202: Tax Strategies for Your Design Business
Michele 00:01
Hello, my name is Michele, and you're listening to Profit is a Choice. Wendy Barlin is on the podcast with me today. Wendy has worked with business owners for over 25 years to guide them with business development, tax, and cash flow strategies. She has a very direct and clear communication style, and she'll help business owners to understand a topic that brings much fear and trepidation. And so today, we're going to talk all things taxes. Every day, empowered entrepreneurs are taking ownership of their company financial health, and enjoying the rewards of reduced stress and more creativity. With my background, as a financial software developer, owner of multiple businesses, and the interior design, industry, educator, and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line, and to have fun again in their business. Welcome to Profit is a Choice. Hey, Wendy, welcome to the podcast.
Wendy Barlin 01:05
Thank you.
Michele 01:06
So you are an accountant. And you have worked for years with all kinds of business owners helping them do all the accounting things. But recently, you have switched your business model. And you are doing a lot in the area of education. Did I get that Right?
Wendy Barlin 01:25
Correct. I did 25 tax seasons.
Michele 01:27
Oh my gosh.
Wendy Barlin 01:30
It was so hard on me, my health, my family, that I decided to take my knowledge and take the questions I've gotten over the last 25 years, and educate because when you work in tax season, you don't really have time to educate. So I really am passionate now about taking all those years of knowledge and sharing them with business community.
Michele 01:51
Awesome. So tell us a little bit about your background. And so tell us about the 25 years 25 tax seasons that you had to get through. You know, I don't know if everybody knows this, but I'm going to throw it out. A lot of the accountants that I have worked with over the years, literally right after April 15. Many of them schedule a one to two week vacation because they are so exhausted. Yeah, I think the busiest season and I could be wrong. So if I am you can correct me. But the busiest season for accountants, like almost, I would say the time they feel the most be that is January to April, if not December to April, because they're doing all those year-end closes. They're hit with all of the tax implications in January where people are trying to figure out what did they need to pay for the prior year before the January 15 date, right behind the January think date is the march 15 date for corporations right behind that is all the rest of us, you know, for personal and LLC, all of those dates, April 15. And at the same time, that's when everybody's realizing that their accountant or bookkeeper from the year before is either not going to work with him anymore, or, you know, their books stink, and they need to start over. And so people are trying to say can I even onboard somebody new so it is just it is such a jammed up time? Because everybody's business needs to be touched in some way. During that. I mean, it really is. There's a lot of pressure in there.
Wendy Barlin 03:17
It is. And I think when you're a people person, so I'm a people person, and people first work second. And I feel the responsibility of all my clients and I feel the pain when I tell them, You owe $20,000 in taxes, and I know they don't have it. And so as much as Yes, it's a lot of hours of work. For me the most stressful part was the human side with the conversations that were hard, you know, divorces, money problems, everything ends up exacerbated in that narrow time window. And so I found it emotionally very hard. The hours of the hours and the hours. I don't believe we work any harder than anybody else on any deadline. But I found that the emotional stuff that comes with money that fits in that narrow window was extremely stressful. And that's where I just said, I can't anymore. I can't do it to myself, I can't do it to my family to bring home that level of stress.
Michele 04:15
So you know what's interesting, so I don't do books, right? I'm not their bookkeeper and accountant. But the work that I do is very emotionally heavy like that as well. And that's one of the reasons that I have a small client roster and I've chosen not to be like a coach that coaches 5000 people at one time and let's have 100 people on a call like that's not me because there is an emotional load, a mental load and emotional load to supporting businesses and people through this. I had heard one time I used to always think that infidelity was the number one reason for divorce. And it's not just money management problems. It's money. But what's also interesting Wendy that you say about the emotion of it the same emotion you thought other people are feeling right, we're all tied into our money that way, I actually just did a coaching call for my inner circle group yesterday on profit first and taxes, teaching them how to figure out their effective tax rate, why it starts at 15% of gross profit, why the 15% might not be the percentage they need to keep, while theirs might go down, why it might go up how to use it, if you're an LLC, how to use it if you're an S-corp, because that account can be used differently, what it's meant to cover, what it's not meant to cover, how it's not meant to be exact. And then I even showed them that if they are doing estimated tax payments, without knowing what is estimated on you, and I talked about this pre show, how they were gonna get a call from their accountant says you owe $20,000, $40,000, $60,000. And they're overthinking but I've been paying taxes. And it's