Bookkeeping has been around forever, even before the days of QuickBooks software and spreadsheets. Toby Mathis and Jeff Webb of Anderson Advisors welcome a special guest, Troy Butler, to discuss how bookkeeping began and evolved to track, document, and record transactions. Do you have a tax question? Submit it to taxtuesday@andersonadvisors.
Highlights/Topics:
- Should I hire a bookkeeper for my business, or do it myself? Depends on level of detail and number of transactions
- We have several companies. What’s the best way to pay and track expenses for each? Whether each company needs a separate set of books depends on if the companies are related or not, and go on the same tax return
- What’s the best way to set reminders of accounting tasks that I should do? Set up monthly or quarterly tasks; don’t let everything build up and do it all at once
- What’s the difference between a profit-and-loss (P&L) and balance sheet? Balance sheet lists your assets, liabilities, and equity for the company; P&L shows profitability for specific timeframes
- How do you keep track of reimbursable expenses before your corporation makes a profit? Even if not profitable yet, you need to track your expenses and income
- What are some tips to get good bookkeeping results with the least amount of effort? QuickBooks, Peachtree, spreadsheets, and calendars; automate as much as possible and consistency is critical
- When we take money out of the holding company to use for personal expenses, how do we handle that in the bookkeeping? Distribution recorded as an equity item
- Is it legal to put personal funds directly into our holding company, and how do we document that in our bookkeeping? Yes, that’s allowed; you can put your money into your company, but it’s your money and you can take it back later, if needed
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Resources:
Anderson Bookkeeping Services (Discount Code: BookTax)
Real Estate Professional Requirements
Capital Gains Exclusion/Section 121
Individual Retirement Arrangements (IRAs)
Save A Vet With A Pet – 1 Veteran Foundation
Full Episode Transcript
Welcome to the Anderson Business Advisors Podcast, the nationally recognized, preferred provider for asset protection and tax planning in the nation. This show is for investors and business owners looking to save on taxes and build long-term wealth with Toby Mathis, an attorney, author, business owner, and a featured instructor at Anderson’s Tax and Asset Protection Event held throughout the country. Enjoy the show.
Toby: Hey guys, you’re listening to Toby Mathis here with Jeff Webb. You can say hi, Jeff.
Jeff: Hey, how’s everybody doing?
Toby: And a special guest, Troy Butler.
Troy: I feel very special. Thanks for having me.
Toby: Today, we’re going to really focus in on bookkeeping. Today, we have our head of our bookkeeping here, Troy.
Troy: Very happy to be here.
Toby: Very static. We have a whole bunch of people so we’re just going to jump in. We will answer your questions as they come in. If you have questions that we can’t get to because we have about over 20 questions to answer and a short period of time to do it, then just send them on in to taxtuesday@andersonadvisors.com. If you need a detailed response, something specific to your needs, or you need a written response, you got to be a Platinum or a tax client. This is fast, fun, and educational. We want to get back and help educate.
Speaking of giving back, we do have a little bit of issue in this country right now. We want to raise awareness this year and make a dedicated effort to see if we can’t change some of these numbers but we have a real issue with a suicide amongst our veterans. I’m just throwing you some of the numbers and there’s a veteran’s crisis line there to help people actually get help.
A lot of these folks in our armed services do not seek help. We want to make sure that we do what we can. I work with an organization, 1 Veteran Foundation. I care about them because they actually do something that works. The 1 Veteran Foundation, great guy, Dave Rafus, that I’ve worked with, what they do is they train service animals to work with veterans. The reason that we want to call that numbers, 20 days is far too much.
You can go 1 Veteran Foundation. Great group. Feel free to go visit them. If you want to hear about what they do, I’ve done a podcast with Dave and his group and he does a fantastic job. I’m just going to tell you guys. You can go to our podcast page, Anderson Advisors podcast, you can find it, I think, it’s page 3. They are able to train service dogs now at about $2500 per dog, hard cost because they have so many people that donate.
If you don’t know how much it cost, it’s about $50,000 a dog if you’re going to do this in the private market. […] do a really great job. I just can’t recommend them enough, but if you want to, though, please visit them. If nothing else, become aware that at least think of our veterans because God knows they went through hell for us (a lot of them) and they carry those […].
On to bookkeeping. Let’s go through a little history, how bookkeeping began. You can go way back to medieval time because it’s been around for a long time. Let’s say I had a sword but I wanted to eat and I didn’t want to eat what I was killing with my sword, I might trade my sword for a chicken or a bunch of chickens. Maybe I’m trading my sword for a bunch of chickens. Whatever you do, don’t give your chicken a sword, that’s just bad.
Maybe I’m trading my sword for chicken and then I would keep track of it in a detailed record and I would say, “Hey, I bought five chickens with one sword. I sold one sword and five chickens.” The only problem is that we started dealing with currency. Now, we had to track all these stuff with dollars. Here’s how it ends up working.
It’s country bookkeeping. Thank you to whoever came up with that. You’re evil and you’ve made a lot of people’s lives worse. No, I was kidding. They would say, “Hey Tuesday, on the 21st of January, I bought five chickens. I’m debiting my inventory by the value of those chickens at $10. I bought the five chickens for cash so I have to credit my cash but I sold a sword in essence to buy the chickens, so I have to debit my cash by $10, I have to credit my inventory.”
The accountants are all giddy at this point because they’re just excited that everybody gets to see exactly what they do. Somebody saying, “Yes. They are in existence with the Romans. I think the Romans had a sword, they had trade for chickens, too.” It’s been around forever and I always point that out. The reason I point that out is because everybody thinks that you have to have QuickBooks. It used to be that you would actually just note this stuff down. Maybe you had an abacus, maybe you had a little ledger, if you were in the […] too, got it? That was funny.
Here’s the question we’re going to get into tonight because it’s all bookkeeping. Troy, thanks again for being here because this is all he does all day.
Troy: Right, it’s what I do.
Toby: And you love it?
Troy: Love it, my favorite thing.
Toby: You can’t tell, you sound really excited. When accountants gets excited, they usually don’t show it. Questions that we’re going to ask, should I hire a bookkeeper for my business or do it myself? These are the questions that we’re going to answer tonight.
“We have several companies, what is the best way to pay and track expenses for each one?”
“What’s the best way to set reminders of accounting things I should be doing? I’m pretty new to bookkeeping for our business.”
“How do you keep track of every reimbursable expenses before your corporation makes profit?”
“I have a business degree. Starting my first real estate business. I would like to know what the current best practices are with software, QuickBooks versus spreadsheets versus others. What are some tips to get good bookkeeping results with the least amount of effort?”
We’re going to answer all of those plus, “I’m starting an Airbnb business and an ecommerce store,” because you must be bored and you said I’m going to do two things at once, right? “What bookkeeping do I use to integrate with Airbnb and the same question for the Shopify API?” We’ll answer that.
“What is the official name when we transfer money from a company, a C Corp or an LLC to a holding company? How do we handle these transfers in our bookkeeping?”
“When we take money out of the holding company to use for personal expenses, how do we handle that for bookkeeping?”
“Is it legal to put personal funds directly into our company and how do we document that for bookkeeping?” That’s actually a good question. There was a lot of questions, by the way. You guys did a really great job.
“What is the proper way to account for expenditures made to improve a warehouse building? Should expenses above a certain amount be capitalized versus expense? Does it depend on the nature of the expense like age […] et cetera?” It’s a really good question by the way but you said something in this question that freaked me out, which I will point to.
“I’m trying very hard to build a stock option business to retire. I would love to learn and master bookkeeping and accounting because I’m having a hard time finding the right answers for creating a trade log type spreadsheet, where I can keep track of buy and sell crediting premium received, debiting of expenses, broker regulatory commission taken out of my account by brokerage, and knowing a balance of what’s available if I leverage account as collateral, i.e. selling naked puts.
Stop that, I watched so many people blow themselves up with naked puts. It’s fast money, 25% held back guarantee. “How are the taxes calculated and all that?” If you guys don’t know the naked put is, it’s really exciting.
