Diane Gardner is a certified Tax Coach and CPA. With over 30 years of experience in both tax preparation and accounting, she has quite a few tips for Jason’s audience. She is the author of The Obamacare Survival Guide and Why Didn’t My CPA Tell Me That? Diane talks to Jason on how small business owners can avoid some serious tax mistakes and save on thousands of dollars.
Key Takeaways:
[2:20] What isn’t my CPA telling me?
[5:45] With the right company entity type, you might be able to write-off medical expenses through your business.
[7:50] CPAs often don’t look at how you maximize your vehicle deductions.
[10:25] There’s a difference between a tax preparation engagement versus tax planning.
[15:15] It’s never too late to talk to a CPA. You can end up saving much more money than doing it yourself.
[17:45] How can businesses survive Obamacare?
[22:00] Hire subcontractors or virtual assistants to cut down the number of employees in your business.
Mentioned In This Episode:
http://www.taxcoach4you.com/ma-journey-diane-interview/
Tweetables:
“Due to Obamacare, the medical deduction is now 10% off of your adjusted gross income.”
“It’s a crazy time to try and be in business and do all of this stuff.”
Transcript
Jason Hartman:
It’s my pleasure to welcome Diane Gardner to the show. She is a CPA who runs the tax coach for you website and she’s the author of several books including Stop Over Paying Your Taxes, Why Didn’t My CPA Tell Me That? The Ten Most Expensive Tax Mistakes That Could Cost You Thousands, and The Obamacare Survival Guide, and a lot of business are trying to survive under the pressure of Obama-ism. So, we’ll talk about those issues and more, talk about real estate, the most tax favored asset in America. Diane, welcome, how are you?
Diane Gardner:
Doing great, Jason. Thank you so much for having me on your show. It’s always an honor to be interviewed by you.
Jason:
I have a feeling I’m going to be depressed about this interview, not because you won’t be telling us good stuff, but because you will, Diane, what isn’t my CPA telling me??
Diane:
Unfortunately, Jason, there’s a whole lot that your CPA generally isn’t telling you and people are just shocked when they found out some of the stuff that they don’t even know to ask the questions, therefore they’re not getting the answers that they need. So, some of the biggest things that your CPA isn’t telling you are how to take advantage of tax strategies that can save you thousands of dollars in your business or out in your real estate investment type businesses and some of those strategies are simple as having the proper entity type.
So, often CPAs and other tax preparers, they just get kind of tunnel vision and they focus so much on preparing that tax return. They focus on getting all the right numbers in the right places and making sure that everything ties and they’ve got beautiful work papers that would stand up to an audit and all that type of stuff that they forget to have the conversation with their client about things that could possibly save them some tax.
Does this client have a home office? Are they marking every tax deduction that they can get by writing-off all their mileage or their home office deduction. Are they deducting the portion of their home that they’re using as an office space and talking that valuable tax deduction. A lot of people aren’t even aware they can do that. So, those are just a couple of the ones we see all the time when we’re looking at tax returns that are prepared by other accountants.
Jason:
I mean the home office deduction, isn’t that kind of basic. I mean, people have been talking about that one for 20 years. Is it really that big of a deal? Can you save that much with it?
Diane:
Well, where the biggest savings comes in when you have a home office conceivably every mile that you drive could potentially be tax deductible, because you’re leaving from your home, which is your office. The IRS has rules that say, your tax deduction mileage begins once you reach your office and head on out to call on a customer or client, whatever. Well, if your home is your office, you just expanded your mileage deduction and sometimes that’s quite a bit of money.
Jason:
Let’s talk about real estate if we could. You know, I like to say real estate is the most tax favored asset class in America or especially income property, of course, deprecation, it’s a non-cash write-off. It’s a phantom write-off, so we don’t have to write a check to get that deduction, which is great and the 1031 exchange rules and just the ability to have expenses and maybe even use a home office as a real estate investor, you know, if you’ve got a couple of properties and, you know, you get a regular day job, a corporate type job, can you take a home office deduction there, too?
Diane:
You potentially could, because as long as your home is a place where you do your administrative type work, then it could conceivably qualify for a home office deduction, which then allows you to write-off potentially part of your internet, maybe some of your other expenses to do with your websites and with advertising and all those other things that go along with running that type of a business, but a bigger deduction over and above that is, are you missing out on some of your medical expenses, because you maybe have a job in corporate America, your income is too high, and with the changes now due to the affordable care act or Obamacare where the medical deduction is now 10% off of your adjusted gross income gets subtracted from your medical expenses.
You might not be able to write-off your medical any longer. So, with the right entity type, you might be able to potentially write that medical expenses off through your business, especially if you don’t have any employees. It’s a pretty nice way to write-off your health insurance and out of pocket costs.
