Can Starting a Business help Save Taxes? | Main Street Business Podcast

Welcome, everyone, to the Main Street Business Podcast with Mark Kohler and Matt Sorenson. We are excited to be with you today. Talking about. Yeah, today we're excited every day. But also today.

Yeah, recording the podcast is our favorite day of the week. It's really fun to just. First of all, I'd hardly ever talk to Matt if we didn't force ourselves on lunch to meet and do this. And we've been doing it, boy, for seven years, every week, Wednesday at noon. You'll find us here.

It's our seven date night. Date night.

It keeps a partnership strong. You know, you need that love in your relationship. So. All right, well, today's topic. Let you roll it out, Matt. This is a good one.

Yeah, we want to talk about whether starting a business can save you taxes. I mean, as business owners, ourselves, business and tax lawyers working in the trenches with clients over the years, we've learned something about this. We can answer the question.

Yeah, we can answer this. And Matt's a tax lawyer. I'm also a cpa. And all we do is small business. Hence Main Street Business.

Podcast people, we're here for you.

We've got a few questions that we gathered before the show. And we're not going to do a little tax tip or legal tip. We're just going to dive into this. We're not going to talk politics. We're getting love mail and hate mail from both parties. So someone said that means you're doing a great job because no one can tell where you're at. So we're just trying to do. If we start telling you who we're voting for, we'll lose half our audience.

Yeah. So, but, you know, saving taxes is something everyone's looking at, right? I mean, those of you that filed an extension, you know that's the extension deadline is due in a week, if you're listening to this podcast. Right when it airs. And so it's a topical time. Also, end of year, this is the time when tax planning happens. You do not do tax planning and save on taxes. In April, when you're doing your tax return, you save on taxes by doing it in the tax year. And most of that's happening at year end for a lot of our clients who get some time. Get your extension, get your return filed, then get your crap together for 2020 with some good tax planning. When so much of it resolves. Excuse me. So much of it revolves around owning a business.

Well, here's how our format generally works. Matt and I try to one up each other throughout the show with good comments. So that gives a better result for you, the listener. So we've just got some questions that people have emailed in on this, and we're just going to dive into it. Matt, may I make the first comment?

Yeah, please.

Okay, I'm up to the plate. The question is, will starting a small business or can starting a small business help save taxes?

Yes.

Resoundly. Yes. It'll also help you build wealth. It actually will relieve stress in your life. It can bring your family together or get rid of some family members. It can. It can do a whole host of things. And we're going to go through that, but just dealing with taxes. And I want to explain how that works. We're going to get into the technical pieces. It's not going to be too technical. You're going to love it. But I want to finish this point with yes. And one in three Americans, working Americans, one in three now have a side hustle, or a side gig, as they call it. And that's a small business. You got to take advantage of that. If you drive for Uber, if you sell crap on ebay, that's a small business. It is, yes. If you own a rental property, that's a small business. So I think people sometimes just miss the fact they even have a small business.

Yeah. And the most common small business out there is the side hustle. You know, you've got the day job, or maybe your spouse works full time and you're dealing with kids and doing something on the side, you know, so this side hustle, which, like one and what is it, one in three Americans have a side hustle. I mean, this is awesome for tax planning, and we'll get into that. But just think of the things in your life that are personal expenses that now become business expenses. And that's one of the key things and tips of this. But also, I think it also is building financial freedom, too. Mark's got a book called the Business Owner's Guide to Financial Freedom, which is for business owners. But one of the main attractions to owning a business is getting financial freedom in many other ways. And so you could. There's. There's many benefits to it, as Mark mentioned as well. But I think, just think of the, you know, you might be in it for the tax savings, but to get started. But then you stay for the financial freedom. Yeah, it's okay.

Now, I just asked my studio producer here to give us a whiteboard, and I think visually, for those that are listening to this on a podcast, I'll explain what I'm going to draw here if you're able to catch this on

YouTube and share it.

So powerful. Because if one in three Americans have a side hustle and you're listening to this, you know at least five to 10 people in your life that are making money on the side. And this little show could be very, very helpful to them. So what I want to diagram here is what a basic tax return looks like. Now, I know this might drive some of you crazy, but I'm gonna. Let's put it on the left side of me so I can write with my right hand.

Wow. Did you guys. You're listening to a podcast of someone diagramming a tax return. Let's. Okay, you picked this podcast, people. Okay.

Don't turn it off.

Okay.

Yeah, this is good.

All right, give him a shot. Okay, Give him a shot.

Close your eyes. Unless you're driving or running on a treadmill. Okay, just imagine a vertical rectangle. So there's a piece of paper, and that is your 1040. That is your tax return. So that's all I've done. I've just drawn a vertical rectangle that looks like a eight and a half by 11.

It looks like a tax return. Okay.

Yep, there's our 1040. Now this. Now with the tax cuts and Jobs Act, Paul Ryan, Nancy Pelosi fighting it out, and then Donald Trump, they all. They wanted to simplify the tax return. So. But so the actual tax return in the last two years, the numbers have kind of moved around the page. But just work with me. For any of you accountants out there for the last 50 years, in the bottom right hand corner of this little rectangle that I've drawn, that piece of paper in the bottom right hand corner is a number. And I'm going to test Matt here on it. It's called AGI. What's that stand for, Matt?

