Ep. 31 | What Qualifies As A Business Deduction
Download MP3Welcome to the Teaching Tax Flow podcast, where the goal is to empower and educate you to legally and ethically minimize taxes paid over your lifetime.
Speaker 2:Hey, everyone. Back at it again here at Teaching Tax, the podcast. Now onto episode 31, what qualifies as a business deduction. In this episode, we actually get a little, we've been a little spicy. Some may say a little feisty.
Speaker 2:Just on this topic and diving into some of the examples. Probably one of the best examples of a business deduction you may have ever heard in your life. We're actually gonna go over two based off of Chris's past experience with a client. So please grab your notepad, grab that pen, jot down some notes, almost a guarantee that something will come up here that you are not aware of that you could take advantage of with your taxes right away. So enjoy the show.
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Speaker 2:I'll just give you the title of this one now and then we'll deal with all the details. How about that, Chris? Sounds good. Awesome. Well, the title of this one is what qualifies for a business deduction.
Speaker 2:So if that didn't get your attention, hopefully this will. So I'm John Chropolsky, host of Teaching Tax with the podcast. Again, to my right, as we like to poke fun at a little bit, Chris Pachero. How are we doing, Chris?
Speaker 4:I am well. Thank you for asking. Happy to be here on this this episode because it's gonna be a good one. Oh, they're all they're all good ones, and we get the question all the time of, can I deduct blank? Can I deduct blank?
Speaker 4:So we're gonna dispel a few myths. We're gonna give you some great advice to take to either but, hopefully, one of your teaching tax flow black belts, your tax preparers of that we have in in teaching tax flow or your tax preparer if you have a a great one.
Speaker 2:And before we get running, one thing I have to admit. I really look forward to this one because now I get to push your buttons a little bit. So and I'm gonna I have some examples that I have asked Chris over the past realistically, the past ten years, I've probably started to ask you some of these what we'll call ridiculous questions, but exactly what you said. Can I write off blank? And and sometimes I think you give me the stare, you know, when you when you move when you moved away from me, man, when when you moved from Michigan to Tennessee.
Speaker 2:Yeah. We talked to the phone, and I I I had convinced that if you could punch me in the throat when I asked them, you would. Let's dive into this a little. Again, the the title of this is what qualifies or, quote, unquote, does not qualify for a business deduction. So, Chris, give us a little bit of background on what the IRS what parameters the IRS gives us for this.
Speaker 4:Well, John, I'm sure just like some of the other episodes, you did your show prop reading IRS publication five thirty five. Oh, absolutely. I I have my notes right here right here. So IRS publication five thirty five really goes through business expenses. But what is important to understand is this.
Speaker 4:It's really simple in some ways. For an expense to be deductible by business, it has to meet two criteria. It has to be ordinary and necessary. Now before you ask me your
Speaker 2:questions He's rolling his eyes, folks.
Speaker 4:I'm never never we never allude to that they're dumb questions. The IRS does not tell you, here's a list of deductible expenses, and here's a list of not deductible expenses. An ordinary expense is one that is common and accepted in your industry. That is different between each industry. A necessary expense according to the IRS is one that is helpful and appropriate for your trade or business.
Speaker 4:So ordinary and necessary. Every industry is different. Someone that is a musician that performs live, and, obviously, you know, I don't have this problem, but has to have their hair done for every performance. Those type of expenses would be deductible for that person. But someone that works in an office that just wants to feel good about themselves and look good and gets their hair done, that is not deductible.
Speaker 4:So let's have a
Speaker 2:little fun with this one. K? So I know I know, Chris, I like to put you on the spot and you in return no. You really don't put me on the spot, so I'm pretty lucky with that one. I think I just put a target on my back, but I noticed you sometimes like to put our guests on the spot with rapid fire.
Speaker 2:Mhmm. K. So let let's put a fun little twist to this one. So instead of asking there's the eye roll Yeah. And the clinching of the fist.
Speaker 2:So I'm not gonna ask you and, folks, he had no idea that this was coming, by the way, that is a genuine comment. Mhmm. So if you hear a bang, he threw something at me. So I'm not gonna ask you anything new with your personal life. I'm not gonna ask you about dogs or cats, what your favorite weekends are, what your favorite beverages, favorite food.
Speaker 2:None of that. I'm gonna give you an item. Okay. And that item, basically, the question I'm going to ask without asking it after the first one is, is the deductible yes or no? Okay.
Speaker 2:Great business deduction. Okay. Not personal. Business only. Here's the challenge for you, and I've known you for a very long Mhmm.
Speaker 2:I'm building up to this to make them nervous. I've known you for a long time, and I do not give me your CPA answer with a very don't educate me on it. Say yes or no, and you get one sentence following that Okay. Justifying it. So I have six of them.
