30 min read
The Ultimate Solopreneur Checklist for Bookkeeping and Taxes
Carly Ries
:
May 7, 2024 6:00:00 AM
Ever feel like taxes are the ultimate entrepreneurial riddle you're never quite sure you've solved?
Every form you have to complete and every deduction you have to consider can leave you wondering if you're doing everything correctly.
Taxes and bookkeeping are hard to understand, especially when you’re busy running the rest of your business.
That’s why we invited on Melissa and Eric Broughton of Busy Bee Advisors. With over 20 years of combined bookkeeping and tax experience, this duo helps solopreneurs and small businesses gain more financial clarity and pay less in taxes.
We were shocked throughout this episode and our jaws hit the floor a couple of times. We learned some valuable information we had never heard before that is so beneficial to one-person business owners.
During the episode, we discussed things like:
-
Melissa and Eric's New Business Start-up Checklist for Bookkeeping & Taxes
- The $12,000 Tax Loophole
- Why the Tax System is Rigged & What You Can Do About It
- 5 Essential Questions You Should Be Asking Your Tax Preparer
Plus so much more! Be sure to tune in.
Like the show? We'd love it if you'd leave a 5-star review!
Connect with Eric and Melissa Broughton
Favorite Quote About Success:
"If you believe you could not fail, what would you attempt?
Being a solopreneur is awesome but it’s not easy. It's hard to get noticed. Most business advice is for bigger companies, and you're all alone...until now. LifeStarr's SoloSuite Starter gives you free education, community, and tools to build a thriving one-person business.
So, if you are lacking direction, having a hard time generating leads, or are having trouble keeping up with everything you have to do, or even just lonely running a company of one, click here to check out SoloSuite Starter!
About Melissa and Eric Broughton
Melissa and Eric Broughton co-own Busy Bee Advisors, and have combined their passions and experience to help small business owners gain more financial clarity and pay less in taxes. Melissa is a seasoned accountant and Eric is a tax professional - with more than 20 combined years of experience, they have seen it all. Eric's extensive understanding of tax code and its intent, Melissa's enthusiasm for the bookkeeping business, and their gentle, thought-provoking banter allow them to discuss a wide range of topics while questioning each other's points of view. You can hear more on their podcast The Real Buzz.
Like this show? Click on over and give us a review on Apple Podcasts Thanks!
Episode Transcript
Carly Ries:
Ever feel like taxes are the ultimate entrepreneurial riddle you're never quite sure you'd solved? Every form you have to complete and every deduction you have to consider can leave you wondering if you're doing everything correctly. Taxes and bookkeeping are hard to understand, especially when you're busy running the rest of your business. That's why we invited on Melissa and Eric Broughton of Busy Bee Advisors. With over 20 years of combined bookkeeping and tax experience, this duo helps solopreneurs and small businesses gain more financial clarity and pay less in taxes.
Carly Ries:
I think I put my palm to my forehead more times in this episode than ever before. And Joe is well educated in this area, and even his jaw hit the floor a time or 2. It was wild. We invited them on to discuss things like their new business startup checklist for bookkeeping and taxes, the $12,000 tax loophole, which may have been one of the times Joe's jaw hit the floor, why the tax system is rigged and what you can do about it, 5 essential questions you should be asking your tax preparer, plus so much more. This was such a great episode, so be sure to tune in.
Carly Ries:
You're listening to The Aspiring Solopreneur, the podcast for those just taking the bold step or even just thinking about taking that step into the world of solo entrepreneurship. My name is Carly Ries, and my co host Joe Rando and I are your guides to navigating this crazy, but awesome journey as a company of 1. We take pride in being part of Lifestarr, a digital hub dedicated to all aspects of solopreneurship that has empowered and educated countless solopreneurs looking to build a business that resonates with their life's ambitions. We help people work to live, not live to work. And if you're looking for get rich quick scheme, this is not the show for you.
Carly Ries:
So if you're eager to gain valuable insights from industry experts on running a business the right way the first time around, or want to learn from the missteps of solopreneurs who've paved the way before you, then stick around. We've got your back because flying solo in business doesn't mean you're alone. Okay. So before we jump into this episode, I just have to share this new free offer we have called the SoloSuite Starter. Being a solopreneur is awesome, but it's not easy.
Carly Ries:
It's hard to get noticed, and most business advice is for bigger companies, and you're all alone until now. Lifestar's solo suite gives you free education, community, and tools to build a thriving one person business. So if you're lacking direction, having a hard time generating leads, having trouble keeping up with everything you have to do, or even if you're just lonely running a company of 1. Be sure to check out SoloSuite Starter at Lifestarr.com and click on products and pricing at the top menu. It's the first one in the drop down.
