How To Write-Off General Business Expenses

Jeff: Jeff Webb, CPA.

Troy: Say all the stuff. Jeff Webb, CPA, what else?

Jeff: Vice-President of Professional Services. I help out the tax department and the bookkeeping department as much as I can, but I primarily oversee the tax advising department right now.

Troy: Jeff was my boss for a long time here at Anderson for six years or something like that, Jeff?

Jeff: Yup.

Troy: Today, like I said, it’s a special bookkeeping edition of Tax Tuesday, so we’re going to be answering some bookkeeping-related questions.

As always, I want to remind everyone of our ground rules. Make sure to make use of the Q&A feature if you have any questions. If you have any questions that don’t get answered today, you can always email them over to taxtuesday@andersonadvisors.com. If you do need a detailed response, you will need to become a platinum or tax client. As always, this is fun, fast, and educational. We want to help give back and educate.

Let’s start out with our usual way. Tell us in the chat where everybody’s from. North Carolina, Texas, Washington. Bay Area, Iowa, San Diego. That’s where I’m from originally. Wellington, Colorado, Atlanta, California, Connecticut, Beverly, Massachusetts, Seattle. Awesome, we got people all over.

Jeff: I don’t understand why it took so long for her to type out Beverly, Massachusetts.

Troy: Yeah, that’s a lot of letters. I can’t spell it.

Jeff: If you have questions about your own situation, please ask those in the question and answer, not in the chat. They will give you a personalized answer to the best of their ability for the information they have. As you can see, there are already some questions in that question and answer. We typically get quite a few.

Troy: Usually, north of 200. We’re busy in that Q&A section. Today, we have some bookkeeping managers and supervisors joining us to answer those questions you guys have, as well as some tax advisers and at least one lawyer, so we’re in good hands.

Now that we’ve gone through the intro, let’s go through some opening questions. These are the big questions that we’re going to come back and answer.

The first one is “How do you write-off classes or courses, cars, equipment, or anything in general? What is the process? What do you keep? How do you show your proof of funds spent?”

“What’s the best way to get payroll started? I want to start with hiring a couple of part time employees.”

“Can I deduct expenses for working from home, and what forms can I use?”

“What’s the best way to record startup expenses incurred on your private accounts?” There’s a lot to read there, so we’ll go on to the next one.

“Which bookkeeping app would you recommend for four units or less landlords to make our tax preparation easier for all of us?”

“Can we discuss how our bookkeeping service works?” I can do that pretty well. “We’re drowning in Excel and Quicken.”

“What are common expense categories I should use?”

“Can I discuss some big picture strategies to help with bookkeeping automation/AI?”

“We have a physician set up their PLLC in New York State. Do I need to set up payroll, give myself W2? How much do they pay themselves to avoid an IRS audit? What’s the bookkeeping needed? How do I take the remaining money out as a distribution?” That’s seven questions in one. They’re getting their money’s worth out of that one.

Jeff: Absolutely, it’s a value question.

Troy: “They’ve attempted to do their own bookkeeping, what are the minimum requirements to do so and suggested curiosity of tasking?” That’s a good word, curiosity.

Jeff: I don’t think I’ve ever used that one.

Troy: It’s good. “If our business is still paying off business debt from previous tax years, how do we account for that as far as bookkeeping and reporting?”

Those are the questions we’re going to hit today. Like I said, we’re going to have a bunch of people working in the Q&A if you guys have anything that should pop up.

Before we get into it, go check out Toby’s YouTube. There are a lot of good videos, a lot of good knowledge. There’s a video with a very good-looking bookkeeping manager talking about bookkeeping. You guys should all go check that one out for sure. Also Tax Tuesday, the replays can be found there.

Jeff: I think they break those down by question.

Troy: I think so. We should probably know this.

Jeff: Because sometimes me and Toby go way off.

Troy: You guys talk a lot. All right, so you guys can subscribe and go to aba.link/youtube and sign up for those.

Jeff: Toby has his. He does a lot of tax. Clint has his, more focused on structuring and asset protection.

Troy: They’re both brilliant, but Toby specializes more in tax and Clint on asset protection. You’re in good hands either way, though.

All right, now we’re going to get into it. Here we go. “How do you write-off classes, courses, cars, equipment, or anything in general? What is the process? What do you keep? How do you show proof of funds spent?” I read this as, how do you do bookkeeping? It’s pretty general, right?

Jeff: When you talk about writing off stuff, it will be stuff spent on the business. Is that fair to say?

Troy: Yup.

Jeff: All of these get treated differently. The three that you mentioned, classes, you may be able to put on your books but may not be deductible.

Troy: Correct. Depending on the entity structure that you have, it might not be deductible at all. But you still might want to put that on your books as this is a business expense, but it’s not tax deductible.

Jeff: I will tell you if you’ve got substantial amounts for classes, education, and you just have a disregarded LLC like one of our affiliates used to generate tons of class expenses, you may want to consider having a corporation to manage your disregarded LLC.

Troy: Specifically a C-corporation. In a C-corp, you’re allowed to take education for new lines of business. Other entity types, you’re only allowed to deduct education for business that’s already doing. If I want to learn how to flip houses, I’m not able to deduct that on a Schedule C, LLC, or something like that.

Anyway, bookkeeping. What is it? Why is it important? You need to have a system of keeping track of your income and expenses. That’s what bookkeeping is. It can be as simple as an Excel sheet, keeping track of all the transactions that happen. It can be as complex as accounting software that costs thousands and thousands of dollars.

