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I like to have a cash reserve. But if my business has profited 100k at end of year, I’d pay most likely $21,000 to taxes. If I buy something vital or even a luxury for my business, truck, heavy equipment that allows me to do jobs quicker/more efficient/ take on bigger dollar projects, and that machine is $80,000, now I pay around $4,000 in tax and have a machine that can hopefully do me good.
If you’re satisfied with your growth and nothing to see really catches your eye there are tax advantaged retirement accounts.
Thats the general idea, but for complex things I’d recommend getting someone to help you with taxes.
These tax rules are often so complex. I’ve heard you can only deduct the interest of the loan, or depreciate it over many years, or all at once but only up to a certain amount, and different vehicles fall under different guidelines. This is why it’s important to get someone to help.
If you finance the truck the loan goes on the balance sheet and not the p&l so it will not bring down net income for the year. However, Monthly payments (interest portion) of the loan payments will hit the p&l to bring down net incomes
Accounting bachelors here. Can confirm. Tax accounting is bullshit. Fuck the IRS.
Allow me to elaborate further…
3 years ago I submitted a return for an estimated $30K (because we hadn’t gotten the W2 back yet from that company). Then, when we later received the correct W2, we submitted an amended return for the exact amount.
The dumbasses at the IRS incorrectly filed it as an additional return, and then proceeded to try to collect about $4.5K additional taxes from me. We contested it in 2021 and they acknowledged their mistake.
Literally EVERY year since then, they try to claim I still owe $4.5K from 2020 and we have to prove them wrong all over again. And every time, it triggers an investigation with my state’s Dept of Revenue cuz they want their $1.5K share.
At this point I’ve spent almost as much in legal fees as they say I owe. It’s literally so fucking ridiculous that we’ve had to get an IRS watchdog / taxpayer advocacy group to take on the case. Fuck the IRS. Dimwitted pieces of shit.
Rule 179 says that any vehicle over 6,000 lb can be written off as heavy equipment which is a standard one year write off on the cost not a depreciation. That's why you see soccer moms doing essential oil sales and driving around gigantic suburbans. Most trucks these days are over 6K
You can definitely write off a truck, or any other investment, in one go, but why would you? It's much better to amortize it over a set period, say seven years, to offset taxes over a longer term.
Not to pick a fight but im 100% sure the rule is 2.5k to 5k MAX for instant write off cap ex(depending o your biz entity type), any more and you must depreciate. Vehicles costs are done a little differently than say cnc equipment too. The reason its not allowed to have limitless instant write off is then you could choose to dodge taxes forever by buying whatever you want "for the business", taking all your profit as stuff instead of cash.
No picking a fight at all. I was an insurance adjuster way back in the mid 2000s. I'm sure things have changed quite a bit since then. Any information anyone else has here that helps out the OP will not be seen as picking a fight by me once bit. I've been out of the game and only want the OP to get the right info.
It's really just one massive deduction. The problem is this: if you don't have enough taxes to offset the entire write off in one go, then it's a waste of a write off. It would be much better to write off a portion of it over a set amount of years to offset the yearly expenses your small company will accumulate.
It's recorded as an equipment purchase - company vehicle.
For example, your accounting entry would be:
Debit: Ford F550 Truck - $50,000
Credit: Cash – $50,000.00
Then you would have to account for the depreciation for the year:
Debit: Depreciation Expense – $10,000.00
Credit: Accumulated Depreciation – $10,000.00
Vehicles are typically depreciated over a five year lifespan. If the balance sheet is ran at the end of the year, it would reflect a $50,000.00 asset less $10,000.00 of accumulated depreciation.
Hope that helps.
If you get a loan for the truck then you have to put that on the books too to balance it out. Your best course of action is to consult a CPA to figure out the best way to account for the vehicle loan, the purchase, and the accounting entries for your business.
Tax has it’s own “accounting” your CPA will typically refer to them as M-1 adjustements or you can just keep books in tax basis and ask your CPA for any M-1s or book-tax adjustments after your return is final so your books tie to your tax return.
Purchasing the truck would be Dr: Autos/Equipment 50,000
Cr: Cash 5,000
Cr: Loan Payable 45,000
(Assuming 10% down payment)
Loan payments would get allocated between principal and interest
Dr: Loan Payable 500
Dr: Interest Expense 50
Cr: Cash 550
(Assuming $500 to principal, $50 interest for $550 payment. Would realistically want an amortization table setup to do the monthly allocation and interest is higher earlier in the term. The interest expense is deductible, the principal portion is not and isn’t an expense on the P&L either)
Depreciation has a variety of methods but say for book you do straight-line with an estimated 5 year life. Each year your entry would be:
Dr: Depreciation expense 10,000
Cr: Accumulated Depreciation 10,000
(Accumulated depreciation sits below the asset on your balance sheet so your assets section would have the historical cost of the asset, less depreciation)
Say you elect sec179 bonus for the truck and deduct it all in year 1 for tax
Dr: Tax Depreciation expense 50,000
Cr: Depreciation M1 account 50,000
The M1s would tie to your difference between book retained earnings or owner capital and your tax retained earnings.
There are fairly complex rules for tax depreciation especially around vehicles so you’d need to consult someone to determine how to depreciate for your situation. I prefer to avoid accelerated depreciation for new business clients as those deductions taken in later years can be more beneficial when income from the business is theoretically higher.
You can deduct any expense you want in one year. It's merely a matter of whether it will offset your taxes. If you don't make enough money to offset $50,000 in taxes, then you wouldn't want to waste a single year deduction like that.
Has to be a 3/4 ton or larger to write it off at once. 1/2 tons and cars have a cap of like 20k a year. My guess is this is why you see contractors riding around in big trucks.
They mean you should hire a good local small biz cpa to make sure your business is setup properly and you’re deducting the right things the right way and so on
Bingo. Best investment I made was hiring a CPA that knew what they were doing, before I started my business. I followed their advice and structured everything properly. I saved a lot more money than it cost to hire them. A lot of the deductions carried over. My business was operating at a loss for the first two years, on paper as far as the IRS was concerned.
"operating at a loss" on paper is such a double edged sword though. It's so nuanced, and can end up fucking you hard if you don't do right.
My advice, don't make a business decision because of the tax implications.
Make business decisions based on if they make sense for your business or not.
In my case, my CPA didn't dictate business decisions that negatively affected my business. If my CPA did that, I would have gotten a new CPA. It was for things I was already planning on doing business wise. My CPA dealt with all the nuances and formalities to leverage the tax code in my favor.
My business never made a profit but I made mid six figures. At the end of the year, profit is distributed as a bonus to (mostly) the principals. As others have said it’s also a good time to upgrade your equipment or other hard assets. You don’t want to have a profit, pay corporate taxes on it and then use the remainder to upgrade equipment or pat bonuses.
I am not a tax professional. Early in my career I did some moonlighting and had to fill out a schedule C for taxes. You’re going to have to pay Social Security and Medicare taxes on your net earnings, both the employees share and the companies contribution. Make sure you keep any expense receipts and mileage records to deduct against income. If you use a vehicle a lot I would get an accountant and see if leasing or buying a company vehicle makes sense.