Speaker 4:Okay. 10? What I have to ask you something then. Okay. What business are you in?
Speaker 4:Oh. You're saying? Qualified question. I think all of my answers are gonna be at the pen itself.
Speaker 2:Okay. Well, let's say oh, man. Let's say let's say I'm a traveling salesman not telling you, k, what it is. So you're traveling salesman, traveling sales. Are they are you an independent manufacturers rep?
Speaker 2:Oh, boy. Here we go. So but these are good questions. So I can't I cannot avoid these. Oh.
Speaker 2:Yeah. Okay. I yes. I can be. Okay.
Speaker 2:Okay. Are you ready? I'm ready. Okay. Again, I'll give you, I'll give you seven of them.
Speaker 2:Okay. And, again, say yes or no, one answer explanation. Okay?
Speaker 4:Mhmm. Jerome, you want my DISC assessment. You want my c. Yes. Yeah.
Speaker 4:There. Straight to the point.
Speaker 2:So the question is, can the following be deducted as a business expense? Okay? Yes or no? Suits as an apparel. No.
Speaker 2:Why?
Speaker 4:I don't have to tell you why. Do ask for a one overnight, sir.
Speaker 2:Good. And that's even better. I'm I'm very proud of you, sir. Home Internet. Yes.
Speaker 2:Assuming that you have a qualified home office. Oh, okay. Very valid question or a very valid response. I'm sorry. What about a boat membership?
Speaker 2:As there's a lot of these around the country now, and people are taking advantage. Instead of purchasing a boat, it's basically No.
Speaker 4:If you're if you're traveling salesman, no.
Speaker 2:But Oh, there it is.
Speaker 4:Oh, it's and, by the way. And selling. Yes. We don't need and but we don't need yep. And for some people, they could deduct a boat.
Speaker 4:For our real estate brokers and agents that live in coastal communities that legitimately take people out of to properties via water because it's quite frankly easier or charter foe boat fisherman? Sure. But for you, no. Sorry.
Speaker 2:Heck, you know what? I'm very proud of you there too. You you went more than one sentence, put your stoppers up, and you stayed on topic. Good answer, sir. What about any travel expenses?
Speaker 2:Very easy question. Somewhat. Not any. Let's put it this way. Travel expenses related to business.
Speaker 2:Yes. K. He's still clenching his fist because he wants to save more, but you're not allowed. Pet food. No.
Speaker 4:I was what? What the hell? I was like, oh, that's our first call for our newest podcast.
Speaker 2:It's okay because that's the dumbest one. Right?
Speaker 4:We We were pretty dumb. But you know what? Here's the thing. And I'll I'll let you let you venture out
Speaker 2:on this one because I wanna hear this.
Speaker 4:We had a client that owned a scrap metal yard in a not so nice area. He had two pit bulls that lived outside, and the cost of the dog for him to maintain those pit bulls was a sec legitimate security expense. The pit bulls were not inside. They lived in the scrap yard and protected the assets of the scrap yard, and the scrap yard was in a impoverished area. So is that so not not It wasn't a horrible question.
Speaker 4:It was just a bad question.
Speaker 2:Well, leave it to leave leave leave leave it to somebody with your experience to take that, which was literally intended just to derail everything we're talking about, and then bring it bring it into reality. So so in a sense too, on on that note, I I do have one more we're gonna have. Actually, you know what? Can you deduct planes? Can you deduct a plane?
Speaker 2:He's thinking, folks. Well, first of all, you want you must be one heck of
Speaker 4:a salesperson if you're buying a plane.
Speaker 2:I'm the best around. Right? Like, I I'm the only sales rep Yes. For a manufacturing
Speaker 4:company. An aircraft. If you would deduct the business use part of the aircraft. And we actually have clients that buy aircraft and our pilot licensed pilots that either, charter it or they utilize it for business travel because they might have real estate transactions and business in several states.
Speaker 2:And I'm sure it can be justified based on, you know, time of travel. Engine hours. Can you actually write so you can't write off mileage on a plane. Right? It would be like, is there a and I'm trying to stop him here, so I may be able to
Speaker 4:do that. It's for a standard mileage reductions for our in truck.
Speaker 2:Because you may just have a bad pilot who doesn't drive in a straight line.
Speaker 4:Well, if you're pissing away, then I'm such a fucking driving around our airplane to get mileage, and you've got other problems. We're getting that's just a bad word. I hope my skids don't work.
Speaker 2:Oh, it's okay. We'll we'll we'll put something. It. It's so funny, everybody that's listening to this. So you guys will hear the polished product.