because it was based on an assumption, not real numbers. And it is very, very painful. I also am the type of coach that I am risk averse. I'll just say that before we jump into our conversation and risk averse, I don't like it. But I also think that there are things that we can do to mitigate risk and to take deductions that we need to be able to take. And so finding that educator like you are the accountant that is not trying to push you off the cliff, I tell mine all the time, get me to the edge of the cliff, that's not going to raise an audit flag, and I'll go there, don't push me off the cliff, like I don't want to do stuff. That's like raising audit flags and having people come after me. And that's the way that I advise the people that I've worked with when they talk to their accountants and bookkeepers. So that we understand the risk we're taking, but the actions that we are choosing to engage in, in our in our company with regard to Financials. So that's kind of going to be our conversation today. Because you you, you served your time, your time with tax bracket. And now you offer all types of opportunities for people to learn about taxes and saving. And we'll we'll add all of that into the show notes. So I'm sure we'll talk about it as we go through. But what made you go the route, when you decided that you'd had enough of individual tax prep, to say, let me start kind of carrying the banner and waving the flag for tax deductions that maybe people are missing or aren't taking, or that can be looked at in a different way? Because the rules change all the time. You know, they're it's
Wendy Barlin 07:22
They do. That's true. So when you're running a busy accounting and tax firm, do our best to educate. And people would always say, Well, nobody's ever told me that before. People who've been in business for 20, 40 years would say to me, Wow, no one's ever explained that to me before. And I'm thinking how's that possible. But most accountants don't want to teach, they don't have the patience they don't have the personality, they don't enjoy it. I love to teach. And I enjoy it. And I start by saying tax stuff is not obligated. Your accountant makes himself complicated, because that's how we've been taught. But it's not there is nobody that I cannot teach how to find more tax deductions, everybody, if you're running a business, you could do this. So that's the way we're like to start. But to your point about taxes, changing the fine print changes every year, every month, every three months, right, depending who's in office, taxes change, like the basis of how income taxes are calculated, how meals are deducted how receipts are necessary, that stuff hasn't changed in 100 years. And it's unlikely to. And so what I'm teaching is not necessarily the tips and tricks based on today's minutia, but in the broad scheme of things, because you'd be amazed how many business owners don't even understand in the broad scheme of things, how taxes are calculated, how profit and tax and cash is all different. And so I it made to some people be simplistic, but it's not. If I can go back to the basics and show people how taxes are formulated, calculated what the law says, we'll have a sudden the world opens up.
Michele 09:06
And I agree with you that because when you're starting to look at it that way, you see it in a different way. Right, you start to see strategy, you start to see the bigger picture. I know yesterday, I was asking my group, if people understood what an effective tax rate was versus your tax bracket. They're not the same thing. And they were like, No, we don't understand. And I did a mini pause on where we were going and went back to explain if this is the number that you're being taxed on. You've got this amount of this tax at this percentage and this amount at this percent. So I showed them how it worked and the light bulb. Oh, oh, that's why I can be in, you know, a 35% tax bracket, but my effective tax rates 27. Yeah, that's why that happens.
Wendy Barlin 09:51
And so just really understanding and no one's ever explained that before, right? No one's ever explained that to them before. And so I find when we do exactly that when we go to basics, and you'd be amazed how these little details can change things for people where even, you know, just down to receipts, they say to me, my accountants never told me or I didn't know to ask. I'd say, Well, did you ask your accountant? I didn't know I was supposed to?
Michele 10:17
Yeah, I think that's a big point is them not knowing what to ask? I mean, we all know, we kind of don't know what we don't know, right? It's not like we're sitting here with all the knowledge. And we're not asking and we want to stay in the dark is that we don't even know what to ask. So let's, let's start by we talked about receipts, let's just start there. Because that's something that everybody can do, whether they understand accounting or understand taxes or not, we all are getting receipts all day, every day. Talk to me a little bit about what we need to do with receipts, what we need to hold on to what we don't need, how long we need. And if you could also touch on paper versus electronic. Because we're getting a lot more years ago, you didn't have anything electronic, right. But I also have receipts from five and six years ago that the ink is already faded, and it's not even there. And you couldn't read the receipt, I could hand you the receipt, couldn't read the receipt. If you didn't, you can see like what I wrote in ink, which you can't see the ink on the paper from the printer. And so you know, things are shifting and changing. Talk about receipts and fill us in. What's the 411 on receipts.
