Its that topic that few people like to talk about, taxes! But with tax season fast approaching, business owners like you need to know the most important information to stay productive. On this episode of The Amazing Seller, Scott invites Josh Bauerle back on the podcast to talk about all the relevant info sellers like you need to be aware of for the upcoming tax season. Together they cover why bookkeeping is so important, when to outsource a bookkeeper, what you can deduct as a business owner, what to do will inventory that won’t sell, what type of business entities to create and when, and so much more! You don’t want to miss a minute of this helpful episode!
Why good bookkeeping is so important.
Any good builder knows that if you want to have a solid end product, you’ve got to have a quality foundation. That same truth applies to building a business, if you want to succeed, don’t skimp on the basics! On this episode of The Amazing Seller, you’ll hear from CPA Josh Bauerle as he shares the importance of good bookkeeping. According to Josh, part of the process of keeping organized books is having separate accounts for your business. You need to have a bank account that is specifically set aside for your business, not a mixture of business and personal use. That same principle needs to be applied to your use of credit cards too. Get more helpful advice regarding bookkeeping and much more from Josh on this episode!
How deductions can help you save BIG!
Did you know, as a business owner, that you have a wide range of options at your disposal for deducting costs associated with your business? As a business owner who is likely running a large part of your business out of your home, there is a list of ways you can use deductions on everyday categories. For instance, you can deduct up to ten percent of your mortgage payments if you work out of a home office. You can also deduct utilities such as internet service and even travel costs! Learn more about tax deductions on this episode of The Amazing Seller with guest CPA, Josh Bauerle!
What you can do with inventory that won’t sell.
Have you ever been told that you should buy up lots of inventory before the end of the year to use it as a tax write off? Is that sound advice? What should you do with inventory that you can’t seem to sell no matter what you do? On this episode of The Amazing Seller, Scott and his guest, CPA Josh Bauerle go over some helpful options to both scenarios for sellers like you to consider. For the first scenario, Josh says that you can not use the purchase of new inventory as a write off until that inventory has been sold. For the second scenario, Josh says that it is a good idea to consider inventory you can’t sell as “Scrapped Inventory,” this allows you to write off the cost of acquiring that product as long as you document that you’ve disposed of it. To hear the guys expand on both of these topics and much more, make sure to listen to this fascinating episode!
Four different types of business entities you should consider creating.
As you start building your ecommerce business, you might be left with the question of which business entity you should create. Which option is the best one to select at the stage you find yourself in? On this episode of The Amazing Seller, Josh Bauerle breaks down the four options of business entities you can create and roughly when is the most appropriate time to set them up for your business. The four entities you can create are;
- Sole Proprietorship or if you have a partner, a General Partnership.
- Limited Liability Company also known as an LLC.
- S Corporation.
- C Corporation.
To hear Josh break down each option and when it would be best to consider creating the entity that is the best fit for you, listen to this episode to find out!
OUTLINE OF THIS EPISODE OF THE AMAZING SELLER
- [0:03] Scott’s introduction to this episode of the podcast!
- [5:00] Why bookkeeping is so important for business success.
- [12:30] Outsource a bookkeeper.
- [15:00] What can business owners deduct?
- [25:00] Can you deduct inventory that hasn't been sold?
- [28:00] What is “Scrapped Inventory?”
- [32:30] The question you should ask yourself when thinking through deductions.
- [35:30] Josh talks about the different types of entities that you can create.
- [47:00] How do you know which entity to create?
- [48:30] When do you have to collect sales tax?
- [55:00] How you can save money by running your business outside of the US.
- [58:30] Will the new US tax legislation impact Amazon sellers?
- [1:04:00] Closing thoughts from Josh.
TRANSCRIPT TAS 456
TAS 456: Your Business TAX TIPS from my CPA (Deductions and More)
[00:00:02] Scott: Well, hey, hey, what’s up everyone. Welcome back to another episode of The Amazing Seller Podcast. This is episode number 456 and today we’re going to be talking about your business tax tips and…
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…deductions and bookkeeping and inventory and all of that non-sexy stuff. But, you should be interested in this because this could save you thousands and it also could allow you to sleep a little better at night knowing that your business is structured properly and you know where you are. I mean me, personally, I like to know where I am almost every minute of the day like I like to know where I am. I mean, that’s a little extreme but like every week I like to go look at my books and see where I am financially and also prepare for the taxes that I’m going to owe and then this way here I’m not surprised.