Adjusted Gross income.

You're so smart. I love it. That's a nerdy accountant. Okay.

I should have had a note for that.

Okay, this is adjusted gross income. This is the line whenever you hear in the news, above the line, below the line, above the line, deduction, below the line. All that crap is this line at the bottom of the paper, this AGI. Anything above AGI is a frickin awesome write off. We love that. Write off. Anything above AGI saves you taxes. Right now, anything below AGI pretty much sucks. That's paying taxes and paying for stuff. So one example that I'm going to shut up and Max is going to make this so much more understandable for everybody else. So I've got this piece of paper, bottom right hand corner AGI. I've drawn an arrow up to the top indicating very good and then an arrow down below indicating bad. Okay, so what millions of Americans do, I'll use the cell phone as an example. They pay for their cell phone with after tax money. Common. Unless your job's paying for your cell phone, you're going to be out a couple hundred bucks a month. Maybe you got a spouse, a partner, a kid, someone's on your cell phone plan, usually with you. So you're going to be out at least 200 bucks a month. Let's say 200 times 12, that's $2,400. So you've spent $2,400 on a cell phone throughout the year. So I wrote that down here in the bad section below AGI. But if you have a small business, you can deduct that entire cell phone bill above the line. There's been IRS rulings in the last four years that as long as you can show you have a dedicated line for personal use, a home phone line, a hole in the wall. Plug in the wall, you know that you're good to go. This is why Nona rider with the yellow phone and stranger things, you're blowing up on the wall. This is that wall phone allows you to write off 100% of your cell phone. So if you have a side hustle, I can now write off that $2,400 and this number below goes up above. Now I just got a write off for $2,400. Now what that means is it reduced your AGI by $2,400. That means I'm going to pay taxes on a lesser amount. I'm going to pay tax on $2,400 less. Now if I'm in a 30% bracket, let's say 25 Fed 5 state, just hypothetically, if I take 30% times that $2,400, I just saved $800 by writing off my cell phone.

I saved $800, which you're going to pay for anyways.

That is the first concept. Now there's more to this. There's more, but this is our first concept and I'm going to finish it with this. Any expense below AGI below this paper I call a personal conversion expense. It's kind of a religious experience. I want to convert those expenses over to a business write off. So now all of a sudden, cameras, cell phones, drones, home office, travel, dining, auto, all these expenses that you're going to pay for anyway. If you have a small business, we might be able to convert them above. So that's my concept. Matt first.

Right.

And I know you can expand on that. What do you think?

Yeah, I love that. I mean that is, that's going to save you taxes. You cannot find a small business owner that's got a legit side hustle that's using these things. That's not saving on taxes. Just you're going to. Unless you're like, keep putting your head in the sand. But just think of Kramer in Seinfeld explaining to Jerry why he should just spend the money on something. I forget what it was, but he's like, it's a write off, Jerry. It's a write off. Who cares? It's a write off. Right? All the big corporations do it. All the big corporations do it. It's a write off. Just spend the money.

I love Jerry's.

Just once, I don't think you really know what a write off is. Yeah. Now that's an important point because obviously you could start a business and spend money in the business. That's money you wouldn't have spent except for the business and you needed to spend it and you're going to get a write off for it. But you spent money to do it. Right. So sometimes the low hanging fruit is already picking up the things you're already spending money on.

Right.

Pick up the like. Do you have software that you use in your business that also you have personal use? You have Microsoft Office, whatever. Think of, think of your Internet, the marks at home office like you're already incurring these expenses. Now you're gonna find a way to get a deduction on it above the line too.

Now if there's an IRS agent listening or another accountant out there that writes some hate mail to me once in a while because they think I'm a little too aggressive. And here's the disclaimer. There are certain expenses you're going to have to prorate or bifurcate. I love that word. So let's say it's a camera. And you don't do full time camera, video or pictures for your social media or your website. You might use it occasionally personally. Well, we might write off 80% of the camera and call the 20% personal. I don't want to get overly aggressive. I don't want to get audited. But the point is so many people leave money on the table because their accountant is afraid of their own fricking shadow. And there are tons of expenses in your Household, in your garage, in your toolbox, in your car, on the desk that you're using for business and you deserve, and it's honest and righteous to take a write off there. That's okay. Don't freak out.

I like that. Thank you for the disclaimer. You know, what do you think? Podcast with two lawyers, you're gonna get at least one disclaimer.

Thanks. Okay, we may come back to the whiteboard, but the whiteboard is off the set for you driving home or on a treadmill. We're all good. Matt, I'm gonna pose a question that came in via email and they said, essentially, I want to paraphrase it, they said, yeah, starting a business saves taxes, but only if I lose money. I mean, do I want to set up a business to lose money? Is that how I'm saving taxes? Is that really what I'm doing? What do you think? How would you respond?