Speaker 2:Now that we're gonna cut anything out of it, but the we have so much fun doing these, and these are conversations that we really have even when we're not recording. I'm probably gonna have to clip the audio because we're we get a little loud Mhmm. But quite quite lightly. So thank you for for participating in my well, I guess we can call it an experiment. You're what?
Speaker 2:It that no.
Speaker 4:It's actually it's not a bad experiment. So
Speaker 2:and I've never heard that. You've actually never told me that story either about the about the scrambler, but it makes sense. Right? So Mhmm. Not I mean, I I love animals.
Speaker 2:I mean, clearly I mean, we have a bass at how it is louder than a car alarm, but is are those animals so those dogs in that situation, are they actually property of the business then? So so could you really write off in in a sense, what a deduction be the food, I hate to say maintenance of it. They're like vet bills.
Speaker 4:Yes. You can make an argument that definitely the food and the vet bills, would be deductible ordinary. So security is ordinary and common and necessary.
Speaker 2:So, basically, sending your dog on a on a lavish, all inclusive vacation because you think he needs a vacation is not time away off off the property is not ordinary, I assume.
Speaker 4:No. And probably you're not gonna take these pit bulls that live in a scrap yard.
Speaker 2:What if I like some?
Speaker 4:Pit bulls are very I yeah. Absolutely. They're very loyal and great animals.
Speaker 2:It's the little ones.
Speaker 4:It's just I don't see you taking them to the spot or as a service dog to the airport.
Speaker 2:Oh, crap. Alright. We could we could have some fun with this one.
Speaker 4:But in in all seriousness, so let's talk about we know what the two requirements are for something to be deductible. Once we figure out if it's deductible or not for a business perspective, then we look at, is it an expense that we deduct in the current tax year, or is it something we capitalize and write over a period of years? When we will call when we would say depreciate or, technically, we call it makers, which is modified accelerated cost recovery system. Okay. Wake up from your nap.
Speaker 4:Yep. We know that's a that's a mouthful. So depending on the expenditure, we would either deduct it in the current year, or we would set it up for depreciation and write it off over a a period of years. And sometimes, it actually benefits the taxpayer to write something off over a period of years, especially if
Speaker 2:you think your marginal tax rate's gonna be higher in the future than it is now. Especially with, say, startups. I mean, your your startup costs, I think it goes without saying, are usually extremely high. Cost of goods sold if you're in manufacturing, especially. Right?
Speaker 4:So Absolutely. And and but sometimes you might have capital expenses that you can make a tax special tax election, what's called the de minimis safe harbor election, that you take immediately. That's why it's so important to really understand the concepts of teaching tax flow and understand what is your marginal tax rate. If you don't know your marginal tax rate, then you really that's the basis of tax planning. It's very different than tax strategy, and and we encourage you to jump into teaching tax flow and educate yourself about these things.
Speaker 4:But if you're just getting started, you wanna put your dip your toes into tax planning and strategy, check out our private Facebook group, defeating taxes. Put a question out there. One of our teaching tax flow black belts will answer it for you.
Speaker 2:And, Chris, tell us a little bit like, very, very shortly, what is one of these black belts? Obviously, we know, but tell everybody here. And and to Chris, your point, easiest easiest way to find that that Facebook group. So it is a Facebook group. Consider this your personal invite to join.
Speaker 2:We basically just ask that you check a box and say you're gonna treat others the way you like to be treated. You won't be a pit bull? You won't you won't Any other side pit bull. So we're I'm kidding. What is a scrapyard dog?
Speaker 2:Because I would I would actually love to see a anyways, I was pulling chihuahuas out of this. I had dachshunds too, so I can speak for for crazy little, you know, ankle biters. But, yeah, drop some stuff in in that group, and you can find it very easy. Just go to defeatingtaxes.com. That's defeatingtaxes.com.
Speaker 2:That'll direct you straight to that page. But drop those questions in there, please. We we enjoy it. But, Chris, sorry to cut you off there. But who who are these black belts?
Speaker 2:Right? People probably think we're now karate instructors. Mhmm. But what do they do?
Speaker 4:We're a teaching tax law black belt is a tax professional within our community that has taken our three base courses and displayed competency to provide tax planning and strategy and guidance to taxpayers. Awesome. So yeah. Absolutely. And the vast majority of teaching taxable black belts are not part of our private CPA practice.
Speaker 4:We really want to yeah. I I used the analogy many times and on other podcasts that I use analogy about sports or music or gaming. You have using tax planning a strategy is like having a play or having a plan. Instead of in basketball, instead of five players just running around with no no play, when you have a play or in football, then everyone knows what they're supposed to be doing, and you get the best result possible. And and thank you for mentioning a couple of things in there too.