Really, it depends on the level of activity that you have and how much business you’re actually doing, because if you have 10 transactions, you can probably get away with just using an Excel sheet or something like that.

Jeff: We’re going to talk about accounting system, bookkeeping systems a little later. I just want your thoughts now on this. QuickBooks Online or my preference, QuickBooks Desktop for my personal use, do you feel like it’s something that most people can learn how to use?

Troy: It’s pretty user-friendly. If you run into any problems with it, you’re not the first person to run into that issue. There are thousands of forum posts, videos, all sorts of stuff that can help you fix whatever that problem is that you’re having.

Jeff: I felt the same way. The problem then becomes not the software, but what you know about accounting.

Troy: Right. It has a lot of tools and features to make it as easy to use and user-friendly as possible, but you can always mess it up. The good thing about having accounting software is that if you do make a mistake, it’s easily corrected as well. It’s just as easy to fix as it is to mess up.

Jeff: Let’s say I’m a client, and I know enough about accounting to get myself in trouble. I have QBO when I’m working with the bookkeeping department. What’s that look like? I know we’re getting off.

Troy: Sure. We will talk more about the services we offer. But if you’re doing the books yourself, and you want us to come in and take a look to make sure you’re doing everything properly, we do have a service. We call that a bookkeeping checkup. We’ll give you like, here’s the corrections you need to make to make sure that your books are in order, you’re doing the right thing.

Jeff: Bookkeeping in this case acts as a backstop.

Troy: Correct. What do you keep? I would definitely recommend keeping all bank statements, credit card statements, property management statements. Anything like that, you need to keep for a minimum of three years.

I’d probably recommend seven, but a minimum of three years’ receipts. I would recommend everyone to do digital receipts rather than keeping paper copies. That thermal paper goes to caca real quick. So definitely keep digital receipts.

How do you show proof of funds spent? You have to make sure that things are going in and out of the bank account. You don’t want to just use your personal funds on behalf of your business. You want to make sure that you’re using your business’s bank account. If you have reimbursements, actually reimburse those reimbursements. Don’t just submit to your entity and just let them go into the ether.

Jeff: The IRS requires that all business clients keep books and records. Your books are your financial statements that your accounting software produces, and your records are going to be all those receipts, all the things that Troy just mentioned. You may never ever look at it again, but you don’t want to fall into the case of getting audited and not having it when you know that it was perfectly reasonable to deduct.

Troy: Right. You can’t deduct what you can’t document. That’s important. To be able to document all of your deductions, make sure that they’re reasonable, ordinary, common, and necessary—CORN.

We’ll talk more about the services we offer in the bookkeeping department a little bit. Anything else we want to add on to that one, Jeff?

Jeff: No, I think I’ve killed that one.

Troy: Cool. All right.

Jeff: I’ve beaten it like a dead horse.

Troy: We’re off to a good start. They’ve made a terrible mistake, guys. They have given me access to Toby’s soundboard machine, so I believe we deserve some applause for that.

All right, next one. “Best way to get payroll started. I want to start with hiring a couple of part-time employees.” Payroll is important. It’s important. Depending on your entity structure, it may be required. If you have an S-corp, you are required to have payroll if you’re profitable on taking distributions.

Jeff: And are profitable.

Troy: Yes, good point. I highly recommend using a third-party for payroll. I don’t recommend that you do it yourself, unless you have a full-time dedicated bookkeeper that this is their job. Don’t try and do it yourself.

Jeff: Folks, payroll is very easy to screw up.

Troy: And costly if you screw it up. There are lots of services out there. They all do a good job, but the ones I like working with the most are ADP. I think they’re the best at providing the reports and breaking it down in a usable way for tax and bookkeeping. In my experience—this is just Troy talking, I’m not speaking on behalf of Anderson—I haven’t seen where ADP has messed up a whole lot, where I’ve worked with other payroll providers that have made mistakes before.

Gusto is another good one. It’s a newer one, and it’s cheaper than ADP. That’s a good one. QuickBooks offers payroll as well. That’s a little more hands-on, but it guides you well enough that you can do it without screwing it up, I feel like. Those are the three I would definitely recommend. Outside of that, there are lots of other services. Find one that works for you, find one that’s within your price point.

Jeff: Question for you with Gusto, even Paychex, or the QBO I heard you say was very hands-on. When I got my ADP account, they set up all my accounts with a state, workers comp, insurance. I took care of all that. Are you seeing similar things? Or are there going to be some things that you have to do personally?

Troy: With a lot of services, you’re going to have to do it yourself. They’re going to give you a sheet of this is how you do it, but you’re going to do it yourself. It’s not rocket science, but it’s nice to have someone who does this all day every day being the one to do it for you.

Jeff: My payroll was always with ADP, very easy to run. It’s not exactly cheap, but it was super convenient for me. And that’s why I liked it.

Troy: Yup. Gusto is a little cheaper. It does a good job. Intuit, QuickBooks are pretty good as well. But yeah, ADP is what I think is the gold standard when it comes to payroll.

Next question, “Can I deduct expenses from working at home, and what forms can I use?” It depends.

Jeff: I wanted to say that.

Troy: It depends, that’s the classic Tax Tuesday answer. It depends. What we recommend, typically, is that if you have an entity such as a corporation or even a partnership, you do administrative home reimbursement, correct, Jeff?

Jeff: Yes, especially if you’re an S-corporation.

Troy: Agreed. You can do it if you have an LLC that’s disregarded to you, if you have a Schedule C. Can you do it on Schedule E?

Jeff: I don’t recommend it on Schedule E.

Troy: Right, and we don’t recommend doing it on a 1040 hardly ever, because it’s one of those audit red flags, correct?