“Where are the best accounts in the chart of accounts you recommend to set up in QuickBooks to make the end of your filing easiest to transfer expenses to an IRS form?” I’m sure they’re just asking what categories.
“I am currently a wholesaler and not sure how to input my income into QuickBooks. I feel like I’ve set it up incorrectly.” I don’t know if that’s a question.
Troy: We’ll help them.
Toby: Yeah. We’ll still help them.
“Disregarded the LLC right up for our own current charges and […] connecting business for the LLC and […]. How does the business owner reduce the bookkeepers? I really […] to improve on recording? How do you reduce the book? I really don’t have time, it’s just me.” No, I think what they’re saying is, how do we reduce the amount of time it takes for them to do your books.
“How does a business owner ensure documentation and receipts? How does a business owner ensure the bookkeepers’ understanding the big picture of the company?”
“How does the bookkeeper, tax preparer, and CPA work together to help reduce taxes for the business owner?”
“Does a business owner need to work with their business accounting person on a monthly basis?” We are getting close to the end of the questions. Like I told you guys, we had a lot.
“I have a ranching business organized as an S Corp and just bought a new truck […] in the business. I use it primarily for personal use. Similarly, we are currently building a garage shop that can be used partially for business storage and use partially for personal use. Does paying for your items, which have mixed use with your business account jeopardize your corporate bill? How should these transactions be reflected in QuickBooks? Can you explain what practices for a bookkeeping and accounting are suggesting when setting up a S or C Corp for long-term real estate, hold on land, or future development of small hotels?” We’ll get in all that fun stuff.
And then last but not least, I think we have two more. “Does a holding LLC require books also?”
And “C Corp was incorporated in mid-2019. Can management fees be charged retroactive to January,” I’m assuming it’s January 2019, “to an entity that the C Corp is managing? Can we go back a couple of years to capture expenses?”
We will go over all of that fun stuff. You guys have […].
“What is a naked put?” Jennifer. A naked put is when you sell the right for someone to force you to buy something that you don’t own. It’s free money so long as the item doesn’t become worth less than the amount that they can force you to pay, the promise that they may […] does, and you don’t own it. You have to go out and buy it. […] stock tank. That’s a good way to lose everything you own.
A great example would be Emulax. Emulax was $125, this would’ve been almost 20 years ago and you could sell naked puts at $35 and still make a pretty good premium because somebody knew that it was going to tank. A long short is that I could say, “Hey, Jeff, give me $1 and you can make me bet $35 anytime next year or whatever period of time we negotiate.” I get $1 no matter what and I think this is great because Emulax is at $125.
What if it goes down to $20? Now, I have to go buy Emulax and sell it to Jeff. I can buy it for $20 and I’m selling it to Jeff for $35, or I’m having to buy it. I’m buying it from Jeff at $35. I’m going to be way under water on this one. Pay $35 or however many contracts I give it into some really bad situation. Anyway, I’ll make sure that we’ll get to that. Here’s the question. Troy, since you’re the man on the hour, are you ready for this?
Troy: I’m ready.
Toby: All right. “Should I hire a bookkeeper for my business or do it myself?”
Troy: It depends.
Toby: You sound like a lawyer.
Troy: It depends on the level of transactions you guys have. If you have two transactions in a month, I maybe wouldn’t worry about just getting a bookkeeper to handle your books, I would handle it myself. You started getting a hundred transactions a month, that’s where I would recommend you hire a bookkeeper.
Toby: Now, here’s the thing. What’s the legal requirements for bookkeeping? What do all businesses have to do?
Jeff: All businesses have to have books and records, so they have to file their tax return. But the IRS really doesn’t define what those books and records are. It could be spreadsheets, it could be QuickBooks.
Toby: It could be ledger, guys. It could be cocktail napkins. A lot of you immediately start thinking, “Oh my God, I have to buy all these beautiful Peachtree, QuickBooks,” they buy all these programs. I’m with Troy. If it’s a few transactions, document it somewhere. Spreadsheet is just fine. If you need a P&L (profit and loss) or a balance sheet, then you can pay someone to put it in there, QuickBooks or whatever it is, and create a P&L or balance sheet for you if needed. But if you’re doing small businesses, very few transactions, you’re probably not going to need that level of detail, it’s just tracking it.
Troy: Yeah, the do-it-myself part, you really got to look at two things. Your confidence and when you’re bookkeeping, your ability to do the bookkeeping. The other part is I sometimes seen where people doing business are doing so much on the administrative that they’re actually interfering work that they’re trying to do.
Toby: That’s it. You didn’t go to school and become a bookkeeper, right? If you’re doing whatever you may be doing, maybe running a restaurant, guess what? You’re not getting paid to do your books. You got to figure out what’s the best value of your time, whether you want somebody else do it, and then what’s the fastest way from A to B.
So many people create separate sets of books for each side of their business and they make huge chart of accounts. These big, huge Christmas tree-looking things is better unless you need that level of granularity and it’s serving you a purpose, you don’t need to go to chart of accounts and they’re doing $200,000 a year, like what the heck is running? I don’t know about you, better not be doing that.
I’m going to answer a couple of questions that came right up in the very beginning. The first one was, “If I have a 501(c)(3) and a C Corp, do I have to file a 1099?” If you’re being paid, no. Somebody does not have to give you a 1099 if you’re a corporation. But if you are paying somebody for services over $600, you got to get them a 1099 and it has to be done. It’s due at the end of January, right?
Jeff: Correct.
Toby: Somebody says, “When I get donation on profit for more than $500, what form do I need to fill up with the IRS?” If it’s cash and it’s over $500, it’s 8283, something like that?
Jeff: If it’s cash, it’s just Schedule A. Form 8283 is only for non-cash.
Toby: Non-cash. If somebody gives you a bunch of clothes or something and plus, you’re supposed to be giving them a receipt with the value of it.
Jeff: From the charity point of view, you almost never have to do any kind of form. The one exception is car donations, there’s a form for that.
Toby: By the way, if you go over $5000, like you’re giving an item that has a value more than $5000, you either get an appraisal or has to have a readily attainable market value like stock. Easy to find out. If you’re going to real estate, you don’t want an appraisal unless you just bought it within a year which case, you use its basis.
All right. Somebody says, “Does interest report on a 1099 get offset for taxes if there’s a K-1 with negative?” That’s negative from depreciation. I get to say, it sounds like they have a K-1, from real estate, that’s a passive loss. The question is can they offset income?
Jeff: Yeah. They will be able to do that assuming that it’s ordinary income or something like that. Those K-1s typically have about 20 different kinds of income or deductions.
Toby: If you have passive real estate loss, though, you’re going to be either looking at real estate active participation or real estate professional offset though, right?
Jeff: Right.
Toby: It’s portfolio income but it’s the passive income per se.
Jeff: Correct.
Toby: “We purchased a house in April of 2019 and lived there for three months. After moving out in July, the house was available to rent. We then decided to take a major renovation without renting it out and all of this is going to be added to basis. Can we do a cost segregation for 2019 […]? The house will be back on the […] market in April.”
Sound like they made it available. They need a cost seg, it’s a vacant house. My understanding is that you can do the cost seg but you can’t create a loss if it’s a vacant house. Am I missing something?
Jeff: No, that sounds about right. There’s always that issue that you’re creating losses and you have no income for the property.
Toby: You’re allowed to grab all the expenses. Here’s the deal. Yes, you can add it to basis. Yes, you can cost seg it. The problem with the vacant house is that you can’t create a loss. You can’t get yourself but you don’t have any income coming in anyway, so all you do is you carry forward that loss into the next year so you don’t lose it. You’re just going to use it in 2020 when you start making money or if you liquidate it, you’ll get to release that loss and offset ordinary income. Isn’t that exciting? You guys are asking really great questions.
“What is the best way to use funds received from the sale of a business?” I’m just going to tell you. Me, you just give it to me. Those are the best use of it. If you made money out of the business, chances are its capital gains. If you sold the business, if you sold the […] income, is the businesses, so there’s no right or wrong way to how you use those funds. You got to figure out what type of funds they are, what type of gain it has, if it has a gain, if it has a loss, and whether there’s anything you could use to offset it. It’s not magic dollars. You just have to figure out what it is for.
