It’s nearing the end of the year and most sellers are so busy preparing for a great fourth quarter that they aren’t thinking a bit about preparing for tax season. That’s pretty normal but could be a mistake. You’ve got to begin thinking through your tax liability a long time before tax season comes. That’s why Scott is doing this episode with his friend and business accountant, Josh Bauerle. Josh works with lots of online entrepreneurs and Amazon sellers and has a great deal of experience dealing with the tax implications of those kinds of businesses. You’re going to learn some great things from Josh on this episode so make sure you carve out the time to listen and get yourself ready for tax season.
One of the biggest tax mistakes Amazon sellers make has to do with inventory.
As a seller of online products you naturally have inventory. Inventory is the products you purchase to resell through your online platforms. You can write off your inventory when it comes to taxes – BUT inventory for tax purposes is NOT what you might think it is. You’ve got to know what the IRS considers to be inventory, how it handles these things, and how it requires you to keep your inventory records. Josh Bauerle is an expert on these things and he’s got a very clear explanation of how you need to handle your inventory issues – and he shares it on this episode.
Sales tax is a real headache for eCommerce sellers. Do you know how to handle it?
Every person or company who sells products online is liable for sales tax on those products. It's not only a federal issue, it also varies with each state in which the products are sold. If you spend even a small amount of time thinking about that you’ll realize that the potential sales tax liability for an Amazon private label seller can get pretty heavy, pretty quickly. And on top of all that, every state handles the rules differently. You’ve got to get this one figured out though – it could make or break your business. CPA Josh Bauerle is Scott’s guest on this episode and he’s got lots of wisdom for you regarding taxes and tax liability.
Why it’s legally vital for you to keep business funds separate from personal funds.
Many people start out in business flying by the seat of their pants. Every business expense and every personal expense seem to be the same thing because they are living off of the money they make from the business. But today’s guest, Josh Bauerle is a CPA who has worked with business people for a long time and he’s got some horror stories about the kind of things that can happen when you co-mingle your personal and business expenses. On this episode, he highlights the reasons you need to keep those funds separate and how you can easily track and coordinate them to keep you out of tax trouble. This section alone is worth the time it will take you to listen.
Are you getting all the business tax deductions that are rightfully yours?
When you start a business of any kind you’re going to spend money for a variety of things that go into the operation of your business. From office supplies, to educational resources, to trips, you can legally and ethically write off many of the expenses you have in order to decrease your tax liability. But there are guidelines for how you do it that you have to understand so that you don’t get yourself in trouble with the IRS. Find out how to do tax deductions the right way from Josh Bauerle, CPA on fire, on this episode of The Amazing Seller.
OUTLINE OF THIS EPISODE OF THE AMAZING SELLER
- [0:03] Scott’s introduction to this episode of the podcast with Josh Bauerle.
- [4:00] Josh’s experience with Amazon clients so far.
- [6:15] How you should track inventory for tax purposes.
- [11:18] The variety of business entity options you could form for your business.
- [16:30] The essential nature of using a separate checking account for your business.
- [20:00] The tax advantages of forming an S-corp.
- [25:50] What is sales tax and why it’s a mess for Amazon sellers.
- [33:30] The tax breaks that come through business deductions.
- [42:00] Why bookkeeping is vitally important for eCommerce sellers.
TRANSCRIPT TAS 288
TAS 288 : Get Ready for TAXES – Deductions Tips – Sales Tax – Mistake Prevention
[00:00:03] Scott: Well hey, hey what’s up everyone! Welcome back to another episode of The Amazing Seller Podcast. This is episode number 288, and today we are going to be talking about a not so sexy topic. What is that topic you ask? Taxes, who wants to pay taxes, who wants to talk about taxes? Now, I have no problem paying taxes, I think that everyone…
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…should pay their fair share, I do have some issues about how much you get taxed, the more that you make and all that stuff, but that’s for another discussion and I’m not even sure that I should even talk about that because you know what, it doesn’t matter at this point, right? You just have to do what is right, play by the rules, I’m a big fan of playing by the rules, you guys know that.
What I wanted to do, is I wanted to have my CPA buddy Josh Bauerle back on again to go over some tax tips, how to get ready, how to take you deductions that are coming to you, don’t miss those deductions because they are yours.
Talk a little bit about sales tax and also some mistakes that we can prevent. He’s been working with a lot of Amazon sellers since being on the podcast, he has been on episode 143, was his first time he was on, which was just before taxes in last year, and then he came back on for episode 251, for some additional tips and he’s been working with a lot of Amazon sellers and there are some common mistakes that people are not aware of that he is finding are coming up over and over again. We are going to take about them. It’s going to be a little bit of a recap, we are also going to give some other tips that he may not have talked about before, some deduction stuff.
Then also talk about the business entity which is always a confusing topic. We are going to talk about that stuff. But really it is going to be an episode for you to understand how to get ready, how to get prepared, and do what is right and to stay above board. This way here, you are not going to be surprised when it comes tax time. We want to make sure that we are prepared for that.
[00:02:00] Scott: I have heard some people that just wait to the end and then they figure it out and then all over sudden they’re like, “Wait a minute here, I owe how much? Where am I going to come up with that money?” Like I’m a believer that you should know who you are throughout the year, you should start taking some of that money and putting aside. And that way you are not surprised, and having a good CPA or a good accountant will help with that process.