Jason:
Yeah, fantastic. So, maybe dive into the medical thing a little bit more. Can you drill down on that and give us maybe like an example of how it would work and what kind of savings we’re looking at there.
Diane:
Okay, good example, Jason, would be let’s say you’ve got kids and there are at the stage in life where you need to be looking at buying braces for them. Well, you may or may not have enough to write-off on just your normal itemized deductions, but if you have the correct entity type in your business, you could potentially put in a medical expense reimbursement plan if you have no other employers, because you’re just doing some real estate investing and stuff, then you can set it up so it’s very favorable for yourself and write-off 100% of all those out of pocket medical costs, which is a pretty nice tax deduction that a lot of other kinds of business can’t necessarily get.
Jason:
How does it work normally with the medical? I mean, I remember the number of like $7,000 per year or something like that.
Diane:
Well, normally you would take all of your medical expenses and you would subtract from them, it used to be 7.5% of your income, well now it’s 10% of your income, so somebody is earning a $100,000 dollars, they get to subtract $10,000 off of their medical expenses before they can begin deducting it on their itemized deductions or schedule A. Well, with a medical expense reimbursement plan, you could potentially write-off a 100% of your medical costs, your health insurance, your doctor’s visits, prescriptions, anything out of pocket that way, right through your business as a bonafide business deduction by filing the appropriate paperwork and having good record keeping system.
Jason:
Yeah, good, good. Okay. Anything else that our CPAs aren’t telling us?
Diane:
They are potentially not making sure that you’re maximizing your car, your auto and truck or your vehicle type expenses, because a lot of times they’re not taking the time to run out the numbers and determine if you would get a higher write-off by using that standard mileage or tracking actual expenses and deprecating the vehicle. Most of the time I see people just using the standard mileage rate and they’re cool with that, but in the triple A studies that are done every year or two, they have shown that the average cost of driving a vehicle far exceeds that amount that the IRS is willing to allow you to take and so most of us are actually losing money by using the standard mileage rate.
So, it’s usually in your benefit to go ahead and deprecate your vehicle and track all your actual costs, which includes your fuel, your oil, your insurance, your maintenance, tires, repairs, all that kind of stuff. It does mean some additional record keeping, but almost always it results in a larger deduction. So, most CPAs aren’t even thinking about let’s have that conversation about which one is going to give you the biggest deduction so that you’re maximizing.
Jason:
Diane, what kind of money are we talking about, though. It feels to me, you know, I guess for some people that adds up and it’s all relative to your income, but it feels like that’s a relatively minor amount of money, isn’t it or does it add up to something substantial?
Diane:
I’ve seen it add up to several thousand dollars worth of deduction for people that they weren’t even aware that they were missing.
Jason:
Right and so that’s the deduction amount and then you apply the tax bracket and that’s the actual in the pocket savings, right?
Diane:
Correct. So, let’s say that they’re at the 25% bracket for federal and they are in a state that’s maybe got 7-8%, let’s say 7%…
Jason:
Or by God if you’re in the socialist republic of California and you make over a million a year, you’ve got like over 13%, right?
Diane:
Right. Then it really starts making a difference just to take the time to run out that calculation and see which one is going to benefit you the most.
Jason:
Yeah, sure does. Okay, good, good. What else should people know? I want to talk about Obamacare too, but just anymore expensive mistakes, overpaying, you know, CPA not telling us stuff, and then let’s dive into some Obamacare stuff for a moment, because I got an interesting story for you that I think you and the listeners are going to like to hear about.
Diane:
I think that a lot of times people get confused about the difference between what is a tax preparation engagement entail versus tax rejections versus actual tax planning and I think they get bogged down in that and they think it’s all one in the same and i think that’s why the accounts of CPAs, the tax preparers out there, aren’t telling this stuff is because in a typical tax return engagement, you are engaged to take the client’s numbers, put those right numbers on the right forms and split out a tax return. Engagement has been completed, the tax return gets handed off.
They might mention something in passing, but they’re doing potentially hundreds of tax returns during tax season and they just don’t have the time to actually sit down and really work with the client in this way where proactive tax planning allows you to really sit down and take a look at this stuff, run some analysis, find out if the client is maximizing each of these deductions and then put together a plan so that you can make sure they aren’t overpaying their taxes just even if it’s a couple thousand dollars here and a couple thousand dollars there, pretty soon you’re up to between $5,000 and $10,000, $15,000 or $20,000 in savings each year because all these small little things can add up to a fairly sizable amount of money.
Jason:
Yeah, it really does become real money and you know, even $1,000, I mean, in the overall scheme of things, heck a $1,000 is a lot of money! So, it all matters and it all adds up, doesn’t it?