If I get to sell a business, I’m selling these shares of my company, that’s a long-term capital gain. If I have it over a year, If I have it for less than a year, it’s short-term, but I could also just sell all the assets in my business, in which case it’s income to the business and now it really depends on what type of business that is. I love getting into the business stuff, by the way. When you’re selling a business, there are ways to do it that’s tax free.
There’s a bunch of other questions, but we’re going to keep jumping on. “What is the best way to pay and track expenses for each of them?” What say you, Troy?
Troy: Again, it depends. If there are several companies that aren’t related, they each need to have their own set of books. They need to be tracked separately, not combined into one giant set of books. However, if one of the entities or companies is disregarded to another one, we can combine those sets of books into one but we got to make sure what […] or business activity.
Toby: You just said a magic word. I think, Jeff, you like this word. You like using classes. When you use classes in a program like QuickBooks, it means you’re not setting up a whole other set of books. You’re literally creating a subset under a major setting. In rental real estate, this is your secret weapon guys.
A lot of accountants will set up separate set of books for each property and they’re tricking you. They’re going to say, “This is how you have to do it, this is best practices or whatnot,” then they’re going to charge you for each set. And you’re going to have to get a license, like QuickBooks online, for each set of books. Don’t do that. Use classes and put your properties underneath it. Is that fair?
Troy: That’s 100% fair. We just got to make sure that all those rental properties are going to the same tax return. That’s the best way to think about it.
Toby: “What’s the best way to set reminders of accounting, things I should be doing? I’m pretty new at bookkeeping in our business.”
Troy: What you don’t want to do is you don’t want to let it build up for an entire year and then, have to do it all at once. It’s very hard to remember what’s this expense from Home Depot from six months for $42 was for. You want to do it monthly. What I recommend is if you use a calendar, put it on your calendar, to do it once a month, every two weeks, something like that.
Toby: Jeff, do you have anything you want to add on that?
Jeff: No. On my own set of books, I do mine about every two weeks. I could easily get away with doing it monthly. But like Troy said, sometimes you see these expenses on your credit card statement or something you never have no idea. You may lose the receipt, hopefully you haven’t, but understand how these things should go.
Toby: Absolutely. Just […] $75 and it’s a meal, you don’t have to actually have a receipt, just get some back up on it. Use credit cards, if you have a debit card, just so you have a track of it. Most things, now, we’ll just load into a spreadsheet. Get used to using a spreadsheet. Everyone’s going to tell you they use QuickBooks and all these stuffs, great if you need to have a P&L and a balance sheet, it doesn’t blow you up if you don’t,
My recommendation for most people is track it on a spreadsheet and give that to a bookkeeper and let them create your P&L, maybe quarterly, maybe twice a year, maybe once a year, whatever works for you. […] transactions. You have […] transactions a month, that’s not going to work. You need to do it more often. If you have a hundred transactions a year, I’m probably doing that quarterly.
Troy: The more complex your business gets, the more complex your accounting needs to be.
Jeff: This is a little […]. How often would you suggest they either backup their QuickBooks or make backup copies of their spreadsheets? Do you do that mostly?
Troy: I would do that every time you use it, honestly.
Toby: Every time you use it, yup. Have it automatically. More step you can do that’s automatic, the better. If you expense that are on a monthly basis, put them on autopay, just set it and forget it. […] where you can’t forget it. A lot of people are like, “Hey, what kind of things should I be doing?” Use a calendar. Google calendar is free and just set yourself reminders on doing stuff. “Hey did I pay this? Don’t forget. Reimburse myself expenses and run a payroll once in a while,” if you’re an S Corp or something like that.
“Hey, few questions. One is, the difference between a P&L and a balance sheet.” Do one of you guys want to take that one?
Troy: Sure, I’ll take it. A balance sheet lists your assets, liabilities, and equity for the company. Your cash is an asset, building is an asset, liabilities would be something like credit cards or mortgage, equity is how much money you put into the business essentially or retain earnings, the lifetime earnings of the company. A profit and loss shows your profitability for whatever period we’re looking at. You can do profit and loss by year, month, quarter, a week, a day. Usually, when we’re looking at tax returns, we’re looking at it on a yearly basis.
Toby: Balance sheet is in my bank account, what I owe other people.
Jeff: The balance sheet is a snapshot at anyone point in time.
Toby: Yeah, it’s that point in time. I can have a balance sheet that shows I have a $1 million sitting in it but I owe $300,000 in credit card bill. That tells in my equity, I just subtract that one off the other. My P&L maybe showing that I’m just having a really horrible year, they don’t really relate to each other. In order to get the cash, they’re getting contributions, loans, or are making money. That’s still on my balance sheet.
A few things that people ask that I’m just going to knock these out, Somebody asked about Airbnb. “Tax implications of being the owner of a short-term rental business like Airbnb?” If you have an average daily rental of seven days or less, it’s an active business, you’re going to be charged self-employment tax. You are a hotel for all intents and purposes. You still get depreciated, it doesn’t blow you out of the water for that, but you are an active participant.
If you want to keep that passive and make that income passive, what you do is you put the real estate in an LLC and you lease it to the host, that would be a corporation. C Corp, 9 times out of 10, or an LLC […] and you would do the short-term business through the corporation. It’s listing it out of Airbnb, it’s a host, you’re renting long.
I’m renting on a monthly basis to my corporation. The income that the corporation pays me is passive, it’s going to be rental income but I take the depreciation against. The corporation, on the other hand, it’s going to be receiving the money and that income’s going to be in the corporation where it’s possible to be offset through other expenses or it could sit on it. If it’s a C Corp, it’s 21%. If it’s an S Corp, after a small salary, then at least I’m not subject to the self-employment tax.
Somebody says, “The […].” Be aware right now that that would probably be tested just because of 199 […]. You have to show an actual reason as to why you are changing that relationship on the 20% deduction.
Jeff: Right. We’re talking like a C Corp to an S Corp?
Toby: Yeah, she’s asking which would be better. Generally speaking, if you need the money, you’re going to be an S Corp. You just said basically, it’s $241,000 a year. I can tell you already.
Somebody said, “I have an independent contract for overseas. Do we still need to send them at 1099?”
Jeff: If they’re doing all of their work overseas, they are not going any work within United States and they are not US citizens, then you do not have to issue a 1099 to them.
Toby: Yup. No 1099 on non-US citizens. Somebody said the same thing, they ask that same question, there’s two of them. If it’s foreign and all the business being done over […], you don’t have to.
“I’m managing someone else […] and disperse to the owner, do I need to […] 1099?” So, you’re acting as a property manager?
Jeff: Yeah, typically you do. You’re going to issue a 1099 for the amount of rent that you collected on their behalf.
Toby: Let’s see. “If I’m in an audit for a specific year and they want my QuickBooks for this year, can I restrict them to only see the year and question?” Yeah, you’re only giving them the information that they’re requesting. They can open most audits to three years, though.
Jeff: I would provide them most reports. I would not provide what’s your QuickBooks.
Toby: Yeah. That’s actually a really good one. “What is cost spaces?” That’s how much you paid for something plus any improvement or things that adjust the cost spaces.
Jeff: Depreciation reduce cost spaces.
Toby: Depreciation, yeah. Anything else you can think of?
Jeff: No.
Toby: In stock, it’s what you paid for plus the commission that you paid. Sometimes, you’re going to add things to basis when you’re dealing with options.
Somebody asks about futures and what’s the best way to hold that. You can’t write off expenses as an individual when you’re in investment, unless your activities […] the level […] which I would never suggest you try that do. I would always say operate through traditional business or use a partnership as a corporation as the […].
Apart from that, attorney’s fees are […] foreclosure proceed. That’s a weird one because attorney’s fees, you cannot deduct but if you’re an investor, then you will deduct them against the income that you receive.