But that’s what we are going to be talking about. There are show notes like all the other episodes, there are transcripts, there is going to be links that we talk about. Head over to the amazingcellar.com/288 and you can download those over there get all the links that we talk about and I just have to say, I mean starting this podcast, I mean all the way back from the beginning, I really didn’t know anybody in this space and then being able to meet people like Josh or like other people in the business now that are able to help us through this process. Not just taxes, but you got like Ted Limus. He is an attorney that all he is doing is really focusing on Amazon sellers so me being able to meet these people and have these connections with these people and these relationships is just priceless and being able to then transfer their information over to you is just awesome.
I’m so privileged and honored that you are listening and that you are able to learn along with me but then also get this information as we need it. As we need this information, we are going to be able to put it out there and that’s why I’m doing this just before taxes. This why we are here you can be prepared as best as possible so you are not surprised. Definitely going to be a lot of nuggets in here for you so definitely either take notes or download the transcripts and then just follow along and then play by the rules.
That’s going to wrap up the little intro here. Let’s go ahead and get ready to rock and roll here, with my good friend Josh Bauerle of CPA on Fire, enjoy.
[00:03:52] Scott: Hi, Josh what’s up man! Thank you so much for hanging out with me this morning, what’s up man, how are you doing?
[00:03:57] Josh: I’m good, thanks for having me back on the show.
[00:03:59] Scott: I wanted to have you back on because we are getting close to you know tax season, I figured what better way than to have you on and kind of share some more tips and maybe give us some advice, maybe moving forward, maybe recap a little bit of what we talked about in the past episodes but just kind wanted to dig into that stuff. Before we get started though, what’s been up in your world since you have been kind of taking some of these Amazon clients?
[00:04:24] Josh: Definitely since we were on last December, December 2015 we have picked up a ton of Amazon sellers. You obviously have an awesome audience there, that come over to us, and it’s actually become one of the areas that we really specialize in now. So that’s has been really cool to get to know that industry and kind of see the ins and outs and what the needs are in there.
[00:04:44] Scott: I think that was the last time that you were on we talked a little bit about some of the things that you weren’t even aware of that were like these issues that the Amazon businesses were having but just physical product businesses I guess is really more what we can talk about because inventory has a lot to deal with that.
What I want to do is I want to make this episode, obviously I want the information be there so if they are getting ready to do their taxes like to be prepared but then also give us some, maybe recap a little bit but also give us some stuff that we know is best practiced that we should be prepared for and also for just starting, like what should we do as far as like the whole business entity and all of that stuff again, because I know that a lot of people don’t really understand and actually I was just to add our live event here in Phoenix and the question came up. LLC S-Corp, C-Corp, that whole stuff.
I said you got to go back and listen to that episode because I’m not going to give you that advice. But maybe we could dig into those areas. What are you still seeing that people that are coming to you are like not aware of that you think that you need be aware of?
[00:05:53] Josh: I think there are two things that I see the biggest confusion with Amazon sellers compared to other businesses is the issue of inventory and definitely issue of sales tax.
[00:06:05] Scott: I can relate to that, I get those questions almost daily.
[00:06:08] Josh: Those are the two biggest things. Should we just start there and dive into how it is different?
[00:06:14] Scott: Let’s just kind of dive into that. Let’s start with inventory, let’s start there. Take it kind of like from someone that comes to you that already has maybe started or something but they are not really quite sure how that whole thing works as far as like doing the deductions, then we can kind dig into some common deductions too or some things that people might not think that they can deduct and that they can’t deduct. But first thing is the inventory, how do we deduct the inventory?
[00:06:38] Josh: Just to get it back to the very basics, when we say inventory basically all we are saying is that the product that you are going to sell. If I sell cell phones on Amazon, all the cell phones I purchase to sell are my inventory. They remain inventory until they are sold. Where the confusion comes is number one, I have heard people ask, “Is this a tax deduction?” and this absolutely the cost of the product you sell is a deduction on your taxes. If I buy that cell phone for $10 I resell it for $20 that $10 cost is an expense, it is called cost of goods sold. Okay, that is right off the start, a deduction. Now the big question is, “When is it a deduction?” And this is where there is ton of confusion, a ton of bad information, because with inventory it is not a tax deduction until it is sold.
This is a very big deal for us, especially the Amazon sellers who are really getting going and maybe buying large volumes of inventory at one time, and I have even had people do it purposely for the tax deduction, where they get maybe in December and say, “I’m just going to buy $100,000 worth of inventory right now to get that tax deduction.” They come talk to me and they get the bad news that unfortunately that is not a tax deduction, until you sell that inventory.
[00:07:56] Scott: Let me interject, I almost made that mistake my first year. I’m like you know common sense, right you buy, you invest in your business, and you automatically you should be able to get that back. At the time I wasn’t working with you, now I am. Luckily my accountant knew that as well and he is like, “No, you can’t deduct that until it is actually sold.” I’m like, “Wait a minute, so I’ve got like $50,000 worth of product that I bought for my business that I took and invested right back in, and I can’t use that,” he is like, “No.”
That is an issue so anyone listening right now, this is a huge lesson. Make a note of that and we are going to dig into a little bit deeper so it makes it clear but don’t think that you can just spend $10,000 and automatically that’s is going to be a tax deduction. It is not going to be a tax deduction until you have sold that item. I would love you to keep going on that.
[00:08:51] Josh: I guess basically the flow of how it works is just to keep using the cell phones as the simple example, you buy $100,000 worth of these cell phones. That $100,000 goes into a category in your bookkeeping called inventory. Which is not an expense. As you sell each cell phone it moves into cost of goods sold as an expense. You buy $100,000 worth, you immediately tend to sell $10,000 worth. $10,000 moves out of the inventory in the cost of goods sold as an expense. If you are thinking that sounds incredibly confusing, how am I going to track all that?
