, supplies and postage can be estimated if records are unavailable. Be sure to review the rules with the link at the beginning of this paragraph to avoid problems.

And here is a final deduction nugget frequently overlooked. If you have a customer appreciation event, Christmas party for the office or other business event at your home you can charge your business a reasonable fee (deductible) and not report it on your personal return (tax-free) if you rent out your home for 14 or fewer days per year. To determine “reasonable”, check around locally for the cost of renting a similar facility. As always, document ad nauseam.

 




Retirement Planning

Even the owner of a micro business can reduce or eliminate income taxes.

We turn now to deductions that amount to moving money from one hand to the other and receiving tax advantages as a result.

There are a host of retirement plans available to micro business owners unless the income is classified as hobby income.

SEP plans are probably not the best choice for a micro business due to contribution limitations based on income. (20% of a $20,000 profit is only $4,000).

401(k) plans, including solo plans, allow for larger deductions ($18,500 in 2018 and $19,000 in 2019) but can have higher fees than other options.

If other income doesn’t preclude an IRA contribution you then have a choice: Roth or traditional. The maximum contribution allowed for either is $5,500 in 2018 and $6,000 in 2019; folks 50 and older on the last day of the tax year can add an additional $1,000.

If the traditional or Roth IRA are not allowed or not enough for your needs you should consider a SIMPLE IRA. SIMPLE IRAs are just the way they sound: simple. They are simple to setup and maintain with low fees, if any. Investment houses like Vanguard and Fidelity will help you with the process if you have issues. The best part of SIMPLE IRAs is the higher contribution limits: $12,500 ($13,000 for 2019) with a $3,000 additional catch-up provision for those 50 and older on the last day of the tax year. Also, you can contribute 100% of your business profits up to the contribution limits! This means if your micro business earns $10,000 per year you can contribute the entire amount, avoiding income tax on your business income (SE tax is stilled owed on business profits regardless of retirement plan contributions).

 

§199A: The Qualified Business Income Deduction

This new and unique deduction is in the news a lot lately. The Code is vague on certain issues at it pertains to the §199A deduction. While vague may sound like a problem, tax professionals deal with vague tax issues all the time. It comes with the territory.

We can avoid many of the complicated issues because we limited our discussion to micro businesses of less than $30,000 of annual profits.

Owning a micro business/ side gig/ side hustle is rewarding and profitable. Use this guide to pay the least amount of taxes with your venture.

Owning a micro business/ side gig/ side hustle is rewarding and profitable. Use this guide to pay the least amount of taxes with your venture.

Real estate investors of income property can also benefit from the 199A deduction. (Generally an income property investor must meet the definition of a “trade or business” (undefined as of this writing) before taking the QBI deduction up to the level of profit or 2.5% of the original basis before adjustment, whichever is less.)

Regular corporations saw a massive reduction in their marginal tax rates, except for the lowest bracket which was increase from 15% to the flat rate for regular corporations of 21%. Unlike partnerships, S corporations and sole proprietorships, the §199A deduction does not apply to regular corporation.

Revenue issued some guidance on the QBI deduction. One thing is certain, the deduction is allowed for all business entities, except regular corporations. Partnerships that pay guaranteed payments to partners (the paycheck portion paid to owners of a partnership, in a manner of speaking) will reduce the QBI deduction.

Example: Sally and Mark form a 50/50 partnership to sell widgets. They have one part-time employee. The employee receives a weekly wage and a W-2 at year-end. Sally and Mark agree to pay themselves $100 per week. They do not get a W-2! Instead, their payments are considered guaranteed payments to partners. If profits are $20,000 after all expenses, including guaranteed payments to partners, they use $20,000 to calculate their QBI deduction of $4,000.

S corporations generally require more than $30,000 of annual profits to be a viable choice for tax reductions. If you have an S corporation you must pay reasonable compensation to owner/employees which reduces the QBI deduction.

Sole proprietors do not pay themselves a wage or receive a W-2. Instead, they take draws. QBI is generally the reported profit of the sole proprietorship without regard to self employment taxes. Once again, multiple by 20% and deduct.

The QBI deduction is not taken at the entity or business level. The deduction is claimed on page 2 of Form 1040, Line 9 (2018 tax forms).

Claiming the Qualified Business Income (QBI) deduction(Section 199A) on your tax return.

Claiming the Qualified Business Income (QBI) deduction(Section 199A) on your tax return.

Caution! My journals have some conflicting advice on reasonable compensation to S corporation owner/employees and guaranteed payments to partners. Before Revenue released guidance on August 8th some felt guaranteed payments to partners and reasonable compensation to S corporation owner/employees would be added back before calculating QBI. Sharp readers called me on this. The reason for the assumed (by some people) add-back before guidance was released is so high earners couldn’t play with reasonable compensation to qualify for the QBI deduction in certain service businesses. Guidance now indicates QBI is profit after reasonable compensation or guaranteed payments.

Planing tip! Because S corporations require reasonable compensation to owners/employees, micro businesses probably do better as a sole proprietor since there are no wages to the owner to reduce QBI.

 

Entity Selection

I preach LLCs treated as S corporations a lot. However, micro businesses rarely benefit taxwise from such a structure. In most cases S corporation treatment does not lower taxes enough to offset costs of organizing as an S corporation until profits consistently exceed $30,000. Even $30,000 is really low! I prefer to see $50,000 or more before deciding to switch to an S corporation and only if it appears profits will remain north of $50,000 in future years.

We are discussing micro businesses of under $30,000 of annual profits so organizing as an LLC is fine for legal purposes, but electing to be treated as an S corporation is a questionable move if taxes are the reason why.

Your S corporation may have started as something bigger and withered over the years as you downsized. Keeping the S corporation may be more convenient than moving to a sole proprietorship.  For these reasons we’ll touch on S corporations.

S corporations generally pass all their profits to the owners on Form K-1. The QBI deduction is not lost! Rather, as stated above, owner’s wages are added back with 20% of this higher total deducted on page 2 of Form 1040.

We already discussed partnerships above.

While I focus on tax considerations, entities serve a legal purpose as well. I encourage you to discuss the legal ramifications of entities with a competent legal professional.

While the sole proprietorship is easy to organize, it also pays the most tax of any form of conducting business. Sole proprietors also face a highest federal audit risk, around 4% per year. Corporations (regular and S) and partnerships are audited at well below 1% per year. For this reason  alone you may wish to organize even a micro business as an S corporation, regardless of the tax ramifications.

 

The Best Tax Choice

Here is a step-by-step guide to deciding how to manage your micro business:

  1. Are you a Hobby or business? It makes a difference. A hobby is by far the easiest way to report income. But no expenses are allowed while SE tax is avoided.
  2. Choose an entity structure. An LLC provides legal protections and takes on the tax flavor you want. A single member LLC defaults to a sole proprietorship and if there are two or more owners to the business, partnership is the default. These are called disregarded entities (disregarded for tax purposes only, not legal purposes.)
  3. Make sure you don’t miss any deduction.
  4. Take advantage of the QBI deduction.
  5. Consider retirement plans.
  6. Enjoy! It is a micro business for a reason. Your goal is a bit of extra money while engaging an enjoyable activity.

 

Note: Technical corrections were made to this article. The complexities of the Tax Cuts and Jobs Act have caused serious issues when tax planning. The IRS issued some guidance on August 8, 2018, but more issues remain. Tax professionals are encouraged to contact the author if they disagree with a statement here. I have attended several training programs this year on the new tax rules and there are areas of disagreement between programs. I’ll make additional technical corrections as they are discovered by readers (or me) or further guidance is provided by Revenue.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!