Carly Ries:
Again, it's totally free, so check it out at Lifestarr.com Click on products and pricing, and it's the first one in the menu. Hope to see you there. Okay. Melissa and Eric, this is not something that everybody celebrates, but I just wanted to wish you to a happy tax day.
Eric Broughton:
Thank you. Thank you. Thank you.
Carly Ries:
We're recording this on April 15th. We'll not go live then, but Joe and I were talking. We were like, how in the world do we get tax preparers and and people that educate people on the topic onto our show on April 15th. So we are just so happy you're here. Melissa, we were talking offline.
Carly Ries:
You were like, well, if they're not if they don't have things in at this point, they won't have things in general. So, we hope you guys can breathe easy starting today and and for the weeks to come.
Melissa Broughton:
Yep. We we actually looked at each other last night and it was like, okay, we can breathe. We can take a deep breath. You know, everybody at this point, to answer your question, everybody at this point who, who hasn't filed, wouldn't you say, has either filed an extension or they've gone MIA. We have that happen too sometimes where clients just kinda disappear and then they come back and maybe they come back tomorrow, which is, you know, it'll be a day or 2 after tax day and it's like okie dokie.
Joe Rando:
Did you ever see the Steve Martin skit where he talks about paying taxes and he says, don't pay your taxes and when the IRS comes to say, I forgot.
Melissa Broughton:
You know what? We have
Joe Rando:
That sounds like the strategy.
Melissa Broughton:
It's an interesting strategy.
Eric Broughton:
It's not a winning strategy, but it's a Strategy.
Joe Rando:
We are not recommending that strategy,
Carly Ries:
not recommend. Well, speaking of strategy because I feel like this is the time of year where if solopreneurs don't have it together, this is where they're like, oh, gosh. I need to educate myself. That was a rough month, few weeks leading up to tax day. I need to get a better strategy in place moving forward, and you guys have, like, a new business startup checklist for bookkeeping and taxes.
Carly Ries:
Can we walk through that list or at least a few parts of that list?
Melissa Broughton:
Sure. You know, I think the biggest piece and, Eric, definitely feel free to interrupt. Right? So I think the biggest piece is when somebody is a solopreneur and they start a new business to open up a separate account for that business, to open up a separate checking account and savings account at the very least for that business.
Melissa Broughton:
That alone will help them to, you know, organize their expenses and of course organize their income so that any income from the business is deposited into that account. And then hopefully, any expenses for the business are able to go out of that account. And I say hopefully because, you know, sometimes when we're brand new and we're starting, there's not quite enough cash coming in to afford all of the different things we need to spend. But that's the absolute first thing I recommend is a separate account. And it doesn't necessarily have to be a business account.
Melissa Broughton:
They can go I recommend going to the bank that they're currently banking with and just opening up if there's a free checking account available or, finding a bank that offers a free checking account at least to start with.
Carly Ries:
Okay. So they have that a separate account and then they're like, oh, did it. Now what?
Melissa Broughton:
Right. So, depending on what cash flow for their business looks like. I mean, some some businesses are lucky and they've got money coming in from day 1. Others need to maybe, you know, have a loan or use a credit card. We'll have a lot of our, you know, our realtor clients when they're brand new and they're starting out, their business is funded essentially on a credit card or maybe a majority of credit cards.
Melissa Broughton:
So don't go crazy with those cards. If you get a business loan, don't go crazy with that business loan. Know that you will have to pay it back at some point. Keep your expenditures to business expenses, and, you know, have a plan set out. So have an idea of what you know your expenses are going to need to be, set a budget for yourself, and I and I I say that as far as office supplies, equipment, it's tempting when we, I'll tell you this, it was tempting when we walked into a store and purchased things to spend a lot of money, but now that everything is purchased really online, I mean, you can go crazy, Right?
Melissa Broughton:
You can you can easily spend $1,000 on Amazon. So set a budget for yourself and kind of know what your what your goal is and what your objectives are.
Carly Ries:
So for people that are like, I like make one of my good friends makes pies for a living. Let's say they they make pies and they're like, I'm good at this, but I have no idea what I'm doing when it comes to tax prep bookkeeping. Should I be making quarterly payments? What should I do? What should I even?
Carly Ries:
What kind of business should I run? Do you recommend that they because a lot of slow preneurs starting out don't have a huge budget. So do you recommend that they go the QuickBooks route or do you recommend that they hire somebody knowing it's gonna be an investment, but that will save them tons of time in the long run?
Melissa Broughton:
So I'm gonna answer that and then I'm gonna have Eric answer it from kind of a tax perspective. Right? So I, you know okay. If it's a retail business or something where you're selling product, I say retail and most people assume that means like storefront store, but that can be so you can be an Etsy seller, right? Not even have a storefront.