It is actually pretty simple when you get down to it. There is three numbers you need to know to figure out what the cost of goods sold is for the year. You need to know how much you had in inventory at beginning of the year as of January 1st. You need to know how much inventory you purchased throughout the year and you need to know how much you have had in inventory at the end of the year, as of December 31st. Does that make sense?
[00:09:46] Scott: Yeah. It makes total sense? The way that I have always kind of thought of it you have explained perfectly and I can visually see that, but basically if you sold a hundred units this month, and you have a thousand units of inventory, you only going to take the deduction on the hundred units that you sold.
[00:10:03] Josh: Exactly.
[00:10:04] Scott: Right. If you paid five bucks a unit, you’re going to write off the $5 times a hundred, and that’s your deduction that you get. Obviously you get the expenses of the fees that you have paid in Amazon or whatever or any other fees, but the product itself is, you paid five bucks for it, you only get to write the $5 off when you sell that item and if you sold a hundred that month and that’s what you get. But what you’re saying too is you only take that up to the end of the year, and then from there that’s where you’re going to figure out your total inventory that you purchased.
[00:10:34] Josh: Exactly. That will get you to the number that you need. I think one of the reasons this is so confusing is because no other expense works this way. If you are with what they call a cash basis taxpayer, that means you take the expense when you pay for it regardless of when you use it, but then all of a sudden they turn around on inventory and say, “Not so fast, we’re going to tweak that one a little bit.”
[00:10:54] Scott: Thank you. Yeah, right. Just tweak that one just a little bit. Okay, so that’s the inventory thing and to me it is pretty simple to think about now that you kind of understand it, but you need to understand it. If you’re brand new and you guys are thinking to yourself that you’re going to throw some money down in this, you’re going to write the whole thing off. It’s not the case. Not until you sell that item. Just be aware of that.
Let’s move into, I do want to get into more deductions and stuff. I want to talk about that stuff, but maybe just to kind of go through now the other thing is the different business entities and when we really should start thinking about those different entities because so many people get started, they say, “You know what? I want to get started but I’m just not sure that I’m going to be expanding this brand.”
“I might just get started and just want to do some retail arbitrage or I might want to do some wholesaling or something like that and it’s just not going to be the brand I might go with. Do I use my sole security number? Do I use just the IN number? Do I use an LLC? When do I form the LLC? When do I form the the C-Corp, all that stuff?” Maybe guide us through like the basics. If I’m just getting started or maybe someone that’s already started and started to generate some cash.
[00:12:05] Josh: We’re going to talk about three different entities here. Number one is the sole proprietor or general partnership and the only difference between that is whether it’s just one person or multiple people.
All that means is you just hit the ground running. You don’t register any foreign entity or any official entity. The next level is the LLC or the Limited Liability Company. The third level is the S-Corporation. I’m going to make it simple, and say we’re not going to talk about C-Corporations because it’s actually for Amazon businesses from 99.999% for you it’s a horrible option.
If you do think that’s an option, get some very specialized help there, make sure it is, but for most of you we’re just going to focus on those three options. Okay, if you’re just getting started and you just kind of want to hit the ground running. You don’t want to register anything with the state, all you have to do is get going and you’re automatically a sole proprietor or if you have a partner in the business you’re a general partnership.
Okay, you don’t have to go and tell the state, “Hey, I need you to recognize this business.” The business is you. You can go and register what they call DBA, a Doing Business As. It has an official name and if you want to reserve that name, you can go and register for an EIN which is Employer Identification Number.
Okay, if you don’t want to operate under your sole security number, those are options, but the bottom line is you and your business are one and the same. In fact if you’re the only owner in the business it’s going to be reported directly on your personal tax return, on what they call Schedule C.
Your businesses doesn’t even file its own tax returns, which does it as your part of your personal. If you’re worried… If you don’t want to spend like the time and money involved in getting registered, and you’re just getting started, this is a perfectly fine option. I get a lot questions saying, “I want to keep it easy and be a sole proprietor, but I don’t want to lose the tax deductions I can get with an LLC.” There is zero additional tax deductions for LLC.
[00:14:01]Scott: I’m glad you said that. Yeah.
[00:14:02]Josh: It operates the exact same way. Let’s move into the LLC, next level up. Okay. It operates for tax purposes the exact same way as a sole proprietor or a general partnership, and there is literally zero differences. The reason for that is the IRS doesn’t even recognize an LLC as an entity. It’s what they call a disregarded entity.
Basically what an LLC does is it separates you legally from the business. The idea is if someone sues you for whatever reason your business may be sued, you potentially can protect your personal assets in whatever lawsuit has brought to it.
[00:14:37]Scott: The big word is potentially, right?
[00:14:39] Josh: Potentially. That’s the huge word because first of all I’m not an attorney. I don’t think you’ve gotten your law degree since the last time we talked.
[00:14:46] Scott: No.
[00:14:46] Josh: We’re not going to give too much advice here but a lot of people I know, a lot of the attorneys will tell you, “Look, if you and your business… If you’re the only one in your business, you’re not all that protected anyways.”
People will disagree in varying ways, it’s absolutely worth looking into it if you think you have that legal liability, but the key to remember here is that’s the only thing an LLC does is potentially protect you legally.
It has zero tax benefits. Okay, so if you’re the only owner in that LLC, it still is a disregarded entity. It’s still is reported right on your personal tax return. You and your business are still considered one and the same.
