1
00:00:00,000 --> 00:00:12,480
Hi everyone.

2
00:00:12,480 --> 00:00:15,560
This is the how to lower your tax bill podcast.

3
00:00:15,560 --> 00:00:17,960
I'm your host, Terrence Hutchins.

4
00:00:17,960 --> 00:00:21,880
I'm a financial and tax advisor in the Dallas forward area.

5
00:00:21,880 --> 00:00:25,960
And the goal of this podcast is to help you listeners get educated with different tax

6
00:00:25,960 --> 00:00:31,080
strategies that you can implement to improve your tax situation immediately.

7
00:00:31,080 --> 00:00:36,240
Each episode will break down useful tax tips you can use to save money, no matter what

8
00:00:36,240 --> 00:00:38,480
your personal or business income situation.

9
00:00:38,480 --> 00:00:41,880
Because our motto is, keep more of what you earn.

10
00:00:41,880 --> 00:00:46,960
So let's get into today's episode.

11
00:00:46,960 --> 00:00:49,760
It's good to be back with you.

12
00:00:49,760 --> 00:00:54,720
Today's episode, we are going to be talking to you self-employed listeners out there.

13
00:00:54,720 --> 00:00:59,440
So whether you're a freelancer, a small business owner or running a side hustle, hopefully

14
00:00:59,440 --> 00:01:03,540
you're taking some notes because I'll be breaking down some tax deduction strategies

15
00:01:03,540 --> 00:01:05,940
to help you save on your taxes.

16
00:01:05,940 --> 00:01:10,400
So let's dive into today's topic, the basics for self-employed individuals.

17
00:01:10,400 --> 00:01:14,880
As I'm talking, normally we have to differentiate tax world from the real world.

18
00:01:14,880 --> 00:01:15,880
All right.

19
00:01:15,880 --> 00:01:18,840
And many times people say that they want to start a business.

20
00:01:18,840 --> 00:01:22,520
They will tell me, hey, I need to save money on taxes, so I need to start a business.

21
00:01:22,520 --> 00:01:26,840
Well, the IRS is going to say, okay, why would you want to start a business so you can save

22
00:01:26,840 --> 00:01:28,280
money on taxes?

23
00:01:28,280 --> 00:01:32,020
The point of you starting a business is for you to make money.

24
00:01:32,020 --> 00:01:37,000
And so when they look at it, they say you have to have a profit motive for this business

25
00:01:37,000 --> 00:01:39,420
that you're trying to start.

26
00:01:39,420 --> 00:01:43,880
And so from a planning standpoint, I would say, hey, look, with the business that you're

27
00:01:43,880 --> 00:01:48,560
starting, we're not looking to potentially reduce your overall tax bill.

28
00:01:48,560 --> 00:01:52,960
So the last year you paid 15,000, we're not going to now pay 14,000.

29
00:01:52,960 --> 00:01:53,960
All right.

30
00:01:53,960 --> 00:01:58,560
Now, depending on the business you're in, that might be the case, depending on how much

31
00:01:58,560 --> 00:02:00,400
cost it takes upfront.

32
00:02:00,400 --> 00:02:04,200
But generally, we want you to start making money immediately.

33
00:02:04,200 --> 00:02:10,160
And ideally, you could say, hey, I could go make more money at my job doing maybe work

34
00:02:10,160 --> 00:02:15,120
that I don't enjoy as much, or I can actually do it in this business that I really enjoy.

35
00:02:15,120 --> 00:02:19,280
And the percentage of tax that I pay on my next dollar will actually be less.

36
00:02:19,280 --> 00:02:24,560
In fact, there's a story Ronald Reagan, one of the things that led him to help change

37
00:02:24,560 --> 00:02:31,120
the tax code was he was an actor and he realized, okay, if I make another movie this year, I'm

38
00:02:31,120 --> 00:02:33,520
only going to be able to keep 8% of my income.

39
00:02:33,520 --> 00:02:35,840
He was at the top tax bracket at the time.

40
00:02:35,840 --> 00:02:41,540
So he said, hey, I'm only going to make another $8,000 for every $100,000 I make extra.

41
00:02:41,540 --> 00:02:43,460
So that's not very motivating.

42
00:02:43,460 --> 00:02:49,640
So if you can now say, hey, instead of me making 8% of my income on the next dollar

43
00:02:49,640 --> 00:02:54,960
I make, if I can make 80 or 90%, which is more than what I would have otherwise, then

44
00:02:54,960 --> 00:02:59,240
that can be a great thought on how you're going to look at your tax situation once you

45
00:02:59,240 --> 00:03:00,680
have this business.