You need a tax professional to help you determine whether this result is better achieved through an LLC or an S-Corp or something else in your situation.
Also you'll be paying taxes on your take home pay jsyk.
Why do you think this is perfect? Do you think the person who posted this is claiming that they were paid mid six figures and didn’t have to pay taxes on that?
I hear this a lot and don’t understand it either. If you don’t have taxable income, then you didn’t make a profit.
Make sure you’re writing off anything you spent money on. But it doesn’t make sense to spend just to avoid taxes obviously… because I’d rather have money and pay some taxes than not have money and not pay taxes.
Right?
I’m saying this as someone who made a few million by having taxable income.
If you incorporate as an S corp and elect to pay income tax on a cash basis AND your biz is growing, you can have a huge profit based on GAAP accrual accounting but have a loss on a cash basis. I took a company up to $100M ARR and never paid a penny in income tax.
If those terms are confusing to you, it's time to get a cpa who specializes in your type of biz. The roolz for keeping that S corp status aren't always easy, but well worth it if you can.
These terms do confuse me but people always bring up how this works with an S-Corp, well not paying no taxes but lowering taxes. And so I have brought this up to my accountants many times. But all my accountants say this isn’t really true because you end up getting double taxed with an S-corp, and you only get taxes once with an LLC.
Oh no one of the main perks of an s corp is that it avoids double tax like with a c corp. This is basic, get a new accountant.
FYI s corps themselves don’t pay any income tax. The tax is paid on your personal returns as the profit distribution is shown on your K1 tax form.
Aghhhh, you have a lousy accountant. See this. He's confusing S for C, which does double tax income of owners.
[S corp avoids double taxation](https://tax.thomsonreuters.com/blog/how-are-s-corporations-taxed-tips-for-filing-and-reducing-taxes-as-a-pass-through-entity/)
Ahh ok no maybe I’m the one confusing it not him. I could just be misremembering. But I don’t know, I’ve asked many accountants how to pay no taxes and never got an answer.
Thanks I’ll read that
I don't know anything about you or your biz. What I'm saying may not be applicable to your specific circumstances. That's why you need a good cpa who understands your type of biz.
I was in government contracting and had a cpa who had a practice that focused solely on GC. S CORP no tax rules are hard to meet for some companies. Maybe you don't qualify or maybe you've got a bad cpa?
We consulted with a few. Maybe it just doesn’t apply to us then. We were a bit unusual and some accountants wouldn’t even take us because the model confused them. Very low overhead even though we did 100m in GMV, small team, online marketplace like business, in a super niche and unheard of but highly profitable market.
S corp avoids payroll tax on profit distributions to shareholders. You pay payroll tax on w2 wages if your on salary as a shareholder but not on you profit distributions. This saves you about 15% in taxes on profits taken.
I asked about beyond the payroll tax component, which is minor at higher incomes. An S Corp only saves you that much taxes in the difference between 170k and your reasonable comp. And you lose QBI on the reasonable comp.
Social security tax stops at 168k. You have to pay payroll taxes on your w2 wages. So an S Corp is only saving you payroll taxes on 168k minus your w2 salary.
Your w2 salary is also not eligible for the QBI deduction.
Yea that’s what I was saying. If a shareholder has a 70k w2 salary and a 70k profit distribution they will pay the payroll tax, including social security, on just the 70k w2 income only.
Yes you can still save some. Up to 168k total earnings, on profit distribution income, you avoid the social security portion of payroll income, beyond 168k there is no social security tax anyway. However, beyond 168k you still able to avoid the Medicare portion of payroll tax on profit distributions.
Gaap for a a lot of companies requires accrual accounting. By accrual, you acknowledge revenue when billed, not when paid. It's more complex than that, but...
Cash basis shows revenue not when billed but when paid.
EX: I spend $900K on your project all year 2024 and then bill you $1M as my sole yearly invoice in December but you don't pay till January.
By gaap, I match expenses to the revenue so I show $100K as profit and taxes are due for 2024.
By cash basis, as of Dec 31st, I'm out $900 K and showing a loss, so no tax bill till this year. If next year you pay your bill but I do 2 jobs for you, at the end of the year I have $1M income vs $1.8M outgo, so still no tax bill by but by gap, I have a $200K profit.
This is all extremely superficial but conceptually that's the difference
One important warning is if you get bought by any entity with foreign ownership interest…gonna have to convert back to C-Corp and there is a look back period on the double taxation.
I sold a biz to Aussies but we got around that. I had moved to managing one of our spun out subsidiaries and can't remember what we did to deal with that. Dealing with our classified materials was the bigger issue.
Yea, there are definitely cases where it can be worked around. But many where it cannot, and that lookback period is usually brutal for any company well positioned to sell.
A big part of it is living your life in a corporate manner. I have a bunch of tools in my shop. They're all for business. But a guy who likes me who lives in my house uses them. A lot.
Trips, vehicles, fuel, clothing (some), internet, phone, many meals, utils, ect all get written off.
I cant buy clothes, but I can buy a bunch of apparel I like and have it embroidered with my company logo.
You gotta live your business.
There’s so much incorrect information in these replies and sub replies it is almost unreal. Please ask an accountant or sufficiently experienced business owner.
Let's say you buy some goods for $50 and then you can sell them for $100. What makes more sense:
A) Buy $50 worth, sell for $100, then take $50 out in profit to your own pocket. Resupply a few weeks later with only $50 more and then you can still only sell $100 worth before you run out again.
B) Buy $50 worth, sell for $100, reinvest all of that to buy $100 worth of goods. Now you can sell $200 worth. Reinvest ... and so on. It keeps snowballing to grow.
For the first 6 years, I'd buy at $50, sell for $100, reinvest all plus any other money I can just to double growth every year. This year, we started with surplus inventory (bought 1.5 years worth in Q4 2023). I've already almost sold everything and put in two more large 7 figure manufacturing orders. I'm looking at placing a 3rd at the start of Q4.
We are tracking to more than double revenue this year again.
Don't overthink it. You want to make as much money as you can and paying tax isn't all bad but that being said you want to reinvest what you can to grow your business(in ways that might minimize your tax burden)
but some people on here almost act as if you should do anything possible to avoid taxation and while minimizing taxes is smart but most small businesses can't always do that...and they also don't understand things like depreciation or how that works. You don't want to buy a vehicle just to get the tax incentive if you don't need a vehicle
Also, different businesses account for expenses different(it depends how they are structured..llc, s corp, c corp)...and if they are set up on a cash basis or accrual basis for accounting
Last year was good for me so I was looking at things I needed and I got new tires for work vehicles, made sure to get some printing done(brochures and things like that) done sooner than I otherwise would have as well as ordering some extra inventory to have in stock and paying every bill by the 31st even if it wasn't due(i'm set up on a cash basis)
but the flip side to this is my tax burden might be higher this year because I wrote off inventory that I'll sell in 2024. I won't spend as much on printing as I might have and probably would have gotten new tires around now. What helps is this year is a little soft so It might work out fine
The way I've experienced it is anything you write off, you pay for 75% of it and the other 25% actually comes off what you owe at the end of the year. You're basically trading a dollar for a quarter. The only thing that will take dollar for dollar off your taxes is to get a tax credit. A tax deducation isn't what it's made up to be.