All right. So, this episode is going to be with my good friend Josh Bauerle. You guys have probably heard from him in the past. He’s also my CPA. He’s a good friend of mine now and he knows a thing or two about taxes so that’s why I wanted to have him come on. Now, we’re going to be talking, again like I said, like personal and business deductions that you can take. We’re going to be also talking about liquidation stuff. A lot of you may be having a product that you’re liquidating because maybe just didn’t work out that first run or maybe you did a test run and you want to liquidate it. There are some things there you need to know about that as well that could help you. Also, business entity tips so proprietor, LLC, S Corp, all of those, inventory deductions, sales tax, and a bunch more. All right. So, there’s a lot we’re going to cover here.
This is probably going to be one of those episodes that you want to go to the show notes and whether you use that as a reference point or if you just want to download the transcripts and the show notes, head over to TheAmazingSeller.com/456. And whether you’re starting right now from scratch, you definitely should listen to this episode because it will get you prepared, get you off on the right foot. And if you're already doing business and you think you might not be doing things properly or maybe there are things that you think you could be getting deductions for that you’re not, definitely an episode for you.
So, I’m going to stop talking now so you can sit back, relax, enjoy this conversation that I have with my good friend, Josh Bauerle, our CPA friend here at The Amazing Seller.
[00:02:12] Scott: Hey, Josh. What’s going on, man? Glad to have you back on the podcast. What’s been going on?
[00:02:17] Josh: You know, just a little bit, few tax deadlines, having a baby, the usual.
[00:02:21] Scott: Just a few things. And you have twins too already so…
[00:02:25] Josh: Yep. Life’s a little crazy. As a CPA, I had to double that tax deduction, right?
[00:02:29] Scott: Yeah. Right. Yeah. You do that on purpose.
[00:02:32] Josh: Right. Exactly. And this one I made sure to get in before the year ends.
[00:02:36] Scott: That is so funny, and I do want to share what you did share with me before we actually hit record is that you had to take care of the twins while your wife was in the hospital and you said, “Man, like I so appreciate what women go through and kind of like staying home with the kids and all that stuff,” right?
[00:02:54] Josh: Yeah. Like, especially stay-at-home moms, mom’s in general, like you guys are amazing. I put two weeks taking care of the twins and I’m like, “I need to get back to work. I want to go do taxes.” It was crazy.
[00:03:06] Scott: It’s so true, man. I mean, and again, I tip my hat to all women out there, stay-at-home moms raising kids. I mean, it’s a big deal and my wife did it actually our first child, Alexis, who’s now 22 and we made that decision that she was going to stay home with the kids and sacrifice a little bit at first because I was the breadwinner which I wasn’t really much of a breadwinner at that time. I was young. I was only like 21, 22 so I was really, really young. But yeah, it’s a lot of work so yeah, tip my hat to all the moms out there that are stay-at-home moms or just raising the kids, doing all the kid stuff. It’s a lot of work. A lot of work. All right. So, everything went good there. So, to let everyone know, yes, the baby is healthy, and the baby is here and all that stuff. So that’s awesome. Congratulations on that.
All right. So, what I wanted to do is have you back on because we are going to be getting into tax season and I always want to have you back on just to kind of do a refresher but then also talk about like what you’ve been seeing working with e-commerce businesses whether they’re Amazon or not and kind of giving us, I guess, the checklist and kind of some good practices that we are going to need to know either if we’re starting a business, kind of how to do it correctly, or even going into this tax season and some things to either ask your accountant, your CPA, or just doing yourself, however, or just setting up things properly. So, where do you want to start? I know we’ve got a couple of other new things we want to talk about too, this 330-day thing and then also maybe this new tax plan that could be rolling out but let’s just kind of start with, I guess, the stuff that people need to know going into this tax season in their business.