Melissa Broughton:
If you're selling a product, I definitely recommend using an accounting software and QuickBooks online is, without a question, our number one recommendation. They just you know, it's easy to use. It's pretty affordable still. And to be honest, any of the other softwares that pop up Intuit buys them anyway. So you might as well go with who's gonna, you know, who's gonna take over the market.
Melissa Broughton:
And the other benefit of QuickBooks online is that it's so widely used that if you do need somebody to jump in and help, you can easily find somebody who can, you know, jump in and help and know the software. If it's a service business, so they're a consultant, I don't know that they necessarily need, an accounting software. And I say that because I look at it from the perspective of you're a brand new business owner starting out, You have the best hopes and intentions to, you know, make your your million, right, in business, but it can be can be slow to watch those deposits come in at first and so you have to be careful of your expenditures and and that software subscription may be an expenditure that you don't need to make every, you know, right away. If you're in a service industry, I think using, there's there's a, you know, a spreadsheet that you can use and we'd be more than happy to send that to you guys for your listeners to have as a, you know, as a tool to have in their toolbox. So so there's options but keeping track of those, expenses is certainly important, initially when they're starting out.
Joe Rando:
So you say you've got a spreadsheet that people can use to keep track of their expenses and instead of revenues and expenses instead of using something like QuickBooks online. Is that what I understood?
Eric Broughton:
Yes.
Carly Ries:
Yep. Awesome. Thank you. Alright, Eric. Let's hear it.
Eric Broughton:
Everything's gonna be based upon how much effort you wanna put into it. Right? So if you don't wanna put any effort into it, but you wanna make sure it gets done, then you wanna bring someone on board. You wanna you wanna pay for a service to to track your stuff. But, generally, in the 1st year, you know, for, like, a consultant, really, you're you're you're making your way there.
Eric Broughton:
You know? You're not quite there yet. Maybe a service is something you're looking at in year 2 or year 3. 1st year, you wanna track everything that you're spending going up that's business related. That can easily be done onto an Excel spreadsheet.
Eric Broughton:
Accountants and tax preparers are so used to converting data from a spreadsheet into something usable for a tax filing that it's commonplace at this point. So you just if you want to do it that way, you could certainly do it bare bones, so to speak, but if you have the capital and you've kind of planned for it, you're saying, Okay, I want to spend my time working on my business and developing my business and my sales. I don't necessarily wanna work on tracking my receipts. Right? I'm gonna pay someone to do that Intuit, you know, using QuickBooks and stuff like that.
Eric Broughton:
Those are good routes to go. But it really comes down to you gotta have a plan on what you're going to do from the from the inception of the business. And if you're really like, man, I just wanna get out there and do some stuff. Okay? Get out there and do some stuff and then you know, keep keep some records of your receipts in a an Excel file.
Eric Broughton:
Keep your life simple in that way.
Carly Ries:
Well, let's say somebody is like, I know I don't want to touch any of this. This is all very intimidating to me. I'm not a money person. I'm horrible at tracking things, but they also don't know what to ask a tax preparer. What what questions would you recommend people ask if they are on the hunt for somebody to help them out?
Eric Broughton:
The first thing I would ask is what they recommend you do for for separating your business from your personal. You know, if the answers are like open up an account, get some things going, then you're on the right path and talking to someone. Because, unfortunately, in the industry, in tax preparers and accountants, just like in all the rest of the industries, there are those who really are just there to kinda do the order taking, and they're not really there to do any forward planning for you. So they you they're like, yeah. Just put it on an Excel spreadsheet and then give it to me.
Eric Broughton:
And if that's kind of all you get from them, then that maybe is not someone that's a good fit for you because you as a business owner need to learn what is a business expense. Right? And we have a worksheet that we've been building slowly over time that's got over a 100 different business related deductions that you as a business owner may not realize that you could take. And so having school provide that information for you and give you that education is as important to developing your business as working on your sales.
Joe Rando:
I love that. I want to ask you a question that I don't know if there's a good answer to this question, but when you think about, especially solopreneur businesses, right, and, you know, typically if these people are retailers, they're doing what you said, they're Etsy, or they have an online store, you know, a Shopify site or something, a lot of them are basically providing some kind of service, you know, whether it's ghostwriting or coaching. But are there any kind of general categories of, you know, expenses that are maybe would surprise people that were new to being a solopreneur or anything that maybe isn't a 100% obvious that they can take, as a category? Just any way to think about it? Or is it just kind of a laundry list of IRS rules that you have to understand?