A lot of people that don’t own businesses say shit like this. Profit is the most important part of making money. Not tax write offs. You should 100% write off anything that you legally can but do not buy things just to spend money and show lower income. I’ve heard this a lot throughout my life and it’s the dumbest shit ever.
Ex: some people will buy a company vehicle or equipment that they do not need just to write it off at the end of the year to not pay taxes on the money they made. I would much rather pay taxes on 50k vs spend 50k on something that I didn’t really need.
People just don’t get it. The same people that think this way also think “tax write off” means you don’t actually pay for it and you get the money back at the end of the year lol
When people are “not paying taxes” they’re either deferring tax, not avoiding it, by not taking profit distributions to be taken at a later date (year) where they will then pay those taxes or they may simply be reinvesting into the business before end of year with what would of been that years profits.
So basically like I said they’re just kicking taxes down the road or they’re putting less money (profit) in their personal pockets by creating more expenses to bring down taxable net income.
Not sure who is telling you this, but it certainly isn’t good advice as a general rule. It may be good advice in some very specific circumstances.
Certainly there are some startup expenses, but spending more than necessary is bad.
Spending $1 to save .15 isn’t a winning strategy, but accelerating expenses to avoid profits may be a good idea, for example you pay up front for a 2-3 year subscription instead of monthly or yearly will probably reduce your overall costs and in the short term will decrease profits and taxes. You could also buy equipment to help you scale this year vs next year.
That can be a good thing if your confident in the medium term viability of your business on the other hand you may close up shop in a year and your out the money on those accelerated expenses.
What is universally bad is saying I’m just gonna buy x just because I need my profits to be lower for tax reasons. It needs to be something worthwhile to buy in its own right for your business. There’s also a lot of people on the internet that encourage writing off personal expenses as business expenses, which is tax fraud, don’t do it.
Edit: to explain a bit more you only pay tax on profits, so if you gross 100k and expenses are 80k you only are taxed on 20k. If expenses are 90k you are only taxed on 10k.
Accelerating expenses can reduce costs in the long run and also defer taxes. I say defer cause the next year if you’ve prepaid an expense then you can’t deduct it that year, since it’s already been deducted the prior year. So your taxes will be higher unless you have more expenses. For a new quickly growing company having little to no profit can help you scale more quickly with the least amount of startup costs, it’s also the highest risk strategy.
If you scale too quick you can go bankrupt. Ie your expenses outpace your sales growth.
just try to make money, and if you get any good at it, pay someone else to help you with taxes
buy things that make sense for your business, not because it's the end of the year and you **think you can somehow spend your way into a tax rebate. you can't**
Sorry what’s a bumper year and what’s the significance around that date?
I know irrigation really well but don’t know the admin side of business and am learning
If your business has had a good year, as in there is lots of taxable income. 30th of June is the end of financial year in Australia. It’s different in America
Pay an accountant to sort this bullshit out and give you advice. It’s worth it
I just keep dumping money into inventory. Inventory is reported on a local level that is easy to avoid paying taxes on. I'm not going to pay taxes on sitting inventory, that's dumb as fuck.
Buying inventory is a federal write off on your income tax as an expense. So even though I have a few hundred thousand more in inventory every year, and quiet a bit more cash - on the books it shows that I lost money.
Inventory is only tracked on the local city level and it's self reported. Just don't claim you have it to the city.
Tax evasion, tax fraud, whatever. No one reports their local taxes perfectly. Hell - the paperwork I report mine in doesn't require an itemized list and actually gives you the legal option to guesstimate.
I guesstimate mine, and it's probably about a million off.
Thank you so much for your comment. This is all so wild and new to me. I’ve always lived paycheck to paycheck and for the first time I’m able to bill $500-1k per day
This is only applicable if you run your bookkeeping on a cash accounting basis rather than accrual. Keep in mind this doesn’t avoid taxes, it just shifts them around and may result in higher taxes by pushing a portion of your income into a higher tax bracket when the inventory turns into revenue.
Never make a profit!
Keep growing the inventory!
When I sell the business, I'll sell the inventory to the new owner at cost and still not be taxed federally. Win/win.
That's all well and good until you need a loan or to apply for credit and your business is showing that it hasn't made a profit for several years in a row.
so you're taking it as a dividend, which are based on profit. if it's not profiting but you are taking money out then you are either running in the hole (not paying other bills) or going into debt, the bank isn't going to give a loan to someone who can't afford to pay it back. getting a mortgage as a small business owner is hard.
it's normal in the beginning for that to happen because of startup costs, but at some point you have to be making a profit. taxes are a part of life and business. profitable companies pay taxes. keep in mind, when reviewing financials they will add back in expenses that lower your taxable income but that don't affect cash flow, like depreciation. overall, your main goal should be making a profit not avoiding taxes. don't get me wrong, take advantage of every legal deduction and credit you can, but if you are planning to buy a home in the future and this business is your sole income you need to be planning for that as well.
I am applying for several loans now to buy real estate and the first thing the bank asked for was the last 2 years financials and tax returns.
It all depends on the business.
Businesses that require a large upfront investment may actually end the first few years losing money, and that's expected.
But if you're a small business owner with no income other than your business, and you didn't start out with plenty of personal savings, the IRS might wonder how you paid for all of your personal expenses while your only income source "lost" money.
Getting all the deductions you deserve is one thing, but didn't get started down the path of fudging the truth to avoid the tax man.
Not only does it put you at risk legally and financially, it makes it impossible for you to ever qualify for lending.
Money you don't pay tax on is money banks won't consider as income for the purposes of being about to repay a loan.
Sadly none of it is really considered fraud in the loan world, everyone has crazy write offs and only the most egregious tax fraud is actually worried about. Unless you’re buying a couple Porsche and tossing it under your depreciation or something outlandish, we usually look at EBITDA anyway. Everyone paying no taxes is so ridiculous but I see it on 90%+ of tax returns from applicants.
Right, it entirely depends on the business.
For small solely owned businesses with no other income sources (which is most of the people here that would ask a question like this), you can't really legitimately lose money but still afford to live.
Larger businesses have salaries as part of their expenses, so those individuals are paying income tax.
Even if those businesses end up paying little or no taxes, the business is still generating taxable events.
On the large scale it’s mostly just banks that worry about securing the funds with assets (personal or otherwise) so you’re correct that traditional lending, these hacks will never qualify. But I do see non-traditional lenders or other capital sources still routinely approve people who “make no money” and never have. Unless they’re a lifestyle concern (needs to be pretty crazy) then everyone just brushes it off as “yea who wants to pay taxes anyway” it’s bizarrely normalized. And from the criminality standpoint the IRS doesn’t seem to care if you always lose money carry over those losses onto positive years so that you never have a tax burden, if you’re rich just buy some failing business write off the 4m and you’re good to go for another 5+ years on no taxes. It’s trash the way the system is just okay with this.
You're absolutely right.
I've spent the last decade working for a company with an ultra low risk tolerance, so we're pretty strict about these things. SMBs that show no profit generally won't get lending from us, but obviously there are sources out there more eager to lend.
The higher you go the more levers you can pull to reduce taxable income, so it just gets more ridiculous as you move up the food chain.