[00:15:23] Scott: I want to just interject there real quick, because the LLC again, to me, it’s a layer between you and your business. Again, this is I think a good point to bring up too is like if you are running your own business, whether you are an LLC or not, I think it’s very smart to, and this is again my advice to myself because is what I have done, is really having your own business account, your own checking account, and all the money gets sent and funneled through there, so this way here…
Again, this was recommended by my attorney was like, and then that does make it harder then too because now you’re not mixing funds. This way here you are operating as the business even though you’re technically the only one in the business. So it’s going to make it a little bit harder, it doesn’t mean it’s not fool proof at all, but I would say even you would agree with this. I’m sure is that you want to keep your things separate anyway. You don’t want to mingle your personal checking with your business checking and stuff like that.
I would say the LLC for me personally was, I guess a way for me to separate it, that if I did ever have an issue that it would then go after the business and the business checking account or the business account but that doesn’t mean that there is not going to be a loophole and they can get back to me, that’s where product liability and stuff would come in next, which we won’t talk about that, but that’s another layer of that would come into, right?
[00:16:43] Josh: Absolutely. Great point, and that separation, getting a separate bank account, separate credit cards for your business. That is one of my number one advice whether you have LLC, whether you’re just a sole proprietor. No matter what you’re doing from day one go get that separate bank account, go and get that separate credit card.
If you’re too early to get it in the business name itself, just get a separate account in your personal name so that you’re keeping things completely separate. You’re absolutely right. Whatever protection LLC can offer you is limited by you keeping that separate. If you’re co-mingling them guess what? You and your business are the same thing, so good advice there.
[00:17:20] Scott: You had said to me I remember a while ago since we’ve been working together, you said to me, because I said, “You know what? I’ve got this other business that I’m doing, but it’s not a major business. It’s doing some money, but I don’t want to have to go out and get a new business card and stuff.” You’re like, “Listen, just use one credit card even if it’s in your name for just that business, so that when they look at that, they’re going to see that that card was designated for those purchases.” I’ve done that ever since.
I think that’s good advice, but again, if you want to go the route of giving your own business credit card, well go for it but I think that’s… Like you said, just keeping it separate is key.
[00:17:53] Josh: Absolutely. There is one thing I do like about the LLC and the potentially legal protection is it does offer you some flexibility for what we’re going to get into next which is the S-Corporation.
Okay, it makes switching to another entity easier than if you’re just a sole proprietor. To recap those two, there is zero tax difference between the sole proprietor and the LLC because if you’re looking for tax advantages, there is no need to go to the LLC. When you want to go to the LLC is if you want that a little bit of legal protection potentially. Some people will do it because they feel it makes their business more official to have…
[00:18:29] Scott: The LLC.
[00:18:29] Josh: The Amazing Seller LLC instead of just The Amazing Seller, whatever it is. If you think that and does that, absolutely go for it, but when it comes to taxes, the exact same thing. Now the next level up, the third level that we’re going to talk about is the S Corporation, and in a lot of ways the S Corporation operates the exact same ways that the previous two entities did. It is still what they call a Pass-through Entity.
What a Pass-through Entity means is everything the business does passes through to the owner, and the owner pays all the taxes on their personal tax return. Let’s just say that your new Amazon business profits a $100,000 that first year, and when we say profits all we mean the income that’s left after all your deductible expenses, they would say there was $100,000.
That business is going to pay no taxes on the $100,000. Instead it’s going to pass that through to you. You’re going to claim $100,000 income on your personal tax return, and you’re going to pay all the taxes on that personally.
Where that really confuses people and gets a little tricky is, you’re going to have to pay taxes on the $100,000 whether you take all of it out, whether you take none of it out or somewhere in between. A lot of people will say, “Yeah, my business profit $100,000 but I didn’t pay myself a dime. I took nothing out, so I don’t owe any taxes.”
I have to give him them the bad news that that not quite the case. Make sure you understand that no matter which entity you’re in, it’s a Pass-through Entity, and whatever those profit show, the IRS is going to treat those profits as income to you whether you touch it or not.
[00:19:57]Scott: That’s a good point and this was something that I wasn’t aware of, and it’s funny because… I’ll publically say it. There was a little bit of a discrepancy between your advice and my old accountant’s advice. Really the reason is and I think you can kind of probably address this is because there were people abusing this and you talk about it. You did with me anyway that said, listen, this is totally legal, it’s totally legit but there’s right ways and wrong ways of doing this.
The guy that’s going to use it and show no money and not have a reasonable salary is going to throw up a red flag is going to be in the wrong and I think that what’s my old accountant because he was old school, he was totally that is not the way that it’s going to work, this that and the other thing, but when you explained it to me it made total sense and other CPAs that I’ve talked to since then and people that are specialist in this have totally agreed with your advice.
Again I believe in like anything, if you’re going to cheat the system you’re going to be in risk of getting in trouble. If you’re abiding by the rules and you know what they expect then you should be okay. Maybe you can explain where people were abusing it and then maybe the right way.
[00:20:00] Josh: Let’s get into how the S-corp actually saves you money first. Like I said it works the exact same way. Those $100,000 profits flow through to you, you pay taxes on them. If you’re a sole proprietor or an LLC not only are you going to pay ordinary taxes on those you’re also going to pay what they call self-employment taxes which is an additional 15.3% tax.
You can do the math $100,000 that’s an additional $15,000 tax right there on top of all your ordinary taxes. S-corp works the exact same way that the $100,000 passes through, you a pay all the ordinary taxes on the $100,000, you do not pay that 15.3% self-employment tax. Doing the math you just wiped out $15,000 off your tax bill. Now, having said that, the IRS obviously is not a big fan of you just wiping $15,000 off your tax bill.