Jeff: On Schedule C, you do what’s called form 8829, home office expenses. When Troy’s talking about the administrative expense and the home office expense, you actually do them identical to each other.

Troy: For calculating purposes, but it’s slightly different as you’re going to have your business reimburse you for those costs rather than deducting it straight on your tax return. That’s what we usually recommend. If you can do it, do it that way rather than doing it as an expense on your 1040.

Jeff: Now, Sallie Mae, an Anderson employee, is working from home, and she’s generating home expenses. What can she deduct?

Troy: If she’s just a W-2 employee, nothing, not a thing. You have to be in business to be able to deduct it at all.

Jeff: That goes back to why we say if you’re an S-corporation or even a C-corporation, you want to make sure those entities are reimbursing.

Troy: Correct. It’s key that you reimburse. You don’t want to just accrue those expenses and have them set on loan from shareholder or capital contribution. You want to see those funds actually come out from your bank. Submit a reimbursement sheet to your business, have them reimburse, cut a check. If you don’t have the funds in your business to do it, what you can do is actually loan your business funds to them, in turn, pay yourself back.

Jeff: In the past, we had a little different position. But in today’s atmosphere or environment, you really want to see a check being written from that entity back to you.

Troy: Correct. You want to see it coming out of the bank account before we deduct it on your tax return. Cool. Good enough.

All right. Next one, “What is the best way to record startup expenses incurred on your private accounts while in the process of forming official entities in order to keep it from piercing the corporate shield or similar? For instance, cost of registered agents, filing fees, joining Anderson platinum, et cetera. Do those get written off as capital contributions or? How should we be tracking and recording bookkeeping/taxes and liabilities?”

Jeff: It sounds like we’re talking about startup expenses and organizational expenses.

Troy: Right. Startup costs, organizational costs are actually intangible assets, and those intangible assets get amortized. You’re going to take it over time, you’re not going to take it all at once. It’s an asset in the books.

But there’s also a way to accelerate some of that. If you have startup costs and organizational costs of less than $50,000, you’re able to take $5000 in the first year as an expense on your tax return. Am I so far, so good?

Jeff: Yup.

Troy: Where it gets complicated is if you have more than $50,000 of startup costs. That $5000 gets deducted dollar for dollar until you get to $55,000.

Jeff: Yeah, it phases out very quickly. From a bookkeeping point of view, I’ve got $10,000 of startup expenses. How do I get that in the books?

Troy: You want to submit those to your corporation and say, these are my startup costs. You can do it in one of two ways, and it really depends on your entity structure. If you’re a C-corporation, you’re probably going to treat that as a loan from shareholders. The corporation owes me this money, and I can be paid back for it. Then when you get paid back, it’s not income to you. It’s just a repayment of a loan. It’s not a dividend like it would be on a C-corp.

For S-corp, I’m okay with it being a capital contribution rather than a loan, because you’re able to take distributions from an S-corp freely where you’re not with a C-corp. You can in theory have a startup and/or cost on a partnership, or cost for sure. Startup cost is easily done. In the same theory, I would do capital contribution there.

Jeff: I’m going to talk just a second about startup costs on the partnership. Even the S-corporation and the 1040 of (say) Schedule C in the past are by far our largest startup expenses were education. You can’t deduct that kind of education on a 1040, which means you can’t deduct it if it’s coming from a partnership, Schedule C, or an S-corporation.

That’s the case where if you’ve got a lot of startup costs, you probably want that C-corporation who can deduct it, because they considered a working condition fringe benefit to pay you for your education, to do your job. All the other entities treat it as you’re into a new line of work, and that kills the deductibility of that.

Troy: Agreed. Like I was saying, it is an intangible asset. It takes over 15 years. You don’t get to deduct the entire amount if it’s more than $5000. But you can do work costs and startup costs, so they both have that same…

Jeff: What’s the difference between them?

Troy: Startup costs is a cost that I incurred in starting my business. It could be a number of different things. It could be like Jeff said, education, it could be travel costs, it could be I don’t know. What else, Jeff?

Jeff: Research.

Troy: Yeah, research, office expenses. It could be a lot of different things. Organizational costs are very specific. They’re the costs that you incur to organize your business. If you paid someone $1500 to set up an LLC for you, that is an organizational cost.

Jeff: I’m sure a lot of you are familiar with IPOs (initial public offerings). When a company does an IPO, they tend to have humongous organizational costs, the things that they need to get them to be a publicly-traded organization. Troy is exactly right. Things like franchise fees and all, I almost want to put that off as a separate asset.

Troy: Agreed. I 100% agree with that. Anything else you want to add on to that one? I think we got it right.

Jeff: I think so.

Troy: How should they be tracked and recorded? Like I said, they’re going to be an intangible asset. It’s going to show up on your depreciation report on your tax return, and it’s going to amortize over time. That would be the only other thing I’d want to add there.

All right, next question. “Which bookkeeping app would you recommend for four units or less landlords to make our tax preparation easier for all of us?” QuickBooks is always good. I like QuickBooks Online. Jeff’s old, so he likes QuickBooks Desktop.

Jeff: I don’t like changing.

Troy: I was the same way for a long time, but they’ve really done a lot with QBO to make it user-friendly. There’s a lot of integration with apps. That’s great. QBO is always good. There’s a new up and coming software called Stessa. It’s assets spelled backwards.

Jeff: I didn’t know that.

Troy: I didn’t either until recently. I was like, woah, that’s an awesome name. How did no one come up with this earlier? But yes, Stessa is a good one. That’s specifically for real estate investors. We’re doing a lot of research into that right now. What’s another one, Jeff? There’s Sage, but that’s a little more complex.