Well, you only pay tax on money you make. So, you know, think of your. Any business, let's say you have a hundred thousand in revenue. Okay? You've done services, you've sold product, you have a hundred thousand in revenue. It took you 60,000 in expenses to do that. Well, you're only paying tax on the 40,000 left, you know, and so do you. So sometimes I feel like people are like, well, wait, this will bother me all the time. All this very successful client who's made a lot of money, who's had a good year, and be like, I don't want to pay taxes. Well, I'm sorry, you can't write off everything. I'm like, this is a sign of success. You've made some money here. So the strategy, of course, is to expense as much as possible. But if you're having success, if you're making money, you're gonna have to pay taxes. There's no way around that. Unless you're Wesley Snipes and you, you end up in prison for not paying your taxes.

Yeah, don't let. I want to make this point. We don't want any of our clients to set up a business to lose money. That is counterintuitive.

And there's a loss rule to that. Right? Like if you have certain amount of losses over recurring years, like a few years, you just have loss, loss, loss, loss. The IRS is going to disallow that business and any of those expenses.

Yeah, let's jump over to that. The technical rule is you have to show a profit at least by the third year. So within a three year period, you've got to show profit at least one year. So you could lose money the first year, lose money the second year. But on the third year, when you file that tax return, you better show a profit or the IRS is going to possibly. No one's going to jail, no one's going to get. IRS isn't going to bust through your kitchen window and, you know, whatever. But what the IRS is going to say to you is, is this really a business? Is this really a hobby? Or do you just suck at this business? I mean, why are you losing money three years in a row? The average person wouldn't do this. And you're saying I'm doing it to save taxes. Well, the IRS isn't okay with that. Yeah, you got to show some profit. And I want you to show a profit.

Yeah, just, you know, I mean, we want this to be a legit business that's going to have success. And I think that's what our clients are doing. You know, whether that's some consulting on the side. It's an Amazon store, it's a, you know, a rental property. I mean, that's one of the easiest layups. Great wealth building strategy. It's like the gateway drug to small business. I think as Mark may sometimes call that gateway drugs.

Gateway drugs, they're everywhere.

So now you're, now you're listening. I know. So, but those are things that now, rental real estate, let me say is that it has an exception to that because you might have a rental property that does have losses over three years because you have a depreciation expense and such. And we need to talk about that one because that one is a great tax strategy, the rental real estate tax strategy on just saving taxes.

Yeah, let's come back. Rentals. Yeah, yeah, let's come over to rentals because that's another category here.

Separate little conversation.

Yeah, no, I love it, I love it. But now here's where, Matt, this happens to me a lot. People go, okay, you say, I've got all these expenses that I could write off now that I have a business, fine, but how do I show I have a business? The IRS does not consider you in business until you have income. You got to have in some income. This is a two part point I want to make. Number one, if you're going to open a lemonade stand, and many, many people that have followed me for years know, I love this example. You're going to go out and set up the table, get your ice, your sugar, your lemonade, your cups all set up. Are you in business? No. You're not in business till you sell your first cup of lemonade. Now I can get use all those startup costs of setting up my lemonade stand. Those will be a write off, but not until I sell a cup of lemonade. That's point number one. The second part to this is, and this is the tricky part, this is deep. Well, Mark, how does starting a small business save me taxes when I've got to make money in a small business to write stuff off? Aren't I right back where I started? No, and here's why. Let's go back to those personal conversion expenses. Let's say you start a small business just selling something online. Okay. Could we drum up $500 to $1,000 a month in write offs that you spend for anyway, for for example, home office, Internet, cell phone, your computer, maybe there's some advertising. That would not be a personal conversion. I'm thinking of expenses you already spent. So auto driving over, picking up supplies, going into the post office, some dining, some travel. So things you're going to spend for anyway, could we drum up 1,000amonth? Okay, just work with me. Let's say we could drum up a thousand. That could even be paying your kid to help clean the office at home that you're helping with their school lunch. Anyway, that's a write off. And your kids don't pay tax on the first 12 grand and more. Okay, so let's say it's 1,000amonth. What we've done is just giving you carte Blanche to earn $12,000 tax free. Yeah. See now you can go out and earn 12 grand driving uber or selling crap and you're not going to pay a dime of tax on that. Your overall income has gone up and your effective tax rate on what you pay on your income has gone down. Because see what's happened? You're making $12,000 more, but your baseline of tax has never changed. That's the first step in this process is we want to maximize those conversion expenses and say we just got 12 grand free. Free. Is that too deep, Matt? That was deep, right?

That was deep. But that was good because that's, that's the reality. I mean, that's the reality that what you're getting there. And there's not many opportunities to make money and not pay tax. Like there's, you got to be smart on how to do it, strategic on how you're doing it. So

I've got another question for you here. I got another question I was going

to talk to about. Just because A lot of people also ask, well, do I need to set up a company?

That was the question that came in. They're like, do I have to have an llc? So I love it.