Melissa Broughton:
You know, I think the one that's, you know, maybe it's obvious to some people, maybe it's not. I think mileage is one that a lot of, solopreneurs, forget about. And for, you know, first, I don't know why for some reason, the smaller our smaller clients, that's what I see consistently that they, you know, they have all of their receipts for different things. Office supplies, everybody knows about office supplies. Of course, if you have to buy, you know, equipment, people know about that but they forget about mileage and mileage can, you know, can add up really really quickly, especially if you're, you know, that, maybe a direct seller or and we love I love working with direct sellers, but, if you're a direct seller and you're going to appointments or going to meetings and things like that or even a real estate agent, We had somebody, last year that we were working on her taxes with her and she, left mileage out.
Melissa Broughton:
She was a real estate agent. We, you know, kind of asked, did you have any mileage? Oh, yeah. I think so, but I didn't really keep track of it. Is it worth it?
Melissa Broughton:
Probably. And she had, like, 12,000 miles that she had driven. You know, at 56¢ a mile, that's pets money.
Eric Broughton:
So that was a $6,000 deduction that she was just eating on the table because she thought maybe it was too much effort, it wasn't worth it, stuff. Yeah.
Joe Rando:
You're right. Writing down those numbers is a bear.
Eric Broughton:
But there's apps that you could do. There's an app you could put on your phone that I'm kidding. You start your business day. You press the app, and the app says go, and it tracks your mileage, and it gives you a mileage report at the end of the day, and it keeps the report going. And then when at the end of the year, you could actually email to yourself your annual report, and it'll basically give proof, and it's a written record of all of your mileage.
Eric Broughton:
And it was just by going through her calendar, she was able to backtrack and look at that she had at least 12,000 miles. That's cool. That's just going off of her calendar. Imagine if she actually tracked her true mileage.
Joe Rando:
So related question. So what about the other one that almost all solopreneurs have now, which is the spare bedroom slash office.
Melissa Broughton:
Right? A home office deduction. Sure.
Joe Rando:
But, you know, I've been told by people smarter than me that that is a trigger for an audit, And I'm wondering if you think that that's true, or is it worth doing?
Melissa Broughton:
you know, I think there's a lot of rumors out there about things that are triggers for an audit and I think the IRS keeps it a very well guarded secret on what triggers an audit. I I in truth, I think the thing that really is the biggest trigger of an audit that I've heard is if you are, you know, claiming a child and somebody else is claiming that child, so maybe a divorce or a custody situation. Aside from that, I have not consistently seen anything that's, you know, an audit trigger. I think if you are doing your due diligence, and you have a tax preparer that is encouraging you to keep all of your receipts and records that you are that you are fine because you have the backup. Now if you just claim a whole bunch of things and don't have any backup, then you you should maybe be a little bit, a little bit worried.
Melissa Broughton:
But, Eric, talk about the home office deduction.
Eric Broughton:
Home office deduction is going to potentially put you on a list for audits. I hear that a lot of times. I say, filing taxes will put you on a list for audits. So if you're worried about being on a list, then, yeah, you got some other issues that you maybe need to attend to. Just because you're, I mean, you're a small business owner, if you're a sole proprietor filing a schedule c with a home office deduction, a business mileage, and stuff like that, you file taxes.
Eric Broughton:
You're already on a list. Now, how do you work past that? Don't be afraid of the audit. It's like, welcome it by having your documentation in order because the first thing they're going to do is send you a letter and say, hey, what about this? And if you respond in a timely fashion with accurate documentation, then the IRS says, thank you and have a great day, and then they move on.
Eric Broughton:
But if you ignore the letter, if you don't have documentation that proves what they're asking, then they say, you couldn't provide information for that so maybe you can't provide information for the rest of this. We're gonna send someone to come say hi to you. That's when things start getting a little bit more interesting. But if you have your documentation in order and you answer questions in the form of letters because they're not gonna call you. Remember, the IRS doesn't call.
Eric Broughton:
The IRS sends letters and if the letters aren't responded to, then they send someone actually in person. You know, so don't get to that point. Respond to your letters. And anything that you can do in regards to filing taxes could raise a flag.
Eric Broughton:
I love that one. Or put you on for a potential audit. You file taxes. You're already on the list. Don't be afraid of that.
Eric Broughton:
Move forward and take the maximum allowed deductions for you as a taxpayer. Don't feel that you need to under report your deductive values. You're reporting your full income value because that's the law as well, but the IRS is never gonna send you a letter saying, oh, hey. You forgot your home office deduction. They'll never do that.
Eric Broughton:
But they will send you a letter if you forgot to add a 1099 to your sole proprietor for, like, $25,000. They're gonna be like, hold on. One moment. You owe us more money.
Joe Rando:
I guess that makes sense.
