This is the follow-up article to the post Prepare for your Taxes to go up, which ran two days ago. Given the possibility of a recession or an economic collapse, Pete feels financial preparedness may be as important as food, water and shelter.
Hire a CPA
If you have investment income, are retired, or make more than $80,000 per year, retain a CPA to do your taxes. Mine charges $400, and it’s worth every penny. Not only does he do the heavy lifting, if I get audited, he will go to the audit with me and argue with the IRS.
Will having a CPA save you more money than using a tax app? Maybe. Mine recommends tax saving strategies. For example, as I mentioned in an earlier article, mine suggested I depreciate the chicken coop. I doubt an app would have known enough about my business to suggest that. Likewise, if your CPA knows you have a child in college, he’ll know whether you can qualify for any education credits. I have used TurboTax, but I prefer a CPA.
Keep Good Records and Take Every Deduction
The tax code includes deductions. You should take every one you possibly can. In most cases, all you need to do is keep good records.
When you drop something off at Goodwill, get a receipt. If you volunteer, track the miles you drive as a volunteer. When you drive somewhere for work (not counting commuting), track those miles as well. If you buy a computer you use for work, talk to your accountant about deducting the cost. Same with office supplies and any other work-related equipment.
This is the one place where paying with cash makes documenting your expenses more difficult. My advice is to pay cash for your personal expenses and use a credit card for things that you can deduct from your taxes.
Use Retirement Accounts
If you are putting money into a 401k, an IRA, or a similar retirement program, talk to your accountant or financial planner about whether you should have a traditional account or a ROTH. If investing in a ROTH isn’t possible at your current employer, ask your accountant about converting, or rolling over, funds from your traditional IRA into a ROTH IRA. Yes, you will pay taxes now, but you can withdraw that money tax free in later years. Since taxes are likely to be higher in the future, you may be better off paying them now rather than alter.
Also consider whether it is better to put money in your 401k or to pay extra on your mortgage. Let’s say your employer requires you to put 8 percent of your salary into a 401k to get the maximum 4 percent match. My advice would be to put in enough to get the match because it is the equivalent of a 50 percent return. Instead of adding additional funds to your 401k, use it to pay off your mortgage or save to buy a place in the country for cash. Given the way the world is today, land you own and no bank can take from you has more immediate value than money in a retirement account you won’t spend for 25 years.
Put Money in a health Care Savings Account
If your kid needs braces or you have another big-ticket medical expense, see if you are eligible to put money in a health care savings account. You don’t have to pay taxes on any money you put in an HSA, so it helps lower your tax bill. You can then spend these funds for medical expenses not paid for by your insurance. You can add money every year and it will accumulate over time. It isn’t taxed unless you withdraw it for non-medical use.
Form a Small Business
If you’ve been reading this blog consistently, you know that I recently cut back on posting because I formed a new business. Yes, some income would be nice, but the ability to write off business expenses is valuable as well.
I mentioned the value of business deductions a few days ago. You can form an LLC and start a business with an investment of just a few hundred dollars. As long as the business is legitimate and you try hard to make money, this is one of the best legal tax-avoidance methodologies available. Here’s an example of how it might work.
You remodeled your bathroom, and it turned out great. Then your buddy asked you to remodel his bathroom, and he and his wife are thrilled with the results. You look into becoming a contractor and doing bathroom remodels as a side gig and decide it’s too much paperwork because you need to get permits and have inspections and you aren’t a licensed plumber. Instead, you decide to focus on doing tile work, which you enjoy and because of your fine eye for detail, you excel at.
Great! You now have a business idea. All you have to do is take it from an idea to a real business.
Make it Legal
Pick a name for your company and look at your state’s department of state and make sure it is not in use already. Using the forms available on their website, apply for an LLC in that name. If you don’t want to do this yourself, there are companies that will do it for you, usually for a fee.
Once you get back your paperwork, create an operating agreement. You will need this to open a bank account. Your next step is to open a P.O. Box for the company. Then, using your new address and operating agreement, open two bank accounts for the business at your local community or other small bank. (One account is for money going in and out, the other is for holding money so not one can suck it out). Get a debit card and order checks for the one account. If you ever have non-family employees, open a third account for payroll.
Just these few steps go a long way to showing that this is a legitimate company and not a tax dodge.