Wendy Barlin 11:23
Receipts are a big deal. I know it's not sexy or fun topics when it comes to taxes, or receipts are a big deal. And the unfortunate situation where you are audited, you must have receipts. Anything over $25 needs a receipt, any expense over $25 needs a receipt, a bank statement and a credit card statements are not receipts, and want to be very clear, a bank statement and a credit card statements are not a receipt. And here's why think about as totally makes sense. You know, I can go to target, I can buy any manner of things their clothes, household supplies, business supplies, gifts. And so when your credit card statement says Target $125. That's not a receipt, because that's not a proof of a business expense. The IRS cannot tell what you spent what you purchased at Target. So please, bank statements and credit card statements are not a receipt, I hear that every day. The way to keep your receipts is however you'd like. The IRS has no rules about how you keep your receipts. If you're a good old fashioned paper person, papers fun. If you're an electronic person, PDF is fine. In case of an audit, what they asked for is a stick drive. So they'll ask you to send your PDF receipts on a stick drive to them. And they don't need to be organized, they don't need to be alphabetized, they don't need to be in any beautiful form. If you'd like to, then that's your thing, by all means, but not required. So in terms of time, and being busy business owners, you must have a receipt, it doesn't matter if it's a JPEG or a PDF, take a photo with your phone, put it in a little yellow folder that says 2022 receipts, there are a lot of different software's out there that will help you organize your receipts. It's great if that's your thing. But as far as the IRS is concerned, they don't need it in that format. They just need to see the receipt. And their audit has to have the receipt. Now, a lot of clients say to me, I don't have any cuz I didn't know I was supposed to. Okay, what happens, you're not going to jail to be very clear, nobody's going to jail because they don't have what would happen in a worst case scenario, don't have your receipt, it becomes a negotiation. So the auditor would say to the Wendy, your client doesn't have any receipts and be like, I know where to throw those on legitimate deductions or, and they'll say, All right, I'll give you 50%. And I'll say, Oh, come on Michele is such a good business owner look at her profits, she's paid in taxes, can you give us 75? And we kind of go back and forth. And then we pick a number. And that's the audit number. They don't deny everything if you don't have receipts, unless of course you're being rude and obnoxious, then they will. But if you're being kind and polite, they will usually negotiate it out. That is your worst case scenario.
Michele 14:19
Okay, so now let's go a step further. A couple of questions. Is there anything that we should mark or write on a receipt? And how long should we keep them? Because we've always heard seven years is that still the case?
Wendy Barlin 14:31
Seven years. It's like the rule of thumb. And that's what the lawyers recommend. The IRS has a statute of limitation of three years. After you file a return they have three years to audit us, unless they suspect fraud or wrongdoing, then they can go back further. So I would probably stick to the seven years especially because now most of us have digital it's no big deal to keep your receipts if you still have paper receipts on shredding anything that's seven years old or at this point.
Michele 14:56
So at the end of every every year I have Oh my. So I get a lot of online receipts, right just because I do software and all those things, they're mailing me anything. So I have a folder in my email and I just pull every single receipt into it. Like I don't delete any of those that come in for receipts for payment. But I also then have a physical folder for all of the going out to a meal or buying something at a store or have a paper receipt, and I put them in the folder. And at the end of every year, after I go through them all and talk to the accountant and we wrap up that year, I put them into a manila folder. I write the year and I put the information and I store them so that in my you know, physical day to day space is not taken up space. That way, I can always go back and pull them if I need to. And so that has worked well for me.
Wendy Barlin 15:47
Well, you get a teenager once a year to come and scan that envelope for you. Yeah,
Michele 15:51
yeah, totally could, in turn in turns could do that for some of you that are looking for, for things to do.
Wendy Barlin 15:58
I put my teenager to work. Yeah, yeah.
Michele 16:00
The other thing that I tend to do is make notes on on paper receipts, especially if we're going out to a meal. Yeah, if it's something that's I mean, if it's a printer, because I went to Best Buy and bought a printer, it says printer, you know, HP printer, I don't need to do that. But if it is a receipt, where you cannot tell to your point earlier, I will make notes on what I bought, what it was, and so that I have that on there, if it were to ever come up as a question.
Wendy Barlin 16:29
That's awesome. And that is absolutely the right way to do it. For those of us who are a little less diligent, or I don't do that, but that is the right way to do it. On audit, when they asked for your receipts, they don't know whether you wrote that today or yesterday or a year ago. So where I have clients that have been audited, what we do is we pull the calendar, and we go through the receipts. And we're like I had lunch with Wendy Barlin and had lunch with Michele Williams had lunch with Mr. Smith. And I'm going to call me and Gomez Harlan, I see on the receipt date of May 3 show had lunch.
Michele 17:03
We're not going to do that. But that's also assuming you've had your calendar updated. And so right. I mean, at some point, we've got to keep something that proves the legitimacy, especially for meals. And I think that's probably more than anything else. Because most of the rest of it, there is no proof.
Wendy Barlin 17:18
That's why and you're right. There's no truth. Yeah. And so receipts, receipts, receipts, because if you have that receipt, and you are somewhat creative about the business purpose of that meal, impossible for them to make a judgment call whether that was true or untrue. It's not a receipt. Either you have what you don't have. That's it. So yes, I totally agree with you, if you can keep track of the business purpose of the meal and who you ate, what that's always best. But if you're like me, and you're like the 8020 rule, you just don't get to that, that as long as you have your receipt, you'll be okay, perfect, perfect.