Jeff: Sage actually has a bunch of different products, MAS 90 and MAS 500.

Troy: Right. I’m missing what was called a Peachtree. That was my jam.

Jeff: Was that a Sage product?

Troy: Yeah. I wouldn’t recommend that one per se if you don’t know exactly what you’re doing bookkeeping-wise. What are some other ones? ZipBooks is a good one. ZipBooks is free up to a certain level, so that’s cool. What I wouldn’t recommend is Quicken.

Jeff: Somebody actually mentioned Quicken.

Troy: Yeah, we’re going to talk about that in a little bit. We’ll get on that, but Quicken is not great for businesses.

Jeff: Quicken was never designed to be business software. It was designed to track your personal expenses. It does one-sided accounting, which every accountant will tell you they absolutely hate.

What about QuickBooks, if I may? I like QuickBooks Desktop. However, if you are a bookkeeping client, having QuickBooks Online will make your life and your bookkeepers’ life so much easier.

Troy: Yeah, and you said to touch on that, and I appreciate you bringing that up, Jeff. If you’re using QuickBooks Online, me as your bookkeeper and you as my client, we can look at the same thing at the exact same time. We don’t have to send files back and forth, and that incurs the risk of the wrong file being sent.

Jeff: The account’s copy is the nightmare of Desktop.

Troy: Correct. I made adjustments in that, and it was the wrong one, so now we got to make all those adjustments over again. It can be a nightmare. Also, if you’re using us for bookkeeping, we’re going to be able to do your books quicker if it’s in QBO versus Desktop, because on Desktop, we have to remote into a server using a VPN. It’s a lot of time. When there are 60 people trying to get into the VPN at once, slow as molasses.

Jeff: What is too small for QuickBooks? I think nothing is. It just becomes a matter of the price you’re willing to pay for it.

Troy: Correct. There are lots of different versions of QuickBooks Online. There’s Simple Start, there’s Essentials, there’s Plus, there’s Advanced. Simple start is not, I wouldn’t recommend that for most people. It has its place. If you have multiple properties, it’s not for you.

Essentials does an okay job. When we’re really cooking with gas is when we get into that Plus, because that enables classes. Classes allow you to have your financials broken out by LLC or by property, and that makes everyone’s life easier having it done that way.

Jeff: And that’s a great point. You don’t want to set up four different sets of books for your properties. It just can be nightmarish. But you can do exactly what Troy said, have classified financial statements that you can see what it looks like as a whole, but you can also see what each property or each LLC looks like.

Troy: Exactly. That can be really useful. But on that same note, what you never ever want to do is combine multiple tax returns into one set of books.

Jeff: Yeah, please don’t do that.

Troy: It’s the worst, don’t do it.

Jeff: You may get to a point if you’re doing really well, especially if you’re a manufacturer, a retailer, or something like that, where you need something more than QuickBooks. Tracking inventory, purchase order, or stuff like that.

QuickBooks does make an enterprise product. I’m not really thrilled with it. It’s a little hard to work with, but that may be when you start looking at others like SAP, Great Plains, or a whole bunch of different ones that are higher level. Don’t do that unawares, because those higher end, usually ERP programs, take a lot of work to get ready to use.

Troy: Getting it set up is the hard part. Once you get it set up, it’s pretty easy to keep it rolling, but it’s a lot of work to get there.

Jeff: Once you get it set up wrong, it’s a nightmare effect.

Troy: That’s a good point, too.

All right, next one. “Please discuss how your bookkeeping service works. We are drowning in Excel files and Quicken.” All right, I’m going to put on my salesman hat now.

We have several different services we offer here at Anderson. The flagship one is called full service bookkeeping, and that’s where we’re going to do your books on a monthly basis. We’re going to reconcile everything. We’re going to make sure your credit cards are good to go. We’re going to make sure you’re taking advantage of the things you should be taking advantage of. That’s our flagship.

We do use QuickBooks, like Jeff was mentioning. We prefer QuickBooks Online, but we can work in Desktop. With that, you get a monthly profit and loss balance sheet and general ledger to show this is how I did each month, and so on and so forth. We work hand in hand with our tax team, which I believe we’re going to cover in a later question. That’s the main one, full service bookkeeping.

We also offer bookkeeping checkups for those who are doing the books themselves or have a bookkeeper already. We are very, very, very good at real estate bookkeeping.

It’s a niche. Not everyone is good at real estate bookkeeping. They might be a great bookkeeper, but don’t have the experience specific to real estate. That’s why you might want to bring us in to review their work to make sure everything is being done correctly. For instance, HUD statements, very hard to record, very easy to screw up. If you don’t have experience recording that, it can get messy real quick.

What else do we have? We have our virtual bookkeeping video series. That is where I will teach you the basics of QuickBooks, and we’re going to give you some templates to use, some Excel templates. That also comes with a credit towards Full Service Bookkeeping. If you ever decide like, oh, I don’t want to do this anymore, that’s another one.

What else we got? Chart of account setup. Chart of accounts is the lifeblood of your bookkeeping. Everything is based on that chart of accounts. Having it set up correctly, the first time goes a long way. We can customize those charts of accounts for you.

Seasonally, we offer Q&A sessions and training sessions as well, but it’s only during non-peak time, so not right now. Probably in a month or so, we’ll offer those. We’ll go until March or so, and then we’ll close it down again.

Jeff: Does your department offer any training services?