Diane:
It does and it’s really cool when I can setup something for people so that the government ends up buying something else for them whether it’s a down payment on another piece of property. I had a client a few years ago whose dream was to own his own commercial building instead of renting, so through his tax plan after three years of tax savings, he was able to put a down payment on a building and over the next five years through his tax savings, he will pay for that building, so when it’s all said and done, after a eight year time period, he’ll have a building sitting there, compliments of the IRS.
Jason:
Yeah, wow. That’s a pretty nice deal, no question about it. If someone has a job in, you know, a regular day job in the corporate world, I’ve long said that, of course, everyone should be investing in real estate, income property, as soon as you can afford to do it, I think you should do it, because it’s just the most historically proven asset class and the most tax favorite asset class, but I’ve also said for a long time, Diane, that everyone should have some kind of little business on the side. Just something that they can have as a little home base business and run some expenses through it that are expenses you’re probably going to have anyway. You know, you can allocate some of those expenses to your business. What are your thoughts on that, first of all?
Diane:
I think that’s an awesome idea and I have seen a real surge and increase in that since we went through the recession back in 2008/2009/2010/2011. People started to get very creative and you saw an awful lot of small businesses that you would never would have thought could be something that could turn into a business are now turning into viable small little businesses that they’re running on the side out of their homes. I think it’s a wonderful way to really just capsulate on all different tax deductions that they can potentially take while still making a little bit of side money.
Jason:
So, what is the rule about having a, you know, I’m not even going to call it a small business, I’m going to call it a micro business, just a little home based sort of moonlighting thing on the side type deal, but sometimes mostly for tax reasons, sometimes it might turn into something big and great, you know? You never know. A lot of businesses have been started that way, but what is the rule in terms of, you know, does it have to make money three out of five years, I’ve heard that rule, or can you have a business that just loses money forever and it’s a tax deduction or does the IRS say, hey wait, we’re not going to let you just write things off forever.
Diane:
Well, Jason, there’s really no hard fast rule that says you have to make money three out of five years or you have to make money after the first five years or any of that kind of stuff. Where the IRS gets a little concerned is when you continue to lose money year after year after year after year and it starts looking like a hobby and when hits that hobby stage, then you’re not allowed to deduct expenses that exceed your income, which means you never have a loss.
Jason:
Now, I would say though, you know, can you just make the claim that you’re modeling the government. I mean, the government loses money year after year and it never – they never make their books work, why should we have to, right?
Diane:
Right, I don’t now if that one would hold up in court, but boy, you could certainty go for it.
Jason:
Give it a try.
Diane:
That’s right.
Jason:
Good stuff. Well, Diane, is there any question that I didn’t ask you that you want to share with the listeners?
Diane:
I think the main, important thing that your listeners need to know is that it’s never too soon to hook up with a tax professional. I hear people all the time say, but I’m just really small little business. I should just do it myself on one of those do do-it-yourself type pieces of software and that, from my view point, is probably a big mistake, because when I see them a few years down the road, they have potentially missed out on all kinds of deductions from even as little as not realize they could deprecate something or even use section 179 if it’s applicable to not realizing about the need to keep a mileage log or just little things,because they tried doing it themselves versus engaging the services of a professional to help them navigate those waters and make sure they are taking advantage.
My husband and I own a few different pieces of rental properties and I really try to make sure that I take every deduction I possibly can that we write them off through one of our rental properties if I can’t write it off through my regular businesses, just because that’s smart investing and smart financing
Jason:
Yeah, I would agree with you and every rental property its own little business and then if you have a business-business, I’ll call it, I don’t know how to say that differently. You can likely find some place that can, you can allocate that expense to or at least part of that expense, can’t you? So, it just gives you more options.
Diane:
It really does. It opens up the door to a whole new world. My husband is always telling me, I didn’t realize we could write that off. It’s like, sure, all we have to do is XYZ and it’s making sure you’ve got a good paper trail and a good record keeping system. It’s probably the heart of most of it.
Jason:
So, you’re saying that our former Treasury, Treasury Secretary, right, Timothy, TurboTax, Geithner. Tim Geithner. You know, using TurboTax was not the thing, huh, for him even?
Diane:
Probably not.
Jason:
Those guys get away with everything, though. They are never held accountable, are they?
Diane:
Not like we are.
Jason:
Yeah, unfortunately. How fair is hat. Good, well, give out your website if you would, tell people where they could find out more.
Diane:
Right, okay, Jason. The best place they could go is www.TaxCoach4You.com. We’ve got some free books and free special reports of various things like that that they can pick up out there. They can also pick up copies of my books if they’re interested in finding out more about making sure they’re not overpaying their taxes.
Jason:
Good stuff. Obamacare. Let’s talk a little bit about that. What should businesses know to survive Obamacare? You have a book by that title.