Michele 18:00
Okay, and we talked about how long we should keep records for let's talk about taxes, you you wrote in on your paper, and it's true. Everybody says I pay too much in taxes. I think we all feel like we, if we paid $3 We felt like we paid too much in taxes like, but I want to give a caveat before we go down this path, because I have also been called by people who say these things to me. And I have big feelings about this. Some really big feelings. But when when I get a call from a business owner who says I'm trying to have a net profit of zero, so I don't have to pay any taxes this year, that sets up alarms for me, for a couple of reasons. One, it says you're trying to hold back something, right. And number two, it says maybe you're trying to create expenses that aren't really expenses to get it to zero. And number three, it tells me you're not really trying to run a business, because businesses don't ever want to just end up zero at the bottom like that doesn't make sense. So there's all kinds of problems with that. The next one that that I get is when they call and I do understand if you're getting toward the end of the year and you're trying to stay out of a tax bracket. Maybe you make an additional purchase. I've done that before were my accountant and I are watching everything and she'll say Michele, you know between you and your husband, this is where you are you're getting ready to move in the next place. And if you're going to move up to that next bracket girl we need you all the way in it not like right there in it because it's going to be really painful for that. So what we need you to do is is there anything that you have already planned to do? That is not going to ruin your cash flow at the beginning of the year. And that is not going to set you back that may be a purchase that you were going to make in January February. Is there a way we can make it in December and so that's when I tend to buy a new fine No, I need a new laptop for the next year. I did that this past year mine was mine was cutting off like every other hour. But I also knew in December wasn't the time for me to set up a whole new laptop but I went ahead and bought it and then we set it Uh, you know, in January, February, so thinking through the deductions, it's more than just here's a list of deductions that go take them, like there is still strategy that goes behind it that we have to work. But we don't have to be afraid of paying taxes, like part of paying taxes is saying that you're a profitable company in the first place. So we need to make peace with that. I think the second thing is knowing that when we pay those taxes, if we are doing some version of profit, first tax first, save the taxes, put it aside, it is not as painful, right? So if we've made peace with those two things, taxes are as to pay, and it shows that we're profitable. And we've set it aside. So it's not going to hurt our family structure or our business or anything else. Then the third thing comes, how do I reduce the amount of taxes that I pay so that it's still fair and reasonable for what we're doing? And it's within the law? And that's where we're going to focus now. Right? So absolutely that how do we how do we go about finding more tax deductions? Because everybody feels like we've hit the wall? And what we can do? What else can we do? And how do we find them?
Wendy Barlin 21:05
So I think the most important thing first is to look in the mirror. And you alluded to this earlier about being a risk taker, or a risk averse. So I never worked with a client who said I refuse to pay taxes, I'm not paying any tax. I mean, that's just silly. Those are not people that we want in our world, right? We work hard, make as much money as we can we pay our taxes. That being said, tax law is very gray. And so for everybody, we need to look in the mirror and say, I am a big risk taker, and I am willing to roll the dice to save money on taxes. And other people will say to me, Wendy, I never want to get a letter. I don't care if I overpay, I never want to get on it. I don't want the IRS coming, sniffing around my house. And so it's important for us as your advisors to know who you are, and for you to know who you are. So that what your neighbors are doing and your friends are doing and your book club buddies are doing. You don't go there, you stay in your lane. This is what's important to me, this is what's important to my family. And I always like to start with that because I think too often, I listen to podcasts, I read books, and I hear some great strategies, but they in my stomach they hurt. And if they hurt in your stomach, don't do it. Right. Don't do it.
Michele 22:19
With the whole risk averse and risk taker, you have to also think about, we all have to think about if if I get a letter and if this comes back, am I willing to pay the penalties? And am I able to pay the penalties? Because if they change something or come back on something, and you're not able or willing to pay the penalties, it may not even if you are a risk taker, it might not be worth it to you for what's going to come on the other side. So I think there's I guess what I'm saying is most of us are not either a risk taker or risk averse, where it's a continuum, and we're somewhere in there. And we have to kind of look at each strategy potentially and say, I'm willing to risk it on these but I'm not willing to risk that.