46
00:03:00,680 --> 00:03:08,440
But anyway, as it relates to the actual definition, the IRS says a business is something that

47
00:03:08,440 --> 00:03:12,820
you're participating in regularly with the primary persons of earning a profit.

48
00:03:12,820 --> 00:03:16,200
So if it's a hobby or it's just something you're doing sporadically, it's not considered

49
00:03:16,200 --> 00:03:18,160
a business for tax purposes.

50
00:03:18,160 --> 00:03:23,120
So you're not going to just be claiming tax deductions for expenses that didn't have any

51
00:03:23,120 --> 00:03:24,120
business purpose.

52
00:03:24,120 --> 00:03:30,100
Now you can, I'm not saying that you will get caught, but if you weren't get audited,

53
00:03:30,100 --> 00:03:34,020
you're just not going to prove that unless you had some type of business purpose behind

54
00:03:34,020 --> 00:03:35,200
what you were doing.

55
00:03:35,200 --> 00:03:39,480
So when it comes to the actual expenses of what you can deduct, you're going to now have

56
00:03:39,480 --> 00:03:43,640
to justify them as being considered ordinary and necessary.

57
00:03:43,640 --> 00:03:45,800
That's in section 162 of the tax code.

58
00:03:45,800 --> 00:03:50,880
If you want to have some good late night reading, then anything that you spend that's ordinary,

59
00:03:50,880 --> 00:03:53,960
necessary, and generally it can't be lavish or extravagant.

60
00:03:53,960 --> 00:03:59,400
All right, that lavish and extravagant is going to be facts of circumstances dependent.

61
00:03:59,400 --> 00:04:03,120
But if it's something that's out of the ordinary for you to normally do, then you could probably

62
00:04:03,120 --> 00:04:07,880
pretty seriously think about is this going to be considered a deductible expense or will

63
00:04:07,880 --> 00:04:09,560
that expense be reduced?

64
00:04:09,560 --> 00:04:13,000
Okay, so when it comes to being ordinary, they're looking at some of that as common

65
00:04:13,000 --> 00:04:14,720
and accepted in your industry.

66
00:04:14,720 --> 00:04:18,200
A landscaper, it's ordinary for you to buy equipment.

67
00:04:18,200 --> 00:04:22,280
Graphic designer, it's ordinary for you to buy a computer for you to work on.

68
00:04:22,280 --> 00:04:26,520
Also necessary is something that is appropriate and helpful in carrying out your business

69
00:04:26,520 --> 00:04:27,520
activity.

70
00:04:27,520 --> 00:04:31,720
So it doesn't have to be absolutely essential, but it should contribute to the success and

71
00:04:31,720 --> 00:04:33,760
functioning of your business.

72
00:04:33,760 --> 00:04:37,440
Things like office supplies or your internet, those are things that would be considered

73
00:04:37,440 --> 00:04:38,440
necessary.

74
00:04:38,440 --> 00:04:40,040
And it doesn't have to be frequent.

75
00:04:40,040 --> 00:04:43,560
It might be a one time purchase, but it was necessary in that moment for the activity

76
00:04:43,560 --> 00:04:45,880
that you were trying to get accomplished.

77
00:04:45,880 --> 00:04:48,520
So I need to always be able to say, okay, is this ordinary?

78
00:04:48,520 --> 00:04:50,840
Is it necessary for my business?

79
00:04:50,840 --> 00:04:56,600
And then the three, I would say main questions I get asked about as it relates to specific

80
00:04:56,600 --> 00:05:01,920
business expenses are going to be around business travel, business mills, and automobiles.

81
00:05:01,920 --> 00:05:03,920
So we're going to kind of dive through those three.

82
00:05:03,920 --> 00:05:09,400
Then I'll kind of give you a interesting tax court case and then we'll wrap up for this

83
00:05:09,400 --> 00:05:10,400
week.

84
00:05:10,400 --> 00:05:14,360
When it comes to travel, we have to start with is my travel ordinary necessary?

85
00:05:14,360 --> 00:05:16,080
Is it not lavish or extravagant?

86
00:05:16,080 --> 00:05:21,720
Lavish and extravagant is also going to be at scale because I might normally go on trips

87
00:05:21,720 --> 00:05:25,520
to Europe or Dubai in my personal life.

88
00:05:25,520 --> 00:05:32,920
But if I run an office supply store, I probably need to go to Dubai in order to meet a client.

89
00:05:32,920 --> 00:05:41,680
Or if I'm doing a marketing event and my average sale is $5 per item, I probably don't need

90
00:05:41,680 --> 00:05:46,940
to spend $50,000 on a party to invite people for my business.