Diane:
I do and probably the best news is if you’re a small business with 25 or fewer employees, you’re probably in pretty good shape, you don’t have to get involved with all the different requirements and stuff and in my part of the country that pretty well covers just about anybody that I have as a client, which has been a big sign of relief, because we were all pretty scared there for a while that little businesses with two or three employees were all of a sudden going to have to offer the full gamut of health insurance, which could potentially put them out of business.
Jason:
Yeah, so, I have a friend who is investing in real estate with my real estate investment company and then he has a couple of oil change places, like Jiffy Lube. They’re not Jiffy Lube, but those kinds of franchises, right, and I think they have three shops and they really like to expand, they’ve got the capital to do it, but they have 48 employees and he says that if he goes over 50 employees it’s a whole different world with Obamacare and there are just not, he and his bother own the business together and they are just not willing to do it. You know, we’ve seen the situation where companies are turning their whole labor force or, as much as they can of it, into part-time employees before 30 hours per week. What do you think about these things and just in general from maybe both sides. The general good from the economy and America and then what should the business owner do as well.
Diane:
Well, I’m going to go for the business owner side first, because I totally sympathize with your friend. I’ve got a fellow business owner here in town who owns a couple of McDonald’s franchises, same type of thing hit him, because under the Obamacare rules, they are all counted as one business, as opposed to single stand-alone businesses and so they are trying to stay underneath that magic number themselves so they don’t have to, you know, turn around and offer this whole gamut of stuff that they’ve never offered in the past.
So, it becomes very costly, which the bad thing about when a business has to encourage additional costs like that, they have no choice but to pass those costs on, which raises the price of everything and then we are right back where we were to begin with in that the business is back in the same spot they were. They are still struggling to try to keep their profit percentage of what it needs to be and offer everything that is required and it makes it very challenging on the business owner.
From the other side, I know a lot of people are real happy with the requirements and having the insurance. We had some really big surprises during tax season with people that went out on the marketplace and bought health insurance, especially those that were self-employed and tried to guess at what their net profit might be for the year and their net profit came in a little bit higher and they owned a ton of money where they had to repay that credit that they received from the marketplace during the year. So, this rule has some pretty significant repercussions on both sides, the business owner side and the individual person’s side.
Jason:
Yeah, it’s amazing. It’s so complicated all of this stuff and everybody, especially if you own a business, you just live in fear that you’re breaking some obscure law about which you don’t even know the law or understand the law and yet you are probably a criminal.
Diane:
Potentially, you bet. Yeah. There’s another little ruling that’s come up recently that a lot of businesses used to reimburse their employees. Maybe they had one employee or something. They would reimburse that employee for the cost of their health insurance or they’d just pay the insurance company just straight across, you know, the employee paid it for them and that is illegal after the end of June and it’s like, my goodness. These small businesses have a hard time just getting ahead and here they were doing that out of the goodness of their heart for their one or two or whatever, you know, small number of employees that they had and they can no longer do that.
Jason:
Yeah, wow, it’s a complicated world. So, what survival, I mean, you know, we kind of went around there, but what survival tips do you have for people, just sum that up for us, if you would, on the Obamacare side.
Diane:
Try to keep your employees down below the number, so you don’t have to provide everything that’s required under the law.
Jason:
Hey folks, you heard it right here, didn’t you? You heard it right here for a tax professional, don’t grow your business, don’t hire people, don’t stimulate the economy. Okay, good.
Diane:
Actually, see if you can delegate some things out through the world of subcontractors, whether you pick up some virtual assistants, do some things like that where there’s no doubt about it there are definitely an independent contractor and try to help, you know, that with the number of employees that you have to actually have hired. I know a lot of people are kind of learning about the whole virtual assistant world that they never even thought of before, because that can cut down on a number, a couple of employees and stuff for them.
So, just being aware of the rules, being aware of the law. You know, it has been out there for a couple of years now, but every time we turn around, it seems like there’s just another new surprise as this law and ruling unfolds and they kind of get familiar with what it really said. There was a lot of hidden stuff in it.
Jason:
I mean, the bill itself was what, 2,700 pages. Nancy Pelosi famously said we have to pass the bill to see what’s in it. I mean, you couldn’t make this stuff up, it’s unbelievable, but then when you actually turn it into law and you legislate and you start making all the regulations to turn that bill into a whole set of laws, it’s literally thousands and thousands and thousands of pages of regulations, isn’t it?
Diane:
It is and I think the further along we go in it, the more we’re going to see of just really unexpected bizarre stuff that none of us would ever dreamed was going to be included in that law.
Jason:
Wow. It’s something else. It’s a crazy time to try and be in business and do all of this stuff, but Diane, thank you for clarifying at least a little bit of it for us. It’s so complex. Your website again, TaxCoach4You.com and thank you so much for joining us today.
Diane:
You’re welcome, thank you so much for having me. This was a lot of fun.
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