Secret to Unlocking Often Missed Tax Savings in Your Painting Business

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution. While we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decisions.

Hey, this is Daniel, the founder of Bookkeeping for Painters.

And this is Richard. I'm the tax director for Bookkeeping for Painters. And welcome to the Profitable Painter Podcast. We're happy to have you here today. Today, Daniel and I are going to be talking about one of the best-kept secrets when it comes to taxation. I love it when people say the best-kept secret because that usually means it's the thing that everybody knows about already. And but it's something you should know about, and that is accountable plans. If you, if you have an entity. So if you have a partnership or an S corp or C corp, then you're definitely going to want to know about an accountable plan because an accountable plan is a very powerful tool that allows you to reimburse yourself from your company for business expenses that you pay for yourself. And so that, of course, would be, you know, cash that you spend on business materials. But it can also mean for the use of your personal property in the business, such as having a home office or running your personal vehicle for business use.

So when you said that, you know, I can— I know a lot of people are thinking right now, I was like, I've never heard of an accountable plan. And, you know, I know I tell my CPA or my tax person like, hey, I use my vehicle or I had mileage or I use my cell phone in my business and they never mentioned accountable plan. So what are you talking about here? Why is this new to me now? And was I not getting these deductions before?

Sure. Well, well, if you are a sole proprietorship, so in other words, you file your taxes on a 1040 Schedule C, then you don't need to worry about an accountable plan because you are taking your expenses directly. When you're a sole proprietorship, there is no difference between you, the individual, and the business that you run, at least from an IRS perspective. So if you use your car in your business, you just take that deduction directly as automobile mileage. If you use your home office, you take that directly. If you spend your own money on, you know, buying materials and supplies, you deduct that directly. The problem comes in when you have an entity. So partnership, S corp, C corp. Now your business is its own it's its own animal. You've at least asked the IRS to treat it as its own animal, which is completely separate from you, who is an employee of the business or a partner in the business. And when that happens, we have to have some kind of framework in place so that the company can reimburse you when you spend your own money, because otherwise it doesn't happen automatically. You know, hopefully if you're submitting deductions to your CPA, he is helping you get those deductions. But if it's not being put through an accountable plan, it could be that you are missing out on those tax deductions. You know, by default, any time you— a business gives an employee money and that that includes a shareholder employee. So maybe you're an owner in the business, but you're also an employee of the business. Anytime the business gives you money, by default, that's a taxable event. There is no gift giving, unfortunately, not of cash at least. That has to be reported on your paycheck. We have to assess payroll taxes and it has to be reported for income tax purposes, but an accountable plan allows you to do tax-free reimbursements. So for example, let's say— I know I've used this before— let's say you walk into Sherwin-Williams and you buy $100 worth of materials for the job and you don't have the business credit card on you. So you just pay, you know, the $100 bill out of your wallet. Now, if you don't run that expense through an accountable plan, Technically speaking, if the company gives you $100 to cover what you paid, that's taxable income to you. We don't want that. You shouldn't have to pay taxes on that. We should be getting a deduction for that. So if we follow the rules of the accountable plan, then we're able to take that $100 tax-free and the company gets a deduction for that. You can see that there's, you know, obviously some benefits to this. Both the employee and for the company itself. And I want to point out, too, I'm talking a lot about shareholder employees because a lot of us, you know, we may be single-member S corp, so we're the only employee in the business. But this applies to any employee, not just shareholder employees or employees who have an ownership in the company. So what are some of the benefits to the employee? Well, for one thing, it gives them lower— a lower AGI, a lower taxable income. If you're— if your employee is making $50,000 and you need to reimburse him for $10,000, then rather than upping his pay to $60,000 where he's going to pay more taxes, he's going to start to hit phase-out thresholds for things, you know, for credits and things like that. You're keeping his AGI lower. And so he's paying less taxes and more credits and things are available to him. It also means you're not paying payroll taxes on that $10,000. And so half of those payroll taxes are paid for by the employee. That's a 7.65% savings to them. So employees love accountable plans. Corporations love accountable plans. Because they're not paying 7.65% in payroll taxes. So that's a savings. It also allows them to get deductions for things that, you know, an employee purchased. So, you know, if he buys $10,000 worth of materials and supplies, that's, that's a $10,000 deduction to the company. So it's Yeah, yeah, it's a win-win.

Yeah, it sounds like, you know, the employee gets the benefit of getting reimbursed through payroll, no tax, no payroll taxes applied to them. The company gets that deduction. So it's a win-win really for that to use that accountable plan because it's good for the employee. So whether that be the owner slash employee, employee, or just, you know, Joe the painter employee, and also the company itself, whether that be a corporation, a partnership, or an LLC taxed as an S corporation. It's good for those types of entities, it sounds like.