91
00:05:46,940 --> 00:05:51,720
So the yacht party that you saw on Tic Tac that you could deduct may or may not be the

92
00:05:51,720 --> 00:05:52,960
case for your business.

93
00:05:52,960 --> 00:05:56,120
So facts and circumstances is always going to be important.

94
00:05:56,120 --> 00:05:59,600
That's why it's important to work through things with whoever you're working with that

95
00:05:59,600 --> 00:06:01,040
does your taxes.

96
00:06:01,040 --> 00:06:04,560
For one, to see if they're going to actually do it because some frustrations I hear from

97
00:06:04,560 --> 00:06:08,160
clients is that their CPA won't even entertain what they're doing.

98
00:06:08,160 --> 00:06:11,640
If you had had the conversation with them ahead of time, you're either now saying, okay,

99
00:06:11,640 --> 00:06:13,400
I'm going to either do it myself.

100
00:06:13,400 --> 00:06:18,640
I'm going to fire my CPA because they don't want to go along with whatever scheme I had

101
00:06:18,640 --> 00:06:22,640
or I'm just going to lose out on the deduction and I've already spent money on whatever it

102
00:06:22,640 --> 00:06:25,880
was that I'm not getting a tax benefit for.

103
00:06:25,880 --> 00:06:31,020
But when it comes to business travel, the IRS says that your business trip must take

104
00:06:31,020 --> 00:06:33,040
you away from your tax home.

105
00:06:33,040 --> 00:06:35,080
I live in Dallas, Fort Worth.

106
00:06:35,080 --> 00:06:42,160
If I'm traveling out of the area and I'm traveling long enough for it to require sleep or rest,

107
00:06:42,160 --> 00:06:47,920
then I can now deduct my lodging expenses and my other travel expenses while I'm away

108
00:06:47,920 --> 00:06:49,520
from my tax home.

109
00:06:49,520 --> 00:06:53,760
So for example, if I'm going to Austin in the morning, this is three, three and a half

110
00:06:53,760 --> 00:06:59,080
hours and I'm done by two o'clock, it would be natural for me to get back home before

111
00:06:59,080 --> 00:07:01,840
dinner if I left immediately.

112
00:07:01,840 --> 00:07:06,640
But if I got wrapped up around seven, eight o'clock and I could probably justify, hey,

113
00:07:06,640 --> 00:07:08,000
look, it was already late.

114
00:07:08,000 --> 00:07:09,560
I don't want to drive in the middle of the night.

115
00:07:09,560 --> 00:07:14,400
I'm going to grab a hotel and I can deduct that hotel for my current stay so that I'm

116
00:07:14,400 --> 00:07:20,440
not having to disrupt my sleep pattern so I could justify the lodging for that expense

117
00:07:20,440 --> 00:07:22,480
and that would be considered my business travel.

118
00:07:22,480 --> 00:07:27,240
All right, now when it comes to the actual specific expenses you could deduct on business

119
00:07:27,240 --> 00:07:32,280
travel, so you're going to look at airfare, train, bus tickets, rental cars, even your

120
00:07:32,280 --> 00:07:33,360
personal vehicle.

121
00:07:33,360 --> 00:07:38,880
You have the operation of that vehicle, so gas, repairs, tolls, things like that, that

122
00:07:38,880 --> 00:07:40,320
you could deduct.

123
00:07:40,320 --> 00:07:43,040
And then if you're doing ride share, so if you're going out of town or you're catching

124
00:07:43,040 --> 00:07:45,540
an Uber or Lyft, you can deduct that.

125
00:07:45,540 --> 00:07:47,060
You also have baggage charges.

126
00:07:47,060 --> 00:07:51,400
So if you don't fly Southwest, then you're paying for bags potentially.

127
00:07:51,400 --> 00:07:53,280
So you can deduct that cost.

128
00:07:53,280 --> 00:07:54,700
And then any meals that you have.

129
00:07:54,700 --> 00:07:58,960
This is something that's often overlooked, but if you're away from your tax home, you

130
00:07:58,960 --> 00:08:04,940
can deduct pretty much any expense that is normal for you to operate in your daily life.

131
00:08:04,940 --> 00:08:07,180
So it would be natural for you to eat.

132
00:08:07,180 --> 00:08:11,400
So if I eat out of town over my tax home, I can deduct that cost.

133
00:08:11,400 --> 00:08:15,240
And then incidentals, if you're actually out of town long enough where you had to dry clean

134
00:08:15,240 --> 00:08:20,960
or do laundry, if you tipped your bellhop or whatnot, you can deduct those things.

135
00:08:20,960 --> 00:08:21,960
Okay.