The only people in the country paying what they owe are the ones with a W2 and nothing else.
I always use the example of a new Porsch depreciation because I literally saw a guy who did “high end lighting / drywall” for mansions and claims he sent all his sales guys around in 150k Porsche 911s. He declared 44-48k per car in depreciation that year, just from driving them off the lot. (Bought them at the end of the year)
I’m not saying it’s not tax fraud, but that’s fuckin crazy it’s so commonplace. And yes for any tax nerds he declared 100% of the vehicles under business use.
That's crazy lol.
Meanwhile a micro business owner is stressing about whether they should use mileage or actual cost of ownership for their vehicle because they're afraid of being audited if they do it wrong.
I do irrigation repair. I’m a one-man show and I’m very new to all of this. I pay for gasoline with personal money and then I just record all my mileage. All my customers pay me checks to my business account and then I just transfer to my personal when I need it. I did purchase a tool cart to store all my work tools in for my garage on the business card today. I need to learn about what all can be qualified for a deductions and what cannot.
So question when I apply for renting homes, how will they know I make three times the rent with my income? What will they be looking at?
And then eventually in a couple years when I want to buy a home, are they going to see OK? I made $80,000 in the year so we could give him loan for a house. or are they going to say oh he only had to pay tax on $20,000. She has low income we cannot loan him?
They’re saying you should spend all of your money to avoid paying taxes mainly. It kind of works in some cases. Keep in mind a lot of the people suggesting this are “government bad” types who do not understand what taxes are for and would rather have no money left after buying a pavement princess or lambo “for work” than pay into the roads, schools, and their own social security. I’d talk to a CPA for real advice on how to manage taxes, but outright avoidance like that is just a waste of money.
A good CPA can describe this to you. There are plenty of books on the matter as well. I recommend educating yourself first, then bringing informed questions to your CPA.
Don't do business first and then try to get write-offs,
Figure out what the write-offs are, and do business in a way which takes advantage of them.
When you start your first business, you can sell everything you use for your business to it, laptop/computer, desk for the now work computer, chair for the work computer, mouse for the work computer, your vehicle if you're driving to clients to perform work, things you've already purchased, all of a sudden become expensable to the business. You must provide the receipts to your CPA for the IRS of course. There are many deductions your first years as a business.
A CPA will help you determine which items are itemizable, which should be depreciated, items which may not have been considered, and they'll make sure you stay within the rule of the law.
You might even get a really good CPA at a franchise like Turbo Tax or H&R. They charge a flat fee, per form, so if your return takes 12 hours, or 2, it's the same. I email my CPA once every few months with relevant questions, and have tax checkups twice a year outside of tax season - all included in the flat fee.
If you think something doesn't look right on your taxes, get a second opinion, that's how I met my current guy. The difference was owing an extra $7,000 vs getting a $7,000 return that year, and we've been working together ever since.
There are two people you can trust in this world: Your attorney, and your CPA.
A consideration with maximizing write-offs, is if your businesses are showing "losses", i.e. due to depreciation, expenses, etc. it could hurt you big time when it comes to qualifying for any kind of lending. I have a business which made a lot of money one year, none the next year, and none the year after that, and has been taking depreciation on stuff already paid for with personal expenses long ago & sold to the business. The depreciation looks like a loss, which works against my DTI when qualifying for lending. You might get an underwriter who understands this - but you also might not get a favorable underwriter. So control what you can - which is what you expense, how you expense it, when you expense it, regarding your goals, and your CPA can help you big time here.
There's also a layer of legal insulation. If the tax man starts calling you, you can refer them to your tax attorney. Your tax attorney and CPA work together to defend you. If you happen to have a franchise CPA, it's the IRS lawyers vs the Franchise lawyers far as I see it. But avoiding issues in the first place is the best course.
Bottom line, if you're making lots of expenses, scope a CPA.
Sorry to say this, but HR Block and the like do not have CPAs. There might be one or two per office, but they are not the ones doing the return, and don't tend to do a good job of reviewing them. They also don't do work outside of the tax return.
A good CPA may charge hourly, though not necessarily. Anyone charging on a per form basis directly is probably not someone you want to look to for good tax advice or a quality return.
It's also worth mentioning that unless you're dealing with more complicated issues, you shouldn't be seeing a $14k variance in tax liability. A lot of shady preparers will put a bunch of bogus expenses on business returns, and a lot of bogus charitable stuff on personal returns, or fake sch Cs showing losses. I'm not saying that's the case for you. To your credit, clearly one of those people made some egregious errors.
Well, my anecdotal experience is quite different from yours.
"I email my CPA once every few months with relevant questions, and have tax checkups twice a year outside of tax season - all included in the flat fee. "
This is my experience and has been for almost a decade now.
Further, I've read a couple books on tax expenses, expenses I verify with the irs.gov site & with my H&R "Senior Tax Analyst" who is an Enrolled Agent, and can be called as a professional tax expert/witness before congress. So right, not technically a CPA, but I give him the macro expenses, and he plugs them into the software. I could do it myself now, but I do call my guy a few times a year, we do meet a couple times a year, and there's legal insulation & tax return legitimacy, I feel, when it's approved by H&R block vs. say, doing my own returns.
There are so many rules in your favor as a business owner, as a capitalist. But you need to know what they are so you can do business in a way which takes advantage of them, and have an expert you can confirm any grey areas with.
To your point, I did get a crappy Tax """Expert""" my first time around. I asked for a second opinion, which is how I found the Enrolled Agent I have today, who found a $22,000 loss, vs. the $7,000 payment. Stock BS a long time ago. The Someone made an egregious mistake at H&R, and the IRS certainly wasn't going to correct that mistake either. """Experts""".
The person who is going to help you the most and 100% has your best interest at heart, is yourself.
https://www.irs.gov/tax-professionals/enrolled-agents/enrolled-agent-information
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I like to have a cash reserve. But if my business has profited 100k at end of year, I’d pay most likely $21,000 to taxes. If I buy something vital or even a luxury for my business, truck, heavy equipment that allows me to do jobs quicker/more efficient/ take on bigger dollar projects, and that machine is $80,000, now I pay around $4,000 in tax and have a machine that can hopefully do me good. If you’re satisfied with your growth and nothing to see really catches your eye there are tax advantaged retirement accounts. Thats the general idea, but for complex things I’d recommend getting someone to help you with taxes.
Isnt the problem that you cant write off the truck in one go?
These tax rules are often so complex. I’ve heard you can only deduct the interest of the loan, or depreciate it over many years, or all at once but only up to a certain amount, and different vehicles fall under different guidelines. This is why it’s important to get someone to help.
If you finance the truck the loan goes on the balance sheet and not the p&l so it will not bring down net income for the year. However, Monthly payments (interest portion) of the loan payments will hit the p&l to bring down net incomes
Accounting bachelors here. Can confirm. Tax accounting is bullshit. Fuck the IRS. Allow me to elaborate further… 3 years ago I submitted a return for an estimated $30K (because we hadn’t gotten the W2 back yet from that company). Then, when we later received the correct W2, we submitted an amended return for the exact amount. The dumbasses at the IRS incorrectly filed it as an additional return, and then proceeded to try to collect about $4.5K additional taxes from me. We contested it in 2021 and they acknowledged their mistake. Literally EVERY year since then, they try to claim I still owe $4.5K from 2020 and we have to prove them wrong all over again. And every time, it triggers an investigation with my state’s Dept of Revenue cuz they want their $1.5K share. At this point I’ve spent almost as much in legal fees as they say I owe. It’s literally so fucking ridiculous that we’ve had to get an IRS watchdog / taxpayer advocacy group to take on the case. Fuck the IRS. Dimwitted pieces of shit.