If You Love Spending Money This Will Make You Rich

5 spending habits that can make you wealthy. How you spend your money determines how rich you will be. Right spending habits increase your wealth. #wealthyaccountant #spending #spendinghabits #investing #debt ##indexfunds #incomeproperties #rentalproperty #guilty #guiltyfeelings #buyersremorse“Should I feel guilty when spending money?” It’s a common question when I consult with clients. They are so tuned into frugality they sometimes start associating negative feelings with money. It’s a bad thing to start feeling.

Spending money is NOT an evil activity! In modern society we have it so easy that we tend to either overspend (the vast majority) or become hyper-frugal (a significant percentage of the demographic reading this blog). Both lifestyles are unhealthy. Overspending leads to serious problems when the bills come due and income might not keep up. Debt is a serious issue I ask clients (and readers) to consider purging. The opposite of overspending is the hyper-frugal drive. This can suck the pleasure out of life as fast as a heavy debt burden.

I tend toward the frugal side of the equation and get called out on it periodically, too. Sometimes I do things just because it’s the cheaper choice. If I were as smart as I think I am I would reconsider such decision-making. Frugal isn’t always the best answer.

Frugality for me is more about my hate for shopping. When I spend I know exactly what I want and side purchases are never a distraction.

Buying a good or service feels good even for a frugal accountant like me. I needed a longer breaker bar (torque bar) to get the lug nuts off a tractor tire so I can take it in for repair. The breaker bar I have is only 14 inches; the one I bought is 30. By the time you read this I might have that tire off with my new piece of equipment. Yes, I’ll save money on a service call by getting the tire to the shop, but it still feels kind of good knowing I have a shiny new tool in the garage.

But spending is a problem for many people. Frugality is a forced habit at best for the majority. Economically enforced austerity gives way to bad spending habits when normalcy returns. The cycle is familiar and we know it while we do it. If only we could stop.

Since most people enjoy spending money I thought I’d share 5 ways you should spend because this kind of spending makes you richer. In fact, if you don’t adopt these spending habits I outline below you will suffer serious personal finance issues. Those who have money will realize they were already spending this way. For the rest of you, please come along. I’m going to show how you will want to spend that money burning a hole in your pocket.




Maintenance

This may sound like common sense, but too many people defer spending to their detriment. Every so often you should change the oil in the car. It runs better and lasts longer when you do. When the roof needs replacement frugality is not your friend. The structural damage follows shortly after and gets very expensive. Then you get to spend a lot of money for no additional value. That is not a good spending habit.

5 ways spending can make you rich. Spending habits can lead to debt or wealth. Here are the secret spending habits of the wealthy.. #wealthyaccountant #secrets #wealthy #spending #spendinghabits #habits #debt #moneyDo-it-yourself (DIY) projects are a good opportunity to spend. One of the cables broke on my garage door recently. I bought new cables and discovered I didn’t have tools or the recommended bars to loosen and tighten the spring. I broke down a bought a pair (you need two) to finish the job. Now I need to keep them safe for a distant future event when I need to work on a garage door again. The cost was only $15, but it is spending. The spending saved me the cost of a service call which would have been significantly more. Some spending is good spending and increases your wealth.

The same situation occurred at the office this summer when I wanted to do some light landscaping. The place really needed it. Clients have a better opinion of an establishment with appealing décor. I acquired several quotes which all came in over $10,000. (And it wasn’t that big of a job!) I decided to do the job in-house. The cost of dirt and river rock and some seed money for some extra helping hands was under $2,000. I have several huge rolls of felt in the barn I used and unused treated fence posts from a previous farm project so that cost nothing extra. In the end I spent a couple thousand, assuaging my spending itch, and created over $10,000 in value; more if you count the added business an attractive building can bring in.

Maintenance and DIY projects are a perfect way to spend money in a way that creates value. If I would have written a check for $10,000 to landscape the office it wouldn’t have felt as good. I got the satisfaction of a job well done and the opportunity to order 10 yards of top soil and two orders of river rock. There were multiple spending opportunities for the same job. For people with an itch to spend, this might be a good way to kill two birds with one stone.

Pay Down Debt

I’ve preached this line often before. Loan payments are not completely new spending. The interest is, but it doesn’t feel like fun spending. You get nothing for the interest spending: no pretty baubles or service or vacation. Nothing. Your wealth just disappears.

The act of spending is addicting to many. Rather than spend on more stuff and putting it on the credit card at 18%, consider tricking your brain into spending the right way. Here is what I propose. Spending is about wanting something. Some people enjoy the shopping experience. Either way, turn these desires into a wealth creating machine. For the shopping addict, lay out all your debt and obsessively review your balances. Create an aggressive spending payoff habit. Set your payments up on automatic, but also send in extra whenever an extra nickel crosses your path. Turn it into a game! Have fun with this. Instead of building debt, turn debt elimination into an exciting adventure.

If shopping doesn’t trip your trigger then you probably spend just to have something new. I have something shiny and new you’re going to want: a debt free balance sheet! I mean it. Instead of a new boat, roll up your sleeves and butcher those bills. Remember, it is easier to enjoy a new toy when you don’t have to work to pay off the toy, plus interest.




Investing

Once you pay down debt you might be tempted to return to old habits which caused the financial problems. I say, “Nyet!”

The newfound habit you used to eliminate debt is a good behavior for proper future spending habits. Turn investing into an automatic wealth creating machine. Automating investing doesn’t always satisfy the itch to spend. There is a solution.

It may be hard to believe, but there was a time when I enjoyed spending a bit more than I tend to nowadays. Money was rolling in and times were good in the 1990s. I was smart enough to know good times don’t last forever so I devised a plan to satiate my spending desires with intelligent cash allocation.

These are the 5 things you need to spend on if you want to be rich. The 5 secret spending habits wealthy people use are available to anyone. Frugality isn't the entire game. The wealthy spend. They spend right. #wealthyaccountant #frugality #frugalliving #wealth #money #passiveincome #spending #spendinghabitsTax season was always a good time of year. My mutual funds were automated, but I needed a home for my excess cash so I wouldn’t be tempted to spend it. My solution: dividend re-investment plans (DRIPs). I wrote checks to all my DRIPs. It gave me great pleasure to finish my day with a spending splurge. I’d write a check to JNJ, Aflac, Phillip Morris, Wrigley (damn you, Warren) and more. As fast as it came in I sent it out. I don’t know what you spend your money on, but I have a nasty habit of buying as much stock as I can get my hands on. For the record, it’s a good habit to have.

DRIPs aren’t what they used to be. Brokerage accounts generally automate re-investment of dividends and many DRIPs now have fees. There is still a solution. Set a minimum amount you can easily invest every month. Automate the process. Then either write a check every time money comes in or log in and set up a transfer. Trust me, you’ll have so much fun spending on your index fund. The best part? Instead of paying interest on your purchase you’ll be paid dividends instead. Oh, the joy!

Turn investing into a game. Real wealth creation is built on the proper allocation of capital. The bank is fine for short-term and emergency funds. But your serious money needs to be working hard building a better world and the only way to do that is to own a piece of great businesses.

Another spending game to consider is investing funds you planned on spending foolishly. Excessive dining out or drinking in bars can be swapped out for an index fund investment. I’m not telling you to forgo a pleasurable life. God forbid! All I’m suggesting is that you switch some consumer spending for investment spending. And besides, you know as well as I you will enjoy those dividend checks more than interest payments.