Yeah, yeah, that's right. Now, when you, when you do these reimbursements, again, that is not income to the employee. You might choose to report it on the W-2 in Box 14, which is kind of the catch-all box for, for nontaxable benefits and that sort of thing. But you're not required to. In any event, the employee is not going to be paying taxes on these reimbursements. And if you're the employee, if you're the owner or the shareholder employee, it is an excellent way to get money out of your business to yourself without having to pay taxes for it. Now, we do have to follow the rules, right? Because, you know, by default, the IRS is going to want to tax anything, anything that you get. So the rules on accountable plans are pretty simple. It basically comes down to good recordkeeping. So you or your employees need to submit a record of your expenses. Doesn't have to be fancy. We've got some premade spreadsheets that we give our clients that kind of help them know what to fill in. But it can be, you know, any kind of a list. You don't necessarily have to keep receipts, but it wouldn't be a bad idea if you did, because each expense has to be a legitimate business expense. and we need to be able to substantiate that just like any other, any other deduction. One of the biggest things that can kind of get us in trouble is has to do with timing, right? So these have to be submitted within a certain amount of days. So the employees need to account for their expenses within 60 days of incurring them. Which means they need to get those expense reports to you. I like to recommend once a month because even if they miss a month, they're still within that 60-day timeframe. But at least once every 60 days they need to submit these expenses to you. Now, another thing you could do is you might be able to foresee in advance that they're going to have some expenses. And you might say, well, you know, I don't want to ask my employees to have to come up with this cash to, to buy materials for my jobs. So I'm going to give them what I think it's going to cost in advance. And that's fine as long as they account for the expenses after they happen. And if you end up giving them too much, So say you gave them $1,000 to buy supplies and the total came out to only $900. They need to return that $100 to you within 90 days or— I'm sorry, 120 days. They get, they get 4 months. That's 4.

There we go.

4 months. As long as they return that to you within 4 months, it's not a problem. But if they keep that extra $100, then it becomes taxable income to them. So the big thing with accountable plans is just get your timing right. Don't wait too long to record these things and to have the money change hands.

Yeah, it seems like a big opportunity for owners, owner employees is, you know, as an owner of a painting business, you are using a lot of your personal assets to run the business. So you're working out of your house, you're using your personal cell phone a lot of times, personal vehicle. There's all these things that you're doing using personal assets in your, in your painting business. And a lot of the times folks are missing out on a bunch of deductions when it comes to that. And I think the Accountable Plan could probably help them out a bit with that.

Yeah, no, absolutely. It's amazing, like, because we're so tied to our businesses, which is great, right? Our business is our baby and we're so used to just giving everything we have to it. And sometimes we forget, like, hey, we're not getting tax deductions when we drive our personal car to the job site. And, you know, we're using our cell phone almost exclusively for business, but we're paying for it out of pocket. Can we, can we recoup some of that money? And the answer is yes. If you're using your home for your business, you know, we have clients who store materials in outbuildings on their property or are running the entire business from their home office. You know, these are business expenses that they need to get reimbursed for. And the accountable plan is excellent for doing that. So maybe we should talk a little bit about like some examples. Of, you know, reimbursed reimbursable expenses and how that might work. One that I get probably more so than any other has to do with vehicle expenses. So if you are using your personal vehicle for business, you definitely want to keep track of your mileage. Mileage is king when it comes to figuring out deductions. You can write it in a little notebook. They've got special logbooks you can buy at Walmart, Office Depot, or if you want to be, you know, a little bit more tech savvy, there are apps like MileIQ and a few others that will track your mileage using your phone's GPS. I don't— haven't used MileIQ myself, but I have heard some good things from, from people who enjoy that. So why is that so important? Well, once you know how many miles you've driven for business, then you can figure out what your reimbursement would be. Easiest thing to do is to use what's called the IRS standard mileage rate. This number changes every year, but for 2023 it is $0.65 per mile. So if you drive 10,000 miles for business, you are able to reimburse yourself $6,550. 10,000 times 65.5. Daniel, did my math check out on that? I tried to. I tried to. Yeah, I think it did.

And I can't do public math.