What they say is, okay fine you won’t have to pay those self-employment taxes on that $100,000 net income but we’re going to require you to take what we call a reasonable salary in the business which means you’re actually paying yourself as an employee of your own business a salary paycheck. The reason we’re going to make you do that is because on that salary you’re going to pay what we call payroll taxes. Guess how much payroll taxes are, that same 15.3% as the self employment tax.
[00:22:35] Scott: Okay. All right.
[00:22:36] Josh: That’s how they’re going to recoup a portion of that. Here’s where tax savings come. You profit $100,000, we decide that for you a reasonable salary is $40,000. Now on that $60,000 difference between the two you’re saving that 15.3% in self employment taxes.
[00:22:54] Scott: Got you.
[00:22:56] Josh: It can add up pretty quick. The key remember there is just because you only paid yourself a $40,000 salary doesn’t mean you have to keep the other 60,000 in the business. You can still take that $60,000 out in what they call distributions which have no tax consequence because you’re already paying taxes on the profits.
[00:23:12] Scott: That makes sense.
[00:23:13] Josh: Does that make sense?
[00:23:14] Scott: That makes total sense.
[00:23:16] Josh: Getting into what you were talking about, the big question is what constitutes a reasonable salary because as you’re seeing here there’s a tax incentive to keeping that salary as low as possible. Typical IRS they don’t give hard set firm guidelines on this is what reasonable is so you’re kind of left guessing. But one theory that we kind of go with, and a lot of people go with is what would you have to pay someone to replace you in the business? If Scott said, “I can’t do this podcast anymore. My voice is gone, I’m done.” What would you have to pay someone to come in and start running The Amazing Seller and doing your podcast?
Obviously there’s not many jobs out there, job postings that are looking for someone that’s doing exactly that. It still takes a little bit of guess work. But that’s a big way to think of it. You’re probably not going to… A lot of CPAs like your older CPA might say you have to pay salary at least 50% of the profits. If you’re business is profiting a million dollars you probably don’t have to pay somebody $500,000 to come replace you. That’s not quite the way it works.
Some of it is just common sense. What would I have to pay someone? If you’re struggling with that a number guideline we like to use is somewhere between 25% and 40% of those profits. The lower your net income is the higher the percentage of that salary has to be. Maybe if you’re profiting $40,000 you pay yourself 40% but if you’re profiting $200,000 you’re done closer to 25%.
[00:24:55] Scott: That makes sense though like you said if you have a company that’s doing $500,000 or $1 million a year you can’t say well it’s going to be 40% of that. Even the CEO isn’t going to be making that most likely depending on what kind of business they’re running. It makes sense that if you’re less money like you said $50,000 or even $100,000 it might be in that 30% range. But I think having a good CPA too that kind of knows and wants to play by the rules. I think that’s important because I could probably reach out to another CPA and be like I would want to do 10% and you’re going to be fine.
I think you have to trust that person. To me I always want to be above where I really think is the comfort a little bit because I just want to be able to sleep at night. I don’t have to worry about that stuff because we don’t want to have to go through that hassle. I think that’s good advice. That’s the entity stuff that was the product cost, we went through that. Let’s talk a little bit about sales tax. I’m not going to go too deep into that, I know that’s a crazy topic.
We did episode 257 with Mark Faggiano from actually Tax Jar, had him on and we had a great discussion. We did a whole sales tax 101 discussion and it was really good. But what’s your thoughts on it right now since the last time we talked or since what’s been going on? What’s your thoughts?
[00:26:23] Josh: I guess my thoughts are still a lot of…
[00:26:26] Scott: It’s a mess?
[00:26:27] Josh: It’s a mess, there’s a lot of uncertainty. It’s crazy. The biggest problem or the biggest mess I guess is in this Amazon FBA business because we’re getting right back to inventory. Let’s just talk about what sales tax is. Sales tax is the state saying any sale that you make within our state we want to collect and pay sales tax to us on that sale which depends on the stage it can range anywhere from 3% to 8%. It’s not a tax that you’re paying as the seller, it’s one that you’re charging the buyer and then remitting that tax to the state.
The way it works is you only have to charge and pay that sales tax to states that you have what they call a physical presence in. For most businesses this is pretty simple to figure out, it’s where you’re located. I’m in Ohio if I have books that I’m selling what that means is I only have to collect and pay sales tax on books that I sell to people located in Ohio. Once I branch out beyond Ohio, Ohio has no reach on that and they can’t demand that I collect to pay that. That’s simple enough.
But then you get into things like the Amazon FBA and Amazon if you don’t know can store your inventory in up to 14 different states’ warehouses.
[00:27:47] Scott: Exactly.
[00:27:47] Josh: One of the things that constitutes what they call Nexus which is just another word for where you have that physical presence is where you store inventory. You potentially could open up Nexus in 14 different states by Amazon’s storing your inventory there. The big question is do I know have to be collecting and paying sales tax to sales within all 14 of those states plus potentially whatever state I live and work in? That’s where the mess comes in.
[00:28:15] Scott: Yah that is where the mess is, because the other thing that people have said and they’ve thought and I actually thought about it the beginning was and I thought like this was, okay well that’s easy. I can send my inventory to one Amazon location and just that’s where it’s going to be sent and that’s fine and that sounds all great and everything. But the problem is Amazon is going to move that inventory around without you even knowing it. They could move it in the next day. They could ship 500 of the units to a whole another state that you don’t even know that that’s where it is and now all of a sudden you have a presence in that state.