Go ahead. This is great. No. Okay. And the LLC is not going to save you taxes right now. If you're doing the rental property, which we're going to get to in a minute here, we like the LLC for asset protection, to protect you from a liability on the property. But if you're doing, let's say it's Uber or the lemonade stand or whatever it is, you got the side hustle. You don't need an entity. You might. Some, some people's strategy is I just kind of want this side business to, you know, it's like you're teaching music lessons. I don't know. Like I'm trying clients I had, some of them are like, I just always want this to be a part time little side gig. Okay, that's cool. Just maybe you're just a sole proprietor. It's just hitting schedule C on your personal tax return. Maybe you're making 10 or 20 grand a year and some extra income on it. You're being strategic and writing as much stuff off to have as little taxes owed on that as possible. And that's super common right now. Now some people are like, you know what, I want to start this small business to transition into it. I want to just, I'm like quitting my job, which we don't recommend or I've lost my job and I'm like going for 100% in. So you can go that route and then get the entity that you might want. Listen to our prior episodes on choosing the entity and listen to the S Corporation. That's for those that are at least make 50 grand a year in your business. You're kind of more full time going for it. We want to see you in an S corp for other tax reasons, but not necessary. Just for the side business.

You know, I'm going to say it one other way. And then I like what Matt said about the hobby. He didn't say that word, but that's what he alluded to. So first Mike, I'm going to say

it one other way.

Having an llc, not having a business. An LLC is a shell to go around your business to protect you. Maybe convert for to an S corp down the road, build corporate credit, get to tax ID privacy. All these good reasons LLC is, are great, but the LLC doesn't save you taxes. Yeah, I mean the business is what we're trying to accomplish so I can have a lemonade stand with an LLC or without. Same freaking write offs, same process. Okay, Now, Matt alluded to the hobby because why not make money at something you love? For example, Matt Sorenson, he's pretty good on a guitar. So Matt loves to jam out. So let's say Matt, he's had a couple bands in his life. It's a great story. We may get Matt to share a little something. Maybe he'll sing us a tune. But Matt's had a. Let's say you start a small band and you start getting some gigs. You're playing some local hockey tonks. Matt's going out to Prescott, Arizona. Little cowboy, honky tonk. He loves country, so he's out there playing his guitar. Okay. He's so nice. Not saying a word here. I'm just ghosting him. He'll come back and clarify this. So Matt's in a band. Let's say they're going somewhere with this.

You're going somewhere.

I'm going somewhere. But let's say Matt out there. Two or three ways he could make money. One, they could go to a little place and make some money doing a show.

Right.

Number two, they might produce some music and get some royalties on itunes or Spotify or wherever. I don't know. Number three, they might record some tracks and sell those tracks on like a music bakery for background music for other people's websites or videos. Number four, Matt may start giving lessons playing guitar. Number five, he may have a little website and sell the guitars he likes as an affiliate on Amazon or without carrying inventory. I just created five sources of revenue doing what Matt loves. Did you hear that? Go on tour, give lessons, record tracks to sell on music bakery. Sell royalties online. And what was my fifth one? Oh, sell equipment. I bet you I could come up with four more. So there's five ways he could make money doing what he loves. And again, that means he can write off his guitar, write off his amps, write off the travel, wherever he goes to play, write off his computer, his cell phone. Now he could make probably 15 grand a year doing music.

Tax free. Yeah.

What do you think, Nat? Do you want to clarify any of that story or example?

No, I mean, that's a reality. I mean, I've actually done that so. Because one of the bands that I was in, we would get paying gigs, you know, and we would take that money and we would pull it back in and we'd all just go buy cool equipment, you know, and so. But that was a Business expense. Because now we had revenue from this stuff. We would play for free. You know what I mean? It was just fun to do. But we would go and one of the bars we'd go to would split. They would literally split the entry fee in that night. And I was shocked that, like, you get like a wad of cash. I'm like, there's that many people here. But, like, but we reported it, you know, they had 1099 US. But then, hey, we're in business now. I want a new guitar. It's 2,000 bucks.

That's a write off.

I got the money. I got the money from paying the bar. And it's going to be totally an expense now too.

And I mean, this is how Matt and I met. I was down in Tijuana and just bouncing around the streets. And I walked into this bar and there's Matt up on stage, just rocking

it and playing La Bamba.

Yeah, yeah, playing a little Bamba. And I was like, this is my future law partner. I could see it right there, right in front of me. And it was a match made in heaven. And five tequila shots later, we signed a partnership agreement and we're done, you know, so that was a total joke Anyway, Matt, what, you don't play country? Please clarify that for everybody. Matt likes country, though.

I like some country. I like, but I like mostly rock. You know, rock.

Oh, we got to give a tribute to Eddie Van Halen today. Died yesterday. So, so sad for all of you fans out there. Van Halen. I was playing some Van Halen last night. Just. Man, those 80s, they were so good.

Yeah, yeah.

Eddie Van Halen dies at age 64.

Cancer. Oof.

Brutal. Okay, now let's see what we've covered here. Turn your hobby into a business. Make some extra money tax free. We don't want to set up a business just to lose money. Number three, we don't have to have an entity to do this. Number four, we want to show revenue that shows that we're actually cranking along. Number five, we don't want to lose money repeated years because the IRS is going to come knock it. We do need to show some profit in our third year or every three years, have a year in there where we're showing some decent profit. Next, let's go to rentals. Matt, rentals are kind of like a pseudo business. Why do you say that like it's. It's a business, but it's not. What's weird about it? You. You see if you can I.