Wendy Barlin 23:01
So we can have different tolerance, right? And some people will ask me, people will say to me, what will happen if I do this? What's the worst thing and I'll tell them, You're not going to jail? You're not Beyonce, you don't owe them enough money that you would ever go to jail. This is what the worst that would happen to you. This is if you've got away with it, how it would be. And so I when people ask me that I'm very clear about what's the worst that could happen? What could this cost me how what would happen to me, because I do think it's important to understand the consequences. But that being said, tax law says anything is deductible for your business that is ordinary and necessary. That's all it says, when I'm 64 years of college. But seriously, that's what tax law says anything is deductible that is ordinary and necessary. So from this day forth, anytime you spend $1, you're gonna say to yourself, is this ordinary and necessary for my business? And an example of that is a client of mine who had a white shitzu dog on her little white fluffy thing. And she's adopted on a picket fence, which traditionally, one would not think on their personal, she deducted the grooming and the medical expense everything. And she got audited one year not because of that she got audited something out. And an IRS agent looked at he went pet expenses, really what's your business purpose, and she was able to show how her dog is on her website. Her dog is on all the marketing materials and he is part of her brand. And guess what the IRS to all her pet expenses, she was able to deduct it all. So again, ordinary and necessary business purpose. And if you can answer that question to pretend person on the other side of the desk, you have yourself
Michele 24:46
however, let me say this because I've seen it go the opposite direction. A lot of that depends on who was the person the luck of the draw that you got sitting on the side of the other side of the table. Because if she had gotten a different auditor or a different person who did not see that they can they can rule very differently. I've seen that happen, where, again, is the risk that you're taking. It's not like the whole great big IRS is making these decisions is whoever you have on the other side of the table, just like when we go through trademark processes and copyright processes, it's who is the person reviewing it? And can you make that case to them, somebody else could have looked at that, and said, That's not the case,
Wendy Barlin 25:26
I've had a different experience, where we have not I found that three in 25 years of doing this, the only time I've had things denied as we're clients don't have receipts. But and we have no leg to stand on. But other than that, if you are kind, polite, honorable, they are more than happy to help you there are people to just trying to get to their job, they want to get cases closed, they get bonuses for moving cases through the system. So I've never had something denied when we've made a claim for ordinary and necessary. I've never had it tonight. And we've taken some up the chain two or three people into management. And I've never had an issue, the only time that's the issue, or when people come on very strong. And the auditor kind of gets a backup, or where people don't have receipt to prove their expenses, but within the realm of ordinary and necessary. If you're confident that you have a case, then by all means, but again, if that has just stomach, don't do it, then keep it super simple. Just keep it super simple.
Michele 26:31
And I think that's what makes the gray areas what we offer is kind of like GAAP, right? And accounting generally accepted accounting principles, there's still gray in there, it's how do you keep your books, that's why we don't have one set of books that the whole world keeps. And it's not the same, right? Same kind of thing. And there is a gray area here. I know even with my accountant, you know, the different rules that are legislation that comes down, like you said, based on who's in office and what they're doing at the time and what we're getting, even when the the laws, the tax laws are made, if there's another three, four months before people even have an idea of how they're going to be implemented and what they're going to do. And then there's a testing and that gray area of what I think it means this Well, I think it means this well, I'm going to apply it this way. Well, I'm going to apply it that way. And that's what causes the it's not just black and white to your point. And I think that's seriously important for us to realize, which is why, you know, it's kind of like when they talk about creating your salary as an escort fair and reasonable. You're like, Okay, wait, what? That's my favorite one. Yeah, they're just words. And so it's about how you apply those words. And now there are tax cases out there that show how it's applied, and how the judgments and how the judgments have been made on that. I mean, it's out there. And it may be different than the way we would have wanted to apply it. But sometimes you don't know unless it goes to a further case, how it's going to be upheld, to be applied. So back to your does it make your stomach hurt? Or does it not is really a good indicator?
Wendy Barlin 28:01
Absolutely. And I also think it's very important to keep asking, keep asking say to your accountant, I don't understand why, why why would keep asking. And if they're not willing to explain to your satisfaction, you're not at the right accountant, my mom went to my mom, I went to the same dermatologist a couple of weeks ago. And I kept asking and asking why, why this cream? Why this cream? Why not this cream? And my mom was like, well, she's the Doctor Don't question her. And, and that's not okay. I was really upset by that. And I believe that with accountant says the same as you work with your doctor, keep asking, why this deduction? Why not that deduction? And you need to be comfortable with the answer. Don't make their accountant decide what you are and are not going to deduct this is your money.
Michele 28:49
So what are some deductions that you think we overlooked sometimes when you that are that are there or they're maybe not as well known? Or there's a different way to apply them than then maybe what we have thought in the past.
Wendy Barlin 29:04
So one of my favorites is I get a lot of clients who come in and say my accountant says if I take a home office deduction I'm gonna get audited.
Michele 29:12
I used to hear that all the time.
Wendy Barlin 29:15
And it's used to be to 25 years ago, in 1998, between 1998 and 2000s. I did have clients where the IRS would show up and show that and say, let me see your office. I mean, you have a hold the IRS, there's no one there. There's no one coming to your house. There are 19 million home office filers in this country right now. To the point that the IRS has no simplified before and said there is now a if you don't want to fit in all the flat rate. Exactly because there are so many home office files so I implore anybody, please do not not take a home office deduction for fear of audit it is simply not true. If you are entitled to a home office, please do take it It will not result in an audit and wersal. If you're not taking the deduction, you are overpaying the government. And the reason I don't want to overpay the government is that I would rather leave the money in your hands, where you could plow it back into your community, hire people support charities, don't give it to the government because of fear of audit. And so please do take a home office if you're entitled to one.
Michele 30:24
Okay. What's another one that we can look for? What about auto this talk about auto.