[00:28:48] Josh: Exactly. That is the biggest problem. There’s so much uncertainty. The other thing is you can ask 10 lawyers and 10 CPAs whether you have to collect and pay sales tax in those 14 different states and they’re going to give you 10 different answers. There’s no certainty right now. I guess my conclusion after working with so many people is number one you have to immediately register and collect and pay sales tax within the state that you’re located.
[00:29:16] Scott: That’s the point.
[00:29:16] Josh: If you’re not doing that you’re in the clear violation of the rules if you’re not doing that and it’s very easy to catch. From there if you have the time and resources and money to get it done go ahead and register in all 14 states. You’ll make your life simple. You’ll cross it off your worry less. That’s going to be super expensive I can tell you from helping clients do that. You’re going to pay anywhere between $4,000 and $6,000 depending on who you use to do that for you.
If you don’t have that I recommend starting slowly with the states that you have the most sales in. First of all I highly recommend using Tax Jar, the tool you just brought up. They’re going to plug right into Amazon, tell you where you inventory’s stored, tell you where the most sales are being made. Do that, look at it and if they tell you you’re selling a big chunk of product to California you should probably go register and start doing sales tax in California. That’d be my recommendation on of how to approach it. For sure start in your state that you’re located and then branch out slowly to the states that you’re starting to pick out more product sales in.
[00:30:21] Scott: That was Mark’s recommendation was people getting started right now might listen to this and be like, “Oh my gosh, I’m going to have to do all…” You don’t have to do all that technically. What you want to do and like he said is you want to almost monitor where your sales are coming from. The obvious ones where you’re going to be sending in the inventory is to meet the obvious as well. If you’re sending all of your inventory in, I don’t know, let’s say it’s Florida or let’s say that it’s in California, then those are the ones you probably want to start to file for the next after your home state. That would be to me my next move.
After that I’m going to want to see inside a Tax Jar because it’s going to show me where all of my sales are coming from without me having to dig through all my reports and it’s going to show me where all of my sales or a majority of them are coming from and then I can start to kind of go in that order in a sense. That was his recommendation too. Again guys we’re not giving legal advice at all. I’m not an attorney, I think my dog Brody was in his past life but he’s no longer practicing and I know that you’re not as well Josh.
But we are just kind of giving you like… To me it’s like the common sense kind of I guess advice as well. It’s like trying to do what’s right and you’re not trying to I guess go against the system. But again we don’t even know what the system really is 100% because it’s so crazy out there with them giving us information and they make it so freaking hard. They make it so hard… I say they, the states they make it so hard to file. Some of them are only allowing you to file by paper. Some are only allowing you to… Some you have to file every single month, some you have to file every 3 months, sometimes it’s once a year and it can get really messy. That’s why Tax Jar to me helps tremendously with that. But it’s totally crazy.
[00:32:21] Scott: I already said this, if they were smart, if all the states would get together and go, “Listen, we all want a piece of this, right? We do, okay good. What we’re going to do is we’re going to create this portal and people are just going to go in here, they’re going to register once and they’re going to register for all the states because they’re selling on their own platform or Amazon and they have inventory stored all over the place.
When they get sales and they’re basically tracked then we’re going to basically… The money’s going to get sent in.” That would be the easiest thing to do but you can’t because every state is going to have their own people trying to dictate how things should be done which is insane.
[00:32:54] Josh: That’s why you got my riding vote for president Scott.
[00:32:58] Scott: Not me, trust me. Not after that last election. We don’t even want to go into that man but anything’s possible. I would just say do your homework, Tax Jar is a great resource I’ve said it before. Listen to episode 257 with Mark. He really did a great job with that and I know you and I have talked about it on other episodes which I’ll leave them in the show notes as well. Let’s wrap up with some solid deductions. Let’s help people save some money this year that they normally would have saved if they knew but they didn’t know and they just basically handed over money.
[00:33:35] Josh: Here’s the cool part about owning a business is the IRS kind of favors business owners, that’s where the majority of tax breaks are. Where those tax breaks come is all these expenses that you’ve been spending in your life personally now could potentially become a full or partial tax deduction.
We’re talking things like your cell phone that you use long before you started this Amazon business. Obviously you’re using it from time to time in your business, now it’s a tax deduction. For me that’s a full tax deduction. I wouldn’t even bother trying to say I use it 50% of the time for business. It’s absolutely necessary to run your business so to me that’s a full business deduction.
Home internet same way, obviously to sell on Amazon you need internet access, full tax deduction even though it’s being used partially for personal reasons. Portions of your house all of a sudden become tax deductions. If you have a home office that could be potentially become a tax deduction. If you turn your garage into a storage unit to store your inventory that could potentially become a tax deduction.
The biggest key with using your home as a tax deduction is the rooms you’re using have to be used strictly for business. I wouldn’t put a computer desk in my kids’ room and use it time to time. That’s not going to work out because that has to be an actual office or if your garage is your inventory it has to be strictly this is used to store inventory not my car. That’s a big one. One of my favorite things is vacations. You just mentioned that you held an event for Amazon sellers, right. Where was that located?
[00:35:08] Scott: That was in Phoenix Arizona.
[00:35:09] Josh: Okay beautiful. I would want to take a vacation to Phoenix Arizona I find out Scott’s holding this awesome event for Amazon sellers, guess what, I’m going to plan my vacation around this event which is clearly going to help my business and now that vacation becomes at least partially deductible on my taxes. I guess the biggest thing as a business owner you have to start doing is anytime you’re spending money you have to be asking yourself, does this correlate to my business?