136
00:08:21,960 --> 00:08:25,660
Now, in order to substantiate your expenses, you're going to need to keep track of the

137
00:08:25,660 --> 00:08:27,300
amount of each expense.

138
00:08:27,300 --> 00:08:32,640
So if there is a receipt that's available, normally if it's over $75, you're going to

139
00:08:32,640 --> 00:08:33,640
want to keep that receipt.

140
00:08:33,640 --> 00:08:38,000
You're going to want to have the date and you're going to also document the business

141
00:08:38,000 --> 00:08:42,220
purpose and where it happened, which can truly be a calendar entry.

142
00:08:42,220 --> 00:08:44,480
So I'm going to make an entry in my calendar.

143
00:08:44,480 --> 00:08:47,820
I met with Jane Doe at this restaurant.

144
00:08:47,820 --> 00:08:50,720
We talked about XYZ business.

145
00:08:50,720 --> 00:08:54,100
It's pretty customary for me to record all of my meetings so I could just prove a business

146
00:08:54,100 --> 00:08:56,640
purpose from the transcript that I created.

147
00:08:56,640 --> 00:09:00,120
Now one thing when it comes to travel, if you don't want to keep track of all of your

148
00:09:00,120 --> 00:09:03,800
expenses, you do have what's called a per diem rate.

149
00:09:03,800 --> 00:09:09,200
The IRS said, okay, based on your area for things like mills and lodging, you can actually

150
00:09:09,200 --> 00:09:12,520
have a rate that you could automatically take.

151
00:09:12,520 --> 00:09:18,660
So for example, in Oklahoma, I had a client, their daily rate was like $160.

152
00:09:18,660 --> 00:09:24,200
So if you had a full day of travel in Oklahoma for meals and lodging, you would get like

153
00:09:24,200 --> 00:09:27,640
$160 without having to track all the expenses from it.

154
00:09:27,640 --> 00:09:31,840
You just have to document the fact that you still had a business purpose with the destination

155
00:09:31,840 --> 00:09:35,860
and all that, but you can just do a flat 160 based on the per diem rate.

156
00:09:35,860 --> 00:09:41,080
Then that leads me into a strategy that you can actually think about if you run an LLC

157
00:09:41,080 --> 00:09:46,400
or a corporation, it is customary in that business for you to actually keep a corporate

158
00:09:46,400 --> 00:09:48,420
book or a corporate ledger.

159
00:09:48,420 --> 00:09:52,660
That corporate book was going to essentially say, how do you govern this entity?

160
00:09:52,660 --> 00:09:56,220
How do we know this is a legitimate business versus something you're just kind of operating

161
00:09:56,220 --> 00:09:59,720
as a side hustle that's not really serious?

162
00:09:59,720 --> 00:10:04,380
One way to do that is to have a board of advisors and to keep corporate minutes.

163
00:10:04,380 --> 00:10:06,760
And so your board of advisors are going to be people you trust.

164
00:10:06,760 --> 00:10:11,360
And most people, they trust their families, their spouses, their kids, their loved ones.

165
00:10:11,360 --> 00:10:16,420
And so one thing that I help my clients with is say, hey, okay, let's go into the year

166
00:10:16,420 --> 00:10:21,600
and we're thinking about where is our travel going to be and can we incorporate a business

167
00:10:21,600 --> 00:10:23,840
function in that travel?

168
00:10:23,840 --> 00:10:28,960
So for example, if we're going on a four day trip down to the Smoky Mountains, I'm looking

169
00:10:28,960 --> 00:10:30,420
at it as a corporate retreat.

170
00:10:30,420 --> 00:10:35,620
I have a travel day getting there and then we're going to have a business meeting while

171
00:10:35,620 --> 00:10:36,620
we're there.

172
00:10:36,620 --> 00:10:39,180
And during that meeting, we're going to have an agenda.

173
00:10:39,180 --> 00:10:41,180
So I'm going to have items that we discussed.

174
00:10:41,180 --> 00:10:47,780
I'm going to be teaching my kids how to do business, talking about things like income,

175
00:10:47,780 --> 00:10:52,900
expenses, operations, marketing, helping them understand, hey, if you eventually want to

176
00:10:52,900 --> 00:10:55,780
take this business over, what does that entail?

177
00:10:55,780 --> 00:10:59,940
Just giving them principles on, okay, let's review some of the tasks that I have you guys

178
00:10:59,940 --> 00:11:01,320
do that I pay you.

179
00:11:01,320 --> 00:11:04,660
So those are all things we can do review and then we can plan ahead and set goals for the

180
00:11:04,660 --> 00:11:05,660
future.

181
00:11:05,660 --> 00:11:08,320
We can document that as our corporate meeting.