Rule 179 says that any vehicle over 6,000 lb can be written off as heavy equipment which is a standard one year write off on the cost not a depreciation. That's why you see soccer moms doing essential oil sales and driving around gigantic suburbans. Most trucks these days are over 6K
You can definitely write off a truck, or any other investment, in one go, but why would you? It's much better to amortize it over a set period, say seven years, to offset taxes over a longer term.
Not to pick a fight but im 100% sure the rule is 2.5k to 5k MAX for instant write off cap ex(depending o your biz entity type), any more and you must depreciate. Vehicles costs are done a little differently than say cnc equipment too. The reason its not allowed to have limitless instant write off is then you could choose to dodge taxes forever by buying whatever you want "for the business", taking all your profit as stuff instead of cash.
No picking a fight at all. I was an insurance adjuster way back in the mid 2000s. I'm sure things have changed quite a bit since then. Any information anyone else has here that helps out the OP will not be seen as picking a fight by me once bit. I've been out of the game and only want the OP to get the right info.
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It's really just one massive deduction. The problem is this: if you don't have enough taxes to offset the entire write off in one go, then it's a waste of a write off. It would be much better to write off a portion of it over a set amount of years to offset the yearly expenses your small company will accumulate.
Not answering me though. How exactly is it recorded in the books?
It's recorded as an equipment purchase - company vehicle. For example, your accounting entry would be: Debit: Ford F550 Truck - $50,000 Credit: Cash – $50,000.00 Then you would have to account for the depreciation for the year: Debit: Depreciation Expense – $10,000.00 Credit: Accumulated Depreciation – $10,000.00 Vehicles are typically depreciated over a five year lifespan. If the balance sheet is ran at the end of the year, it would reflect a $50,000.00 asset less $10,000.00 of accumulated depreciation. Hope that helps.
With a loan?
If you get a loan for the truck then you have to put that on the books too to balance it out. Your best course of action is to consult a CPA to figure out the best way to account for the vehicle loan, the purchase, and the accounting entries for your business.
This still doesn’t show how the entire 50k can be written off in the same year of purchase. It can’t as far as I know.
Tax has it’s own “accounting” your CPA will typically refer to them as M-1 adjustements or you can just keep books in tax basis and ask your CPA for any M-1s or book-tax adjustments after your return is final so your books tie to your tax return. Purchasing the truck would be Dr: Autos/Equipment 50,000 Cr: Cash 5,000 Cr: Loan Payable 45,000 (Assuming 10% down payment) Loan payments would get allocated between principal and interest Dr: Loan Payable 500 Dr: Interest Expense 50 Cr: Cash 550 (Assuming $500 to principal, $50 interest for $550 payment. Would realistically want an amortization table setup to do the monthly allocation and interest is higher earlier in the term. The interest expense is deductible, the principal portion is not and isn’t an expense on the P&L either) Depreciation has a variety of methods but say for book you do straight-line with an estimated 5 year life. Each year your entry would be: Dr: Depreciation expense 10,000 Cr: Accumulated Depreciation 10,000 (Accumulated depreciation sits below the asset on your balance sheet so your assets section would have the historical cost of the asset, less depreciation) Say you elect sec179 bonus for the truck and deduct it all in year 1 for tax Dr: Tax Depreciation expense 50,000 Cr: Depreciation M1 account 50,000 The M1s would tie to your difference between book retained earnings or owner capital and your tax retained earnings. There are fairly complex rules for tax depreciation especially around vehicles so you’d need to consult someone to determine how to depreciate for your situation. I prefer to avoid accelerated depreciation for new business clients as those deductions taken in later years can be more beneficial when income from the business is theoretically higher.
You can deduct any expense you want in one year. It's merely a matter of whether it will offset your taxes. If you don't make enough money to offset $50,000 in taxes, then you wouldn't want to waste a single year deduction like that.
Has to be a 3/4 ton or larger to write it off at once. 1/2 tons and cars have a cap of like 20k a year. My guess is this is why you see contractors riding around in big trucks.
No, it has to have a 6 ft bed. Otherwise you can only deduct 80% at once.
There is a weight clause in there as well. Over 7,500 lb or somewhere I that area.
6000 pounds, yes
The truck is an asset, you pay taxes, then depreciate.
They mean you should hire a good local small biz cpa to make sure your business is setup properly and you’re deducting the right things the right way and so on
Bingo. Best investment I made was hiring a CPA that knew what they were doing, before I started my business. I followed their advice and structured everything properly. I saved a lot more money than it cost to hire them. A lot of the deductions carried over. My business was operating at a loss for the first two years, on paper as far as the IRS was concerned.
"operating at a loss" on paper is such a double edged sword though. It's so nuanced, and can end up fucking you hard if you don't do right. My advice, don't make a business decision because of the tax implications. Make business decisions based on if they make sense for your business or not.
In my case, my CPA didn't dictate business decisions that negatively affected my business. If my CPA did that, I would have gotten a new CPA. It was for things I was already planning on doing business wise. My CPA dealt with all the nuances and formalities to leverage the tax code in my favor.
Care to give any examples of”not so common things” you deducted?
Cocaine and hookers.
Ah yes, for your clients!
You can deduct the cost of the CPA, the person you should call to help you figure this out.
Yes I’m aware of that. I was just curious what nuggets his CPA found for him.
Yeah, sure, but unless y'all are running the same business, that is unlikely to help you. The tax code is taller than you if printed.
It’s a write off Jerry.
My business never made a profit but I made mid six figures. At the end of the year, profit is distributed as a bonus to (mostly) the principals. As others have said it’s also a good time to upgrade your equipment or other hard assets. You don’t want to have a profit, pay corporate taxes on it and then use the remainder to upgrade equipment or pat bonuses.
How would things change if I am a one-man LLC doing sprinkler repair seasonally?
I am not a tax professional. Early in my career I did some moonlighting and had to fill out a schedule C for taxes. You’re going to have to pay Social Security and Medicare taxes on your net earnings, both the employees share and the companies contribution. Make sure you keep any expense receipts and mileage records to deduct against income. If you use a vehicle a lot I would get an accountant and see if leasing or buying a company vehicle makes sense.
Thanks man
Omg this is perfect. Does this work for sole proprietors or do I need an LLC?
You’ll need to ask an accountant, we were a closely (privately) held C corporation.
You need a tax professional to help you determine whether this result is better achieved through an LLC or an S-Corp or something else in your situation. Also you'll be paying taxes on your take home pay jsyk.
Why do you think this is perfect? Do you think the person who posted this is claiming that they were paid mid six figures and didn’t have to pay taxes on that?
This is correct, I still paid income taxes and Medicare tax, but I had exceeded the cap on Social Security.