Jeff: Yeah, I’ve seen that and I’m not sure that all the circuits agree on this. Some circuits will allow you that if it’s added before you get your money, that your attorney’s fees have already been pulled out, then you only have to report those proceeds. Typically, most of the circuits, I believe, will not report all the proceeds regardless how much was paid to the attorneys.
Toby: “How do you keep track of your reimbursable expenses before your corporation makes a profit?”
Troy: Even though you may not be profitable, you still need to track your expenses and your income. Again, you can do that in a spreadsheet or we need to make sure that we’re providing something to the corporation that shows what those expenses were and what they were for.
Toby: And just know that when your corporation is even before it’s operating, you still go back in and grab things as a startup expense. That’s going to be something that will also interfere. What you end up doing is when you have a corporation, the investigation period before it’s alive, […] investigating the line of business to get into and you’re incurring these expenses, the IRS, follows the rules which Congress laid down, which I can write up a $5000 in year one, amortize the rest over 15 years. If I spent too much or worth $50,000, then I’m going to be amortizing the whole kit and caboodle over 15 years. You can get to write it off, you may have to spread it out. Let’s keep on jumping on.
“I have a business degree from decades ago and started by first real estate business. I would like to know what the current best practices are with software, QuickBooks versus spreadsheets versus other and what are some tips to get good bookkeeping results with the least effort?”
Troy: So, […] we’re talking about, it doesn’t have to be QuickBooks, Peachtree, or whatever. It can just be a spreadsheet, you can use accounting paper if you wanted to. But QuickBooks is probably the most user friendly of the options, I would say.
Toby: You like QuickBooks?
Troy: I love QuickBooks. If you come to us for your bookkeeping needs or if you go take your taxes to anyone, they’re probably going to be using QuickBooks. That’s probably the most universal.
Toby: Somebody says that they use Zoho Books.
Troy: I’m not familiar with the Zoho.
Toby: I never heard of it, either.
Troy: Yeah, there’s thousands of accounting software out there. QuickBooks is the most prevalent. Tips to get good bookkeeping results with the least amount of effort. What you can do with most accounting software (QuickBooks included) is you can tie in your bank accounts and credit cards to had them automatically get recorded.
Toby: They’ll pull it right on it.
Troy: Right.
Toby: You know what? Again, I think it comes back to what was earlier said. QuickBooks is universally accepted as probably, maybe not sweet for bigger companies. But if you are not a huge company, what would you say is not a huge company, less than a million bucks?
Jeff: Yeah.
Toby: Then, you may just want to try to use spreadsheets. Somebody said, “What about the categories?” That’s called your chart of accounts. It’s more narrow, you can keep your chart of accounts. The more succinct, like it doesn’t mean you have three but it means you don’t have to have pages and pages of chart of accounts. I’ve seen people do that on small business and they missed class of buying stuff all the time because one month, they’re doing it one way, another month, they’re doing it another. They’re all over the place. What’s a typical chart of account? How many categories?
Troy: Probably 35, I’d say.
Toby: Yeah, tops. So, you know where to put things. I don’t like keeping my data on the QuickBooks cloud or […] hackable nowadays. What version of QuickBooks do you guys like?
Troy: We use QuickBooks Online, it’s mixed. You can see what we’re working on at any time. You don’t have to request access for copy from us, plus we can get you a discount on the QuickBooks Online through Anderson.
Toby: Most people are using QuickBooks Online. If you don’t like it, you can use a hard copy or Desktop. The problem with the Desktop version is when you give an accountant’s copy, like if there’s somebody’s making changes, it locks your QuickBooks because you don’t want to be making changes right after you just gave your accountant the book.
The online is a little bit easier and I understand when somebody is saying about security, your email is going to get hacked before your QuickBooks is going to get hacked. It doesn’t mean that everybody gets hacked, only to a […], pretty much everybody. Every huge server farm has been hacked. It’s just whether they’ve had to tell you is all. Assume that you’ve been hacked.
Let’s see. “What about QuickBox to share QuickB Pro Desktop?”
Troy: I think what you’re saying there, I could be wrong, is that they have services where you can store a QuickBooks Desktop on a cloud and that lets us login and they can also log in. That work is just a couple extra steps. QuickBooks Online or QBO is usually more convenient and it has most of the same functionality as QuickBooks Desktop.
Toby: And I’m still a believer in spreadsheets, guys. I’m going to tell you, QuickBooks takes a while to learn. Bookkeepers love it, but they also use it everyday. I use to go into QuickBooks on a daily basis, many years I did that. I realize how much flipping time I was spending. I would rather just see the summary of my data in a Google Docs.
Troy: Just so we’re clear, I would rather have a good spreadsheet than a messed-up QuickBooks any day of the week. If you’re comfortable doing a spreadsheet, do a spreadsheet.
Toby: Every time I see a big mess, it was usually an error because of the software. User error with the software.
“I’m starting an Airbnb business and an ecommerce store. What bookkeeping do I use to integrate with Airbnb and the same question for Shopify?”
Troy: Airbnb, should be sending you a monthly statement that shows your monthly income and any Airbnb expenses you may have. Management fees, that kind of stuff, that Airbnb charges to use their platform. As far as I know, they don’t directly integrate with QuickBooks. Shopify, on the other hand, does directly integrate with QuickBooks. It will automatically pull your income and expenses and automatically put that on there.
Also, you got to be sure that with the Airbnb stuff that you’re recording all your expenses, not just the ones that are coming from Airbnb.
Toby: Like everything that’s associated with […]. So, it depends. If I’m Airbnb-ing and I’m doing it two weeks at a pop, it’s a passive rental, I’m not doing, I think, there’s criteria for are you providing more services than would be typically to a renter, like cleaning and stuff like that?
Troy: Yeah. Laundry cleaning,
Jeff: If you’re just, “Hey, you’re coming in and you’ll be grabbing it for a month, then it’s completely passive,” then that’s different than the Airbnb business where it’s almost like a hotel.
Jeff: […] seven days or less.
Toby: Seven days or less is you are a hotel, individual bookings. I would say, how many primary guests did I have. If I had 90 days of rents and I had 10 guests, I have nine days, that’s passive. If I have 90 days and I had 20 renters, then I had 4.5, I’m a hotel and that’s active income. Just different animals.
Speaking of different animals, if you need bookkeeping, I’m going to show you guys a link real quick that aba.link.bk, if you want to look at bookkeeping, we do offer a virtual bookkeeping service. This is brand new. For those of you guys that have been around us for a lot of years, you know how we operate. We do the same things you guys are doing. We’re constantly trying to find things that would be a better service to our clients.
The virtual bookkeeping service is really simple, it’s a set of books. You’re using spreadsheets that we setup, we set up chart accounts. We say, here’s what you put in. You put in if there’s areas that you need to reclassify, your […] isn’t asked by an account and then, we go through a month or quarterly basis. We take that, put it in QuickBooks, give you balance sheet.
The cost is $1495 for the first set of books. If you are not a Platinum member, if you are an Anderson Advisors Platinum, which you all should be, it’s $995 and I’m going to give you a little coupon code to take that $200 off of that. You go here and you’re going to fill this little bugger out online. Price […] number one is you get $995, price […] number two is $200 off. Susan will undoubtedly send you the coupon code. I have it somewhere, I have to go find it.
Little things that you could say, real estate bookkeepers you can trust. We’ve been doing this for a long time. There’s the Forbes and all that good stuff. Remember the Forbes Council, I’ll make sure that we get that. I think I put it up there but I will make certain that I get it.
How do we get the discount at QuickBooks if you go through us? Troy, what do they have to do to get the discount at QuickBooks?
Troy: You just need to have a bookkeeping consult and you should be able to tell anyone here at Anderson, “Hey, I need a bookkeeping consult.” We’ll get you pointed in the right direction.
Toby: Hey, what do they get? What do they get for the discount?
Troy: It’s usually $20 off a month. It depends on the level. There’s a lot of different levels of QuickBooks. That’s why we have a consult to determine what you need. But yeah, you get a little discount from us.