Next Steps
Now print up some business cards. Go to Lowes, Home Depot and every local tile store and register for their professional discount. When you buy supplies and materials for your jobs, you will bill your client the retail amount, but you will pay the discounted professional rate. Marking up materials is one way to make money.
Next, visit local kitchen and bath dealers and local flooring companies. Introduce yourself as a new tile guy looking for work. Also call on interior designers, carpenters, and other people in the building trades. They probably already have subcontractors they use, but they might call you one day when they re in a pinch. Hand out your business cards and get theirs. Start a Mailchimp account (no cost for 10,000 emails a month) and put their contact info in it. You can market to them once you get a few jobs under your belt and some nice photos.
After you do a few jobs and the money comes in, watch it closely. Make sure you are not losing money. Consider buying software that helps you do estimates, send invoices, charge credit cards, and collect payments online. Sure, you can use QuickBooks, but your industry may have specialized software that works better.
This is a great type of job for someone who is a firefighter or police officer and works an unusual schedule. You can plan your tile jobs for those days when you’re not on shift. Just make sure the client knows so they don’t wonder why you disappear from time to time.
Once you are Profitable
When you are finally making some money, here are a few things you can do to minimize your taxes:
Hire family members. First, pay yourself a salary. That gives you a steady income. Second, hire your spouse to answer the phone, do the bookkeeping, visit the post office, maybe even make runs to your suppliers to pick up tile, mortar, and grout.
A benefit of being an employee that is often undisclosed is that you can lay off yourself or your spouse and collect unemployment if the business goes through a slow patch because of the economy.
Talk to your bank or a company like Vanguard about setting up a SEP IRA plan. Your company can contribute up to 25 percent of the employee’s pay into their SEP IRA. Your CPA and help you look at the profit and determine how much to pay out. If your business pays you $60,000 and your spouse $36,000, you could potentially contribute $15,000 in your SEP and $9,000 in theirs. That’s $24,000 tax free.
The benefits don’t stop there. You can use your business to lease a truck, pay for your health insurance, set up HSAs, and even buy life insurance.
To maximize your earnings, my advice is to avoid hiring non-family employees. If you need a helper or decide you need a second tile crew, hire them as a sub-contractor on an as needed basis, not as employees. That way, you can avoid paying for their SEP IRA contribution.
Is it Really that Easy?
Starting a business is pretty easy. Depending on the state, you can do it for less than $300. The difficult part is making money, dealing with customers, and making sure you get paid on time. Running a business is where it gets hard. Running a profitable business for years is even more challenging.
Before you start any business, I recommend you read up on the industry’s best practices. For example, if I were a tile guy, I would have the customer sign a contract and would insist on being paid for the tile ahead of time. Depending on the size of the job, I would include an additional payment after demolition, and a final payment upon completion.
If you do a good job, this kind of side gig could turn into a full-time job. You could have revenue of $200,000 or $250,000 and pay tax on less than $100,000, plus you get money in an IRA, a truck in the driveway, and phones in your pocket. At some point, you could lease a building, which could then be a place to store some of your prepper supplies. Or, you could buy a building (using a separate LLC) and charge yourself rent. If you close the business one day, you can lease or sell the building.
If you have a way to make money, the possibilities of writing off legitimate business expenses while building wealth are almost endless.
Another Example
Let’s say you burn wood for heat and enjoy cutting and splitting your own firewood. You have an old splitter you bought at a home good store. It works, but it is slow. Form a business selling firewood. Then buy a faster $5,000 splitter and depreciate it. Now you can split your own wood four times faster, giving you more time to split wood you can sell.
Do you need to sell $5,000 of firewood to justify purchasing the splitter? No, not in the first year. More importantly, you bought a splitter you wanted (and may have purchase din any case) with pre-tax dollars. Another benefit: when you deliver firewood in your pickup truck, you can charge for delivery and you can write off 65.5 cents per mile there and back.
This same approach works for lawn care and many other jobs.
Hire a Lawyer
If your business grows, you may need a lawyer as well as an accountant. All businesses eventually get sued, which is why you have an LLC (or two) and lease the truck instead of owning it. As long as you do not mingle business and personal funds, your LLC will protect you from losing personal money when sued. I also recommend you do not borrow money and never sign for a liability as an individual but always as a member of your LLC or an officer of a corporation.
Please note that I am not a CPA or an attorney and this is not tax or financial advice. Please consult a professional financial advisor, accountant and/or lawyer before acting on anything in this article.