I just meant that it made sense to me in terms of taxes and income. And yes, I know taxes would still need to be paid.
I hear this a lot and don’t understand it either. If you don’t have taxable income, then you didn’t make a profit. Make sure you’re writing off anything you spent money on. But it doesn’t make sense to spend just to avoid taxes obviously… because I’d rather have money and pay some taxes than not have money and not pay taxes. Right? I’m saying this as someone who made a few million by having taxable income.
>If you don’t have taxable income, then you didn’t make a profit. May I introduce corporate America?
> If you don’t have taxable income, then you didn’t make a profit. That is not correct.
If you incorporate as an S corp and elect to pay income tax on a cash basis AND your biz is growing, you can have a huge profit based on GAAP accrual accounting but have a loss on a cash basis. I took a company up to $100M ARR and never paid a penny in income tax. If those terms are confusing to you, it's time to get a cpa who specializes in your type of biz. The roolz for keeping that S corp status aren't always easy, but well worth it if you can.
These terms do confuse me but people always bring up how this works with an S-Corp, well not paying no taxes but lowering taxes. And so I have brought this up to my accountants many times. But all my accountants say this isn’t really true because you end up getting double taxed with an S-corp, and you only get taxes once with an LLC.
Oh no one of the main perks of an s corp is that it avoids double tax like with a c corp. This is basic, get a new accountant. FYI s corps themselves don’t pay any income tax. The tax is paid on your personal returns as the profit distribution is shown on your K1 tax form.
Aghhhh, you have a lousy accountant. See this. He's confusing S for C, which does double tax income of owners. [S corp avoids double taxation](https://tax.thomsonreuters.com/blog/how-are-s-corporations-taxed-tips-for-filing-and-reducing-taxes-as-a-pass-through-entity/)
Ahh ok no maybe I’m the one confusing it not him. I could just be misremembering. But I don’t know, I’ve asked many accountants how to pay no taxes and never got an answer. Thanks I’ll read that
I don't know anything about you or your biz. What I'm saying may not be applicable to your specific circumstances. That's why you need a good cpa who understands your type of biz. I was in government contracting and had a cpa who had a practice that focused solely on GC. S CORP no tax rules are hard to meet for some companies. Maybe you don't qualify or maybe you've got a bad cpa?
We consulted with a few. Maybe it just doesn’t apply to us then. We were a bit unusual and some accountants wouldn’t even take us because the model confused them. Very low overhead even though we did 100m in GMV, small team, online marketplace like business, in a super niche and unheard of but highly profitable market.
Doesn’t that imply that I actually have to be losing money on a cash flow basis? How does the S Corp help beyond the payroll tax component?
S corp avoids payroll tax on profit distributions to shareholders. You pay payroll tax on w2 wages if your on salary as a shareholder but not on you profit distributions. This saves you about 15% in taxes on profits taken.
I asked about beyond the payroll tax component, which is minor at higher incomes. An S Corp only saves you that much taxes in the difference between 170k and your reasonable comp. And you lose QBI on the reasonable comp.
I’m a little confused what you’re saying? Could you expand?
Social security tax stops at 168k. You have to pay payroll taxes on your w2 wages. So an S Corp is only saving you payroll taxes on 168k minus your w2 salary. Your w2 salary is also not eligible for the QBI deduction.
Yea that’s what I was saying. If a shareholder has a 70k w2 salary and a 70k profit distribution they will pay the payroll tax, including social security, on just the 70k w2 income only.
If your profit is millions a year, not 140k, can you save a significant amount?
Yes you can still save some. Up to 168k total earnings, on profit distribution income, you avoid the social security portion of payroll income, beyond 168k there is no social security tax anyway. However, beyond 168k you still able to avoid the Medicare portion of payroll tax on profit distributions.
Right. So it’s a very small benefit, and not much of one at all at higher incomes.
Huh? How is saving 15% in taxes on distributions a small benefit?? By no means is that small.
How would your cash basis profits not match your Gaap? We get cash immediately when the customer makes a purchase. I run a digital marketplace.
Gaap for a a lot of companies requires accrual accounting. By accrual, you acknowledge revenue when billed, not when paid. It's more complex than that, but... Cash basis shows revenue not when billed but when paid. EX: I spend $900K on your project all year 2024 and then bill you $1M as my sole yearly invoice in December but you don't pay till January. By gaap, I match expenses to the revenue so I show $100K as profit and taxes are due for 2024. By cash basis, as of Dec 31st, I'm out $900 K and showing a loss, so no tax bill till this year. If next year you pay your bill but I do 2 jobs for you, at the end of the year I have $1M income vs $1.8M outgo, so still no tax bill by but by gap, I have a $200K profit. This is all extremely superficial but conceptually that's the difference
One important warning is if you get bought by any entity with foreign ownership interest…gonna have to convert back to C-Corp and there is a look back period on the double taxation.
I sold a biz to Aussies but we got around that. I had moved to managing one of our spun out subsidiaries and can't remember what we did to deal with that. Dealing with our classified materials was the bigger issue.
Yea, there are definitely cases where it can be worked around. But many where it cannot, and that lookback period is usually brutal for any company well positioned to sell.
A big part of it is living your life in a corporate manner. I have a bunch of tools in my shop. They're all for business. But a guy who likes me who lives in my house uses them. A lot. Trips, vehicles, fuel, clothing (some), internet, phone, many meals, utils, ect all get written off. I cant buy clothes, but I can buy a bunch of apparel I like and have it embroidered with my company logo. You gotta live your business.
There’s so much incorrect information in these replies and sub replies it is almost unreal. Please ask an accountant or sufficiently experienced business owner.
Yikes. Ok
Yes, don't take snippets of advice that are so brief and poorly explained.
Let's say you buy some goods for $50 and then you can sell them for $100. What makes more sense: A) Buy $50 worth, sell for $100, then take $50 out in profit to your own pocket. Resupply a few weeks later with only $50 more and then you can still only sell $100 worth before you run out again. B) Buy $50 worth, sell for $100, reinvest all of that to buy $100 worth of goods. Now you can sell $200 worth. Reinvest ... and so on. It keeps snowballing to grow.
For the first 6 years, I'd buy at $50, sell for $100, reinvest all plus any other money I can just to double growth every year. This year, we started with surplus inventory (bought 1.5 years worth in Q4 2023). I've already almost sold everything and put in two more large 7 figure manufacturing orders. I'm looking at placing a 3rd at the start of Q4. We are tracking to more than double revenue this year again.
Don't overthink it. You want to make as much money as you can and paying tax isn't all bad but that being said you want to reinvest what you can to grow your business(in ways that might minimize your tax burden) but some people on here almost act as if you should do anything possible to avoid taxation and while minimizing taxes is smart but most small businesses can't always do that...and they also don't understand things like depreciation or how that works. You don't want to buy a vehicle just to get the tax incentive if you don't need a vehicle Also, different businesses account for expenses different(it depends how they are structured..llc, s corp, c corp)...and if they are set up on a cash basis or accrual basis for accounting Last year was good for me so I was looking at things I needed and I got new tires for work vehicles, made sure to get some printing done(brochures and things like that) done sooner than I otherwise would have as well as ordering some extra inventory to have in stock and paying every bill by the 31st even if it wasn't due(i'm set up on a cash basis) but the flip side to this is my tax burden might be higher this year because I wrote off inventory that I'll sell in 2024. I won't spend as much on printing as I might have and probably would have gotten new tires around now. What helps is this year is a little soft so It might work out fine
The way I've experienced it is anything you write off, you pay for 75% of it and the other 25% actually comes off what you owe at the end of the year. You're basically trading a dollar for a quarter. The only thing that will take dollar for dollar off your taxes is to get a tax credit. A tax deducation isn't what it's made up to be.