The one thing of rentals is it's, it's more passive. Right. So think of your, a lot of the businesses we're talking about that, the side hustle, let's say, or the small business that you know, you're doing kind of for some tax planning and some extra income and stuff, the rental property is you buy it, maybe you self manage it or you got a property manager, but it's more passive income. And so some people's personalities are more drawn to that. I like that. I mean I have my own businesses that I'm working in every day building, earning income, trying to build and grow them. But then I like to also buy rental properties as a long term wealth building strategy. So there's lots of, of course, benefits to buying just rental real estate. We can be doing Airbnbs and short term rentals or we're just talking the regular single family rental. Okay. Just, I mean that's, that's what I'm doing. That is easy. So, but like it, one thing I'll say about it is, remember in rental real estate and for those that have not gotten too far into this is you got appreciation of the property. That's happened over time. Right now the real estate market's on fire. I'm like, all my rentals, I'm like, I'm happy. Appreciation's happened, baby. Okay. Rental income, cash flow, right. You want to buy properties, of course, that you receive more income than what your expenses are going to be, what your mortgage payment is going to be, property taxes, insurance, kind of like a 10% set aside for some unexpected expenses through the year. But there's cash flow benefits to it. You're going to buy properties, that cash flow, you're going to have debt pay down. You know, you're paying down that mortgage as you own that rental property, you're paying down the mortgage which creates what? Equity. Equity is money, basically. All right, we love that. And to bring it back together, tax savings, you get to save on taxes from your rental real estate.

And let me give a practical example of that. And Matt gave the concepts there. Now here's an example. Buy a rental where you travel. So if your kids are at college across the country or grandma or brother or sister and they're maybe in a better market for rental property than you living in downtown LA or Chicago or New York. If you're in an urban area, sometimes buying a rental is just not even practical. It's just not going to happen. But if grandma lives out in Oklahoma City in a little neighborhood where a little duplex down the street in a local college town could kick butt. Next time you're visiting grandma, get out with some realtors, make an offer, close on a property, hire a local property manager, do your due diligence, start learning about the process. Now, every time you visit grandma, that's a tax write off, because you're going to go visit your rental and see this little old lady down the street that might have your same last name. That's a write off. People so very, very powerful with the rental strategy because it just works with your family as it expands.

Yeah. Now, one of the things you get when you have rental real estate is something called depreciation. So depreciation is an expense that's like, let's say I bought a property for 100 grand, okay, a rental property, single family rental. I'm going to write off that hundred grand in chunks of like 3,000 a year over what, 27 and a half years, let's say approximately. Let's make 3,500 or so. So I'm getting. I get a $3,500 expense every year. Well, that's an expense that offsets the rental income I'm making. And we're only talking about the rental income after my mortgage expense, after my insurance, after my property taxes. Okay. So then I get this $3,500 expense in this example that just comes in, wipes out some income. So because of that, a lot of clients that cash flow a rental property, they actually make money. They have money in their pocket, they've paid down debt, the property's gone up in value, and they have a tax loss because of the depreciation expense, which for some people, they can take that tax loss and pop it over and offset their other income, like a W2 or other income that they may have on their. Just on their 1040 as Mark talked about.

Oh, and you know what? I feel bad. Some of you are like 30 minutes into this, you're bringing this up. I apologize. But a lot of people say, okay, level one is I want to make more revenue doing something I enjoy, something to help pay the bills, and I want as much as possible of it to be tax free or taxed at a very much effective lower rate because I have these conversion expenses and I. I'm just not going to be taxed on as much. But Matt just hit on a very important point, is that if you do have a loss in an active small business the first year or two, you're going to be able to offset other income like your W2 and things like that. Now, we don't want to get greedy. I've had clients go, I wrote off 35 grand and they had 2000 of income. Not a good idea. The larger that loss is in relationship to the amount of the revenue to brought in offsetting other income. The IRS computers start to go reap, reap, reap. You know, go out, send the suppliers in a letter. What the hell are they doing? So we're going to try to find an artistic approach to not being too greedy. But it's legit. You know, sometimes I have clients that have legitimate expenses. It was a bloodbath. But I tell them, unless you can, you know, prove every one of those, I just don't know if it's worth throwing in the kitchen sink. Be careful. Getting too aggressive with the loss offset.

Yeah.

All right, I want to bring this up too. This is another huge write off opportunity. I've got a little bad news. I'm going to save the bad news for the end. I'm a glass half full kind of guy. Okay? But here's another piece of good news for those of you that are with children, with child. For those of you that are with teenager and want to jump off a cliff, been there, done that. You're paying for stuff that this child because all they do is suck money and emotion out of your life and give you nothing in return. Sorry, was that my inside voice? Okay, sorry. So for those of you that are just pregnant with a child, it's bliss. You're going to love it. But for those that are already down the road, you're petition out. You're just now for school clothes, tuition, private school, auto, gas, parties, dates, it just goes on and on. If you think that little baby with diapers is expensive, buckle up. Okay? Now, when you have a small business now in Matt's band experience or lessons or recording in a personal studio at the house, he's written off all the equipment. Oh, now he's got a built in roadie. So now wherever he goes, he's going to take his teenage daughter Brooke or Claire. And I know they've done this. They've loaded up amps, they've loaded up guitars, lights, mics, and they said, dad, where are we going? You got to go help me set up for the concert. All right? And then they load the car or the SUV or minivan, whatever, and they go to the concert or they go to the gig. Well, he can now compensate his kids for helping with the business. He gets 100% write off for the amount of dollars that he paid these teenagers, no FICA, no W2, no 1099. This is kids under age 18. You gotta watch videos on this, on YouTube. But Kohler paying kids. And you can start digesting all this and unwrapping it. But Matt pays his kids, they don't pay taxes on the first 12 grand. He gets a write off.