Okay. I'm sorry. I didn't mean to put you on the spot. Let's just— yeah, it did. I tried, I tried to use a round number anyway. What are some of the advantages of— or actually, what's the other option? Okay, so, so that's the standard mileage rate. The other option is to use actual expenses. So actual expenses would be depreciation on the vehicle, which can be a little tricky to figure out sometimes. Interest on your auto loan, gasoline, repairs, maintenance, insurance. Now, we can't take all of these things if the vehicle is mixed use, both personal and business, but we can figure out what percentage is business based on the miles and take that percentage. So Another example, you drive 20,000 miles in the year and 10,000 of those miles are for business. 10,000 of those miles are for personal. That is a 50% business use. So you add up your depreciation, interest, gas, tires, repairs, insurance, and you take 50% of that as a deduction. So there is more work involved in doing actual expenses because they do need to be substantiated. You have to keep your receipts on that, and you have to figure out things like, what is my depreciation, what is my loan interest? Um, so it can be, it can be a little trickier to do it that way. Another thing to consider when you're trying to decide between standard mileage rate and actual expenses— so we're going to get, we're going to dig a little deeper on this— is what kind of vehicle you have, how fuel efficient is it, and how many miles do you drive it. So let's use, let's use two extremes. You have a rather fuel-efficient vehicle that's moderately priced. It's 5 years old, doesn't need a lot of repairs, doesn't burn a lot of gas. You're almost certainly going to do better with the standard mileage rate than you are with actual expenses, because that 65.5 cents per mile has depreciation and fuel and repairs already baked in. And it's probably going to be more generous than you would get if you actually figured out those expenses, if you had that kind of vehicle. Now, on the other extreme, let's say you have a $200,000 Porsche that gets 6 miles to the gallon burning premium and costs $2,000 every time you get an oil change. That type of a vehicle is going to benefit from actual expenses. It depreciates like a rock, is incredibly expensive to operate. I don't know why you're driving it in business anyway, but maybe you're a doctor or maybe you're a lawyer and this is something that, that, you know, works for the line of work that you're in. That's going to be something where actual expenses would benefit from. But most, most of our clients, most of the people listening today are probably going to want to use standard mileage rate, if for no other reason than the convenience of it.

Yeah, I think a lot of the, the owner, owner operators, they're— if they're doing a lot of the sales, usually they're using a smaller vehicle. I mean, some of them are using, you know, maybe a truck or something, but, you know, it's a moderately priced vehicle. It's getting a lot of miles. It's okay on gas. But, you know, if you're using a super, like, I don't know, a Ford 9— I don't even know, the F-950 or something crazy, like huge and just, you know, $100,000, you know, off the lot and just ridiculous on gas, that would be something that you might want to depreciate and take actual costs of. But if it's like a kind of a simple F-150, you know, reasonably priced, it's probably, probably good taking mileage.

Yeah. And just being, you know, the accountant that I am in the spreadsheet that that I give my clients for, for figuring this out, it allows them to put in both the standard, put in the miles they've driven and their actual costs, and it will calculate which one is better for them. And with the accountable plan, you can kind of switch back and forth depending on which is better, which is not something you can do when you're filing a Schedule C. You're filing a Schedule C, you kind of have to stick with one or the other. You can switch from standard to actual one time, but you can never go back the other way. With the accountable plan, you have a little bit more flexibility there because again, these are— this is a reimbursement. This is not a straight deduction. Another one that comes up a lot has to do with your home office. So Just to reiterate, to have a legitimate home office expense, you need to have an area that is regularly and exclusively for business. So you're working out of it on a somewhat constant basis and it's set aside for business only. So that's, that's not your kitchen table where you eat dinner and you also work on your laptop. That, that's not going to work. But if you can set aside a room or even a part of a room and you say, this is where I run my business and this all I do, that qualifies for a home office deduction. In this case, you're going to want to get the square footage of your home office and also the square footage of your entire home to figure out what percentage is for business. So to keep it simple, let's say you've got a fairly good-sized home office of 200 square feet in a 2,000-square-foot home, that means 10% of your home is used for business. So your reimbursement is going to be 10% of your whole house costs. So depreciation, mortgage interest, property taxes, homeowner's insurance. If you are renting, if you don't own and you're renting, then your rent would take the place of like your depreciation and interest, lawn maintenance, house cleaning, utilities, any expense that covers the entire home. You could add up, figure your business percentage, in this case 10%, and that would be your reimbursement. Now, those are your indirect costs. You also have direct costs. So those are going to be expenses that apply directly to your home office. And I'm saying home office, but any business or any part of your house that is used for business, the cost of putting in new flooring in that room would be 100% reimbursable. The cost of painting the walls, fixing or not fixing, but adding lighting, that sort of thing would be 100% reimbursable. So that's how you would figure your home office deduction. Now, some, some of us may have been using the simplified method when we were sole proprietors, the $5 per square foot, which is a great method for when we're filing on a Schedule C. Unfortunately, that does not apply to reimbursements. So don't multiply 200 square feet by $5 and figure your reimbursement that way. You want to actually have the actual expenses. One reason that's how we're required to do it, and two, it's all— it's probably going to come out better for you anyway. One nice bonus is that when you're doing a reimbursement for your home office, you don't have to worry about recapturing depreciation when you sell your house. And that's different than when you are a sole proprietor and writing off business expenses. So that's a, that's a nice way of using your accountable plan there.