Toby: How much is the discount? It’s like $15?
Troy: Yeah, it depends on the level. I don’t want to tell them the amount.
Toby: Oh, you’re just being such an accountant.
Troy: Yes.
Toby: All right. Here, I’m going to write the discount code for you guys. Susan sent it but it is BOOKTAX, it’s going to save you $200 off. Here’s how it works. If you become a bookkeeping, we can do the books for a non-profit as well […] $3500. If you do that, I’ll show you where to put it, it’s in that little coupon code. You just zip it down right down here. I thought I had it written in and you put your little book tax right there.
The other good thing about this is if you have multiple businesses. They are $500 thereafter. We’re just trying to get you to have a set amount of expense. You don’t have to worry about hourlies and a bunch of other fun stuff. This is just we work with you. We work with you to make sure that you are able to have a good set of books and you’re not paying a gazillion dollars to do it. Anyhow, you can do it for real estate […] guys around.
What it does is it saves you from having to get QuickBooks. Just QuickBooks Online is $50 a month. You had two sets, that’s a $100, that’s $1200. Basically, for the class to QuickBooks Online, we can do your books for the entire year. That’s what we’re trying to do.
Troy: I don’t know if Toby mentioned this, but we will be doing quarterly calls with everyone to make sure that we’re capturing all the expenses we can, everything gets recorded correctly.
Toby: Yup. We want to make sure that you are getting the best.
“I have one LLC, it’s a disregarded entity, and several rentals under that, it’s that…” Yes. It’s just $995, it’s not $995 for each rental. You have one set of books where we try to make classes. It is one, it is ridiculously inexpensive. That’s why we operate.
Let’s keep going to questions. I know you guys […] that, “Is this better than QuickBooks Online?”
Troy: It’s different.
Toby: Different, cheaper, and it’s going to be easier for you. Again, I use me as an example. I have dug deep into QuickBooks and I love the reporting capabilities. As long as I have the end data, I can do whatever reporting capabilities I need. I usually build my own spreadsheets. I spent way more time instead of doing QuickBooks.
I don’t think I’m alone. I think that for the most part, everybody is kind of the same way. Just get the information into QuickBooks, but let somebody who does it day in and day out do it. I don’t need to be spending all my time doing it, nor do I want to spend all my time doing it, nor do I want to spend $200 a month, constantly having somebody input a few categories.
Even Intuit, their base price is not just the cost of the software but $200. I’m already $250 out of pocket, and I haven’t even […] any transaction yet. I’m just trying to make this easier for you guys and we work with anybody. We’ll make sure that everything works. How is this different? It’s not. If you’re already working with us, we’re going to find out the best solution for you.
You’re already working with us and there’s already a set transaction fee, then we’re telling you, switch. It’s going to be better, it’s going to be more economical and better. I like to make sure everybody has a good set of books and you shouldn’t have to feel like you can’t afford it. We make something that’s perfect for the entry though.
“What is the official name when we transfer money from a company, C Corp or LLC, to our holding company? How do we handle these transfers on our bookkeeping?”
Jeff: I’m assuming that this is like a loan from corp to the holding company?
Toby: Usually, you’re transferring money to a holding company. You’re either transferring the money, the payment is rent into the holding company, the holding company is transferring money to the C Corp to pay, or the C Corp owns the holding company. Realistically, all of those categories are a little bit different.
Jeff: Right, a couple different ways. If your corp is transferring money to the holding company for income, rental income, minus transfer fee, minus […], that would be rental income to the LLC. If it was a loan, more than $10,000, that has to get recorded as a loan. We usually classify them as due to/due from and then the name of the corporation. That’s how we usually do it.
Toby: A couple of questions. When they said about the disregard the LLC (apparently I was breaking up), you will only have to pay for the one set of books. You can have 10 rentals underneath the one set of books and it’s just $995 with the discount, it would be $795. You guys are going to get a $200 discount, just because you’re in this call. It’s a thank you for hanging out with us.
“When we are transferring money,” let’s just say, I’m transferring money from the LLC to the C Corp, as a management fee that’s income into the C Corp to management expense to the LLC. When I’m putting money from a holding entity or from a sub-entity into the holding, I am literally doing that on a clasp. I am just recording it as income to that […] entity and it’s automatically flowing under the parent. I’m not going to set up two sets of books for the holding company.
I’m going to set up one set of books if it’s income, if it’s an expense, it’s going under the expense, but at the end of the day, I am going to be keeping one main set of books. But remember, books, everybody thinks that it is, like separate P&Ls and balance sheets. No, it’s recording transactions. “Can I tell what that sub-LLC made?” Yeah, absolutely. “Am I able to drill down into those expenses if I need to?” Absolutely. But it all flows under one P&L and one balance sheet. Makes life a lot easier and a lot less expensive.
Other fun questions, “When we take money out of a holding company for personal expenses, how do we handle that in bookkeeping?”
Troy: It’s either that is a holding company or that holding company is an LLC. That would just be a distribution, which you’re allowed to take. You would record that as an equity item numbers draw, something like that.
Toby: Makes life easy. Whenever I take money out of a holding company, as my holding company, that’s a safe. All I’m doing is saying, “Did I take money out of the safe or I put money in?” It’s not actually something that implodes. I’ve had people who actually get worried about this, like they wouldn’t take money out because they were concerned that somehow it would affect the veil of the holding company. That’s not the case.
The one area that you got to be a little careful off, is if you’re holding company is paying you $1000 a week, every week and you’re living off that and you just constantly doing that. If somebody has really put their ears back and go after you and then you stop paying yourself the day that you got to judgement, they would say, “Hey, you’re withholding the monies for no other reason than to […].” I don’t know if they’d be successful, but they’d make that argument, that’s it. I just tend to be sporadic, if I need it, I take it out, and then you’re just lowering the […].
Jeff: Right.
Toby: Less cash, that’s it, it’s going to affect your profit at all. The only time that it does affect your profit is when you pay yourself as an employee and you’re taking out payroll, which case it lowers the taxable amount and make it taxable to you. But if you’re doing a balance sheet item, cash out if the business to the owner, it’s literally zero tax implication to you.
“Is it legal to put personal funds directly into our holding company and how to document that at our bookkeeping?”
Troy: I think you’d go to jail immediately if you’ll do that. You’re totally fine to put personal funds into your holding company. It’s the reverse we’re just talking about. You’re able to put your money into your company, but it’s your money, so you can take it back later if needed.
Toby: Absolutely. It is your money. Put it in and it’s just like a safe. You’re just saying, “Hey, I put it in the safe and I took it out of the safe.” We should be able to tell what’s in the safe without opening it up, that’s all.
“What is the proper way to account for expenditures made to improve a warehouse building? Should expense above a certain amount be capitalized versus expense? Does is dependent on the nature, the expense like HVAC, flooring, lighting, et cetera?”
Troy: I’m going to have Jeff, jump in here with me, but if it’s over $25,000, it needs to be capitalized, meaning it’s an improvement, needs to go on your balance sheet, you don’t immediately expense it.
Toby: I’m going to complain to you guys.
Jeff: We’re going also by it says, “To improve.”
Toby: Okay. It always comes down to if I’m making the building more valuable or am I fixing a defect, right?
Jeff: Correct.
Toby: Is it a repair or is it betterment?
Jeff: A repair is really to restore to its previous use. We had a forklift driver who drove through a wall or something like that, that’s going to be a repair, even that might be an expensive repair.
Toby: Just so you guys you understand, I’ll use a roof as an example. If I have a hole in the roof and […], a repair, I get to write-off, I get to deduct the entire amount. If I improved the roof, let’s say I put a new roof of $10,000 and I already depreciated the old roof, then I don’t get to write-off the $10,000. I spread it out over its useful life, which if it’s residential, 27 ½ years.
Jeff: But Tax Cuts and Jobs Act made a change to that.
Toby: What did they make it?
Jeff: Made it 15 years long with the HVAC for tax year beginning after 01/01/2018.