And.

And then they pay for their own school lunch, their own clothes, their own gas. So now you've manufactured another write off legitimately by involving those dirty, I mean, those great, rotten, I mean, good kids into the business.

Yeah. What do you think? That's pretty phenomenal. That is. There's so many reasons to get your kids involved in a business. It brings family together, it teaches your kids work ethic, It's a good bonding time with your kids, you know, and it happens to be a great tax strategy. So I don't know where you lose, there's just win, win, win, win.

Well, one lose that I will say is that. Would it be easier on Matt if he hired some teenage kid for 15 bucks an hour to follow him around and do what he says without complaining? Because Matt's kids don't complain when he asks them to do things. So I'm just saying, hypothetically, managing your own kids in your business, sometimes you're like, I could have done this faster myself. So it does take effort involving your kids because they all want to play.

Yeah.

But this gives you an incubator to do it.

I mean, and a lot of businesses, let's be honest, a lot of businesses are family owned and operated and it goes from generation to generation. And whatever you have right now already get your kids more involved. That's an awesome strategy, paying your kids. We even got prior podcasts on that too. But also just the brand new business that starting out, getting your kids involved from the ground level and think of where it'll be in five years and maybe by that time they're out of high school and they've gone to college and now they're coming back and the business has grown and there's an opportunity for them to work in the business with you as an adult. How cool is that?

I mean, many people say, well, Mark, you brainwashed. I'm sorry, you've trained your kids wisely. Because my kids grew up in the small business. They would sell books at a table, they would help clean the office, they would help paint. I'm looking around the studio now and every one of my kids, every one of them has worked in here at some point helping build out this little studio. Every one of them. And my requirement of my kids that are going to college, you graduate with no student debt. I don't care what your grades are unless you do and you have a small business when you come out of college just to rely on now. Go work for someone. Go work for a company. Build your trade, build your practice, go to graduate school. I do not care. That's up to you. But I want you to finish your four year degree and have a small business on the side that's making money when you get spit out of college. This is the heartbeat of America. This is. What is missing in our college universities today is this financial literacy of how to go out, sell yourself. Not on Instagram or Facebook, but walk into a small business and say, here's my business card. Can I clean your windows? Yes. It's $50. Okay. And do a good job, look this person in the eye, get paid and shake their hand. How many kids are not doing that today? Millions. It's. It's a problem.

Yep. Yep.

I should run for office.

Yeah, that's sounds like a platform.

It does. Bring it on. Biden Trump.

You got the Kohler legislation ready to go on that?

Let's make hiring your kids good again.

Yeah.

Does that work?

I don't know.

Does someone say something like that?

Okay, what else do you want to hit on this?

On? I've got bad news. I'm ready for the bad news part. I don't think I have anything else good. Do you have anything else good?

I think we hit a lot of good, so.

We did.

Yeah. There's so much good in that.

Okay, here's the glass half full part.

All right.

This small business just does not magically end up on your tax return. There's a little word called bookkeeping. A little bit of responsibility, a little bit of I got to track my crap here on my credit card and debit card. I got to keep a few receipts. Sound familiar? Okay, this doesn't just magically, oh, I had a small business. And then your accountant is asking for info and you're pissed at your accountant all the time. Matt, what are some tips you'd give with someone that is going down this path so that they don't have a rude awakening in the spring?

Well, the first thing is get organized. And I would just get QuickBooks online or some other method that you're going to track your income and expense. The very first thing I like clients to do, even if this is just a side hustle. Open a separate bank account.

Yep.

Open a separate bank Account, start running your income through it for whatever this is to make your deposits into it. Merchant account, link to it, whatever all the stuff you're doing, run everything into that. Use that same account for all your expenses. If you suck at bookkeeping, you are at least going to have one complete record of bank statements you can go back through at the end of the year to see. All right, here's all the deposits of income, here's all me, I spent. I can kind of figure out what it is. Trust me. If you are dropping money in your personal bank account that you use for everything else and you're expensing everything out of your personal bank account they use for everything else, you're going to have an Amazon charge on there, you're going to have a Target charge on there, you're going to have a Walmart charge on there. You're not going to remember what the hell it was, was that business or personal. And what's going to happen, you're going to lose write offs because you don't know and you can't guess. So our most organized clients have the most expensive, well documented, clean being organized pays and bookkeeping and other ways in life, but especially in tax planning and bookkeeping.

Few practical tips. One, stay away from cash. Do not pay for expenses with cash because you'll never be able to write it off. Always run it through a debit card tied to a business bank account. You can go into a bank and set up a little DBA bank account. Now this is where some clients are like, I'm just going to set up an llc. I'm in a state where it's affordable. I want a tax ID number. It makes my bank account easier to deal with. Fine. Call one of our attorneys now. We'll make some recommendations if you want to use our office here at the end too.