Wendy Barlin 30:30
Yes, everybody else's favorite one auto. So I was very tricky. I spend a lot of time on the phone talking to people about auto expense, because it says I'm a hoarder. So either you track your mileage, and you use the governing rate that the IRS puts out some years, 55 cents a mile, 58 cents a mile,
Michele 30:51
it might be $2.50 this year, but taxes could be fuel, right? It
Wendy Barlin 30:56
ought to be. So you have a choice. And that's actually a perfect segue to that because you can track your mileage and just say 55 cents a mile, whatever the rate is. Or you can keep your actual receipts, your gas, your repairs, your service, your insurance, and then take a percentage of those expenses commensurate with the percentage of business travel mileage. So you have a choice. And again, it comes back to good record keeping, right because when it comes to the end of the year, when I have that discussion with you, I don't know which is better for you until I see your receipt. Generally, it's always been easier to just do the 55 cents a mile. But in this situation where gas prices have more than doubled over the period of a year, you're likely better off to keep your actual receipt and take, again, a business percentage. And this is another one that's really hard for the IRS to audit really hard, because it's your word against that, you know, you could show the fanciest apps. I mean, I usually have my calendar where I went, come on, they know what we're doing. So I've had auditors match. When clients come in with their absolutely mileage on the auditor snap, they're like, listen, I know what you're doing. We know what this is, I'm going to give you seven questions on the dollar for everything you're taking for auto expenses, because they know. So what you want to do is have your receipts, have your business purpose, and take your auto expenses, because you're entitled to deduct the 20 100% of your auto expenses cannot be deductible, it cannot. And so this is where I find people get in trouble. If they say, well, it's 100%. Because I never used my spouse's car, or I never stopped at the grocery store. And that's going to get you in trouble. So be reasonable with what you take as your deduction.
Michele 32:53
Let's talk about paying kids, because that's a good one.
Wendy Barlin 32:57
That's a good one for some people and not others. So this is where it's really important that you discuss it with your tax advisor and look at your situation. Because paying kids, although it can be a good tax deduction, can have other ramifications for loans that your children might want to get jobs, your children might want to get a college application. So I always tell people, in theory, you can deduct your children, save some money on payroll taxes, it's a good deal. But be careful before you just do it. Make sure that you check with your tax advisor about your tax situation and what your actual savings would be, and weigh it up against the cost. Because it's not a no brainer for everybody.
Michele 33:43
So what are some other fun deductions that maybe we might miss sometimes, right?
Wendy Barlin 33:48
So some of the other ones are? I want to go back to the home office again here. Sure. So one is if you have a home office, you truly have a home office, the IRS that says anytime you drive from your home office somewhere, and you even a part of the trip is citizeness, the entire trip is deductible. So an example would be today, I've got to go to the UPS store and mail a client to get and then I'm picking my son up from school. So it's maybe a 10 mile round trip. That entire 10 mile round trip is deductible, even though probably the biggest part of the trip is going to school to pick up. The IRS has said anytime you even have one piece of the trip that is business related when you're leaving a home office, the entire trip is deductible. So that's interesting, right? Because now when you think from a strategic point of view, where am I going today? Can you add a business stop on a personal trip to make the entire thing possible?
Michele 34:53
I do that a lot of times like if I am for example if we're going on vacation, I will find my clients that are close to that and Stop in and visit with them and do a live coaching session or something while I'm there. And then I can write off the mileage of getting there and getting back. So you know, just thinking about things. Exactly years ago, you could only deduct portions of things like that. So they've changed it. And I know they also, and I could be wrong here. So you'll correct me if I am Monday, but I think that they made some changes over the pandemic timeframe where they were trying to get the economy going, again, that there was a time that like 100% of Mills was the not the 50% Mills, because they wanted to encourage you going out to restaurants, and, you know, so there are little things year to year, and that's where we would hope that our accountant was keeping up with those tiny little we still have to have the receipts our job doesn't change that's exactly their job and how they look at it. staying up to date. Definitely does change to make sure that we're we've just had to like you said, keep the receipts like if nobody hears anything from today, keep the receipts, just keep
Wendy Barlin 36:00
good bookkeeping, good bookkeeping, receipts. And then the other one that the IRS decides the round trip home office mileage, the other one, the IRS, kind of hold it on, and we're done, just adopted cell phones. So a lot of people still come to me, they go, Oh, well, I only got 20% of my cell phone bill, because you know, I use the same cell phones. The IRS doesn't care, they've thrown up their hands with cell phones significant to ask your cell phone bill and highlight over personal calls, they've given up. And so now your entire payments for your cell phone is deductible. Now, I wouldn't deduct my kids cell phones, right? That would be egregious. But my own cell phone 100% of what I pay for my cell phone this deductible, you don't need to split it because you made three personal calls to your mom. And I think there are a lot of these situations where you know, the IRS looks at time value of money, and just says, All right, you guys can have this
Michele 36:53
well, and we we've become a society where we're merging things, right. We're merging cell phones, I use a good portion of the internet all day long. I don't have the TV on but it's the same internet that we turn our TV on, but I write off a good portion of the internet, I write off my cell phone, I write off my Apple watch, I write off my iPad, because all of them are what I use in the course of doing business. You know, for what I'm doing. It's all my little set of Apple graphics out there. But I think we again, I and I'm, I'm not the riskiest of people, but it is, I do use it all day long to keep up with things for my business.