Carly Ries:
Yeah. And I mean, so many people think that the tax system is rigged and and it is in a sense, and I know that you guys would agree with that. So I'm curious why you think that, but also is this just a way to deal with it? Like, just have your ducks in a row or are there other things people can be doing to help them out in this system?
Melissa Broughton:
I think if you're, you know, an individual who works a w2 job, you're absolutely fine to file your taxes yourself. In most cases, you can use there's great programs out there. TurboTax is excellent. I think H and R Block has one. There's a whole bunch of different ones out there and they all do a good job.
Melissa Broughton:
I think the second that you venture into being a business owner, whether it's a solopreneur or you've got a huge, you know, corporation, that's when you need to consult a professional. And that professional, to take it a step further, needs to be someone that you feel that you can have a conversation with and that doesn't, that doesn't make you feel like they won't explain things to you or that they're just doing what's in your best interest or that is doing things and you don't understand. So that would be, the first big recommendation I would make. The second thing, do I think the tax system is rigged? I absolutely think the tax system is rigged.
Melissa Broughton:
And, yep, putting your ducks in a row and keeping your documentation is probably the best thing you can do to protect yourself. I don't think that the IRS is a big, you know, scary monster that's hiding under your bed. In fact, that would be super awkward to have an IRS agent hiding under your bed. But, I think they're an agency that just like any other agency should be it's, you know, it's having a healthy respect and, yeah. I think that the system is rigged though.
Joe Rando:
Can I ask you one one clarification? So I've been in business for a long time. I've been self employed in one form or another since 1990. A number of different companies.
Joe Rando:
And one time the IRS made a big mistake. They didn't just pay us a visit. They showed up. I mean, I'm glad this woman didn't have a gun because she walked in, slammed this big folder down, started screaming at people. And I'm just curious, have you heard was this just really bad?
Joe Rando:
We ended up being completely in the right, they were completely in the wrong, but have you ever had an experience like that where the IRS just went off, like, you know, completely crazed? Or is it was this just a one off?
Melissa Broughton:
I, you know, don't hear about it happening too much. I have heard of of situations where there's been a little bit maybe of a, oh, I I guess you'd call it an overzealous agent. I think if, again, if something like that happens or if you feel that you're being treated unfairly, you should seek representation. So that would be when I would absolutely recommend to somebody to reach out to, a tax attorney and maybe go a step above just their their, their tax professional. You're you're gonna be pretty hard pressed on your own as, you know, Joe Citizen to get the IRS to admit that they're wrong.
Melissa Broughton:
It sounds like you were able to get the issue resolved, but, you know, we had a client, and this was kind of an interesting situation. He sold a commercial property at the end of 1 year and didn't receive funds for it until the next year. So that's already an interesting tax situation. He was the type of person that would go for the, we'll just say lowest price service provider. So he kind of shopped around for either people who would do taxes and trade or cheapest price he could get.
Melissa Broughton:
So the person who filed his taxes in the year that he sold the property didn't catch it. And then the next year, they didn't know till it was a different person that had prepared the taxes, didn't know to look for it. So he got a notice that he owed, like, what ridiculous hundreds of thousands of dollars in taxes. And, you know, when you get into that 6 figure debt range with the IRS, they get slightly more aggressive than, you know, if you owe $500 and, our our biggest recommendation to him was, you know, really sorry that that's happening to you and here is an excellent, tax attorney that you probably need to reach out to.
Joe Rando:
that's the important thing. There's bookkeepers. There's accountants, and then there's tax attorneys. Right? So we've got this kind of progression of of skills and expertise.
Joe Rando:
And you've also got accounts that are just crunching the numbers versus accounts that are helping you with tax planning. So we can almost think of like 4 levels. Okay, cool. Thank you.
Eric Broughton:
It's just like any other profession. Right? You've got doctors, and doctors come in a wide variety of not only education backgrounds, but they also come in a varying levels of expertise. So think of taxes in that realm is very similar to that. You have people that specialize, but then you also have people that do general practice.
Eric Broughton:
Right? And so, a tax in the world of tax, you're going to have that as well. And you're also going to kind of get what you're looking for if you're if you're looking for someone to just do a bare bones job, you're gonna find that someone that's gonna do a bare bones job and you may just pay the amount for the bare bones job. I wouldn't necessarily trust that bare bones job for the most part, but in that essence, yes, there field just like any other profession. But when an agent actually comes to your home or to your place of business, you should not be doing that without some form of representation.
Eric Broughton:
It's the same thing about going to court. If you're going to court for not a traffic ticket, but, I mean, an actual criminal matter, hire a lawyer. Right? Have someone there to look out for your interests. And that would be my number one bit of advice in that particular situation, especially if they show up out of the blue.