But

don't use cash. Number two, find a credit card and dedicate it to business. It doesn't have to have the business name on it. Just say, I'm going to use my capital one for business, my Visa for personal. Fine. Then when it's end of the year, you print out your capital one statements and it should be 95% business. It. It'll make bookkeeping a lot easier too. So if you're tracking points, if you want to go that route, fine. Just dedicate a card to business. Third, this is where you can tie the stripe, the square your merchant account on your online business, PayPal, Venmo, whatever, whatever you want. Lots of methods you want to make it Easy for your customers to pay you. That's a whole other topic. But make sure all of those methods of payment tie to your small business account. That way, at the end of the year, you can see how much you made on PayPal. What was Venmo? What was this? What was that? And you'll send out requests for payment through those methods, and the money will come right into your business account. So, again, bookkeeping becomes a lot easier when you're not stuffing dollars in your back pocket or what. Oh, Matt, there's more. What do I want to say?

What do you.

What would you say? So, separate checkbook, you said.

I'll just say there's a little more tax preparation. So you're going to have a Schedule C on your personal return, so that 1040 is going to have some added on to it called Schedule C, which is where you're going to pick up this income and also take all the expenses.

And I just remembered, receipts. Everybody else, should I keep my receipts? Receipts. Okay, this is deep, people.

This is Mark Kohler. Quote.

You can put this anywhere, write it on a bathroom wall at their truck stop. It's mine. You're going to love it. Receipts are not bookkeeping. Receipts are audit protection. So if you get audited three years from now, because that's usually what happens, you don't have to have the receipt. You can have a scanned copy of it, you can have a picture of it, but you want to try to keep receipts in a folder. Don't organize them. I don't want to see him. Your accountant doesn't want to see him. Receipts are just there to keep. So if later you have to prove your expenses, you got a pile of receipts scanned into a folder you can print out and organize, that's all the IRS wants to see. You don't have to have the actual paper. Bookkeeping is the bank account, the debit card, the credit card showing what you spend it on, and that's going to generate your tax return. The receipts are just the support. And do your best from now on. When people say, do you want a receipt? If you're in your mind, you're, ooh, yeah, that's a business expense. Say, yes, take the receipt, take three seconds, pull out your app, take a picture, throw the receipt away, Done. And you've got an app on your phone. Most apps that you're doing your bookkeeping on are going to provide an online app where you can take pictures of receipts and they just go into a folder. And then if you ever need them, three or Four or five years from now you can just freaking print them out. Easy schmizzy.

Love it.

That's what I wanted to say.

Okay. Okay. I like it. So I think we've answered the question. Yes, starting a business can save you taxes. But it's so much more than that too. It's so much more. But there's still many great tax strategies. And in our office with our tax owners we have like a 25 point tax strategy list and it's actually a little expanded. But guess what? Strategy number one is literally starting a small business. That is strategy number one because it opens up the door to so many other cool things. A few things we didn't even talk about today because there's just so much of tax strategies you can do in a business that an individual just can't do.

So and I've got two last points. Number one, this is also a great way to build your retirement because when you start this small business, don't go out and buy a Range Rover, don't go out and buy the BMW lease, don't go and prove this or that. Use the money from this small business to fund your Roth ira. To fund your spouse's Roth ira, to fund your kids college education through a Roth ira. Get your Roth account going. And if you're like well Mark, I don't have enough money to fund my Roth, then start a small business, pay zero tax on the first ten grand. At least I don't have a client pay tax on the first 10 grand period. That could go into a Roth IRA. And I've got my YouTube video how to have a $1 million Roth IRA you'll never pay tax on. Go just YouTube 1 million Roth Kohler, you'll love it. And that the small business can fund the Roth IRA. You can set it up at directed ira.com at night in your underwear. You got a Roth IRA you can fund immediately. You'll be able to drop it into stocks or bonds or ETFs or whatever and just sit on it until you're ready to self direct it too. I mean I don't matt anything you'd add there. I mean the retirement, that's your gig.

Yeah. Plus also a lot of our self employed clients that even to have a side hustle do what's called a solo 401k. Another common strategy like guys, I don't make a little more. I can throw away more than six a year or I should say throw away, put away. I can put away more than $6,000 a year in a Roth IRA because that's the annual limit. But in the solo K, you can put up to 57,000 a year into that when a solo case. Basically a 401k plan for yourself because you are self employed now, you've got a business now. You've upped your game and retirement strategy options away from just the $6,000 a year stuff. Now up at the 50,000 plus a year stuff and socking money away and getting tax deductions to do it. The opportunities to start opening up of things you can do for tax planning that just isn't possible for an individual. It's a whole new world.

Just come and see.

Not bad, not bad.

What's that from, Matt?

Is that. Wait, it's Aladdin.

Yeah, that's the magic carpet ride, baby.