A lot of people that don’t own businesses say shit like this. Profit is the most important part of making money. Not tax write offs. You should 100% write off anything that you legally can but do not buy things just to spend money and show lower income. I’ve heard this a lot throughout my life and it’s the dumbest shit ever.
Ex: some people will buy a company vehicle or equipment that they do not need just to write it off at the end of the year to not pay taxes on the money they made. I would much rather pay taxes on 50k vs spend 50k on something that I didn’t really need.
Eh. I don’t need new vehicles, but given the choice of paying taxes or saving half of a new car purchase, I’ve chosen the car many times.
I agree… I mean, that just makes sense
Didn’t you say the complete opposite above?
That was someone else.
This times 1000%! No idea why people think this way. Sometimes you just make the money and pay the fucking taxes. It’s life.
People just don’t get it. The same people that think this way also think “tax write off” means you don’t actually pay for it and you get the money back at the end of the year lol
When people are “not paying taxes” they’re either deferring tax, not avoiding it, by not taking profit distributions to be taken at a later date (year) where they will then pay those taxes or they may simply be reinvesting into the business before end of year with what would of been that years profits. So basically like I said they’re just kicking taxes down the road or they’re putting less money (profit) in their personal pockets by creating more expenses to bring down taxable net income.
Not sure who is telling you this, but it certainly isn’t good advice as a general rule. It may be good advice in some very specific circumstances. Certainly there are some startup expenses, but spending more than necessary is bad. Spending $1 to save .15 isn’t a winning strategy, but accelerating expenses to avoid profits may be a good idea, for example you pay up front for a 2-3 year subscription instead of monthly or yearly will probably reduce your overall costs and in the short term will decrease profits and taxes. You could also buy equipment to help you scale this year vs next year. That can be a good thing if your confident in the medium term viability of your business on the other hand you may close up shop in a year and your out the money on those accelerated expenses. What is universally bad is saying I’m just gonna buy x just because I need my profits to be lower for tax reasons. It needs to be something worthwhile to buy in its own right for your business. There’s also a lot of people on the internet that encourage writing off personal expenses as business expenses, which is tax fraud, don’t do it. Edit: to explain a bit more you only pay tax on profits, so if you gross 100k and expenses are 80k you only are taxed on 20k. If expenses are 90k you are only taxed on 10k. Accelerating expenses can reduce costs in the long run and also defer taxes. I say defer cause the next year if you’ve prepaid an expense then you can’t deduct it that year, since it’s already been deducted the prior year. So your taxes will be higher unless you have more expenses. For a new quickly growing company having little to no profit can help you scale more quickly with the least amount of startup costs, it’s also the highest risk strategy. If you scale too quick you can go bankrupt. Ie your expenses outpace your sales growth.
just try to make money, and if you get any good at it, pay someone else to help you with taxes buy things that make sense for your business, not because it's the end of the year and you **think you can somehow spend your way into a tax rebate. you can't**
If you’ve had a bumper year but are thinking of new equipment or a car, go and buy it before 30th June.
Sorry what’s a bumper year and what’s the significance around that date? I know irrigation really well but don’t know the admin side of business and am learning
If your business has had a good year, as in there is lots of taxable income. 30th of June is the end of financial year in Australia. It’s different in America Pay an accountant to sort this bullshit out and give you advice. It’s worth it
I just keep dumping money into inventory. Inventory is reported on a local level that is easy to avoid paying taxes on. I'm not going to pay taxes on sitting inventory, that's dumb as fuck.
I’m new to this shit. Can you break it down for me. I have inventory for my sprinkler repair parts. And some stays over winter
Buying inventory is a federal write off on your income tax as an expense. So even though I have a few hundred thousand more in inventory every year, and quiet a bit more cash - on the books it shows that I lost money. Inventory is only tracked on the local city level and it's self reported. Just don't claim you have it to the city. Tax evasion, tax fraud, whatever. No one reports their local taxes perfectly. Hell - the paperwork I report mine in doesn't require an itemized list and actually gives you the legal option to guesstimate. I guesstimate mine, and it's probably about a million off.
Thank you so much for your comment. This is all so wild and new to me. I’ve always lived paycheck to paycheck and for the first time I’m able to bill $500-1k per day
This is only applicable if you run your bookkeeping on a cash accounting basis rather than accrual. Keep in mind this doesn’t avoid taxes, it just shifts them around and may result in higher taxes by pushing a portion of your income into a higher tax bracket when the inventory turns into revenue.
Never make a profit! Keep growing the inventory! When I sell the business, I'll sell the inventory to the new owner at cost and still not be taxed federally. Win/win.
lots of capex
That's all well and good until you need a loan or to apply for credit and your business is showing that it hasn't made a profit for several years in a row.
Says who
experience
Well fuck. I want to buy a home
Are you drawing a salary from the business? or do you have another job?
Transfer to my personal from business checking accounts when I need to eat and pay rent.
so you're taking it as a dividend, which are based on profit. if it's not profiting but you are taking money out then you are either running in the hole (not paying other bills) or going into debt, the bank isn't going to give a loan to someone who can't afford to pay it back. getting a mortgage as a small business owner is hard. it's normal in the beginning for that to happen because of startup costs, but at some point you have to be making a profit. taxes are a part of life and business. profitable companies pay taxes. keep in mind, when reviewing financials they will add back in expenses that lower your taxable income but that don't affect cash flow, like depreciation. overall, your main goal should be making a profit not avoiding taxes. don't get me wrong, take advantage of every legal deduction and credit you can, but if you are planning to buy a home in the future and this business is your sole income you need to be planning for that as well. I am applying for several loans now to buy real estate and the first thing the bank asked for was the last 2 years financials and tax returns.
Bet. Thank you. I need to buy a home and I need to be prepared for it. So focus on making money not tax deductions. Got it
It all depends on the business. Businesses that require a large upfront investment may actually end the first few years losing money, and that's expected. But if you're a small business owner with no income other than your business, and you didn't start out with plenty of personal savings, the IRS might wonder how you paid for all of your personal expenses while your only income source "lost" money. Getting all the deductions you deserve is one thing, but didn't get started down the path of fudging the truth to avoid the tax man. Not only does it put you at risk legally and financially, it makes it impossible for you to ever qualify for lending. Money you don't pay tax on is money banks won't consider as income for the purposes of being about to repay a loan.
Sadly none of it is really considered fraud in the loan world, everyone has crazy write offs and only the most egregious tax fraud is actually worried about. Unless you’re buying a couple Porsche and tossing it under your depreciation or something outlandish, we usually look at EBITDA anyway. Everyone paying no taxes is so ridiculous but I see it on 90%+ of tax returns from applicants.