182
00:11:08,320 --> 00:11:12,140
So that's kind of be our business function for that day.

183
00:11:12,140 --> 00:11:16,820
And then I have maybe a personal day the following day and then I have my travel day back.

184
00:11:16,820 --> 00:11:17,820
All right.

185
00:11:17,820 --> 00:11:22,180
So I get my travel day, I get my business day and then I get my travel day back.

186
00:11:22,180 --> 00:11:25,120
That's three business days on a four day trip.

187
00:11:25,120 --> 00:11:29,020
If you can coordinate it with the weekend, your weekends will also count as business

188
00:11:29,020 --> 00:11:30,020
days.

189
00:11:30,020 --> 00:11:35,160
So now I might be able to deduct 50, 75, even 100% of my trip, depending on how long it

190
00:11:35,160 --> 00:11:37,240
was and the time that I took.

191
00:11:37,240 --> 00:11:42,180
So I'd say, hey, plan ahead, do your corporate meetings out of town, have them have a business

192
00:11:42,180 --> 00:11:45,740
function, document it properly is actually going to be a body exercise for you and your

193
00:11:45,740 --> 00:11:49,340
family and you get the tax benefits as a result.

194
00:11:49,340 --> 00:11:51,360
Let's dive into business meals.

195
00:11:51,360 --> 00:11:56,780
So when it comes to a business meal, they're going to be deductible at 50% of the cost

196
00:11:56,780 --> 00:11:57,780
of the meal.

197
00:11:57,780 --> 00:12:00,340
It doesn't matter if you pay for them or you just pay for yourself.

198
00:12:00,340 --> 00:12:03,340
50% of the cost of that meal is going to be deductible.

199
00:12:03,340 --> 00:12:07,420
So we're still going to have to go through the filter of is it an ordinary, is it necessary,

200
00:12:07,420 --> 00:12:10,780
is it not lavish or extravagant, did it have a business purpose?

201
00:12:10,780 --> 00:12:11,780
All right.

202
00:12:11,780 --> 00:12:14,820
And you're actually have to separate the meal costs from the entertainment.

203
00:12:14,820 --> 00:12:18,800
So when it comes to entertainment, that is no longer deductible.

204
00:12:18,800 --> 00:12:21,420
The most common I would see is your sporting event.

205
00:12:21,420 --> 00:12:25,840
Hey, we go to a sporting event, the cost of that ticket is no longer deductible.

206
00:12:25,840 --> 00:12:30,620
But if I order hot dogs, drinks, whatever, I can deduct 50% of the cost of that food.

207
00:12:30,620 --> 00:12:35,140
I just need to document the fact that, hey, I was with an employee, a client, a consultant.

208
00:12:35,140 --> 00:12:38,940
I was with someone that had a business purpose behind it.

209
00:12:38,940 --> 00:12:44,860
And I was able to prove that there was a profit motive behind my actions whenever I pay for

210
00:12:44,860 --> 00:12:46,820
a meal at that type of event.

211
00:12:46,820 --> 00:12:47,820
All right.

212
00:12:47,820 --> 00:12:50,840
Now, a few other specific things to know.

213
00:12:50,840 --> 00:12:53,300
If it's under 75 dollars, you don't have to keep your seat.

214
00:12:53,300 --> 00:12:57,180
You just need to keep the amount, the designation and the business purpose.

215
00:12:57,180 --> 00:13:05,500
A few other nuances, if I have working lunches for myself, let's say, then those are going

216
00:13:05,500 --> 00:13:10,340
to be deductible unless I add it to my salary, which can actually be beneficial because like

217
00:13:10,340 --> 00:13:15,180
during tax season, for example, I might be working 12 hours a day and it's hard for me

218
00:13:15,180 --> 00:13:20,580
to actually take an hour lunch out of the office so I can order Uber Eats, eat at my

219
00:13:20,580 --> 00:13:26,220
desk and I just need to document, hey, I spent 100 hours last week on food.

220
00:13:26,220 --> 00:13:29,340
I'm going to increase my salary by a hundred dollars.

221
00:13:29,340 --> 00:13:30,620
The business gets to write that off.

222
00:13:30,620 --> 00:13:34,380
Now I do pay tax on a hundred dollars, but I can write a hundred percent of it off to

223
00:13:34,380 --> 00:13:35,380
the business.

224
00:13:35,380 --> 00:13:39,040
So I do get some type of benefit outside of not getting any at all.

225
00:13:39,040 --> 00:13:41,060
You also could pay for your employees.

226
00:13:41,060 --> 00:13:45,260
If you could prove that meal cost is for the business of the business, meaning it helps

227
00:13:45,260 --> 00:13:48,560
you save time, it allows you to be more efficient.