Yeah. So talked about the vehicle reimbursement, how to get reimbursed for vehicles, using your home. And I know another common one is cell phone use. And what are some other common ones that come up? I guess internet, but that kind of ties back into the home office.

Sure. Yeah. So, so cell phone use, again, figure your business percentage. If you're half on there for business, half on there for personal, reimburse yourself for half. Daniel, you mentioned internet. So we want to be careful here because we're in a digital world. Pretty much everybody uses the internet for personal use as well as business. So you're going to want to separate that out. I have heard of people upgrading their internet to higher packages in order to accommodate their business use. So maybe the lowest— maybe normally I'd have the lowest tier package But now I'm on Zoom all the time, so I have to upgrade to high-speed internet. Well, that upgrade could be justified as a business expense and be able to be reimbursed. You might do like internet hotspots. If you travel a lot, you spend the $20 to get Wi-Fi on the airplane. So that you can conduct business on your flight, that's definitely reimbursable. Meals for business travel is a big one. You're flying to a conference, you're traveling for business, and you're buying meals in a city that you don't live in. Those could be reimbursed. Taxis, car rentals, Ubers, hotels, that sort of thing could be reimbursed. Different business services you might have that you pay for yourself. I mean, there's, there's a myriad of different business services that we use from, you know, virtual post offices to, you know, different things on the internet that make, that make it more convenient for us to operate. If the company is not paying for those already, we want to make sure that we're getting reimbursed for that. Training and education. If you, if you are paying for courses to, to further your professional development, that's something else that you could get reimbursed for. And something else I probably should have mentioned when we were talking about automobiles is parking, tolls, and car washes. Those are reimbursable. And they're in addition to the standard mileage rate.

Yeah.

So you're taking the 65.5 cents per mile. We know that you can't, you know, that, that 65.5 cents per mile includes your gas, insurance, tires, but it does not include parking tolls and car washes. So, so add those to that standard mileage rate.

Yeah. And going back to what you said about the training, you know, one, a common certification is the EPA lead certification. So if you or your teammate start getting that, definitely make sure you're getting them reimbursed or getting yourself reimbursed through the accountable plan or obviously the business paying directly. But get reimbursed for that education and training because that definitely applies to the business.

Yeah, absolutely. So, so we've got all these things that we can get reimbursed for. How hard is it to set up this accountable plan? It must be really difficult because it's so beneficial. Well, the good news is it's not. Technically speaking, you do not have to have a written plan, but I do recommend one. We give our clients sample adoption documents that they can use, which basically just says, my corporation and my partnership is adopting an accountable plan. We will abide by the rules of the plan signed by the officer and put into the corporate minutes. Now, I guess you don't have to have that, but I love to have source documents. I love to have paperwork that, that backs us up. So it is something I do recommend and that you can do. And then the other thing is the expense report. Make sure they're putting in writing their expenses, and that includes you if you're the owner employee. If your cell phone bill is $100 a month and you're using it 50% for business, Write in $50 expense to be reimbursed so that you have some kind of paper trail, because if you are to ever be examined, that's what the IRS is going to want to see to make sure that these, these reimbursements are tax-free. But other than that, there's not a whole lot of, of like, you know, admin or recordkeeping that goes along with it. So, so definitely, if you haven't been using an accountable plan, I would strongly recommend that you think about implementing one. Make sure that you're getting those deductions that you deserve and make sure that you're not paying any more taxes than you have to.

Yeah, I think that's definitely the main takeaway. And if you have any questions about accountable plans or what you've done or clarification on anything we cover today, definitely go to Facebook, type in Grow Your Painting Business in the search bar, and request an invite to join the Grow Your Painting Business Facebook group, and we'll definitely accept you. And feel free to ask any questions directly to Richard and I, and we can get back to you on clarifying anything in the podcast or even questions or any ideas for future podcasts.

Yeah, let us know, you know, what type of expenses you reimburse yourself for. We always like to be able to, you know, collaborate and see what other people are doing. So we'd like to hear from you. You know, that being said, thank you very much for listening. We certainly appreciate your support and we will see you on the next podcast.