Troy: Like I said, on non-peak times. But we also offer our office hours, which we do on a weekly basis. That’s a great place to go if you ever have any questions. We also offer platinum questions. We answer bookkeeping-related platinum questions as well. But office hours is a really good source.

Jeff: And bookkeeping office hours is Thursday.

Troy: It’s currently Thursdays at 3:00 PM Pacific time.

Jeff: That’s a little late. We used to do tax office hours at 4:00 PM.

Troy: Man, that’s a rough way to end the day.

Jeff: Dinner and taxes. No thanks.

Troy: We might be changing up the times here soon, but currently it’s Thursdays at 3:00.

Next one. “Bookkeeping, what common expense categories should I use?” It depends on what your business does.

Jeff: Absolutely.

Troy: There are lots and lots of templates of charts of accounts out there that can give you a good baseline. For our Platinum members, we offer some generalized templates that you can use as a base, but you should always have your bank accounts listed out, and those should always be separate. I recommend putting the last four digits of the bank account on there. Same with credit cards, you’re going to want to list those out separately.

It really depends on what you’re doing expenses-wise, but you’ll need income for sure. No matter what business you’re in, you’ll need some way to track your income, what type of income may differentiate. You’ll always need legal and professional office expense, supplies. There are so many.

Jeff: The mountain of expenses is so big, I don’t know where to start. Let me ask you this. I’m the person who asked this question—I’m not. Is this where the chart of accounts service is?

Troy: Correct. Like I said, chart of account setup. We will customize your chart of accounts for your business, and that will give you the baseline for all your other bookkeeping needs.

Jeff: Let’s say I’m also the guy who asked about it. I have four rental properties. Are you asking me that and then setting up that chart of accounts for four entities?

Troy: Correct.

Jeff: I would buy it.

Troy: Yeah, it’s a pretty good service. I would recommend that one if you’re just getting started out.

Jeff: And it’s a one time expense.

Troy: Correct. Once you have it, you have it. That’s it. Anything else want to add on to that one?

Jeff: Actually, I do. There’s something I was thinking about that fits in nicely here. If I’m a bookkeeping client, I’m doing my own books, I put this expense in January into this category, and then next month, I put it into a different category, and the next month, I put it in a different one, don’t do that.

Troy: If you’re going to be wrong, be consistently wrong. The key to all bookkeeping is being consistent.

Jeff: Yeah, they really don’t want to go fishing for all your gas and electric bills that may be in 12 different expense accounts.

Troy: If you have a general ledger that’s hundreds of pages long, the odds of something getting missed are very high, so be consistent with everything you do in relation to bookkeeping.

Next, we’re going to plug our Tax and Asset Protection Workshop.

Jeff: Yes, sir.

Troy: Patty is going to put that link into chat. Everyone should definitely take advantage of the Tax and Asset Protection Workshop. We have a live event coming up in December. It’s pretty good. It’s going to be in Vegas again, so it’s a good time. We just had one a couple of months ago.

Jeff: September 16th.

Troy: Yeah, it was the day after the deadline. It’s a good time, you’ll learn a lot. I’ve done it a bunch of times. I spoke at the four-day event, and I learned something new every time I go.

Jeff: We do have these other three online events. But from my point of view, there’s something to be said for being there live.

Troy: Correct. If you’re anything like me, I pay a lot more attention to someone speaking to me. I’m very easily distracted if I’m just watching on a computer screen. Don’t get any ideas, people out there watching now. You need to pay attention to what we’re trying to say.

Jeff: Yeah, I’m that guy who’s working on this over here, and I’m like…

Troy: Right. My phone just went off. What’s going on over there? Very easily distracted. Where if you go somewhere and devote your full energy to it, you’re going to get a lot more out of it.

Jeff: These are very good. I also want to promote something else that’s not part of this. SIW (Structure Implementation Workshop).

Troy: It’s now a series, Structural Implementation Series (SIS).

Jeff: I think the proper thing to do is do this. Do the series. A lot of good information, because we used to have a lot of questions. I have this structure, and I don’t know what to do with it.

Troy: Correct. Tax and Asset Protection Workshop teaches you the strategies, and then the Structure Implementation Series shows you how to put it into effect, basically. Is that fair?

Jeff: Yup.

Troy: Cool.

Jeff: I believe you can find those on the main page of our Anderson Business page.

Troy: Agreed. If you go to the events page, they’re definitely there. Patty confirmed that they are there.

All right, next question. “Can you please discuss some big picture strategies to help with bookkeeping automation/AI we should be considering?” There’s a big question.

Jeff: I got zilch on those.

Troy: Okay, I got you. There are lots and lots of different services out there that will automate your bookkeeping. However, as a bookkeeper, I think there’s something to be said about having someone to overlook your transactions. It doesn’t mean we should shun the AI. That’s going to end poorly. That’s how we get Skynet and all that, so we want to avoid that.

There are things just within QuickBooks to make your life easier using automation. There’s something called bank feeds, where it will pull each and every transaction from your bank account directly.

Jeff: That was the only thing I have, and you took it.

Troy: Right, I’m sorry, Jeff.

Jeff: Okay.

Troy: It will pull each transaction, and then you can set up rules. If it’s a transaction from Carl’s Jr, it’s always going to go to meals. If it’s a transaction from Home Depot, it’s always going to go to tools. You can automate it that way.

There are some outside automated services that will do your books for you. They’re expensive. That’s something to think about. But if you’re having a ton of transactions, and you feel comfortable with that, you can absolutely look into those. I’ve done a lot of research. Right now, it doesn’t make business-wise for me, anyway. But for some people out there, it might be great.