Speaker 4:One of which being,
Speaker 2:you know, they they may or not be part of part of the private practice, which either way is great. Right? I mean, you're not they have all gone through the same program, we'll call it, the same training. But I think the real value in that is that anybody who has that, you know, designation, which which is the teaching tax flow back black belt, they're the type of person that and this is going to sound like a sales pitch, but it's not. I just wanna lower the barriers, you know, in some of that relationship, is that you could reach out to them with some of these questions, feel comfortable with it that they're going to have an answer because they've been, quote, unquote, trained through the process.
Speaker 2:Right? So it's not in a sense that you're going to go to a CPA. I'm not gonna say you're a CPA because we don't wanna talk bad about any of them, but they it's it's like minded people. And and I think one of the core concepts of that training is that really I mean, they have to anyways, but really be looking out for the best interest in yourself. So Right.
Speaker 4:It did not all black belts. You don't have to be a CPA to be a teacher at Black Belt. You can be a licensed professional. You can be an enrolled agent. Gosh.
Speaker 4:Some of the most talented tax professionals I know are are not CPAs. They're enrolled agents, and they have different niches and different things. So, absolutely, I mean, you know, there's always that question and and you in in many ways, it'd be nice if IRS came out with a black and white on tax deductions. I would use reasonable thought, and some tax professionals are extremely aggressive. Some are very conservative, but ordinary and necessary, a reasonable expense.
Speaker 4:Don't be afraid to take a deduction for an expenditure if it's legitimate. That is there's nothing wrong with that. So
Speaker 2:That's a great I wouldn't call it a closing, but that's a great thing to to take to heart. Right? As long as long as you can legitimize that deduction to yourself and to others, should be nothing to be afraid of. I know in another podcast, we we talk about, a home office deduction, and them actually getting a visit from an IRS. Alright.
Speaker 2:I believe it was, and it would have seemed like, oh my gosh. Why is this happening? But it was easily legitimized. There was no there was no fight for it. So
Speaker 4:No. Absolutely. So think about your deductions. Talk to a tax professional. Jump into our defeating taxes Facebook group.
Speaker 4:Please rate, review, subscribe to this podcast with five stars. I'm gonna let Johnny t take it away with our thanking our sponsor.
Speaker 2:Absolutely. Absolutely. Well, thank you, Chris, as always, and everybody too. Just a little bit of a reminder, please drop any of those questions that you may have in that teaching tax flow, the our Facebook page specifically as well as the group or email it to us. Shoot us an email.
Speaker 2:We can always be contacted at hello@teachingtaxflow.com. Easy way to get a hold of us. I know a lot of our listeners, we have previous relationships with. So, obviously, text phone, it's it's kind of an open channel. And thank you again everybody for your time.
Speaker 2:We can't thank you enough. Chris and actually I I know we thank everybody for their time and listening, but we really, really do appreciate all the questions that everybody sends us. Sometimes, ironically enough, we're we're filming these or recording these, and we're getting questions popping in, which we always appreciate. So even if we can't get to every one of y'all's questions, please send them over. It really is what drives us.
Speaker 2:So what do you say, Chris? Should should we let them off the hook here?
Speaker 4:We'll let you off the hook. And, again, those, yeah, those questions are great because if you're asking those questions, there's a hundred other people thinking of those questions, and that tells us the direction to go with our content. So thank you. Have an amazing rest of
Speaker 2:the day. Absolutely. Thank you again, and we will see you next week. Hey, everyone. Thanks for joining us again on the podcast.
Speaker 2:John Topolsky here from the team. Couple new things this week, actually, that we have going on. Obviously, our big big project we're kinda keeping up under wraps, I should say. We'll be out here probably within the next three, four weeks. Really excited about that announcement.
Speaker 2:But even in the meantime, we are adding some really cool videos, some fun stuff, you may not expect over at our YouTube channel. I'll drop the link in the show notes on this as well, or just go to YouTube and search teaching tax flow. Those videos are sure to come up as we start to roll out some content on there as well. But also as as always, check out the defeating taxes Facebook group. Again, this is your invite.
Speaker 2:No excuse. Can't say we didn't tell you about it. I know we crossed over that milestone, I believe, of about 800, eight 15 or so members. So really excited for that. I know Chris just posted a fantastic question on there.
Speaker 2:I believe it was yesterday, about estate planning. Just really asking the community what their biggest concerns are with that or biggest needs, and we're connecting some of those dots with some of the members. I know there's been some some fantastic conversations that actually took place just yesterday based on that. But as always, shoot us those questions. Shoot us those show topics that you may wanna hear us discuss.
Speaker 2:And we actually have two actually, no. Three. Three fantastic guests lined up here for the next couple weeks that you guys will be hearing from as well too. Some outside the box. Again, some things you may not expect from us.
Speaker 2:So we look forward to hearing, hearing your feedback on those and keep on trucking. We'll see everybody next week.