Income Properties

If you have an itch to spend, income properties are for you. Many moons ago I owned a city of real estate in my portfolio. From personal experience I can attest you get plenty of spending opportunities when you own real estate.

Your primary residence is different from income property. Money you spend on your primary residence (or second home) comes from another source and can run dry. Income properties have—wait for it—their own income stream to fund expenses. If you have a serious spending itch, real estate done properly can scratch that itch raw.

You still need to buy properties right! Stupid income property purchases will force really bad spending even when you discover how bad the spending is and want to stop. Sometimes you can’t. But a small portfolio of investment property can give you plenty of opportunity to shop and buy. Researching the right property should be a priority. Once you own the property there are always things that need to be paid for: property taxes, utilities, insurance, repairs and maintenance. A property manager can do all this for you, but you can write the check yourself if you insist. Even still, you can review your monthly statement from the manger which will show all the spending. It should serve as a powerful ointment for your spending itch.




Small Business/Side Hustle

Okay, hustlers! Nothing beats spending opportunities than a small business or side gig. Even a frugal guy like me still manages many hundreds of thousands of dollars in annual spending just by owning a small accounting practice. Every two weeks payday comes around and I get ample reminders on how to spend my money.

These smart spending habits can put serious money in your pocket. Spending on the right things can increase your wealth rather than build debt. Spend your way to riches! #wealthyaccountant #smart #spending #happiness #dreams #frugality #frugalA side gig or business is an easy way to alleviate the desire to spend. Maybe too easy. While I can brag I spend $250,000 in my business, it needs to be brought into perspective. I’ve seen too many people over the years start a business, spending like mad to get it up and running. It soon becomes apparent my client isn’t ever going to make a sale. He’s going to keep spending until he’s broke without ever actually starting the business. Then he asks if it’s deductible. (Not if it was a hobby or you treated it as such.)

Still, business owners are spending daily. At home my wallet has moths. At the office money is moving constantly. Office supplies are replenished, utilities are paid, property taxes come due, employees get paid, IT needs money. The list goes on and on. A frugal habit goes a long way toward profitability in a business. It’s easy to spend; not so easy to bring it in.

Spending/shopping addiction is a serious problem with many consequences. Shopping is a waste of time compared to time spent with family and friends. Shopping has its place as long as it doesn’t rise to addiction. Business has a natural built-in need to allocate money. If you can run a “real” business or side hustle you have my blessing. Before long you will lose that desire to spend. Take it from a three decade business owner. Spending gets old real fast when it becomes a job. (You know; a job. That thing you want to take early retirement from.)




Coda

Spending in and of itself is not wrong! Overspending is a bad habit and even a sickness. Excessive frugality is a bit of a sickness too. Careful readers may have noticed that from a certain unnamed accountant over the past few years.

I’m not here to tell you to never spend. What I want for you, kind readers, is a healthy relationship with money and spending. Reducing debt to background noise is important. Investing for your future and that of your family is imperative.

Spending easily becomes a job! Money is a powerful tool to help you live a quality life. Too much or too little is a problem. Using the 5 ways to spend listed above will make you wealthier. That is what we are about around here: quality of life which is the true meaning of wealth.

Finally, can you do me a favor? If you think this is as important as I do, go back to the top of this post and use the buttons to share on social media. You can pin the placards to Pinterest, as well. Help me spread the word. Let’s make the world a better place where people control their spending and build powerful, nurturing money habits.

Thank you.

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!



Side Gig: Tax Preparation

A common request the last few months involves starting a tax preparation side gig. A seasonal tax prep business can be rewarding if you follow a few simple rules. And if it spirals out of control you might find yourself working a full-fledged business 30 years later like a certain tax professional we will not name.

To run a real tax prep side gig you will need some background tax knowledge, an e-filing account with the IRS, commercial grade tax software, workflow management and clients. We will touch on each issue.

Education/Experience: Experience comes with time; there is no shortcut. I started on day one like everyone else. In the beginning it’s best to stick with simpler returns to avoid getting in over your head.

Continuing professional education is widely available in the tax industry due to the requirements for CPAs and enrolled agents. This makes it easy to learn while you gain experience.

The IRS’ Registered Tax Return Preparer program ended in 2013, but you can still be a part of the Volunteer Annual Filing Season Program (AFSP). Without involvement in the AFSP it’s hard to work with the IRS on a client’s account. CPAs, enrolled agents and attorneys have unlimited representation rights before the IRS. A participant of the AFSP has limited representation rights. As you begin your side gig journey this is a great place to start.

It’s relatively easy to be an AFSP. You need 18 hours of continuing education from IRS-Approved CE Providers: 10 hours of federal tax law topics, 2 hours of ethics and a 6 hour Annual Federal Tax Refresher (AFTR) every year. (Note: The links are to  products used in my office with newer preparers.)

I have never been a minimum education type of guy. Generally CPAs need 40 Continuing Professional Education (CPE) credit hours per year; enrolled agents an average of 24. In a typical year I approach 100 hours of qualified CPE! If I’m going to do something I may as well do it at a high level of competence. I recommend you complete at least 40 CPE credits per year. The cost is a business deduction.




As you grow your practice you will want to add some letters after your name. I suggest the enrolled agent designation. EAs are a tax authority and have full representation rights before the IRS. EAs can also represent clients of returns someone else prepared, unlike AFSPs.

The EA exam is tough, but worth the effort. Here is the study guide I recommend. Take your time when working for your EA. Use the study guide and study and study and study. About a third pass the first time through. Success is in direct proportion to dedication of studies.

Here are some IRS-approved continuing education programs I approve:

Surgent CPE: It’s been a few years since I attended a Jack Surgent program, but they were always packed with solid information. Highly recommended.

Tax Insight: I attend Tax Insight’s Annual Tax Course every year. They are located in Wisconsin, but they also have a few classes in Mississippi, plus they are starting an online version this month.

National Association of Tax Professionals (NATP): I was a member of NATP for years, but they were a bit pricey for what they provided. Recommended if no other options available in your area. NATP also has EA exam preparation classes and an AFTR refresher. NATP members also have a tax research help line.

Gleim and WebCE: If you need something fast, cheap and easy you can use these two options. They are not recommended because the courses are very basic. Remember, we want more than minimum effort.

Once you start your side gig the educational programs will find you. Each state has its own list of providers. Feel free to experiment. The only way to find good programs is to try them out.

Become an Authorized IRS e-file Provider: Rather than list the details I will send you to the IRS page to complete the process. It takes about a month and a half to complete the process so start ASAP. Back in my day it took four months so things have improved a bit.

Commercial Tax Software:  My office uses Drake Software and has since 1988. Drake has always been as easy to use program with commercial grade power. I’ve been with Drake so long my account number with them is 197!

I’ve found new preparers find Drake easier to navigate than other commercial tax software. I’ve played with other software over the years, but never was tempted to leave Drake. Their support is second to none. They answer fast with a dedicated team ready to help preparers get the job done right.

Drake is a powerful tax software package at a reasonable price. You can license the full package or pay by the return. Review Drake’s pricing to determine which package fits your side gig needs.

Workflow: I started my tax practice out of my home and prepared around 2,000 returns annually (with the help of employees) for five or six years before moving to my retail storefront. When I ran my practice as a side gig it was always out of the home. From 1982 to 1989 I treated tax preparation as a side gig. I ran a full-time seasonal tax practice from 1990 to 1995 out of my home. Then I lost my mind, bought an office building and watched my practice explode. I tried, and mostly succeeded, in cutting back ten years ago. Then this blog and a push from Mr. Money Mustache happened.