Toby: I’m using it as one is improvement and one is a repairs and immediately deductible. The improvement gets fun, because even if we have to call it an improvement, it’s still maybe something we can write-off. I’ll give you three examples, number one, if you spend $2500 or less, you can immediately call that a repair and they can’t rebut it. If anything that I do that is $2500 or less, I can immediately call that a repair. Option number two is I do something like an HVAC and it quality under Section 170 and I can write it off immediately. Option number three is I have an item that’s 20 years or less and I chose to accelerate the depreciation by using bonus depreciation or 168 and I write that off up to one year. All of us don’t realize that they have that many options.
Jeff: And roof as well is a really good example of the improvement versus repairs because the […] used to be so ludicrous about how much you’re doing to roof. Are you just turning tiles off, or are you replacing side wood, and things of that nature? It was really crazy how they determine whether it was a repair or an improvement.
Toby: Yup, and somebody says, “Are you writing-off the materials and the labor?” Yup. The answer is yes, you’re doing both.
“I am trying very hard to build this stock and stock options to retire. I would love to learn and master the bookkeeping accounting, because I’m having a hard time finding the right answers for creating a trade log, where I keep track of my buy, sell, crediting, premium received, company expenses. Everything taken out of the account, for example, and knowing the balance, what’s available if I leverage the account. This is the first year that I’d like to sell naked puts. How are the tax calculated?” You want to jump on this?
Jeff: I’m going to go and do the bookkeeping side first, because I feel like your best sources of information is coming from your brokerage accounts.
Toby: Yeah, they actually report most of these stuff nowadays. It used to be they didn’t.
Jeff: No, they really forced the brokerage companies to report many things.
Toby: They won’t even report your basis and option until three years ago, four years ago.
Jeff: They weren’t reporting options at all, not that long ago.
Troy: We need to do bookkeeping for your ordinary expenses, but the actual trading side of it should be taken care off with your monthly statements.
Toby: Somebody says, “We use trade log software.” There a bunch.
Jeff: I think where this becomes important is you keep track of this, is that, you’re one of those people decide that you are a trader, doing substantial and continuous trading, and you’re making that market-to-market election. You’re bookkeeping suddenly becomes a lot more complicated.
Toby: Somebody just said, “Hey, use mytradingdiary.com It’s about $129, imports from your trading platform.” Here’s the deal, if you were trading in stocks and securities, it’s going to be passive income. Even if you’re doing it short-term, it’s still passive. Then I would just not set up to self employment tax.
The problem that we have is that, whenever you have an activity that’s investment activity, portfolio income, or whatever you want to call it, you’re not sweating your brow to make it, it’s selling securities. You’re not doing that for a third party, then we look at that and class it as investment activity. You don’t get to write-off things like seminars, your travel, or expenses, ordinary expenses like meals and things like that. You do not get to write it off against it. To make an insult to injury worse, you can’t write-off even management fees or somebody managing your portfolio anymore. They did away with miscellaneous itemized deductions.
Jeff: We’re talking broker fees, not what you’re paying to your management company.
Toby: We’re talking about everything. If you could have somebody that you’re paying, that’s basically getting an override a managing account of 1% and they’re making a $100,000 you can’t write it off. There’s one way to do it and that is it has to be a guaranteed payment to partner and you have to have a partnership.
Generally speaking, we’re going to have you set up either as a limited partnership or as an LLC taxed as a partnership with the corporation as a member or a general partner. You’re going to have to pay them a guaranteed payment or they’re going to have enough of an interest to where they’re covering the expenses and they have enough income coming to them to reimburse themselves. That’s basically it.
I know a lot of you guys say, “Hey, I’m a trader, hey I’m a trader.” The courts are literally littered with people trying to become traders. There is no code provision on it. There’s no hard and fast rule, nobody cite anyone. There are cases with people making $15 million a year that they said it was passive. You have people who did hundreds of trades a year, 500 trades, 600 trades, but they didn’t trade all year, they […] for two or three months and they said, “Wasn’t regular and continuous enough.”
As a matter of course, I would say, at a minimum round trip is probably 700 trades. Even then, I guess it wouldn’t […], because you’re taking Schedule C expenses against Schedule D income. It’s just basically sticking your nose out and making sure that you get harassed by the Internal Revenue Services, as supposed to partnership has an audit rate of 0.02%, less than a fractional percent, just do that.
Jeff: And I believe with have audit technique guides, reads for this as, is the investor or the trader looking to make a profit on the daily changes?
Troy: Literally, it’s a court rule. They took the […] and put it in a publication.
Jeff: Because you can be a trader, you can be a legitimate trader, but that does not make all of your investments trades. Some of them are still investments.
Toby: For example, if you are a sole proprietor and you make $100,000 a year, I know your audit rate is 2.4% and you’re going to lose 94% of the time. On the same token, if you’re a partnership and you make a $100,000 a year, your audit rate is 0.02%. You have a 1200% more likelihood of being audited as that sole proprietor, which is what you’d be as a trader. Your success rate is not even close. I think they win about 60%, but it’s not even close.
I just don’t want you guys getting audited, so I go to where they don’t audit, we just don’t see audits. If you want to be audited as a partnership, there are ways to make sure you get audited. Those are the guys that make up the 0.02% or as an S Corp, which also shares the same audit rate at 0.02%, just don’t pay a salary and pay out a lots of distributions. We just don’t see it. Jeff, you see the odds, do we even have a dozen last year?
Jeff: No.
Toby: We didn’t even have a dozen with 5000 returns. Just start doing the math, it’s almost never.
Jeff: A couple more questions to this slide, using the leverage accounts coateral, if you have a margin account the interest is going to be deductible.
Toby: Always, against the income that’s generating.
Jeff: Righ. The other thing, how is it going? How our tactics […].
Toby: You know what’s not deductible? When you lose your but and that’s the guy that made the $15 million of transactions, he had interest, he bought on margin, he had losses, and they would not allow him to take the losses against his other income.
Jeff: How are the taxes calculated? If you’re trading and new to this […] puts.
Troy: […] Like that.
Jeff: You’re almost always going to be short-term capital gains.
Toby: It’s when the options expires or it is liquidated.
Jeff: Correct. Unless you’re investing into something like […] they’re almost going to be short-term.
Toby: Somebody says, “What deductions can you get LLC as a partnership?” It’s not the partnership that’s taken the expense, it’s the corporation that’s a general partner. What you’re doing is you’re paying it a guaranteed payment, which comes off the top. Anything you pick corporation is a guaranteed payment. The corporation is a management company and it writes-off any expenses that it incurs, basically trading that partnership asset. Works like a charm, guys. I’ve been doing it for 22–23 years.
Jeff: I have a question for you, Toby. I have this corporation who is the general partner, we’re paying him, they’re managing the trading partnership. If they were incurring an advisor fee, could they bill that directly to the corporation?
Toby: Absolutely. If I’m going to charge an advisor fee, I’m going to say, “The corporation is responsible for it.” I’d probably do a 20/80 split and have about 20% of income flowing through the corporation. You’d have to make sure it […] behind it. You say, “All right, the corporation is going to incur all the expenses. The partnership is going to pay it X number of dollars and it’s going to be entitled to 20% of the profit.” I will just make it sure it’s enough there so that the corporation is getting […] enough to cover its expenses.
If you’d like more, a guaranteed payment means regardless, whether it’s profitable or not. I’d like to have a larger number, I’d probably say, “Hey, I’m going to pay the corporation with a reasonable amount, maybe $50,000 a year and I don’t think I’ll have to worry about covering all the expenses anymore.” Comes off the top, so I won’t have to pay tax.
Again, we’re trying to do the path of least resistance, something that works. We’ve won every audit that ever came up on it, although there’s very few, but when they do come up, it’s pretty easy to attract, because you have a statute in the States saying, “The general partner or the manager is into reasonable compensation.” It’s hard for the IRS to say, “Hey, that’s not fair.” When the statute says, “You’re entitled to reasonable compensation.”
“What are the best accounts in the chart of accounts you recommend to set up at QuickBooks to make the end of year tax filing easy as to transfer expense to an IRS tax […]?” I don’t really understand what the question is.