Eric Broughton:
Say, one moment. Let me contact my representative. And then you you excuse yourself and you call someone to be like, what do I do right now?
Carly Ries:
Yeah. Oh, the world of tax, I mean, you I feel like you guys have secrets or no not secrets, but you know things that so many people don't know. It's like a little world that you understand. I know even for me, like, when I was starting, I was only familiar with, like, LLCs. I just wanna go the basic route, but I didn't know s corps were even a thing, honestly.
Carly Ries:
And there are so many benefits there that people may not be aware of. Can you kind of go into why a solopreneur may wanna consider an s corp over an LLC?
Eric Broughton:
The biggest thing is is that when you're a sole proprietor filing a schedule c, all of your profits are considered taxable, taxable wages. So you're paying the 15.3% self employment taxes on all profits from your sole proprietorship. So as you're going down the line, you're like, oh, yeah. It's added to my AGI. I made a little bit.
Eric Broughton:
Then at the end, you're like, why is my tax bill so high? It's because they add that 15.3% self employment tax on from the profits from your business at the end. After all your credits and payments have already been added up, then they add it in and it just jumps right back up. And, an s corporation allows you to churn your business, all of your business income into the corporation and pay yourself a W-two. So therefore, you're paying yourself a reasonable wage out of the business.
Eric Broughton:
You're having a W2 and then whatever profits are coming out of the company are taxed through other means, but not with the extra 15.3% for self employment tax. Now that's not the case with an LLC, just an s corp? An LLC excellent to bring this up. An LLC is a legal term, not a tax term. Right.
Eric Broughton:
So an LLC is just considered to be a legal term for lawyers in the state that you have limited liability for your business' activities and practices. As far as the tax world is concerned, you're a sole proprietor. You if you have an LLC, you also are in the same tax boat as the guy that's doing woodworking out of his garage. Got it.
Melissa Broughton:
Would it be safe to say that an LLC, because I think I've heard you say this before, an LLC is similar to having an insurance policy Over your business.
Eric Broughton:
Yeah.
Melissa Broughton:
So it's not a level of tax protection. It's not necessarily a business entity type but it protects you.
Joe Rando:
it limits liability, which is what?
Melissa Broughton:
Yep. LSC standard Liability. It's right in the name.
Joe Rando:
But you can
Joe Rando:
then have an LLC that elects to be an s corp.
Melissa Broughton:
Yes. K. And those we love.
Eric Broughton:
Yep. Those we love.
Carly Ries:
You know, mic drop. Well, so I'm so glad we got into, these little things that people just might not be aware of, and I did do my due
Carly Ries:
diligence ahead of this
Carly Ries:
interview, and you guys talk about a $12,000 tax loophole. Is that relevant to solopreneurs?
Melissa Broughton:
Okay. So first things first, we're probably not gonna have a ton of time to go into all the things about the $12,000 tax deduction. If people go to our website, and I'm sure it'll be posted in the show notes, they can actually download or get access to a webinar that we put together that's free. It's about a 45 minute webinar and they can learn everything they would want to know about it. So I'll say that because I'm just gonna touch on things with it.
Melissa Broughton:
So essentially, it's a legitimate tax code loophole, I guess, you could call it, but it's called the 14 day rental rule. And so, essentially, what the 14 day rental rule allows you to do is as a business owner, you can rent your property to your business. So your business gets the write off because your business pays you as a person for a maximum of 14 days per year. They can be consecutive days, they can be broken up. However, that it just can't exceed 14 days.
Melissa Broughton:
Your business pays you personally for rental of your property for business use purposes. So if you were, let's use a direct seller, let's say you are a Tupperware consultant or a VeriK consultant and you have a team, and once a month, you host events for your team at your home. Not strange, not out of the realm of possibilities. So you would be able to pay yourself, your business, pays you, the fair market value in your area of what it would cost to rent a venue.
Carly Ries:
I did not know that. Joe, you're the real estate guy. Did you know that?
Joe Rando:
No, I didn't. This is all news to me.
Eric Broughton:
It's also referred to as the Augusta rule.
Carly Ries:
Okay.
Eric Broughton:
So sometimes I've heard of it. Some people have heard of it not as the 14 day rental rule, but also as the Augusta rule. Literally, you as a business, if you went to a venue and said, I would like to rent this to have a board meeting or to have a team building event, and they would give you a price. Right? Okay.
Eric Broughton:
It's gonna cost $1500 to have the event throughout the night or through for a full day. We were like, okay. Thank you very much. And then you as the property owner to you as the business owner say, it's gonna cost you $1500 to use this place for the night. And the business owner, you, says, that sounds great.
Eric Broughton:
And then you write a check.
Joe Rando:
Right. So that's now an expense for the business, but it is income to you personally. So now you're paying
Melissa Broughton:
But it's tax free income to you personally.