If we can prove that what you’re spending money on increased the bottom line of your business meaning it helped you either bring in more money or decrease your expenses in some way then chances are we can deduct at last a portion of that on your tax return.
[00:35:48] Scott: Same thing kind of goes I think too with like the tools that you’re using. If you use Jungle Scout or any of these tools those are business expenses. It’s helping you run your business. If something helps you run your business that’s an obvious one and you should be taking those things but then there’s other things too and I’ll throw this out there. You and I didn’t talk about this but I went and I had the event or I needed… I need nicer clothes. I can buy an outfit right now, can I deduct all of that or do I just deduct a portion of that?
[00:36:20] Josh: Clothing is, I’m glad you brought this up, clothing is a tricky one because anything that improves your appearance the IRS does have stricter rules on. One thing that you can do to guarantee that you can deduct it is get labeled with your business. If all of a sudden you get this nice new polo shirt now you go put a little Amazing Seller emblem on it for sure that’s a tax deduction.
But you do want to be careful with clothes in general. Even if you typically say I would never wear a suit ever but I bought one for this event it may not be a tax deduction. That is one you want to be careful with.
[00:37:02] Scott: Got you. Okay, I’m glad I asked that. Again that’s why I think it’s good to have someone in your corner like you that can kind of tell you these things and I guess you don’t want them to just tell them what you want to hear either. That would be something I’d be like Josh I spent like 300 bucks on these new clothes for my thing. You’re like well Scott you probably shouldn’t do those or we could do a portion or whatever. It does definitely help. Then again stuff like this like meals, a lot of people, that’s another one.
That’s like I took a business partner and I went out and we entertained someone that’s going to be doing some of our manufacturing or something like that or maybe it’s a business trip to the canton fair. Maybe talk a little bit about like meals and when we can deduct them.
[00:37:54] Josh: There’s a specific category called meals and entertainment and this is used any time you bring any type of business associate; business partner, client, potential client, your CPA, your attorney. Any time that you’re meeting for the purpose of business the meal and then any entertainment that you do as a part of that meeting is partially tax deductible. It is a 50% tax deduction. That 50% limitation applies whether you only paid for yourself or you paid for the other person that’s with you.
If Scott really wants some tax advice and he takes me out to lunch to talk about it and he pays for it and I get the most expensive thing on the menu and the total bill is 150 bucks Scott gets $75 tax deduction out of it.
[00:38:41] Scott: Nice, that’s cool. That’s really cool. How would you keep track of that meeting? Was there a way or do you just have a rule to thumb it like if you income is this, if you stay within this you’re going to be probably okay, is there…?
[00:38:56] Josh: Yes. The first thing is the IRS doesn’t demand that you keep receipts of those if the total bill was under 75 bucks. You can start there. Now having said that it’s never a bad idea to keep the receipt and just jot a quick note on it and say I took Josh out to lunch to talk taxes because when it comes to the IRS the more documentation you can write the better. But technically under 75 you don’t have to worry about it. As far as like kind of finding… Like I kind of get what you’re saying here like you don’t want to have $10,000 in meal costs if your net income was $20,000.
That’s very suspicious. You definitely want to use common sense. But of course it’s industry specific as well. If I’m an insurance agent my entire job is going and networking with people, constantly talking them out for coffee and lunch and dinner and drinks. My meals and entertainment expenses is going to be super high compared to other industries. You want to use a little bit of common sense there like I’m an Amazon online seller so they’re probably not going to believe that 50% of my expenses went towards meals and entertainment.
[00:40:00] Scott: That makes total sense. The same thing I guess could be said then for conferences or even education. If I buy an online course for myself, is that a full write off because I’m educating myself?
[00:40:15] Josh: Absolutely because that’s a 100% you’re doing that for the business. I’m not an Amazon’s seller, so I’m never ever going to take the course on Amazon selling. Like that’s just not… That’s 100% for the use of your business, so that’s absolutely a full tax reduction.
[00:40:29] Scott: Got you. Okay cool. All right. That’s definitely helpful, and I think that anyone else that’s listening right now just again, like Josh said think about what you’re spending in your everyday life that could be kind of traced back to your business. The obvious stuff is like if you’re using packing tape to package up some boxes to send them in or if you have to buy boxes to send them into Amazon, obviously that’s going to be a write-off. Those are the more obvious ones.
But if you do those other things, those office expenses or if you do any travel or if you do any of those things, definitely ask your accountant or your CPA, but I would just try to document more than not enough. This way here I can come to you and say, “I’ve got all these other stuff. Does any of these stuff like… Can I use any of the stuff?” Then you’re like, “You can use this. You can’t use this. You can use this.”
I’d rather think about everything, because like you said when you’re working for yourself almost everything you touch on a daily basis could be traced back to a certain extent because we’re always kind of working as an entrepreneur. We’re always doing something that could bring…
Again, I’m not going to go to Disneyland and just say, “I was there and I met someone at a coffee shop, and I’m going to right pole trip off.” That’s not what you’re doing. You’ve got to have like there was an event, like you said. If I want to go to Disney, then I’m going to go to Disney, but then there is also going to be an event in Orlando. You’ve got to make it make sense.
But is there any other last little bits of tips or advice you’d like to give anyone? You’ve been now working with some Amazon sellers, and not even just Amazon sellers, I think ecommerce sellers in general. People that are selling physical products, it’s a different animal. Is there any last little bits of advice that you’d like to give, and then maybe let everyone know kind of where they can get in touch with you?