Wendy Barlin 37:30
I think the biggest suggestion to that I would make to people is don't only talk to your accountant, once a year, I was talking about doing that urine planning is so critical. When you come to your accountant in February or March with the most organized records. There's nothing that any accountants can do besides be a data capture, truly an overpaid data capture where you come on to you with an envelope or a stick drive of stuff. Whereas the true value of working with a professional is that planning throughout the year, stopping before you make your June 15 estimated payment talk to your accountant say this is what I've made this year this is payment going to cover me How am I doing that to Michele's point at the end of the year? Should I be buying equipment in December or January? Should I be depositing checks? Should I be sending client invoices the last week of January? What's my plan for the best tax strategy and outcome? And that is critical. And so for me December was actually my busiest and most stressful month, because I was telling people what they would owe in March. So please don't celebrate the holidays, until you know that you've done your tax planning.
Michele 38:38
Absolutely. 100% jumping up and down hands in the air, you can see me that you can't. It is so so so very true. I think one of the saddest. One of the saddest moments for me is when a potential new client calls me and we do a discovery call. And I find out that their accountant speaks to them once a year. Even when they reach out the accountant doesn't respond, they don't reach, right, they won't answer their questions. And I'm like, okay, that professional a number who's that in air quotes, that professional is not serving you, they're not getting where you want to go. So it is a really great relationship. When you find an accountant who's trying to help you strategize I am strategy above tactics, we have to have a strategy and then we work towards it. Otherwise, we're doing a lot of disparate actions that just don't pull together. And we could like even when you made the comment about before you just write off your children, you know, paying them, you need to look at the implications of what that can mean further down the line. What is it going to limit writing off your home? It's different or your home office is different if you are an S corp and LLC and when are you going to sell the house and what are you going to do? Like there's still conversation like because you even prefaced it with if it's you're eligible to take it so there's an eligibility factor. But then there's also what does it look like on the other side factor and that's shifted over the years. Oh yeah.
Wendy Barlin 39:59
Oh, absolutely. And so that's what I tell. You know, one of the things I have to say is that not all accountants, not all doctors, not all hairdressers are created equal. And so you need to find someone who is willing to work with you. And it's not a data processor, because I do see over the next five to 10 years that the data processes are going to be replaced by software, because tax cuts from tax pro to a fantastic job. If you're going once a year to see your tax preparer, believe me to do just as good a job doing it on tax federal tax code itself, then going to an accountant who's working 80 hours a week and tired and it's fumbling around for your document, there's no value in that. You need to be working with someone who truly knows you, knows your business, and is in touch with you all year long.
Michele 40:43
Okay, so just one more comment around that window that I think is important to denote is that some people may have an accountant just for their business, and that's fine. But you definitely need to touch base with an accountant that is going to be doing everything for your family, oh, my gosh, my business decisions impact my family situation, my husband, and when I go to my accountant, and I say what decision Should I make in my business? She's always asking me for where's your husband's W2 up to this point, that she's looking at the big picture of what's happening over here with him? What's happening over here with me? And so how do we make a decision in the business that is going to be the best for the family. And so again, if you have multiple accountants, you need to find some time before you make these really big decisions to put all of that together under one umbrella, so that you're not making a decision in the business that is going to hurt the family and vice versa.
Wendy Barlin 41:38
That's a great point. There's very rare situations where I recommend splitting it up. I mean, sometimes you have to, and you have different accountants for business and personal but it's very hard for anyone to give you strategic advice when they're not involved in every piece of your life. And all it ends up happening is a finger pointing experience. Little she said no. He said, Well, they did that, well, that wasn't my fault. So most of the time, I would tell people, if there's any way to keep it all under one roof, where somebody has a 2000 foot view of your life and can and can really dig in, you're better off than going oh, my personal accountant, Sony $300. So I'm going to have him do my personal taxes. Again, that's a data processor, you need someone who's truly advising you.
Michele 42:21
Okay, so as we wrap up one other question, I'm going to ask you, from your perspective, what you've seen and what you have access to what is the number one audit risk? What is that number one thing?
Wendy Barlin 42:33
Salary? S Corporation owners not running themselves a salary running?