228
00:13:48,560 --> 00:13:51,260
You could deduct the cost of the meal for your employees.

229
00:13:51,260 --> 00:13:56,340
You also can deduct a hundred percent of the cost for things like employee appreciation events,

230
00:13:56,340 --> 00:14:01,540
holiday parties, or for realtor, you can have an open house and say, hey, if this food is

231
00:14:01,540 --> 00:14:05,060
open to the public, I can deduct a hundred percent of that cost because at that point

232
00:14:05,060 --> 00:14:08,660
it's considered more like a marketing expense as a result.

233
00:14:08,660 --> 00:14:11,100
So that's kind of the high level with meals.

234
00:14:11,100 --> 00:14:15,820
And then if you do have a spouse that works in the business, you can deduct meals with

235
00:14:15,820 --> 00:14:16,820
them.

236
00:14:16,820 --> 00:14:21,180
I would just make it less frequent, make sure it has a business purpose, make sure you

237
00:14:21,180 --> 00:14:25,600
document what you did so that you can properly deduct those expenses.

238
00:14:25,600 --> 00:14:31,380
If not, then you can increase the salary of yourself or your spouse in that case.

239
00:14:31,380 --> 00:14:35,660
So at least you are paying tax on the meal cost, but you are getting the deduction for

240
00:14:35,660 --> 00:14:37,500
it through the business.

241
00:14:37,500 --> 00:14:39,300
So lastly, let's jump into automobile.

242
00:14:39,300 --> 00:14:43,020
So this is probably the biggest one that I get the most questions about because everyone

243
00:14:43,020 --> 00:14:48,420
wants to buy that big, massive car and get that big depreciation deduction upfront.

244
00:14:48,420 --> 00:14:49,420
Okay.

245
00:14:49,420 --> 00:14:55,100
So let's actually dive into that, but going back to my theme, if the use of your vehicle

246
00:14:55,100 --> 00:14:59,440
is ordinary necessary for your business, then you can deduct it.

247
00:14:59,440 --> 00:15:02,580
So there's just going to be two different ways that you're going to be able to deduct

248
00:15:02,580 --> 00:15:03,580
it.

249
00:15:03,580 --> 00:15:06,860
You're either going to take what's called the standard mileage rate, or you're going

250
00:15:06,860 --> 00:15:09,060
to just add up your actual expenses.

251
00:15:09,060 --> 00:15:12,660
So the simple, the simpler of the two is the standard mileage rate.

252
00:15:12,660 --> 00:15:18,660
So with that standard mileage rate, you are essentially taking all your business miles

253
00:15:18,660 --> 00:15:24,620
and you are deducting for 2024, 67 cents of those miles.

254
00:15:24,620 --> 00:15:31,460
So if I drive a thousand miles for business, I'm going to deduct $670 on my tax return.

255
00:15:31,460 --> 00:15:32,460
Okay.

256
00:15:32,460 --> 00:15:33,460
Simple as that.

257
00:15:33,460 --> 00:15:38,260
Now, when you're tracking your business miles, you can just do all of your miles and take

258
00:15:38,260 --> 00:15:41,980
the percentage of business that they are or the actual running total.

259
00:15:41,980 --> 00:15:42,980
Okay.

260
00:15:42,980 --> 00:15:47,100
So I'm going to just total all my miles for the year, and then I'm going to total up how

261
00:15:47,100 --> 00:15:49,020
many of those are business.

262
00:15:49,020 --> 00:15:53,380
Secondly, I could take the same week of every month.

263
00:15:53,380 --> 00:15:58,260
So for example, the first week of the month, I track all of my miles and I add that up

264
00:15:58,260 --> 00:15:59,940
and I basically extrapolated out.

265
00:15:59,940 --> 00:16:03,060
So I say, Hey, look, I had 12 weeks of data in those four weeks.

266
00:16:03,060 --> 00:16:06,140
My average miles were 50 miles.

267
00:16:06,140 --> 00:16:08,500
So I'm going to do 50 times 52.

268
00:16:08,500 --> 00:16:13,700
That's going to be my miles for the year as far as my average, or I can take a 12 month

269
00:16:13,700 --> 00:16:18,020
consecutive time period and extrapolate that out over the year.

270
00:16:18,020 --> 00:16:23,700
So I take three months record all my miles and just multiply by four.

271
00:16:23,700 --> 00:16:29,380
Now when it comes to your actual expenses, you're going to now look at, okay, what did

272
00:16:29,380 --> 00:16:31,500
the car cost me?

273
00:16:31,500 --> 00:16:34,220
What is the percentage of business use for that vehicle?