Workflow issues are a constant challenge in a tax office. Even as a side gig you want to utilize technology to improve performance, reduce errors and remain profitable. I can’t tell you everything my office does because it’s always in flux. I do want to share one thing we do to keep the paper moving.

Tax preparation is largely data processing. The real value for the client is the conversation with the accountant. A simple, short dialog can save the client serious money! The problem is the workload of paper to process.

Plugging every number starts to affect the carpal tunnel. It’s also mind numbing. My office uses a tax organization program called GruntWorx. GruntWorx is integrated into six commercial tax software programs: All Tax Software, Lacerte, Go SystemTax RS, CCH ProSytem Fx, UltraTax CS, and of course, Drake Software.

A compact research book.

You want a paperless office so you’ll be scanning everything in for your record. From inside Drake Software you attach a file with scanned documents GruntWorx handles and send securely. The next day GruntWorx returns a file you import into your Drake software. Several items will need attention, but a large part of the grunt work is processed, saving you time and money. Review GruntWorx pricing to see how much it helps your side gig workflow.

Technology is your friend even with a seasonal side gig tax practice. You want a good computer, Drake Software, laser printer, scanner and security. Contact an IT professional to secure your data!

Tax preparers are a prime target of identity thieves! When Equifax was hacked most of the data stolen was already on the dark net! It came from small tax offices. You read that right, small tax offices. My office IT contract is north of $50,000 per cycle. As a side gig you will have few if any employees so your IT needs will be smaller. My guess is security will cost under $1,000 for most side gig firms.

Technology reduces stress and errors. The computer can read small type on W-2s better than you after hours in a chair. Note, even when using GruntWorx or other productivity enhancements, you must still review each return in its entirety!

Clients: I’ve talked about acquiring clients plenty in the past. Here is a short review.

As a side gig you want basic returns to start until you get your sea legs and gain experience. Decide which type of returns you want to prepare.




Once you’ve decided the focus of your tax side gig you need to study. Maybe a few study courses listed earlier are a good starting point. Take classes on your area of interest.

Clients outside your area of expertise will come knocking. It’s hard, but necessary, to turn some clients away rather than get in over your head.

In your area of practice you need to find where these people congregate. If you want to help elderly people I recommend speaking at churches on Sunday. You might even offer to prepare returns right at the church service. Portable printers and a laptop (with adequate security in place) make it easy to travel. One day a week at a church might satisfy your side gig lusts.

The Chamber of Commerce is a great place to meet business owners; one speaking engagement at the local apartment association will keep you busier than you want. There are so many places where you can grow your client list.

Get some business cards from Vistaprint and carry them with you. You never know when a future client crosses your path on August 4th.

Final Thoughts: Tax preparation is an enjoyable side gig with plenty of profit potential. If you start with smaller returns you can do a lot in an hour. Three hundred simple returns at $100 each is a nice side gig. After expenses you should net over $20,000 in this scenario. Not bad for two and a half months during winter.

Most of the questions I receive are repeats. Please leave questions in the comments below so everyone can benefit from the answers. I’ll answer as many as I can.



Tradelines: The $1,000 an Hour Side Gig

Remember all those credit cards you acquired to earn out those bonuses and eventually canceled? You’re going to wish you hadn’t done that.

Credit cards are one of the most powerful wealthy building tools in existence today when used properly. They get a bad rap because irresponsible people rack up massive quantities of high interest debt and spend decades digging out if they ever get out. Still, credit cards can put a lot of ka-ching in your pocket if you understand the rules and never run a balance on the card.

If you are in the accumulation phase of your wealth building cycle, looking for a high income compared to the time invested or love gaming the system (your favorite accountant is guilty as charged), then you need to learn about tradelines.

To play this game you need a credit card at least two years old. The longer you’ve held the card and the higher the credit limit the better. This game requires you use said credit card and pay it off in full each month. The more credit cards you have the better.

Setting the Table

So what is this tradelines thing anyway? A tradeline is what a bank calls a line of credit. Your credit card is a tradeline.

A “seasoned” tradeline is at least two years old meaning it has a history. If you have no late payments on a seasoned card there is an active market for selling your tradeline.

Still confused? Me, too. It works like this. A credit card is called a tradeline. You can add authorized users (AU) to most credit cards at any time. People with poor credit pay to be an authorized user of your credit card so the bank reports the high unused credit limit on their credit report. This increases their credit score fairly quickly.

You know who they are, but they haven’t a clue who you are! A big concern surrounds risk of having your card cancelled. What if someone buys your tradeline and runs off spending all your money? No worries mate. It’s impossible. When you use a company acting as clearinghouse the buyer never knows who you are and a credit card never gets sent to the AU.

There is no need for you to spend effort looking for people willing to buy one of your tradelines either. There are a multitude of companies out there doing all the heavy lifting for you. They find the buyers, background check them (to prevent fraud), collect the money and send you the information. You add the AU to the card they purchased a tradeline from and sit back enjoying a cold one. Several months later you remove them as an AU and a check is mailed to you (direct deposit actually).

People buy tradelines to increase their credit score to get better loan rates and to reduce their insurance costs. This isn’t repair credit! If you went through a bad patch, buying tradelines can give your credit score a lift as long as you are not adding more negative marks to your credit report. A medical disaster is no longer a lifelong financial death sentence.

Car and homeowner’s insurance can be higher when your credit score is poor. It’s like kicking someone in the face when they are down. A medical emergency can destroy a life without hope of financial recovery. Buying tradelines can lower the interest on a mortgage or car loan, but also lower insurance premiums. Some people enjoy major benefits investing in tradelines.




Time for a Walk

The best way to understand selling tradelines is to walk through the process. By the end of the walkthrough you will know how your credit cards can add $1,000 or more per month to your pocket for an hour or so of your time.

Step 1: You need a clean credit history. No delinquencies in the last year or so. Your credit score doesn’t matter. If you’re like me you collected more than a few credit cards over the years and only use certain ones.

Open an account for free at Credit Karma. Credit Karma should list all your open and closed accounts. Each credit card should list the account open date and credit limit.

Step 2: Research companies brokering tradelines. You will need to vet each company for quality; most will not make the cut. More time will focus on finding the right tradeline company for you than the actual process of earning money with tradelines. The most important questions involve account verification. The banks generally don’t like tradelines being sold. Their biggest concern is fraudsters increasing their FICO score, getting a credit card or other loan and defaulting. Without adequate fraud control criminals can cause losses for the banks and that ends the party. Ask before selling your tradelines with any company. Better yet, ask for proof they are collecting all required documents and running a LexisNexis background on each client.

Step 3: Once you sign up with a tradeline company, you choose which credit cards you wish to sell tradelines on. Your tradeline company will tell you what their firm pays for each tradeline per card. You should try to get your credit limit raised on all your cards to increase the potential income from each tradeline sold.

Step 4: Your tradelines are listed by the tradeline company. In short order you will get an email explaining you sold a tradeline! It’s not money time yet. Follow the instructions for adding the AU to the card listed.

The credit card company will send YOU a card for the new AU. You don’t have to activate the card.

Step 5: The tradeline company will send you another email in two to three months informing you to remove the authorized user. Follow the instructions on how to remove an AU from your credit card.