Jeff: I’ll use retail manufacturing, where you’re having hundreds of merchant fees. It might make more sense, but I’ll check with Troy on this. I still feel whether using bank automation, it’s not really an AI thing.

Troy: Right.

Jeff: Or you’re using something more sophisticated, you still need to go in and look at your books.

Troy: Correct. If you have a bookkeeper, someone needs to be reviewing this. Even with those automations, it’s not always 100% correct.

Jeff: What’s it called, trust but verify?

Troy: Correct. That’s what you should always do if you have someone else doing your books. They’re doing what they’re supposed to be doing, but always verify that they are as well.

Jeff: If you don’t trust them, stop paying them money.

Troy: Correct. All right, next question. “I’m a physician in a single specialty private practice under an LLP. I have set up my personal PLLC in New York State. Do I need to set a payroll, give myself a W-2? How much should I pay myself to avoid an IRS audit? What type of bookkeeping is needed? How do I take the remainder of the money out as a distribution?”

Jeff: If you’re in an LLP (limited liability partnership), you can’t pay yourself. You are going to get taxed on everything that the LLP makes, you and whoever your partners are. It’s already being taxed. Let’s say I make a million dollars in my LLP, and I split with another partner. I have $500,000 that’s already being taxed. So if I want to take money out, I just take the money out.

Troy: Just take the money, you’re free to do that. Now, if you had a professional service corporation, then you would want to do payroll. The IRS requirement is that it’s a reasonable salary. The hell does reasonable mean, Jeff?

Jeff: Reasonable typically means what you would pay somebody else to do what you’re doing in that position.

Troy: Right. What we usually recommend is you do some searching on Glassdoor and Indeed, or find a job ad, or find research that shows this is what someone doing the exact same thing I do for the exact same amount of time would make. And that is what you should pay yourself. Is that fair?

Jeff: Yup. He talks about PLLC. That’s going to come down to how that PLLC is being taxed. I think I’ve seen it more often taxed as a corporation.

Troy: Usually, I’m going to see that as a corp. Very rarely are we going to see that disregarded.

Jeff: I think California is one that requires a PLLC for medical practitioners. That’s another thing. Bookkeeping is not going to be able to help you with this. Tax is not going to be able to help you with this. If you’re a doctor or any medical professional, you need to do the research on what type of entity you can have.

We saw a while back—I hate doing these kinds of stories—where a group of doctors got together, formed their own hospital, and within a year got shut down by the state because they said, doctors can’t own the hospital in a specific state. I’m always very cautious with professionals and how they structure their entities.

Troy: Yeah, it’s very important that it’s done correctly. There’s a lot that goes into it. Not the kind of answer we can usually give on a Tax Tuesday, but I just wanted to touch on that payroll portion. It’s a reasonable salary. What reasonable is depends on what you’re doing within the business. How can you take the remainder out as a distribution? You can do that if you’re paying yourself a reasonable salary, right?

Jeff: Correct. However, you may not want to take distributions, or they would be dividends, if that PLLC is a C-corporation. I probably prefer to take it out as salary.

Troy: Right. If you’re in a C-corp, you’re not necessarily required to have a salary at that point either, though, right?

Jeff: Correct. C-corporations, you’re never required to have a salary.

Troy: All right. “If you attempted to do your own bookkeeping, what are the minimum requirements to do so and suggested curiosity of tasking?” I forgot our favorite word, Jeff.

Okay, let’s start with how often I should do the bookkeeping. It depends on how much activity you have. If you have a ton of activity, and a week’s worth of transactions takes you four hours to do, then you probably shouldn’t wait a whole lot of time to do your bookkeeping. At the minimum, I would recommend doing your books quarterly. No matter how little transactions you have, doing it quarterly keeps it at least a little bit fresh in your mind.

I don’t know if your guys’ families are anything like my family, where if you buy something off of Amazon and asked me a year later what I spent $75 on to Amazon, no shot, I have no idea. But if I’m doing my books on a quarterly basis, I’ll at least have an inkling of what it is. And I’m not going to have to go back through a year’s worth of records to find out what it is.

Jeff: When I was doing mine, I was doing it monthly, partly for the very reason you said. I don’t want to get six months down the road and say, what the heck is that for? Partly because I was having to report revenues to other people. Now, I’m shutting down my entity, so I don’t have as many transactions. I haven’t done my books in quite a while. But my fear, honest to goodness, is I’m going to get bitten in the butt by exactly what Troy said.

Troy: Yeah, memories fade, especially when you’re Jeff’s age. Having good books makes it so you don’t have to have a good memory. Again, I would say monthly or quarterly is the way to go. Don’t be that client that sends all your stuff in the week before the deadline. It’s like, oh, let’s figure it out. No one wants that.

Jeff: Let’s think about real estate, and we’ll go back to the for-property guy or gal. If I’m keeping my books monthly, I can quickly look at that month and say, okay, I got taxes this month, interest payments. It’s much easier to look and see if things look right.

Troy: Right. For instance, let’s say one month your water bill jumps $700. You’re not going to know that, unless you’re looking at your books, looking at your bills, and that kind of stuff. It’s important to have bookkeeping and to have up-to-date records.

Jeff: Or your electric bill jumped significantly and I’m going to think of any money, particularly in the energy.

Troy: Right, that would never happen. All right. Let’s go on to the next one. “If our business is still paying off business debt from the previous tax year, how do we account for that as far as bookkeeping and reporting?

For example, business makes monthly payments to pay down a loan and credit card, does that still go under current expenses each month? Business is a corp.” This one’s pretty easy, I feel like. If you take out a loan, and you’re making payments against that loan, those loan payments aren’t expenses, except for the interest on that loan.