274
00:16:34,220 --> 00:16:38,040
And I'm going to deduct all the expenses it takes to maintain the car.

275
00:16:38,040 --> 00:16:44,580
So for example, if I have a $20,000 vehicle and I've been tracking my miles and 50% of

276
00:16:44,580 --> 00:16:49,660
those are for business, I now have a $10,000 car for tax purposes.

277
00:16:49,660 --> 00:16:53,220
So it costs $20,000, but I was only using it half for business.

278
00:16:53,220 --> 00:16:54,780
So 10,000.

279
00:16:54,780 --> 00:16:59,260
And then I'm going to actually depreciate the car over five years for easy math.

280
00:16:59,260 --> 00:17:00,260
That's $2,000.

281
00:17:00,260 --> 00:17:07,500
Then I'm going to add in my gas, my car insurance, my repairs, my registration.

282
00:17:07,500 --> 00:17:10,100
And let's say that's another $5,000 for the year.

283
00:17:10,100 --> 00:17:12,380
Well, 50% of that is $1,200.

284
00:17:12,380 --> 00:17:14,460
So now I get another $1,200 tax deduction.

285
00:17:14,460 --> 00:17:15,460
Okay.

286
00:17:15,460 --> 00:17:18,300
So you're going to add all that up and you're going to really compare.

287
00:17:18,300 --> 00:17:24,460
So I say, Hey, do I have more miles at 67 cents per mile or do my actual expenses?

288
00:17:24,460 --> 00:17:25,460
Are they higher?

289
00:17:25,460 --> 00:17:29,380
And I can take the higher of the two, but I need to decide that in the first year, which

290
00:17:29,380 --> 00:17:30,380
one did I do?

291
00:17:30,380 --> 00:17:35,660
So generally, if you have a high priced vehicle that the business use is high, you're probably

292
00:17:35,660 --> 00:17:37,520
better off taking the actual expenses.

293
00:17:37,520 --> 00:17:42,660
If you have a lower cost vehicle and you drive a lot of miles, you probably want to take

294
00:17:42,660 --> 00:17:44,620
the actual mileage rate.

295
00:17:44,620 --> 00:17:48,780
One thing that kind of threw a wrench into things was this EV tax credit.

296
00:17:48,780 --> 00:17:54,340
So what I do with an EV, I will actually subtract out the EV credit that I take first from the

297
00:17:54,340 --> 00:17:55,520
price of the car.

298
00:17:55,520 --> 00:18:01,660
So if I had a $30,000 car and my tax credit was $7,500, I'm going to subtract that $7,500

299
00:18:01,660 --> 00:18:05,420
out, take that as my credit or my personal tax return.

300
00:18:05,420 --> 00:18:08,940
And then now my tax basis is $20,500.

301
00:18:08,940 --> 00:18:12,300
So I'm going to say, okay, I have a $20,500 car.

302
00:18:12,300 --> 00:18:16,700
And then if I'm depreciating that, it's going to be based on that $20,500, or I'm just going

303
00:18:16,700 --> 00:18:19,840
to go ahead and take the miles as far as my business use.

304
00:18:19,840 --> 00:18:24,500
Now the biggest thing you probably see on social media is going to be this whole depreciation

305
00:18:24,500 --> 00:18:25,740
aspect.

306
00:18:25,740 --> 00:18:29,980
So when it comes to depreciation, you can actually take a big deduction on the front

307
00:18:29,980 --> 00:18:30,980
end.

308
00:18:30,980 --> 00:18:35,260
So always remember when it comes to depreciation, you're either spreading it out over the

309
00:18:35,260 --> 00:18:39,660
time that the IRS says that you should have the vehicle, or you're going to take most

310
00:18:39,660 --> 00:18:40,660
of it upfront.

311
00:18:40,660 --> 00:18:47,940
And so for 2024, they allow you to take up to $20,400 upfront on a business vehicle.

312
00:18:47,940 --> 00:18:48,940
Okay.

313
00:18:48,940 --> 00:18:54,460
So if you have a passenger vehicle, which means it's under 6,000 pounds, the first year

314
00:18:54,460 --> 00:18:56,860
the max you could take is $20,000.

315
00:18:56,860 --> 00:19:01,380
If it's over 6,000 pounds, you can actually take the cost of the vehicle at 60%.

316
00:19:01,380 --> 00:19:08,420
So if I have an $80,000 car, I can take 60% of the cost of the vehicle in the first year.

317
00:19:08,420 --> 00:19:09,420
All right.

318
00:19:09,420 --> 00:19:15,140
So that's how a lot of people will try to buy their cars and then take that big deduction

319
00:19:15,140 --> 00:19:16,140
upfront.