[00:42:05] Josh: I would say… The last thing I would say is tracking or doing what we call in the accounting world book keeping is so incredibly important for any industry, but man it’s so important for this ecommerce and Amazon selling space because of things like knowing how much inventory you can deduct.
Because of knowing, “Hey, I spent money here, here and here.” As you said maybe bring it to me and I said, “No. You can’t deduct that.” But maybe there is ten other things that you can, because if you’re not tracking that stuff number one, you’re not going to remember to take it come tax time.
Number two, even if you do take it, if you’re one of the unlucky people who’s ever audited, you’re going to have no proof of that. Okay, so number one start out doing what we already talked about. Get separate bank accounts. Get separate credit cards for your business. Stop commingling that if you’re still doing it.
All right. Number two, find a way to track that and do some type of book keeping. My biggest recommendation is to use bookkeeping software. Whether that’s kind of the more traditional high-end stuff like QuickBooks Online or Xero. My personal favorite is Xero. I know a lot of people use Wave’s app which… That one, are you still using?
[00:43:11] Scott: I’m still using that.
[00:43:13] Josh: Perfect. It works perfect, okay. I think that one is free, right?
[00:43:15] Scott: It is free. They have like a banner Ad on the right and sometimes they’ll make you an offer if you want them to help you with your accounting or you know what it means. They’re just drawing the people in as a free-end, and they have some other paid services. But, it’s a cool…I’m telling you.
When I was looking for different ones and I looked at FreshBooks. FreshBooks to me was just a little too much, I didn’t need a lot of what it had, and then I was looking at QuickBooks because I had used that in other businesses, and I kind of run across this, I’m like, “This kind of seems too good to be true.”
I did a little bit of research. They’ve been online for a while now and it’s pretty stable and I’ve never had a downtime or anything like that. It’s a pretty cool free app. I’ve heard good things about Xero. I’ve heard great things about QuickBooks, so just pick one. You know what I mean? Just pick it and then just learn it, and then just start importing or start having it kind of funneled into there so you can kind of start showing what’s happening in your business.
Like you said, if you ever get audited and you want to be able to show the ins and the outs of that account and that’s probably the easiest way to do it, and your accountant is going to love you for it.
[00:44:11] Josh: Sure.
[00:44:13] Scott: I want to say, “Hey Josh, I’ve got about two foot by two foot box for the whole bunch of receipts. I’m going to send it to your house.”
[00:44:18] Josh: It’s going to be returned to sender.
[00:44:21] Scott: Return to sender. I love it. Now, this has been awesome. I appreciate all the advice that you’ve given me personally and on the podcast. I want to thank you for that. I know I get a lot of emails from people saying that now they’re either working with you or that you’ve given them some advice whether they work with you or not. I know you’re always willing to give and share. How can people get in touch with you Josh?
[00:44:41] Josh: They can always check out our website cpaonfire.com. We even have a free resource there that can help you choose those business entities that we’re talking about. You can get that at cpaonfire.com/firenation, and they can always just email me directly email@example.com
[00:44:57] Scott: All right man. That sounds awesome, and you and I will be getting together here eventually soon to have that beer that we talked about. We’ll have to do that, and I’ll buy so I can take that as a tax write-off.
[00:45:06] Josh: I’m set.
[00:45:09] Scott: All right Josh. I appreciate you man. I’ll talk to you soon.
[00:45:12]Josh: All right. Thanks man.
[00:45:14] Scott: All right. There you have it. There are some tax tips for you, some best practices, some mistake prevention, a lot of really good stuff that we talked about and I think this stuff is really important even though we don’t like to talk about it that much because it just… It’s not that sexy, right? It’s not fun to talk about that especially when we have to handover money.
Now, I understand we are paying taxes to help our country stay the way it is, and I understand that, but there is a lot of discussion around that, we won’t get into that. But understand that you want to stay above board. You want to do things that are within the guidelines of where you should be in your business.
I think Josh laid it out perfectly all the way from business entities to inventory management and like cost of goods, and sales tax a little bit. Like tax deductions. There is a lot of things there with tax deductions that you may be missing that you need to ask your accountant. Like, “Listen, I just bought some Windex for my house but I’m spraying my windows in my office. Can I use that as a deduction?”
Let them tell you the things that you’re buying on a regular basis if they’re tax deductible. If you have an office in your home and you’re using it for business. Just ask these questions and every bit will help you.
Now, this episode you might want to go back and listen to it again, you probably definitely want to download the show notes or the transcripts, head over to theamazingseller.com/288 and you’ll find those there. You’ll also find the other episodes that I did with Josh, which is episode 143 and episode 251.
I’ll also put the link in there for the sales tax one I did with Tax Jar and from Mark from over at Tax Jar. That one is episode 257. That’s a definitely a must listen if you have any questions about that. I’d also like to remind you if you have any questions about your taxes, you can always reach out to Josh at cpaonfire.com. Again, I’ll have the links in the show notes, so definitely go check them out guys.
All right. That is it. That is going to wrap it up. I want to remind you guys one more time that I am here for you. I believe in you and I am rooting for you but you have to, you have to… Come on say it with me, you guys know what I’m going to say, and you got to do it, you got to, “Take action.” Have an awesome, amazing day and I will see you right back here on the next episode.
LINKS MENTIONED IN THIS EPISODE
- www.CPAOnFire.com – Josh’s company website.
- www.TheAmazingSeller.com/143 AND www.TheAmazingSeller.com/241 – episodes where Josh was featured in the past.
- www.TheAmazingSeller.com/257 – episode about sales tax.
- Wav Apps
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