Jeff: Let’s get a little more basic. Troy takes out a loan. The moment he does that, he’s going to do an entry into his QuickBooks that says, you have this $100,000 loan.

Troy: Yeah, $100,000 loan that’s going to be a liability on my books.

Jeff: It’s going to be a liability, debt to Wells Fargo or Bank of America, whoever.

Troy: And then the other side of that is going to be a bank of the cash coming in, right?

Jeff: Correct.

Troy: I’ll have a $100,000 increase on my bank account, and then $100,000 increase on my liability. It’s double entry accounting.

Jeff: Now you’re required to make a payment on that debt.

Troy: Let’s say I make a payment of $1000 and $100 of it is interest. So $900 of it is going to go towards the principal. It’s going to reduce my liability by $900, but that $100 interest expense of my $1000 payment is going to be an expense, and I’m going to be able to deduct that interest expense.

Jeff: How are you knowing how much interest and how much principle it is?

Troy: That’s going to be broken down on your statement, so it should be. If you don’t have that, then you should have an amortization table that shows you these are the number of payments I’m going to make over the specified period of time at a specified interest rate. There are lots and lots of things out there that will create an amortization table if you don’t have one. If you have one already, you can google the amortization table and a builder will come up.

Jeff: Let’s flip over to credit cards. You went out and bought a new computer on your credit card. What are you doing with that?

Troy: Let’s say I’ve spent $800 for a computer on my credit card. I don’t know how much computers are nowadays, whatever, $800. I’m going to increase my credit card balance by $800, a liability, and then I’m also going to increase my computer expenses by $800. Once I pay off that balance of my credit card, I’m going to reduce my cash by whatever the amount I’m paying is. I’m also going to reduce my liability by the amount that I’m paying.

Jeff: What Troy is saying confuses a lot of people with credit cards. When you buy something on a credit card, the IRS considers that as money spent at that moment.

Troy: Correct, that is when you record it. When you spend it on the credit card or pay for it with your credit card, that is when it gets recorded as an expense on your books.

Jeff: If you’ve eaten $10,000 worth of tacos, and you’re still slowly paying that off, that amount that you’re paying towards your credit card is not an expense. It’s the reduction of debt, but it may have an interest component.

Troy: Correct, and that interest will be an expense. Again, if you’re making a payment of $500 on those tacos and $20 of it is interest (unlikely), then that interest is going to get recorded as an expense and then whatever the principal amount is going to reduce the liability.

Jeff: Here’s what I really, really dislike about credit card bookkeeping. You’ll get your bank statement, and how often does it end at the end of the month?

Troy: It’s the worst. I don’t think they do it at the end of the month. It’s always the 22nd like some random date. For credit cards, it’s always in the middle of the month. It’s never at the month end.

Jeff: Couple of my credit cards ended on the seventh of the month and some like you said, the 20-something of the month.

Troy: Right. Get it together, credit card payments or credit card providers. Tired of you guys. Figure it out. All right, I think we beat that one to death. Let’s go to the next one.

“How does the bookkeeping service integrate with the accounting service? I have personal bank accounts and you do my personal return. I have a business bank account, credit card, and self direct 401(k) brokerage account. How does the coordination between the platinum members in the bookkeeping service work with multiple accounts? How do we submit info receipts? How does the pricing work?” All right, there’s a lot.

Jeff: You’ve addressed the first part earlier.

Troy: Right. We work hand in hand with our tax team. We’re getting the broad strokes of what we need to know in bookkeeping that our tax team gets. If Toby or Clint say, hey, guys, this is the strategy that you guys need to know to make sure that our clients are taking advantage of, we’re getting that training from the partners, or from me, from Jeff, or whoever it may be. That’s one way.

If you’re using us for bookkeeping and using us for tax, we will coordinate your tax return with your tax preparer. Your bookkeeping team will work with your client tax coordinators/tax preparer to let them know that, hey, this is ready to go. You guys take over from here. We’ve done X, Y, and Z. If there’s anything that your tax preparer needs to know, we will make sure that they have notes on it, and they get that information.

Jeff: A little comment on this, especially the first part of the paragraph. Our bookkeeping is only going to work on your business accounts.

Troy: Yes, but that has also led to some confusion. We can do books. If you have a Schedule C, we can do that. Or if you have rental properties that are disregarded.

Jeff: I consider all those business counts.

Troy: I do too, but some people get confused and think that we say we don’t do personal bookkeeping, that means I’m not doing books for things that I own personally. That’s not the case. Personal bookkeeping, I mean I’m not doing your household books like what you paid for dinner last night or your W-2 income. I’m not doing bookkeeping for that.

Jeff: Yeah, you’ll sometimes hear that term home office. That’s not what we’re doing. We’re not going to track your 401(k), your custodian should be doing that. We’re not going to check your personal bank accounts. That’s frankly a waste of your money. How do you feel about clients that have trading entities?

Troy: I think, frankly, it’s not the best use of their time or money to pay for bookkeeping services, because the monthly statement you’re going to get at the end of the month, and then the 1099-B at the end of the year, is going to do a better job of keeping track of basis and all that in unrealized gain, realized gain. It’s going to do a better job than we could in bookkeeping.

Jeff: I agree with that.

Troy: What I would recommend is that if you are doing trading, keep an Excel sheet of any expenses you may have and submit that along with your 1099-B.

Jeff: I’m going to temper that just slightly.

Troy: I know where this is going.