Jeff: I think they just want to know their chart of accounts should look like? We do have some sample charts of accounts on the Platinum Portal, all you platinum members out there. Then the bookkeeping department does also do a chart of account set-up to customize to your business. It’s the most important part of QuickBooks, is getting it set up the right way, that’s the most important […].
Toby: Depending on the type of business, if you’re real estate business, then go to the Platinum Portal and look at what a typical chart of account look like for real estate business. It’s actually pretty small. The other thing you do is look at tax forms, look at what they’re asking for and you’ll be able to get some pretty broad categories. You may have sub-categories like meals , you may have 50% deductible, 100% deductible, but they all go down to meals. At the end of the day, that’s what your doing is your just trying to keep it as simple as possible. You don’t say, “Meals with Toby, meals with Jeff, meals with Troy.” You have meals.
Jeff: Now, let me bring up a pet peeve from my past, with dealings, clients that are doing their own bookkeeping. Clients said, “This month I’ll put the expenses in his account, next month the same expense and I’ll put it somewhere else.”
Toby: That’s because there’s too many chart of accounts?
Jeff: Right. Even if you’re putting them all in the wrong account to start […]. Troy, do you agree with that?
Troy: 100%, consistency is key. It’s really easy to do a journal entry to move from one account to another, what you don’t want to have to do is go through every single journal or ledger accounts to see, all these needs to get moved here.
Toby: Which is why we recommend that people use spreadsheets. I don’t want you to mess it up. We’re just going to say, “Here’s what we always classify these at, these what we always classify these at.” If you have to decide what account it goes into, depending on how many you have, because we get it, we have clients, they have Christmas trees, they always tell me, “Look at my chart of accounts, look at this beautiful thing.” I’m like, “I don’t even know where to put stuff. Sorry, you have a lot of categories. I got income from this, I have this one, I have income from this category, I have income from over here.” I’m just like, “It’s all income, you’re killing me.”
Jeff: You have more accounts than MGM.
Toby: Yeah. “I’m currently a wholesaler, which means that you’re helping other people find properties. I’m not sure how to input my income into QuickBooks. I feel like I set it up incorrectly.”
Troy: Going back to the last question, getting it set up correctly is the most important part of QuickBooks. It takes care of itself once you get it setup the right way. We can help with that, like I said, we do chart of accounts setup, we can also do reviews, quarterly reviews, we can do Q&A session after the chart of account set up, definitely something. Use us, we know what we’re doing.
Toby: Somebody had a good question, “My minor children own their own IRAs.” It’s possible if you have a custodian. “Can I have a self-directed IRA?” That’s going to depend on the custodian, I believe they had to be over 18. You may have to help them. “After that, can you use that account to open a partnership entity?” You don’t need to. You would use a trading would be […] about expenses. You’d want to have a separate accounts. If they’re making an IRA, they’re not paying taxes anyway. There’s no reason to even pretend you’re taking expenses.
Let’s see what else we have, “Can I disregard an LCC right after rental car charges incurred while conducting business for that LLC?” You guys want to hit that?
Troy: Sure. As long as it’s for a business use, the rental car, you’ve been renting absolutely deduct it. The only thing that I could think of that might be an issue is this disregarded LLC is holding house or something like that, it’s not business use.
Toby: We say this just about every time we do a Tax Tuesday, LLCs are not a tax designation. If it’s disregarded, then we care about who the owner of that or that owner’s tax return. For example, if I have an LLC that’s disregarded to a corporation, then the rental car charges are going on the corporation, just going right on its books. We literally ignore the LLC. If it’s a disregarded entity going up to a holding company, then we have to take a look at what type of business is it.
Do we want to write-off the rental charges in an LLC that holds real estate or it would be better to have that in a management entity? I’m going to say the management entity. So while you could do it, I probably wouldn’t do it. I’d be reimbursing the LLC saying, “Hey, I’ll take that expense. Thank you very much. I am the manager, I will handle all the expenses and you’re acting on my behalf when you’re driving around in a rental car.” Yes, you can write it off, but obviously, if you guys are not catching on, these things are, it depends on quite a bit on how you set it up.
Somebody says, “I went to the Platinum Portal and ask about a guarantee payment, they sent me a template for a management agreement, is this the same thing?” Yes, because the management agreement has a said amount that you can […] and you can make sure you have agreement.
Here we go, “How does a business owner reduce the bookkeeper’s hourly rate and time in your books and improve on reporting?” Troy, before you go over this, I can just tell you from experience. Bookkeepers tend to be able to do about, I would say, 20 transactions an hour, but every three minutes, you can enter another transaction.
Three minutes per transaction is about right for somebody. If you have a lot of transactions, then you have to decide, “Do I need them all individually or should I summarize them and instead of my bookkeeper entering in 100 transactions, can I give them the total sales and just have them enter one transaction knowing that I have the data to back it up in another system?” That is probably the one thing that is the biggest time saver is realizing when you want your bookkeeper to enter something and when you want to just give them a summary and then I’ll let you guys answer.
Jeff: I’m going to jump in on this because you make a good point. This pertains not only the bookkeeping but the tax. The clearer your information is that you’re providing and the more that you summarize it yourself, the less is going to cost you for your bookkeeping I, assuming on tax returns also.
Troy: Yeah, that’s exactly right, Jeff. As long as we know what the transaction is, if it summarized and we have the information, that’s kind of […] not getting the information until way later, it’s hard for us to stay on top of it.
Toby: Somebody says, “How many transactions per minute does a bookkeeper typically take?” Again, I think it’s about one transaction every three minutes, so it’s 20 an hour. If you have a HUD, it takes about an hour per HUD, is that about right?
Troy: Yup.
Toby: You can use some rules of thumb. It doesn’t mean that you always just say, “Hey, I’m not going to have a bookkeeper.” It just means that, the more summary you can give them, the better and the more you guys can be on the same page, the better. If you know what they need and they know what you’re doing, then you guys can agree to a methodology to communicate that information over to them.
Somebody says, “If you have a summary total, that is more difficult to reconcile against the bank statements as bank statements are itemized.” Correct Frank, but you don’t necessarily need to enter into every transaction. You may go through and reconcile looking at your account or giving somebody a bank statement saying, “Hey, could you reconcile these transactions?” Is that a fair assessment?
Jeff: Yes, and that also goes back to what Troy was talking about earlier that many of these credit cards and bank accounts you can import and to QuickBooks, so they’re not entering every transaction in.
Toby: Right, now the bookkeeper is literally just going through the transactions, verifying against the sum. If you don’t have somebody reconciling your books, that’s how you get ripped off, by the way, is don’t have somebody independent reconcile your books. Just about every time I see somebody who takes a big loss from employee theft, it’s because somebody’s putting snow over their eyes and leaking it out and then they don’t realize that the account’s been drawn down.
“How does a business owner ensure documentation of receipts?”
Troy: Like Toby was saying earlier, you want to use a debit card or credit card, something like that, so it’s recorded on the bank statement and credit card statement, that helps out a lot. What a bookkeeper doesn’t want is a box of receipts to enter. The only time we’re ever going to ask for a receipt is if you paid cash for it and who uses cash nowadays, right?
Toby: Right.
Jeff: If you do want to keep copies of your seats, not saying you shouldn’t, I would do it digitally. I wouldn’t keep it all of these paper receipts and I’ll upload them to computer, making PDFs, put it in Dropbox or something like that.
Troy: Another reason for doing that is, if you’ve ever noticed some these receipts fade badly quickly.
Toby: Let’s take a snapshot. Most nowadays, they’ll have a thing that links to your phone trade buttons and these other stuff, or just use the old, “I took a picture of it and I told my accountant what it was and it’s still sitting in my cloud if I ever need a backup,” which hopefully you’ll never need.
Somebody said, “Hey, I’m using the 280A kit,” and they’re paying themselves for the corporation using their house and they said, “Is this a reimbursement?” No, Julius, it’s not a reimbursement. You’re actually being paid for it, but it is non-reported income, so long as you don’t rent your house more than 14 days a year, so it’s actually 14 days or less; or less than 15 if you look at the code.