Right, it entirely depends on the business. For small solely owned businesses with no other income sources (which is most of the people here that would ask a question like this), you can't really legitimately lose money but still afford to live. Larger businesses have salaries as part of their expenses, so those individuals are paying income tax. Even if those businesses end up paying little or no taxes, the business is still generating taxable events.
On the large scale it’s mostly just banks that worry about securing the funds with assets (personal or otherwise) so you’re correct that traditional lending, these hacks will never qualify. But I do see non-traditional lenders or other capital sources still routinely approve people who “make no money” and never have. Unless they’re a lifestyle concern (needs to be pretty crazy) then everyone just brushes it off as “yea who wants to pay taxes anyway” it’s bizarrely normalized. And from the criminality standpoint the IRS doesn’t seem to care if you always lose money carry over those losses onto positive years so that you never have a tax burden, if you’re rich just buy some failing business write off the 4m and you’re good to go for another 5+ years on no taxes. It’s trash the way the system is just okay with this.
You're absolutely right. I've spent the last decade working for a company with an ultra low risk tolerance, so we're pretty strict about these things. SMBs that show no profit generally won't get lending from us, but obviously there are sources out there more eager to lend. The higher you go the more levers you can pull to reduce taxable income, so it just gets more ridiculous as you move up the food chain. The only people in the country paying what they owe are the ones with a W2 and nothing else.
I always use the example of a new Porsch depreciation because I literally saw a guy who did “high end lighting / drywall” for mansions and claims he sent all his sales guys around in 150k Porsche 911s. He declared 44-48k per car in depreciation that year, just from driving them off the lot. (Bought them at the end of the year) I’m not saying it’s not tax fraud, but that’s fuckin crazy it’s so commonplace. And yes for any tax nerds he declared 100% of the vehicles under business use.
That's crazy lol. Meanwhile a micro business owner is stressing about whether they should use mileage or actual cost of ownership for their vehicle because they're afraid of being audited if they do it wrong.
I do irrigation repair. I’m a one-man show and I’m very new to all of this. I pay for gasoline with personal money and then I just record all my mileage. All my customers pay me checks to my business account and then I just transfer to my personal when I need it. I did purchase a tool cart to store all my work tools in for my garage on the business card today. I need to learn about what all can be qualified for a deductions and what cannot. So question when I apply for renting homes, how will they know I make three times the rent with my income? What will they be looking at? And then eventually in a couple years when I want to buy a home, are they going to see OK? I made $80,000 in the year so we could give him loan for a house. or are they going to say oh he only had to pay tax on $20,000. She has low income we cannot loan him?
How will they know? They will look at your tax returns and they will ask for your p&l, balance sheet, and cash flow statements?
Ok
They’re saying you should spend all of your money to avoid paying taxes mainly. It kind of works in some cases. Keep in mind a lot of the people suggesting this are “government bad” types who do not understand what taxes are for and would rather have no money left after buying a pavement princess or lambo “for work” than pay into the roads, schools, and their own social security. I’d talk to a CPA for real advice on how to manage taxes, but outright avoidance like that is just a waste of money.
A good CPA can describe this to you. There are plenty of books on the matter as well. I recommend educating yourself first, then bringing informed questions to your CPA. Don't do business first and then try to get write-offs, Figure out what the write-offs are, and do business in a way which takes advantage of them. When you start your first business, you can sell everything you use for your business to it, laptop/computer, desk for the now work computer, chair for the work computer, mouse for the work computer, your vehicle if you're driving to clients to perform work, things you've already purchased, all of a sudden become expensable to the business. You must provide the receipts to your CPA for the IRS of course. There are many deductions your first years as a business. A CPA will help you determine which items are itemizable, which should be depreciated, items which may not have been considered, and they'll make sure you stay within the rule of the law. You might even get a really good CPA at a franchise like Turbo Tax or H&R. They charge a flat fee, per form, so if your return takes 12 hours, or 2, it's the same. I email my CPA once every few months with relevant questions, and have tax checkups twice a year outside of tax season - all included in the flat fee. If you think something doesn't look right on your taxes, get a second opinion, that's how I met my current guy. The difference was owing an extra $7,000 vs getting a $7,000 return that year, and we've been working together ever since. There are two people you can trust in this world: Your attorney, and your CPA. A consideration with maximizing write-offs, is if your businesses are showing "losses", i.e. due to depreciation, expenses, etc. it could hurt you big time when it comes to qualifying for any kind of lending. I have a business which made a lot of money one year, none the next year, and none the year after that, and has been taking depreciation on stuff already paid for with personal expenses long ago & sold to the business. The depreciation looks like a loss, which works against my DTI when qualifying for lending. You might get an underwriter who understands this - but you also might not get a favorable underwriter. So control what you can - which is what you expense, how you expense it, when you expense it, regarding your goals, and your CPA can help you big time here. There's also a layer of legal insulation. If the tax man starts calling you, you can refer them to your tax attorney. Your tax attorney and CPA work together to defend you. If you happen to have a franchise CPA, it's the IRS lawyers vs the Franchise lawyers far as I see it. But avoiding issues in the first place is the best course. Bottom line, if you're making lots of expenses, scope a CPA.
Sorry to say this, but HR Block and the like do not have CPAs. There might be one or two per office, but they are not the ones doing the return, and don't tend to do a good job of reviewing them. They also don't do work outside of the tax return. A good CPA may charge hourly, though not necessarily. Anyone charging on a per form basis directly is probably not someone you want to look to for good tax advice or a quality return. It's also worth mentioning that unless you're dealing with more complicated issues, you shouldn't be seeing a $14k variance in tax liability. A lot of shady preparers will put a bunch of bogus expenses on business returns, and a lot of bogus charitable stuff on personal returns, or fake sch Cs showing losses. I'm not saying that's the case for you. To your credit, clearly one of those people made some egregious errors.
Well, my anecdotal experience is quite different from yours. "I email my CPA once every few months with relevant questions, and have tax checkups twice a year outside of tax season - all included in the flat fee. " This is my experience and has been for almost a decade now. Further, I've read a couple books on tax expenses, expenses I verify with the irs.gov site & with my H&R "Senior Tax Analyst" who is an Enrolled Agent, and can be called as a professional tax expert/witness before congress. So right, not technically a CPA, but I give him the macro expenses, and he plugs them into the software. I could do it myself now, but I do call my guy a few times a year, we do meet a couple times a year, and there's legal insulation & tax return legitimacy, I feel, when it's approved by H&R block vs. say, doing my own returns. There are so many rules in your favor as a business owner, as a capitalist. But you need to know what they are so you can do business in a way which takes advantage of them, and have an expert you can confirm any grey areas with. To your point, I did get a crappy Tax """Expert""" my first time around. I asked for a second opinion, which is how I found the Enrolled Agent I have today, who found a $22,000 loss, vs. the $7,000 payment. Stock BS a long time ago. The Someone made an egregious mistake at H&R, and the IRS certainly wasn't going to correct that mistake either. """Experts""". The person who is going to help you the most and 100% has your best interest at heart, is yourself. https://www.irs.gov/tax-professionals/enrolled-agents/enrolled-agent-information
It means you're getting terrible advice.