Step 6: Keep an Excel spreadsheet listing all AUs, when you added them, which card added to, when the AU is removed and when you get paid. Recordkeeping is important! You need to know what you have and where.

Step 7: Collect a check.

Step 8: Repeat.

 

It is possible to have more than one AU per card. In fact, it is likely. This is good for you. The more AUs, the more income. There is a limit, of course. Each credit card has a limit on the number of AUs you can have at a time on their card. My opinion is no more than two AUs per card ever. If you already have numerous AUs on a card for your business you probably should keep that card separate and not use it for selling tradelines.

Is this legal? Another question people have is the legality of doing this. My research indicates it is legal, including remarks from a spokesman from the FTC. The illegal issues lay with tradeline companies not doing adequate background checks. This is why it is important to vet any tradeline company before signing up with them. My understanding is this cannot be listed as credit repair and money can’t be collected up front from the client. You get paid after the fact so reading FTC reports indicate there are no legal issues with selling tradelines. If you vet a tradeline company and later the company takes a shortcut there is liability risk to the tradeline company. Having your due diligence in order protects you.

A Few Rules

Tradeline companies will have some rules to follow. I want you to follow those rules and add my more restrictive rules to their list if necessary. The more restrictive rule applies to protect you from account closure.

When your tradeline company tells you to remove an AU from a card, DON’T DO IT, unless at least two months have passed, preferably three.  If you slap additional AUs on and off a card too fast the bank will cancel your card. Selling tradelines may not be illegal, but like counting cards in a casino, the bank will not like it if they know what you are doing, cancel your card and tell you to not come back.

All AUs stay on my cards for 90 days minimum!

The next issue is credit card usage. Your balance should be paid in full each month and should never exceed 10% of the credit limit.

You will be told to spend a token amount on the card. BS!!! Every card with an AU should have meaningful charges. You do the spending. The AU is not around to spend on your card. But meaningful spending on a card with AUs is a must. Don’t game the system with the card issuer getting a few pennies.

I’m lucky. With a business I can find plenty of things to put on the credit card. A typical paper order (in our paperless office) runs 250 reams. You may wish to consider previously published alternatives to spending, too.

If you are frugal (like me) without a business (unlike me) with few expenses to charge, there is a low limit to selling tradelines. Still, a couple hundred a month for less than an hour of time is a nice addition to the mad money account. One account handled properly can be worth $300 or so every couple months.

One Last Caution: There are plenty of companies brokering tradelines. I spent serious time reviewing multiple companies to verify I am with a “seasoned” firm and still discovered it wasn’t as seasoned as I would have prefered. There are other good tradeline companies out there. The real work is in finding them.




Action Plan

Vet several tradeline companies before committing. I use a tradeline company and am aware of two more who run a tight ship. The additional two companies I know of are doing it right so they don’t have much supply. Still, slow and steady wins the race. The company I am using was originally listed in this post and I edited them out until I can verify further. I want happy readers. The last thing I want is a mob of angry people who had their credit card cancelled. A background check on all clients is an absolute MUST!

This is a process. Consider adding to your credit card portfolio to increase future income. Go to the TWA Recommends page and scroll down to the recommended credit cards. Pick a card that matches your needs. Travel miles or cash rewards, et cetera. A good plan might be to add one card every three to six months or so for you and a significant other. Max out the bonus rewards and keep the card until it is ready for use selling tradelines. Don’t cancel the card. Keep it for future personal use too. Of course you will have a favorite card, but I use different cards for different situations as I suspect you will.

 

While I don’t recommend any tradeline company, I use the below company for my personal tradeline sales.

 

Call:  888-844-8910

www.TradelineSupply.com

Darren@TradelineSupply.com

2534 State Street, Suite #433

San Diego, CA 92101

 

 



Forensic Accounting: The High Paying Part-Time Business

Looking for a side hustle that is profitable and fun? Consider forensic accounting; a side gig where you help people find money they lost. Unclaimed money is big business if you know where to look. What was lost is now found. #sidegig #sidehustle #unclaimedmoney #lostandfoundFifteen years ago a client who has since passed away had a complaint. He explained his uncle had died and the family was having a difficult time finding his money. The family knew his uncle had money, but he hid it everywhere, kept no records and refused to reveal his secrets to anyone.

The family decided to hire a forensic accountant who took six months to find around $280,000. My client’s complaint was they knew the uncle had a lot more than $280,000, but had no idea where to start looking.

This was during the my early days as a hedge fund manager. The hedge fund didn’t buy stocks or businesses; we bought charge-off receivables and collected on the debt.

When banks have bad loans on the books they sell them for a fraction of the face value. (Banks never really lose. It blows the mind how they every have financial trouble. It takes a new level of stupid to fail as a bank.) Once we took possession of the accounts we sent our legal teams around the country to locate and collect, even in court if necessary. (I authorized over 22,000 suits over the years. Yeah, I was one of those a-holes. But I was good at it. Stick with me here. This is all going to work to your advantage this time.)

Running the type of hedge fund I did (I eventually was hired to run two) provided me with the resources, connections and experience in finding people and their hidden stash. Finding money is something I got really good at.

My client was awed when I started to explain how I would have handled the case versus the forensic account they hired. In 30 seconds I gave them one piece of advice and found over $300,000 more than the forensic account they hired did in six months. Before I was done we collected seven figures of cash from around the United States and even found an account with serious cash tucked away in Ireland.

The family promptly hired me.




 

Finding Money as a Side Gig

This is a story of finding stuff no one else can. Most side gigs people pick up in retirement earn a modest income. A forensic accountant can earn six figures part-time without breaking a sweat. With the story above in hand we will walk through the simple process of finding old or lost accounts for people.

The resources in this short post will be enough to find the vast majority of assets. To get the fine edge in your performance I will share some resources at the end.

A forensic accountant doesn’t need to be a CPA, enrolled agent or attorney to do the job. In fact, the best people at this are as far away from these professional designations as you can get. This is a job you can do on your laptop in your BVDs without any problem. (I recommend putting on your shorts when meeting with the client.)

The pay is excellent. $300 an hour and up is common in this field. Some forensic accounts change a percentage of what they find while others charge by the hour. People are reluctant to go the percentage route because they all think you’ll find a gazillion dollars and they don’t want to share. Fine! That’ll be $300 per hour, plus expenses. Oh, and I need a $5,000 retainer. Are we having fun yet?

Who Are the Clients?

Over the years I hunted down lost treasures for estates on a regular basis. However, some of my best clients (repeat clients even) are insurance companies looking for answers on an embezzlement claim. Business owners have hired me to do the same. Attorneys sometimes hire my forensic services also. I never had to testify in court on one of these cases, but it wouldn’t bother me if I had to.




The fun cases revolve around helping a family find the belongings of a deceased loved one. For them it is like finding an unknown insurance policy. (I have found a few unknown life insurance policies as well though the insurance companies are much better today than two decades ago at knowing when one of their policy holders is pushing up daises.)

The ugly cases—the ones that also pay very well—involve businesses. Money goes missing or the business owner can’t figure out why business is so good and she is still losing her tail. Hint: The most valued and trusted employee, close friend or family member is the embezzler the majority of the time. I could tell stories.

For several years a local insurance company called me in on any case over a certain value. I reviewed a lot of books back then and it kept the doors open over the summer when tax work was slow. I also liked the work. The down side is you are not a loved visitor when you stop by the business. They know your job is to hang someone. (And I always kept a new rope in the truck for just such an occasion.)