As long as it’s 14 days or less, you just don’t have to report it. If it was to be reported, it would be income, but it’s excluded from income, just as reimbursements from a company to you are excluded as well. There’s exclusions to when you have to show income and that’s one of the good ones. Alright, “How does a business owner ensure the bookkeeper’s understanding of the big picture of the company?”
Jeff: During our onboarding calls, we should be going through every single entity you have and saying, “What that actually does, how it’s taxed?” and making sure that we understand what’s going on, what you’re doing with each one of those entities, that should be happening with every onboard call.
Toby: The big picture just means you’re spending time. Here’s the bit, if you have a larger company, if you’re going over $5 million, for example, you need an in-house bookkeeper, unless it’s like two transactions. Again, it’s a combination of not just the income but the complexity and the number of transactions. If you have a lot of transactions, you probably want to have an in-house bookkeeper and they need to understand your business, otherwise you’re going to find journal entries. I have a pet peeve against journal entries. That’s where they put things that they don’t know where to put.
They make these journal entries and you end up with messes because it’s usually six months after they started doing the journal entry that they look back and now they’re going back in time trying to remember something. If they don’t know it, you need to be able to get to it very quickly and make sure that they understand what it is that you’re doing. Otherwise, you’re going to have a mess and messes are usually expensive for the business.
Jeff: Even if you do have an in-house bookkeeper, I’d recommend getting them reviewed by a professional maybe once a quarter.
Toby: Absolutely. You want to have another set of eyes. By the way, we won’t do your books if you get over a certain size. It just doesn’t make sense. We’re going to ask you to have somebody and then we’ll still look at them. Again, the reason you’re doing it, there’s so many, but the big ones are you want to make sure that you don’t get too far off base. If you start going off track, it’s usually because there’s an assumption being made by somebody and hopefully we can call it and bring it back in. The other thing is you never let the bean counter have control the checkbook.
What will happen is the bookkeeper, it’s really tempting to let them write checks and to have control of the account and they’re reconciling everything and so while they’re writing checks to their uncle Ned’s pretend company and then they’re documenting it and they’re calling it an expense and the next thing you know, two years have gone by and $500,000 is missing. You finally realize something’s amiss and it’s usually when a check is bouncing and then by the time you go back in you’re like, “Holy shmoly, I can’t even tell what happened.” You actually go get copies of the checks.
The only reason I say that is I’ve done that dozens and dozens of times with businesses. I have not run across the business yet where they handed the keys to somebody else, that did not happen. You got to have another set of eyes looking at it and reconciling things.
Jeff: I think it’s also important that you as the owner if you do have a bookkeeper, you don’t need to know how to use QuickBooks, but you do need to learn how to read those financials. You need to be able to go to your bookkeeper and say, “Hey, print me out a monthly balance sheet, and P&L,” and just be able to look at them and say, “Oh, something doesn’t make sense here,” or “We’re going really well.”
Toby: You can usually tell. Most people can usually tell what they should be expecting. If I know that my profit should be $100,000 and my bookkeeper walks up and hands me three months in $20,000 in losses, and looking at it and going, “What’s going on here?” it’s usually a mischaracterization or a misclassification because you’re like, “Hey, I’m profitable, why am I looking…” and if you’re not profitable and you think you should be, something’s horribly wrong and you want to make sure that you’re taking action.
Right. “How does the bookkeeper, tax preparer, and CPA work together to help reduce taxes for the business owner?”
Jeff: We don’t even talk to each other.
Troy: No, do you? In reality, we’re working with your bookkeeper and your tax preparer are working together quite a bit. When your books are completed, if your tax preparer has any questions, they’ll come down to the bookkeeper and we’ll go through the books, go through the general ledger, make sure everything’s simpatico. Your bookkeeper can do some very basic tax planning. Your tax preparer and CPA will be the more high-end stuff.
Toby: Your bookkeeper is giving them the tools like, “Here’s the picture.” If you don’t have good numbers, it’s really tough to do tax planning right. The preparer is usually just preparing what the books say. If I have a good set of books, a corporate return is less than an hour. It’s really easy to prepare it. It all comes down to having this set of books and that CPA’s going to know, “Hey, here’s our options for classification. Do we want to accelerate certain things? Are certain things even eligible for…”
Again, I kind of mentioned it before, you could have a safe harbor, you can have a 179, you can have a bonus depreciation, or you can treat it at 5-7 years depending on how it’s classified. That CPA should be able to say, “Here’s your options. Option number one, do I want to create a big loss?” “No, it doesn’t do me any good.” “Alright, option number two is we’re getting close to break-even and then we’re going to have a consistent breakeven for many years.” “Maybe I’d do that, or maybe I take a huge loss and carry it for the next five years,” and you’re able to say, “Hey, this is how that’s going to impact my tax situation.”
I’ve met people who had their accountant. They had a big old fat loss carry for it. They don’t even remember when they had it and then they run out. They’ve been using it for so long they get to the idea that they don’t have to pay income tax on any of their income.
For example, their stock income. We have people doing that. All of a sudden, they are. Sometimes it catches them by surprise. They’re used to, “Hey, I’m make $100 off of this, but I don’t have to pay tax on it.” You got to be meeting with the accountant to say, “Hey, what’s our projection for next year?”
Jeff: The way this works is you may have a bookkeeper who’s doing your books and doing a little planning, but their work is also going to be reviewed by a supervisor who may have further suggestions that’s going to go to the tax preparer who will make adjustments, or have other ideas, or additional ideas I should say, and they also have a supervisor who’s also reviewing that return. A lot of eyes look at your books from the time you start until the time you get your tax return.
Toby: Right. Somebody says, “Hey, are losses able to be used for five years?” no, I was just using that as an example. This gave somebody a heart attack. You can carry them forward definitely.
Jeff: NOLs.
Toby: NOLs are going forever. Don’t worry, I didn’t think I just input it. I think I just gave somebody a heart attack. “Does a business owner need to work with their business accounting person on a monthly basis?” It depends on the level of complexity and what type of business, but for the most part if you’re an investor, I would say on a quarterly basis check in.
Jeff: Yeah, because you’re bookkeeper can point out things that you’re selling this product for this much, but your cost in your product is this much, so you’re not even making the money out of the gate.
Troy: At least I’d say, you need to look at your financials once a month.
Toby: Look at yours, get a good idea, but as far as talk with your accounting person, I’d say quarterly. Really look at doing tax planning on a quarterly basis. If it’s just not yielding a positive result for you like it’s not making any difference, then you can scale it back but I would say especially in the first year, you want to know, you don’t get blindsided with either a tax liability or you don’t want to leave losses on the table.
Here’s a fun one. Well, this is a weird one. Someone asked a question online, “I found my 2015 tax return in 2016. Is it too late to amend the 3 three years from the date of filing?”
Jeff: Yeah, that ship has sailed.
Toby: Yeah, that ship, I’m sorry.
“I have a ranching business organized in an LLC as an S Corp and just bought a new truck in the name of the business. I use it primarily for business use.” Well, let me hit that one real quick. First off, if you have a personal use of a business vehicle, then the IRS give you a scale every year depending on the value of that asset as to what needs to be included in your income.
If I have a truck that’s the business’s truck and I’m using it 90% personal, then the IRS publishes the lease value that I included in my income and that truck, let’s say is a $40,000 truck, then I’m going to go to that and I’m going to include 90% of that as income. It doesn’t kill your bail or anything like that, it just means I have to pay like I’m using somebody else’s vehicle. Say if I go rent a car from Avis. I’m using their vehicle. I’m agreeing to a price. If the business is in charge because you own the business, it still has to be added.
“Similarly, we are currently building a garage shop they’ll be used partially for business storage and partially for personal use. Does paying for it with the business jeopardize your corporate […]?”
Jeff: My feeling on this, I would rather have the garage, especially if the garage and the truck is owned by one person, one entity, and is renting it out to the people who are using that or the entities that are using that.
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