320
00:19:16,140 --> 00:19:19,380
But the IRS says they have to be placed in service.

321
00:19:19,380 --> 00:19:24,900
So if I buy a car, it has to be used in business by the end of the year for me to be able to

322
00:19:24,900 --> 00:19:25,900
claim it.

323
00:19:25,900 --> 00:19:26,900
Okay.

324
00:19:26,900 --> 00:19:31,060
So that's important to know when you're looking at planning things out.

325
00:19:31,060 --> 00:19:33,420
Number one, does this have a business purpose?

326
00:19:33,420 --> 00:19:36,820
Number two, is this something that I would already have purchased anyway?

327
00:19:36,820 --> 00:19:41,660
I don't want to buy things that I don't need to get tax savings because I'm left spending

328
00:19:41,660 --> 00:19:43,420
more money out of pocket.

329
00:19:43,420 --> 00:19:47,740
So my actual net worth goes down even if my tax bill goes down as well.

330
00:19:47,740 --> 00:19:48,740
All right.

331
00:19:48,740 --> 00:19:55,380
So to recap, we had travel expenses, we had meal expenses, and we had automobile expenses.

332
00:19:55,380 --> 00:19:58,740
So we need to make sure that they have a business purpose.

333
00:19:58,740 --> 00:20:04,580
And that business purpose is in a activity that has a profit motive.

334
00:20:04,580 --> 00:20:09,100
And then those expenses must be ordinary and necessary with the proper documentation, which

335
00:20:09,100 --> 00:20:15,740
is generally going to be amount, business purpose, destination, and when it occurred.

336
00:20:15,740 --> 00:20:19,460
Now one of the things that I did leave out, if you lease a vehicle, you're going to actually

337
00:20:19,460 --> 00:20:21,780
take the percentage of the lease payment.

338
00:20:21,780 --> 00:20:27,060
So if I use my car 80% of the time, that lease payment, I'm going to take 80% of that as

339
00:20:27,060 --> 00:20:28,780
my deduction.

340
00:20:28,780 --> 00:20:32,820
So each week we will go into some kind of unique tax situation.

341
00:20:32,820 --> 00:20:37,420
So I want to talk about the Elvis Presley estate case in 1981.

342
00:20:37,420 --> 00:20:43,820
One of the things that the estate was trying to deduct were gratuities paid to his bodyguards,

343
00:20:43,820 --> 00:20:48,820
chauffeurs, and other employees, because they said that that was part of his lavish lifestyle

344
00:20:48,820 --> 00:20:50,420
to maintain his public image.

345
00:20:50,420 --> 00:20:54,620
So you know, obviously I don't need a bodyguard for my situation, so I couldn't even make

346
00:20:54,620 --> 00:20:55,620
that argument.

347
00:20:55,620 --> 00:20:59,860
The estate was trying to say, hey, look, obviously Elvis Presley, he's a public figure.

348
00:20:59,860 --> 00:21:04,620
He needs to have these people around and we should be able to deduct all these expenses.

349
00:21:04,620 --> 00:21:07,420
The IRS disallowed the cost.

350
00:21:07,420 --> 00:21:11,620
The estate took them to tax court because the IRS is the fire authority.

351
00:21:11,620 --> 00:21:15,700
It's actually the tax court and they tried to get these deductions in, but ultimately

352
00:21:15,700 --> 00:21:17,660
the IRS won.

353
00:21:17,660 --> 00:21:22,460
And so they essentially said, hey, these expenses aren't ordinary and necessary for what he's

354
00:21:22,460 --> 00:21:23,460
trying to do.

355
00:21:23,460 --> 00:21:24,980
They're personal in nature.

356
00:21:24,980 --> 00:21:26,180
So they actually threw it out.

357
00:21:26,180 --> 00:21:29,860
Whenever you're doing something, it's important to look at your facts and circumstances.

358
00:21:29,860 --> 00:21:32,300
See one, is it properly documented?

359
00:21:32,300 --> 00:21:36,740
How can I justify its ordinary and necessary nature so that if I did get called to the

360
00:21:36,740 --> 00:21:39,340
carpet, I'd have a good explanation.

361
00:21:39,340 --> 00:21:43,540
And if I felt like it was worth it enough, I could actually go to a tax court and win

362
00:21:43,540 --> 00:21:45,540
and outdo the IRS.

363
00:21:45,540 --> 00:21:47,540
So thanks for hanging in there with me.

364
00:21:47,540 --> 00:21:52,060
We'll talk in the future about some more business specific tax deductions, but until then, go

365
00:21:52,060 --> 00:22:18,620
be great.