Finding the Goodies

Back to our story. My client knew there was more money. I casually mentioned pulling a transcript from the IRS. This will show any 1099-DIVs and 1099-INTs issued to the person in question. Banks are required to issues 1099s when the amount is $10 or greater. For some crazy reason the forensic accountant they hired never took this step. My client was instantly $300,000 richer and I was hired with a generous retainer.

I now need to introduce you to skip tracing. Skip tracing is a process of finding the whereabouts of an individual. An impure use of the word also includes searching for all the assets, including income sources like a job, of a person or business.

A treasure chest of wealth awaits you in the ultimate side hustle helping people find lost and unclaimed money. This high paying side gig is perfect for people enjoying early retirement. *earlyretirement #personalfinance #sidegig #sidehustle #unclaimed money #lostandfoundSkip tracers generally hunt for debtors or fugitives. We are interested in debtors. In our example we are not looking for debts. But if you have someone who owes you money you want to find their assets and income sources. This is highly beneficial talent if you are searching for a deceased person’s stuff.

The best skip tracers come from the wrong side of the track. Some are clean cut, but in my experience the ones who are really good at it have tattoos and are rough around the edges. These people know how to find a body no matter how deeply dug in. Perhaps from personal experience.

You can learn skip tracing yourself, but there is a short cut. Go to your local debt collection agency and hire their best skip tracer and let’em loose. It’s your way of spreading the side gig economy around. (You are only hiring the skip tracer for the job, not full-time employment.)

Most attorneys already have resources to do this also. But we are not technically looking for the person; we are looking for the goods. Our skip tracer has another skill we need.

If you are serious about a side gig as a forensic accountant you will need LexisNexis. LexisNexis is a powerhouse of personal information. Once you see this thing you will be scared. They know things about you and everyone else you didn’t think anyone knew. In your search for lost accounts they will bring a deluge of results.

LexisNexis is expensive. If you are friendly with a collection agency you can usually hire them to do the LexisNexis search for you. There is so much information it is good to have someone familiar with the platform help you acquire and interpret all the information you get. A deep drill down will uncover just about anything the mark ever did since the first computerized records began and even a fair amount of stuff from before the Computer Age.

An IRS transcript and a LexisNexis search will be 99% of your job. If you suspect the client has money in another country (my client did) you use the same procedures in that country. Western Europe is as straight forward as the U.S. and Canada. Just find a debt collector in the target country and expand from there.

It doesn’t take long to uncover virtually every asset. There are some costs so you need to remind your client of this upfront.

The Problems with Embezzlement

Finding malfeasance can be trickier. In these instances you are not always looking for assets or hidden account (though that frequently is part of your job description later), you are looking for accounting irregularities. We are usually not talking about an accountant cooking the books. The issue is either money stolen (which could be the accountant) or stolen merchandise.

The issues tend to be complex here and if you don’t have an accounting background you will need to at least have a fundamental understanding of the accounting process.

Finding unclaimed money is the best way to make friends. It's also a profitable and fun side gig. A side hustle should be fun. The lost and found just became a piggy bank to the small businessperson looking to grow profits for clients and self. #sidegig #sidehustle #unclaimedfunds #money #freemoneyMisappropriation of funds generally sticks out like a sore thumb in the accounting records. What you are looking for is a discrepancy between revenue and certain expenses. For example, a restaurant will have a cost of goods sold within a relatively narrow range depending on the type of restaurant compared to sales. Payroll also falls within a certain parameter or revenue, COGS and tips.

The issues become too complex for a short blog post. Here is the take-away. There is always a relationship between items in the financial statements. Deviation of these ratios (between sales and COGS or sales to wages as an example) is a telltale sign of something wrong.

The timing of the deviations frequently correlates with the hiring of the instigator. You will always review multiple years of records looking for inconsistencies, i.e. COGS changing significantly from one year to the next. Most of my work is done on an embezzlement case before I even get out of my chair and visit the establishment.

The easiest way to see this is with an example. This is a real client with a restaurant.

My office manger one day came to my office concerned about the client in question. She couldn’t understand why the client had growing sales but was going broke. A 30 second review of the financials and I knew an employee was embezzling. The cost of goods sold was waaaay out of whack for a restaurant of any kind and I could see the progression.




My first thought was a waitress was guilty. The client was brought in and I questioned her about the waitresses and how they handled money. It was quickly apparent a waitress wasn’t the culprit. Waitresses had few opportunities alone with the cash in this establishment.

I started to question the business owner about other employees. When we reached the cashier she said it couldn’t be her as it was her close friend of decades. The search was over. The friend did it.

It wasn’t a guarantee at this point, but I knew where this was headed. The business owner did not have cameras. I told her to inform the employees her accountant was concerned about embezzlement and demanded cameras be placed in the building. The cashier quit on the spot. Uh-huh.

We weren’t done. The ratios between COGS, sales, and waitress payroll and tips was still off even after accounting for the embezzled funds. I suspected more than few cases of steaks and seafood were wandering out the back door of the kitchen. Fed up, I had the client place cameras at the kitchen doorway leading to the parking lot without informing employees. A week later the entire kitchen staff was fired.

The sad end to this story is that the restaurant did not survive the assault. The damage was too great. We caught the malfeasance relatively early even though we weren’t hired to do that job. But the business owner stalled, certain her friends were innocent. The wound was too deep and the victim died. And all the jobs along with a great restaurant were gone. I still kick myself for not insisting more action be taken sooner.

Resources

In 2,000 words I actually gave you a good template for a basic forensic accounting side gig. You will find more than the average accountant for sure with these methods. If you want to hone your skills to a fine edge I recommend you continue your training. Your local technical college may have courses on the topic. There are also plenty of seminars and conferences, of course. Look for conferences specifically for collection agencies. They are the masters at finding The best side hustle ever! Helping people find money. Billions of unclaimed money  are lost every year. A family member dies and the family doesn't know where the money was kept. Forensic accounting is a fun and profitable side gig. #fun #sidegig #sidehustle #unclaimedmoney #forensicaccountingassets. Or, you can start with some really good books on the subject. The books can get pricey, but these are the books used in colleges many times and the books are cheaper than college itself. One gig can pay for the whole thing and more.

Forensic Accounting for Dummies (This is the lowest cost basic education on the subject you can get and also a good place to start if you are new to the game.)

Below is a selection of high quality books on forensic accounting. These books are high quality and cost a bit more. They are worth it if you are serious about forensic accounting as a side gig and tax deductible if you are in the business.

Forensic Analytics: Methods and Techniques for Forensic Accounting Investigations

Forensic Accounting and Fraud Examination

Forensic Accounting and Fraud Investigations for Non-Experts

The Forensic Accounting Desktop: A Practical Guide to Financial Investigation and Analysis for Family Lawyers

Forensic Accounting and Fraud Examination (Irwin Accounting)

I hope this article and resources are an awesome opportunity for you to earn a nice income in a side gig or even as a career.

And remember, no matter where you are, no matter where you go, I will find you.

And you stuff, too. So pay your bill so you don’t end up a client of my hedge fund. (Hint: I sold out the two funds a few years back so you are probably safe. Probably.)

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Amazon is a good way to control costs by comparison shopping. The cost of a product includes travel to the store. When you start a shopping trip to Amazon here it also supports this blog. Thank you very much!

 



The Dangers of a Side Gig

Tax season is officially over and not a moment too soon. As much as I love the work, when months go by without a day off it begins to wear on me. The worst part is the sitting. Too many hours planted in a chair coupled with sleep deprivation and health is not getting the attention it needs.