Jeff: I’m not tracking expenses in the trading partner. But if my partner is my corporation, I am definitely tracking expenses in that corporation.

Troy: Exactly, and then you’re going to submit those expenses for reimbursement to the corp.

Jeff: Correct. You don’t need all your dividends and your buys and sells track. Your brokerage is doing that for your multiple brokerages. However, there are other expenses. There may be expenses for setting up LLC and stuff like that. Setting up the corporation, you’re typically going to want to push all of the expenses related to that partnership to the corporation.

Troy: Yeah, and if you have membership fees, you’re part of trade rooms or something like that, or you’re getting publications related to trading, throw all that to the corp.

Jeff: What we’re saying is, the corporation is actually managing that LLC. In turn, you’re going to give that corporation a guaranteed payment for doing that work for the corporation.

Troy: It’s not a management fee, it’s a guaranteed payment. There’s a key word in there, guys—guaranteed. You have to make that payment at the specified time every single time.

Jeff: Yup. That decision of how much you’re going to pay has to be made before the year even begins. For 2024, if you have a trading partnership, you need to be thinking about that guaranteed payment now. With this recent stock market, I don’t know what you pay them.

Troy: Your guess is as good as mine. All right, and then how often do we submit info, receipts, et cetera? In an ideal world, if you’re using us for bookkeeping, you’re going to give us administrative access to bank accounts, credit cards, and property management. That doesn’t allow us to move money. It doesn’t allow us to do any of that. It just allows us to go in and pull statements, pull transactions, so on and so forth.

We don’t have to bug you and say, hey, where’s your statement? Hey, where’s your statement? It’s not good for anyone. It’s not good use of anyone’s time. Administrative access, but if otherwise we’d request that you’d submit that information to us by the fifth of each month, then we’re going to do the books.

If there’s anything we don’t know how to record it, let’s say you bought something from Amazon, and we’re not sure if that’s an office supply or whatever it may be, because they sell literally everything on Amazon, we’re going to send you what we call Ask My Accountant, which is a backwards name, but that’s what we call it, Ask My Accountant report.

That’s the list of transactions that we’re not sure what to do with, and we’re going to request that you help us classify these. It’s pretty simple. We’re going to send you an Excel sheet, fill it out back, send it to us, we’ll get it uploaded, and then we’ll get those financials out to you each month.

Jeff: Troy’s a nice guy, so I’m going to say this. If you are a full service bookkeeping client, you really need to get that stuff in monthly for a couple of reasons. (1) You can be ready to go for tax returns very early in the year. (2) If you’re not getting that stuff in monthly—we’ve had horrible problems with this in the past—it puts your bookkeeper behind the eight ball. It gets them behind because now they have to do the usual amount of work for this month, plus anybody who’s delayed getting stuff in for them.

Troy: Right. It can get ugly real fast. We’ve gotten a lot better about following up, let’s call it. For some other things, we could call it, but following up with clients to make sure that we’re getting things in timely. But yeah, it’s still a lot better if you get it to us on a monthly basis. Even better, if you get us the administrative access that allows us to pull it ourselves.

Jeff: I think a lot of people, myself included, have to get into that habit of doing it, and then it becomes very easy to do.

Troy: Right, you got to get in that rhythm. Once you’re in the rhythm, it’s good to go. All right, and then how does pricing work? I’m just going to touch on full service bookkeeping, and I’ll go through the how that works.

What we’re going to do is we’re going to get you to do a 90-day agreement at our intro level of two hours per month per entity at $100 an hour. This is, as of what’s today’s date, 10/10/2023. If you’re watching this in the future, that may change, it’s possible.

Intro pricing, $100 an hour, two-hour minimum a month. At minimum, $200 an hour, and then we’re going to do 90 days worth of work. After 90 days, we’re going to know, this is how long it takes us to do your books on a monthly basis, and then we’re going to get you at a flat rate. If it takes us two hours, it’s going to be $200 a month. If it’s five hours, it’s going to be $500 a month.

Jeff: I really liked this because you can figure out in a few months what their flat rate is. Whereas in tax, it could take a year or longer to figure that out.

Troy: Right. Like I said, three months worth of work is how long it takes us to figure out the average.

Jeff: If you’re like me, if you know what things are going to cost, I’m much happier with paying that bill.

Troy: Right. All right, I think that’s it for us, Jeff. Reminder, check out Toby’s YouTube and Clint’s YouTube as well. Come join us for the Tax and Asset Protection Workshop. If you have any additional questions, you can submit them to taxtuesday@andersonadvisors.com. Also visit us at andersonadvisors.com.

Jeff: We thank you for being here and asking all your questions. I see that they’re still buzzing through questions and answers.

Troy: Yeah. We’ve answered 160 of them thus far.

Jeff: It looks like there are only a couple right now. They will continue answering them even after we end the webinar part of it.

Troy: Perfect. Thank you to all of you for joining us. Thanks for making this easy for me, the bookkeeping special edition of Tax Tuesday. We’ll probably be back next year when it’s tax season and our tax preparer friends are a little too busy to be joining us.

Jeff: Thanks to all of our assistance from tax advisers and bookkeeping for answering these questions.

Troy: Patty, Amanda, Eliot, Kiera, Lindsey, Trisha, Blanca, Tanya, Matthew.

Jeff: We can’t forget Matthew.

Troy: We can’t do without him, Eliot as well. All right, that’s going to do it for us, guys. Probably, we’ll be back in two weeks. Hope to see you guys then.

Jeff: Unless you’d rather have Troy than Toby.

Troy: Yeah, we can start a revolution. All right, guys. Thank you.