Okay, yeah, I know, I know most

of your magic carpet rides were in the 60s when you were doing drugs. But this, that, that Aladdin scene, it's really cool. Whole new ride. Matt wasn't even born in the 60s, so I can use that joke. Okay, now starting that retirement account, it could be as low as 300 bucks a year with no broker fees. Brokers trying to, you know, take a percentage of your wealth. You can pool it with other. Watch our YouTube videos on self directing. Get back into our prior podcast. Get over to our directed IRA podcast, which is freaking awesome, and realize that this small business could be again, the gateway drug to having a multimillion dollar retirement in just 20 or 30 years. And for those of you that think you make too much money, you can always have a Roth IRA. You can have a 401k at work and still max out a Roth. We call it the backdoor method. Just YouTube Kohler backdoor. Make sure you put in Kohler Backdoor Roth ira. Yeah, I go that route. Yeah, Kohler backdoor, Roth. And I've got the Sweet spot conversion video. Again, make sure you put Sweet spot conversion Kohler Roth video. But these are great little resources that you're like. And that's why I sang for a minute. Just joking around is. It is a whole New world, Matt. Nailed it. You're freaking opening a door at the Price is Right. That never was there for you before. And that's huge.

It's huge.

Okay, the last resource, our firm. You can meet with one of our attorneys for 350 bucks for an hour. Talk about your small business. If you decide to set up an entity, we'll apply it to an entity, any state. You get an hour with a real tax attorney, not someone in A cubicle in Nevada trying to upsell you multi thousand dollar packages. Not going to happen. Pay for one hour, talk to a tax lawyer and go, hmm, what should I be doing? And whether our clients are making a million a year or making 10,000 a year, sometimes spending a few hundred bucks up front can save you thousands of dollars and hours and hours of time. And our contact info is below too. There's the sales pitch, man. Is that okay?

That's appropriate. Today's show is brought to you by KQS lawyers and directed ira. We thank them for the sponsorship of today's show. All right, well, I think I want to say thanks everybody for hanging on this topic. It's a common question out there and we really wanted to answer that in today's show for some of you who listen to our podcast and like, man, you guys went a little basic today. Kind of went a little entry level. That's cool. I mean, everybody, a lot of our listeners already have a small business. They're like, guys, you didn't tell me anything new. I already got this 10 years ago. And you're lucky. We're just trying to tell everyone else and get them where you're at today. But we hope you enjoy the podcast. You can learn more@mainstreetbusiness.com of course. Yeah.

And timing, I want to say timing. Some people go, should I wait till the end of the year to do this? Should I do when this, when that? Guys, the best time is right now. Start your small business training. I've got a book, eight steps to start and or grow your current business. Eight steps. It's got 60 different little videos. It comes with a business plan, a marketing plan. You get it on Amazon or my website. It's a $99 workbook with downloadable forms and videos and podcasts and webinars with a town hall meeting, eight of them for an hour and a half. Just meeting with small business owners and you can watch it immediately. Start the training. Fear is always hinders us. The more knowledge you get on this and so that you don't feel like you are going down a rabbit hole and never going to get out and you're going to lose money or all this, just start doing some basic training. Binge on our shows, binge on our newsletter. Get this little eight steps workbook. Go to markjkohler.com, go to Amazon and just type Kohler eight steps.

Boom.

And start now. You don't have to be rich tomorrow. It's not a get rich quick scheme. It's a lifestyle choice that's going to make your lifestyle better.

Really will. Thanks, everyone. I liked it. Yeah. Good. Send off. Now, the shirt you're wearing today, for those of you on the video marks. This is like. What is that from, like the 50s?

Yeah, it's a little. It's a little.

I feel like that shirt is like what Biff wore in Back to the Future when they went back to like the 50s. Biff, wear that shirt.

I don't feel like you're complimenting me, man. I don't think this is going in the right direction. It's. It's kind of a golf shirt. You could golf in this.

Is that what that is?

It's a little sweatery if you were here. It's really smooth. It's kind of a. It's argyle type thing.

I like it, you know, shows the confidence.

I'm a boundary pusher, man.

Wearing that shirt, that shows a man of confidence sort of shows

again. I don't know if that's a compliment, but I'll take it. I'll take it. If the shirt fits, wear it. So. All right, well, everybody, we love you. We are so grateful to be a part of your lives. Please share this podcast. Give us a five star review. If it rocked your world at all, share it with anybody. You know, that's a small business. Owner has a side hustle. They need it. We're not going anywhere. We've been here for 10 years every week. And I know I said seven years earlier because Matt joined the show as a co host seven years ago. I was doing this for four years before that and it was going nowhere, so I needed Matt. But anyway, keep listening. We'll see you around, Matt. I love you, dude. Keep rocking. Can we play some music of yours on the way out?

Do you have anything? Well, yeah, now we're just gonna have the regular outro music.

Corey. You need Corey in our studio. You gotta get some tracks of Spillby Dog and play it on the way out of the show.

I do have. I do have a guitar. I played on my. My. It's on my social media. It's probably my Facebook and Instagram. Just rocking out, Corey. Running down a dream. Running down a Dream by Tom Petty. A race on.

All right. Tom Petty would have worn this shirt. He would.

Yes, he would have. Yeah.

So there you go. There's my intro. Okay, see everybody. Talk to you next week.

Sam.