Loving something as much as I love tax work is also a challenge for people around me. Mrs. Accountant is an angel, allowing me the opportunity every year to disappear for months to help complete strangers and semi-strangers with their tax, accounting and financial problems. My daughters have learned from an early age dad is a very intense man when it comes to his work.

Work has never been a four letter word for me. (Considering my profession you would think I could count to four better.) Growing up on a farm meant everything was work, but not work. Running to the creek to fish was something you did. Planting in spring was fun, not really work. Harvesting was an addiction; sleep was hard to achieve until the crops were off the field. I know of no greater pleasure than watching a barn filled with bales of hay, placed there by my own hands. There is no greater thrill than to see the milk cooler fill each day to the rim. A full bulk tank meant money, and therefore, life. It was a good life and I had no idea what the real world was like outside my vision horizon.




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The LLC vs the S Corporation

Is an LLC or S corporation right for you? Your personal situation determines which entity you should use. The tax savings can be huge. #wealthyaccountant #llc #scorp #scorporation #business #smallbusiness #sidegig  #entity #taxThere is a lot of confusion among small business owners when deciding on their entity classification and the tax savings involved. It is the first discussion I have with most business clients. It takes time to get pertinent information out so I decided it would be a good idea to write down.

There are five business entity choices, but it really is only three since two are default choices: sole proprietorship, partnership, limited liability company (and its close cousin, the limited liability partnership), regular corporation (also called a C corporation) and the S corporation. You default to a sole proprietorship if you are a one-person business or a partnership when two or more owners are involved.

Choices

Most attorneys feel every business ought to be an LLC. I agree with the attorneys on this and not only for legal reasons. I like to tell people LLCs are like tuna, it takes on the flavor of whatever you put it with. A single member LLC defaults to a sole proprietorship and joint owners to a partnership. There are no LLC tax forms (with the exception of the “check in the box” election form). A single member files a Schedule C on their personal return; a partnership files Form 1065 like any other partnership. Sole proprietor and partnership tax rules apply accordingly.

An LLC can also take on the flavor of a regular corporation or an S corporation by making a simple election. The “check in the box” election informs the IRS how you want to conduct your business. Most of you don’t want to follow regular corporation tax rules so you will file a second form electing to be treated as an S corporation.

Regular corporations pay their own taxes and dividends paid to the owners are not deductible by the corporation and are therefore double taxed. S corporation profits flow to the owner’s personal tax return and are only taxed on the personal level. Corporations must pay owners a reasonable wage. If you are wrapping your mind around this concept you will naturally want your wages from your LLC/S corporation as low as possible to avoid self-employment taxes on the pass-through profits. The IRS knows this and requires a reasonable wage, but reasonable is a wide road. The tax court is littered with cases on fair compensation. The IRS has provided a safe harbor of 60% of profit as a reasonable wage.

Example: You have an S corporation with $200,000 before owner’s payroll. Safe harbor for owner’s wages are $120,000.

51r-Q3dz1ML._SX388_BO1,204,203,200_Is it possible to have a lower wage and still be reasonable? Yes. A safe harbor is just that, a place where the IRS agrees not to challenge your position. Many owners will not use the safe harbor method. If you have employees (let’s say 20), a large portion of the profit is derived from said employees. Remember why S corporations exist. They allow small firms to conduct business without the negative tax rules of a large regular corporation while still maintaining the legal protection of the corporate structure. The concept of the S corporation is to allow profits from non-owner’s work (passive income) to flow through to the owners without the double taxation of regular corporation dividends or self-employment taxes on the profits derived from employees.

Small businesses frequently have several employees or subcontractors. A reasonable wage for owners may be higher or lower than 60%. Safe harbor is 60% so we can hang our hat on that nail as an owner’s wage ceiling. The higher the profits, the more likely the safe harbor will only be a guideline. There are several places online to find reasonable compensation numbers. Robert Half has a temp agency (Accountemps) that publishes reasonable compensation numbers for a large number of professionals; unemployment offices in most states do as well.

Legal Talk

Before we start this part of the discussion I want to remind you I am not an attorney. I encourage you to consult a competent attorney if you have any questions. I only provide my understanding of LLC versus S corporation law as it pertains to taxes.

What is the difference between an LLC and S corporation? Both provide legal protection. It is easier to understand LLCs when you understand why they were created. LLCs were created for legal, medical, and accounting firms. The reason LLCs were needed for these industries is because regular corporation tax laws are devastating to service corporations (you pay the top tax rate on every dollar of profit) and S corporations back then could only have 25 owners (100 owners allowed now). The other drawback of a corporation is the liability issue of all-acts versus own-acts.

An attorney can explain all the different rules between an LLC and corporation, both C and S. We will not dive into those details. There is only one legal area we will review. Remember, I am not an attorney. What I share here is how I understand the laws regarding LLCs and corporations.

The difference between LLCs and corporations involves something called own-acts and all-acts. As I understand it, LLC owners are only liable for own-acts while corporation owners are liable for all-acts. This is easiest to understand with an illustration.

41a3MMVh6EL._SX331_BO1,204,203,200_We will use a medical firm as our example. Suppose two groups of doctors get together to start a clinic. One group of doctors organizes as an S corporation, the other as an LLC. After some time in business both clinics suffer a malpractice lawsuit against one of their doctors. Unfortunately, both doctors lose their suit and own a huge settlement. In the S corporation, owners are liable for all-acts; therefore, all doctors are liable for the one doctor’s malpractice. The same situation happens in the LLC clinic. However, with an LLC, liability is only for own-acts; only the doctor sued is liable; the other doctors are protected from loss by the LLC.

Once again, review your situation with an attorney. Feel free to leave comments below. If I verify additional information, I will include it in a future edit.

Show me the Money

Now we get to the part I love the most, the money. How much money can you save in taxes with an LLC treated as an S corporation? To make it clearer for everyone I want to start with a really small company example and work up in size. We will assume our small business owner organized as a LLC from day one, but only elected to be treated as an S corporation at the appropriate time.

The strength of your business is partly determined by the entity selection: LLC vs the S corporation. Read the facts before deciding. Save taxes with an LLC or S corporation. #wealthyaccountant #llc #scorp #scorporation #company #business #entity #taxesThe micro business: We start our example with a small home-based business earning a modest $10,000 of profit per year. At this low level of profit electing to be treated as an S corporation is inadvisable. The cost of filing the extra tax return for the S corporation would eat up more than the tax savings. There is still one thing a business owner can do: rent out a portion of his home to his LLC.

Let me review the office in home rules. A single member LLC treated as a sole proprietor will follow office in home rules like a sole proprietor will with one additional option. The office in the home must be regular and exclusive. This means you can’t deduct a corner of the living room you use sometimes. The office in the home must be an exclusive area of the home (like a spare bedroom) and used only for the business.

The LLC is a person in the eyes of the law. (Remember Mitt Romney raising people’s ire when he said this on the campaign trail. He actually was right, even if his delivery could use some work.) Just because your business is reported with your personal tax return does not change the fact that the LLC is a person. Therefore, the LLC can rent space in your home from you. You must have a rent agreement between you and the LLC. You don’t need anything fancy. A simple commercial rental agreement will meet IRS requirements.

The LLC can deduct the full amount of the rent. With an office in the home it must be “regular and exclusive”. For a rent agreement between you and the LLC it only has to be for the benefit of the LLC, a much lower bar to hurdle.