Joe Rando:
Oh.
Melissa Broughton:
I love it. I love when I get the mouth open.
Eric Broughton:
It's up to 14 days. Right. So if you do 15 days worth, then you have to start tracking and report it. But if you did 14 days, you're solid, you're fine.
Melissa Broughton:
under 14 days. Under 14 days. I mean, I guess Fourteen
Joe Rando:
Yeah. Don't go to 15. So it's not that it's not taxable. It's just that it's not tracked 14 days or under.
Eric Broughton:
Till you hit that 15 day. Okay.
Carly Ries:
How do you include that in your taxes? Like, what do you say?
Eric Broughton:
It's a rental deduction.
Carly Ries:
Okay.
Eric Broughton:
It's the same. If you went to a venue and you wrote them a check for a a $1500 to rent the venue for the day, you would list it as rents under your business deductions because it's it's you're renting someplace, it's considered a rent. So if you write the same check instead of it going to, Bob's Business Venue and it goes to yourself, you're writing yourself a $1500 check from the business account to your personal or wherever you want to deposit it. Right? And then the business writes that off as a $1500 rent expense.
Eric Broughton:
Now, I'm not saying $1500 is the baseline people need to figure out because you wanna know what your fair market value is. And I don't recommend going to the lowest value hotels, to get pricing, I would recommend going to some place that reflects your personal property, like my home. If I was going to compare it, I would be like, Ritz Carlton. Yeah. That sounds reasonable.
Eric Broughton:
Right? It's privately in your ZIP code. Right? If it's in your ZIP code or nearby, it's a reasonable comp. And real estate agents and stuff like that, they know all about reasonable comps for all that fun stuff.
Eric Broughton:
So find out what your reasonable value is for your personal property and your business could be charged to that. Let's say you wanted to do a, 4th July extravaganza, staff, friends, clients, family. The first day you read from yourself is your setup day. The second day you read from yourself is actually 4th July where you have a party and everybody has a fantastic time. You pay for a bounce house.
Eric Broughton:
You pay for fireworks. You got food. You got drink. Everybody's enjoying themselves. On day 3, you do cleanup.
Eric Broughton:
Maybe hire a cleaning company to come out and clean up your house from the best from your party. That's 3 days worth of rental. Plus, as a business related expense, you could clean your venue, which was your home.
Melissa Broughton:
Well so, you know, we talk about it and we get we get really excited as tax professionals anytime we can educate someone on something new. Right? Because there's really not anything new with the tax code. There's changes, but there's not any necessarily anything new. So when we, you know, talk about s Corps and what S Corps can do for somebody, or we talk about the 14 day rental rule and what that can do for somebody, we get really excited.
Melissa Broughton:
And I think sometimes when we get all excited about it, people get people get nervous, right? They go, this is it's too good to be true, but it really is a legitimate, it's a legitimate tax strategy. It's a legitimate tactic that that people can use to, you know, pay to pay their fair share in taxes.
Joe Rando:
Can I just get a little technical, but when this happens, when my company pays anybody, including myself personally, more than some amount, and I can't remember what the number is this year, I have to give them a 1099? Is there an exception for the 14 day rental rule?
Melissa Broughton:
Well, you wouldn't have to issue yourself a 1099.
Joe Rando:
Okay. So even though I paid,
Melissa Broughton:
Yes. There is an exception for the 14 day rental rule.
Joe Rando:
Okay. Cool.
Melissa Broughton:
As far as 10.99 is going. Okay. It's over 6 it's any amount over $600.
Joe Rando:
Right. But I could easily exceed that in a year with 14 days of rental.
Eric Broughton:
See, now that would get it to the realm where specific things need to be talked about with your tax person. You have to make sure because while this rule sounds fantastic, once you start going into the weeds on some stuff, you need to have good advice and good rec definitely. Otherwise, you're gonna get yourself into some trouble, unfortunately.
Melissa Broughton:
Right. Yeah.
Joe Rando:
I'm in trouble already because I got a pool and now everybody's gonna wanna have the party in my house.
Carly Ries:
But this is exactly what I'm talking about. You guys know things that others dont. Joe, I feel like we need to have a part 2 or something at some point where we just
Carly Ries:
talk about these types of loopholes that you, the tax preparers, may be well aware of and then the rest of us are like, this is the craziest thing we've ever heard. Well, maybe not you. You're pretty intelligent with this stuff, Joe.
Carly Ries:
Maybe it's just me.
Joe Rando:
But but, you know, it's just I love the fact that I'm a big fan of using professionals. You know, as soon as you can afford it, don't wing it. You know, and it's just you see people getting into trouble. You see people screwing things up and missing opportunities. And so, I love this because it's people are gonna think hear this and go, yeah.