Michele 42:38
No, you mean like paying themselves $10,000 And then having a profit of 3 million, something like that? It's problem? Yeah. So let's talk about that salary for just a minute, because I know what I advise as a starting point for them to go talk to their accountant about, but I'd love to hear what I'm not going to say what I say I want to hear what you say. And I'll tell you, it really
Wendy Barlin 42:59
depends on the industry, right? Industries has no loans. So as a lawyer, when you're offering legal services, it doesn't make sense, the salary would be 50,000, because in the marketplace, the IRS is going to make a case that your salary would be 150 or more. And so for the average business owner, I probably go to the Senate profit is where I would start. But then I always look at the specific industry and say to them, if you were to go get a job tomorrow, I go in and deed or zip recruiter or whatever, what am I going to find as the average salary because that's what the IRS isn't. And then if you claim that yours is less than that, because you know, you're also running the business, you're also doing things that are not really that job. You could bring it down a little bit why what would your case be? Because that's the case, you would need to make it to the IRS while you're not being paid market salary.
Michele 43:48
Right? I agree. That's exactly what I do is I usually tell them, look at the amount that you're going to pay yourself through distributions and draws and salary, put half of it through salary and do the other half through draws and distribution are you know, because it's not always just the profit number, but certainly a good portion of it is, and then I say to them, but you also have to look at that salary. Like I've seen some come to me that their accountant would have them do a $20,000 salary as S Corp. But then they are taking hundreds of 1000s in a draw. And I'm like that you're gonna get your i i am telling you that I think that is that's a problem. And you need to address that go look at the court
Wendy Barlin 44:26
case. And if you think about it, if you think about it, it's an easy one for the IRS to flag right because it doesn't make a human eye a computer runs through these tax returns looking for outliers, ratios, percentages. So a computer can flag that mismatch of profit versus salary. So I just don't think it's worth I think there are a lot of areas in the tax law that I'm happy to be aggressive. That's not one.
Michele 44:50
So what's also interesting is that's why December is so important, because on that last payroll step like I'm meeting with my accountant all the way down to that last payroll step. And we can look at it at that point. And she'll say to me, Michele, how much have you taken it? Like I have a salary? Yeah, but how much have you taken in draws, and then I'll tell her how much I've taken in draws. And then she says, Okay, we need to adjust your salary to match it. So sometimes we go in, and she just reclassifies my draw as a salary, and we pay taxes. And sometimes we actually go in through the payroll and just change it for the last few months, up or down based on what's happening. But having somebody who, again, is looking at it, and advising based on real numbers is super, super important. You know, and I've actually changed my business structure. Over the years, I've been an LLC, I've been an S corp. And you know, there are some opportunities to go back to an LLC. So really having that person that can look at it, and say, for you, and for your tax strategy. This is the best route forward for you is it's a good thing to do.
Wendy Barlin 45:55
100%
Michele 45:55
So, Wendy. Is there anything you want to leave us with? As we wrap up?
Wendy Barlin 45:59
You know, I can keep talking about taxes all day.
Michele 46:01
Right? Tell us where we can find you. Tell us for weekend, if we wanted to, you know, be educated even more? How do we do that?
Wendy Barlin 46:09
So, WendyBarlin.com, just like my name WendyBarlin.com. You can email me there are a lot of free resources on the website, all kinds of tax worksheets I've uploaded for people, home office, how you calculate your home office worksheets. There are a lot of free resources that WendyBarlin.com You can also sign up for our eight hour class. And feel free to email me I love having these conversations. If you are looking for an accountant, I know a lot of people in the marketplace nationwide and always have people so you out. So please do reach out. You don't need to do this by yourself.
Michele 46:45
Amazing. And I'll make sure that all of those resources that you've listed your, your email, and all of that is in our show notes so people can get in touch with you. Wendy do you thank you so much for a fun conversation. I love having these conversations.
Wendy Barlin 46:59
Thank you, Michele, thank you for educating
Michele 47:02
Oh, you're welcome. And it's funny because you can talk about it and talk about it. But I still like talking about it every single time because something triggers differently for me, you know, and I think that's an important note too, is to keep looking at it. Right? Keep up with it, because it's easy to let things go that we're not watching. So thank you for the reminder. Wendy,
Wendy Barlin 47:21
thank you so much. I need to run. I appreciate you. And thank you for this opportunity to share.
Michele 47:27
Take care. Thank you. Bye. All righty.
Wendy Barlin 47:29
Bye.
Michele 47:31
Thank you, Wendy for joining and sharing information about how to look at our taxes, what to save and how to do it. I think the big takeaway, like we said is keep those receipts. If you're interested in looking at all of your business strategies and growing your firm in the process. I would love to have you apply for a discovery call with me. Let's talk about what you need to move forward. What we need to do to help your firm grow and see how we can work together. Choose to be profitable because profit doesn't happen by accident. Profit is a Choice is proud to be part of the designnetwork.org where you can discover more design media reaching creative listeners. Thanks for listening, and stay creative and business minded.