Let me illustrate with some numbers:

Office in the home:

Profit: $10,000

Safe harbor deduction of spare bedroom office used “regular and exclusive”: $720 ($5 per square foot x 144 (a 12×12 room))

Business profit after office in the home deduction: $9,280

Self-employment tax: $1,420 (we round numbers when we prepare taxes.

Income tax (assume 15% federal; 5% state): $1,856

Total taxes attributed to the business: $1420 + 1856 = $3,276 total tax

LLC renting space in your home:

Profit: $10,000

Fair rental value of bedroom office, plus storage area of part of the garage and work area used in the basement: $500 per month; $6,000 per year

Business profit after office rent expense: $4000

Self-employment tax: $612

Rental income: $6,000 – rental portion of home expenses (mortgage interest, property tax, repairs and maintenance and depreciation) $720 (to keep consistent with the above example) = $5,280

Income tax: $4,000 (business profit) + $5,280 (rental profit) = $9,280 x 20% = $1856

Total taxes attributable to the business: $612 + $1,856 = $2,468

Total savings doing it the Wealthy Accountant way: $3,276 – $2,468 = $808

Not bad for a company only earning a $10,000 profit!

The next business we will review earns a $30,000 profit per year. I consider the $30,000 to $50,000 range a no-man’s zone. A $30,000 company can benefit from an LLC elected as an S corporation in some cases, depending on the industry. By the time you reach $50,000 it is easier to get enough tax benefits to offset the additional costs of an S corporation (payroll service expense and tax prep fee for the additional S corporation tax return). Our example will consider the LLC treated as an S corporation.

Our example will assume a small home-based business, but will not consider the LLC renting from you; I will incorporate that into the wage data which will give us nearly the exact same answer without getting to long here.

As a sole proprietor:

Profit: $30,000

Self-employment tax: $4,590

Income tax federal and state at 20% combined: $6,000

Total tax: $10,590

Ouch! Now you can see why you start thinking of tax alternatives when your business starts generating $30,000 or more in profit. It becomes painful really fast.

As an S corporation:

Profit: $30,000 – $18,000 (owner’s wage) = $12,000

No self-employment tax.

Payroll tax: $18,000 x .153 = $2,754 (We will not consider unemployment taxes either.)

Income tax at 20%: $30,000 (profit plus wage) = $6,000

Total tax: $2,754 + $6,000 = $8,754

Total savings doing it the Wealthy Accountant way: $10,590 – $8,754 = $1,846

Better, but it still hurts having a business. Still, you get to keep over 6% more of your money.

As we move to higher levels of income we can introduce other methods of tax reduction. To keep our illustrations simple, however, I will review these additional tax cutting ideas in future posts. Always consider these illustrations as non-inclusive; there are always variables that will change the results. By painting a narrow brush stroke I can show how a strategy works in a vacuum.

The remainder of this post will provide a quick illustration of the tax savings for a non-home based S corporation over a sole proprietor at $50,000, $100,000, $150,000, $250,000, and $500,000 profit levels. Once we reach over $100,000 the Social Security portion of the self-employment/FICA tax begins to reach its threshold and the tax savings change. I’ll point this out when we get there.

Sole proprietor:

Profit: $50,000

Self-employment tax: $7,650

Income tax federal and state at 20% combined: $10,000

Total tax: $7,650 + $10,000 = $17,650

S corporation:

Profit: $50,000 – $30,000 (owner’s wage) = $20,000

No self-employment tax.

Payroll tax: $30,000 x .153 = $4,590

Income tax at 20%: $50,000 (profit plus wage) = $10,000

Total tax: $4,590 + $10,000 = $14,590

Total savings doing it the Wealthy Accountant way: $17,650 – $14,590 = $3,060

Sole proprietor:

Profit: $100,000

Self-employment tax: $15,300

Income tax federal and state at 25% combined: $25,000

Total tax: $15,300 + $25,000 = $40,300

S corporation:

Profit: $100,000 – $60,000 (owner’s wage) = $40,000

No self-employment tax.

Payroll tax: $60,000 x .153 = $9,180

Income tax at 25%: $100,000 (profit plus wage) = $25,000

Total tax: $9,180 + $25,000 = $34,180

Total savings doing it the Wealthy Accountant way: $40,300 – $34,180 = $6,120

At this point I assume there are employees of the S corporation other than owners and reasonable owner’s wages are less than the 60% safe harbor. The Social Security limit is $118,500 for 2016. Wages or profits (for sole proprietors) above this level only pay the 2.9 % Medicare portion of the self-employment tax or FICA tax (both employee and employer share).

Sole proprietor:

Profit: $150,000

Self-employment tax: $19,044

Income tax federal and state at 30% combined: $45,000

Total tax: $19,044 + $45,000 = $64,044

S corporation:

Profit: $150,000 – $70,000 (owner’s wage) = $80,000

No self-employment tax.

Payroll tax: $70,000 x .153 = $10,710

Income tax at 30%: $50,000 (profit plus wage) = $45,000

Total tax: $10,170 + $45,000 = $55,170

Total savings doing it the Wealthy Accountant way: $64,044 – $55,170 = $8,874

Sole proprietor:

Profit: $250,000

Self-employment tax: $21,944

Income tax federal and state at 40% combined: $100,000

Total tax: $21,944 + $100,000 = $121,944

S corporation:

Profit: $250,000 – $100,000 (owner’s wage) = $150,000

No self-employment tax.

Payroll tax: $100,000 x .153 = $15,300

Income tax at 40%: $250,000 (profit plus wage) = $100,000

Total tax: $15,300 + $100,000 = $115,300

Total savings doing it the Wealthy Accountant way: $121,944 – $115,300 = $6,644

Note: There is a bubble effect once your income hits a certain level. Your tax savings may decline if you don’t apply other tax strategies. Working in a vacuum illustrates how the tax saving affect different income levels.

Our final example will not consider and Affordable Healthcare taxes.

Sole proprietor:

Profit: $500,000

Self-employment tax: $29,194

Income tax federal and state at 40% combined: $200,000

Total tax: $29,194 + $200,000 = $229,194

S corporation:

Profit: $500,000 – $100,000 (owner’s wage) = $400,000

No self-employment tax.

Payroll tax: $100,000 x .153 = $15,300

Income tax at 40%: $500,000 (profit plus wage) = $200,000

Total tax: $15,300 + $200,000 = $215,300

Total savings doing it the Wealthy Accountant way: $229,194 – $215,300 = $13,894

An LLC or S corporation? The choice is your and it makes a difference. You will live with your choice a long time so consider the tax and legal advantages before it is too late. #wealthyaccountant #legal #entity #entityformation #llc #scorporation #business #smallbusiness #successA final thought: This area of tax law covers a complex issue. It is not the only tax cutting strategy a business can use, but a very important one. It is of vital importance to business owners if they wish to survive. Several factors could slightly diminish the illustrated tax advantages shown while a significant number of other tax opportunities can reduce the tax liability. If you started as a partnership, the tax savings approximately double, especially for a husband/wife partnership. Knocking $25,000 off the tax bill is meaningful money.

Even if you prepare your own taxes, a tax professional should help you set up your business entity and help you determine reasonable wages. So many factors can change the results. Your situation will differ based on facts and circumstances.

Note: I received many questions on forming an LLC or corporation. In my office we used a company for years called The Company Corporation. You can check out their service by clicking the highlighted text.They handle all U.S states. 

 

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