Joe Rando:
Maybe it's worth, you know, getting somebody engaged to help me plan my taxes. Whereas, you know, without this kind of, you know I mean, some of it's stuff you don't want to just run off and fill out your tax return based on, but still get people inspired to maybe take that leap.
Melissa Broughton:
You know, we we don't get a lot of people that call and explain why they're not going to use a professional. Right? But in the in the rare events that we have a chance to have a conversation with somebody and they're saying, no, I'm gonna do it myself, but I wanna do my taxes myself. One of the most interesting conversations I had with somebody was, you know, a gentleman told me, oh, I don't need I I don't believe in hiring tax preparers. I do it myself.
Melissa Broughton:
All of the information that I could ever need is out there on Google. And I just I I you could you know, and it's yeah. There is a lot of information that's out there on Google and there's a lot of bad information that's out there on Google or a lot of information that tells you, like, the tip of the iceberg. So the 14 day rental rule, you know, it's all about documentation and it's all about having the appropriate documentation for it. So, yes, there's there's this fabulous opportunity that's out there but if you just to write your check yourself a check for $5,000 14 times and have no documentation, you're probably gonna get in some trouble if you get if you do get audited.
Melissa Broughton:
So
Eric Broughton:
And that would be something that would cause, when when people talk about flags, I refer to them more as anomalies. If your return has such values that are abnormal on its on its reporting process, then the IRS looks at it and says, what kind of industry are they in? Now if you're a real estate agent and you're spending 25% of your gross on marketing, that's to be expected in many areas. But it's not expected if an accountant is spending 25% on marketing. That's a little bit off.
Carly Ries:
But Sure.
Eric Broughton:
So that causes problems. Yeah. That's abnormal number counts is what causes, more triggers than anything else.
Carly Ries:
For you guys, I feel like we could dive into this all day, especially today. This is how we should be celebrating tax day, but we wanna be respectful of your time. And so you 2 help people find success with the financial side of their business. We have to ask, which we ask all of our guests, what is your favorite quote about success?
Melissa Broughton:
If you believe you cannot fail, what would you attempt or or whatever that that phrase is. It's a a plaque that I normally have on my desk and it it got moved but, you know, it's it's kind of the don't I just really live my life by the mindset of don't get so in your head about things that you're afraid to try. You know, plan and and kinda jump in and see what happens.
Carly Ries:
So so true. Well, listeners, I'm sure you're intrigued, like, I am to learn more about these 2 and everything they have to offer. So where can people find you if they want to learn more or contact you?
Melissa Broughton:
Our website's the best place for them to go, busybeeadvisors.com. We really are all about educating our clients in the general public and, that's that's kind of what motivates us and gets us excited.
Carly Ries:
And is that spreadsheet that you were talking about earlier on your website?
Melissa Broughton:
Yeah. Or if they fill out the contact form on our website and just request the spreadsheet, my our office admin can get it sent over. Okay.
Carly Ries:
Oh, well, this has been so, so great. Thank you both so much.
Joe Rando:
I don't think anybody's had a more fun conversation about taxes, probably ever. Maybe maybe your podcast does this all the time, but in my mind, we've we've kind of scratched the surface.
Eric Broughton:
Yeah. Remember, don't necessarily take your education from DuckDuckGo or Google. Right. Please, if you're trying to do a strategy, reach out to someone that is educated in this and get their 2¢ on how to proceed forward.
Joe Rando:
Don't use TikTok either, please.
Melissa Broughton:
Don't use TikTok for your tax education. No.
Eric Broughton:
I kind of refer to it as the Google educated. Well, it says you could do this, and then I say, but who said that? Right. Yeah.
Joe Rando:
What's that saying, they couldn't put it on the Internet if it wasn't true?
Melissa Broughton:
Right. That's that sounds like something like 15 year olds.
Carly Ries:
Exactly. Who could post something on the Internet about this. Well, this has been great. This has been great. We so appreciate your time.
Carly Ries:
And listeners, we know you will find value in this as well. We so appreciate your time today too. As always, we love providing this information for you. So if you could leave that 5 star review, comment, subscribe to us on YouTube, whatever podcast platform you use, all of the above, we would so appreciate it because we'd love doing this. But until next time, have a great week, and we will see you next time on The Aspiring Solopreneur.
Carly Ries:
You may be going solo in business, but that doesn't mean you're alone. In fact, millions of people are in your shoes, running a one person business and figuring it out as they go. So why not connect with them and learn from each other's successes and failures? At Lifestarr, we're creating a one person business community where you can go to meet and get advice from other solopreneurs. Be sure to join in on the conversations at community.lifestarr.com.
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