[00:04:50] Josh: Yeah. Let’s do the basics, the fundamentals. To me, the three main things always comes down to bookkeeping, business entity, and deductions. So, let’s start with the bookkeeping. Look, if you’ve heard me on this podcast before, this is going to be a refresher. If you’re already doing this, great. If you’ve heard it before and you’re telling yourself, “Yeah. Yeah. I’ve heard it,” but you’re not doing it yet then you’re not hearing it. So, listen to it again. It’s all about the fundamentals. And bookkeeping to me is the absolute key fundamental to your business when it comes to accounting and taxes.
So, the number one thing you have to absolutely have to do, if you don’t do anything else we talked about today, you have to have separate accounts for your business. I don’t care if you’re a sole proprietor and the IRS says technically you don’t have to. I’m telling you, you have to. You got to go get those separate accounts meaning you need a bank account that is dedicated to your business. It’s not a mix of business and personal. If you’re going to use a credit card, you want a credit card that is dedicated to your business. I’m not saying, “Yeah, things will slip through here and there. Every once in a while, maybe you use that account for personal expense but for the overwhelming majority of the time, it is used exclusively for business. So, if you haven’t done that yet or if you’ve kind of done it but you’re still really mixing them quite a bit, do that today and get completely separate accounts. Everything else we talk about will be completely dependent on that.
[00:06:04] Scott: Now let me ask you, though, really quickly and I bring this up every time we talk about this. If someone has a credit card, they have a brand-new business, they might not be able to get that credit card. What you’re saying though is that you just want a credit card even if it’s in just your name to be used for business expenses, that way you can see that separation. Is that correct?
[00:06:21] Josh: That’s absolutely correct and that could apply to a bank account as well. For whatever reason the bank is giving you a hard time opening in the business, I’m saying open it in your personal name, open a credit card in your personal name but only use them for business, exclusively for business.
[00:06:32] Scott: Got you. That makes total sense. Okay.
[00:06:35] Josh: So, after you have those accounts in place, then you start tracking what your business is doing meaning monitoring the income that’s coming in and the expenses that are going out and there’s really three ways you can do this. You can use some type of simple spreadsheet. All right. I have a free one on my website. If you go to our website, it’s CPAonFire.com. If you’re just getting started, if you have time on your hands to do this, this option is fine. I personally wouldn’t recommend it because there’s plenty of free options for the accounting software which we’ll talk about next but if you love doing that kind of stuff and you can make it nice and clean and actually do it, go for it. Create a spreadsheet, use a spreadsheet that we have, whatever it is and monitor it there.
The second option and if your business is starting to grow, you have several transactions coming in and out, you got to step up to the plate and get some type of accounting software. Meaning Xero, QuickBooks Online. There are free ones like Wave, GoDaddy Bookkeeping. There are tons of options there. Everyone is always asking which one should I choose? Honestly, they’re basically all the same. My personal preference is Xero but that has nothing to do with anything but being a personal preference. So, look at them, see which one you like, even the ones that you pay for, you’re going to pay like $20 to $30 a month.
Okay. But what it’s going to do is you have those separate bank accounts, a separate credit card, it’s going to synch right up to those accounts so that anytime a transaction hits that account, it’s going to automatically pull into that software and all you have to do is go in and code what it’s for, meaning, you go to, I don’t know why I always use this example, but you go to Walmart and buy a $200 printer and that $200 charge from Walmart is going to hit your Xero account, whatever bookkeeping software you use. All you do is go in there and code it to office expense. Okay. So, it’s not fully automated. There’s still somewhere it can involve for you but it’s partially automated. It’s automatically going to come through as opposed to having a spreadsheet that everything you do, you have to immediately go in and do it. But this is definitely the next step up. I recommend you even get started with this but especially once your business really starts to get going, step up from the spreadsheet, use accounting software. Go ahead.
[00:08:34] Scott: No, no. I was just going to add what we’re using right now is Fetcher. And I use Fetcher. Greg’s a good friend of mine. It’s so super simple but the cool thing with this one that I love it’s like Xero in a sense to where it syncs up to your Amazon account as well. So, what’s happening is behind the scenes like pay-per-click costs is all coming out of there. It’s in your Fetcher account. All your cost of goods, you enter them once, so you would basically say, “I got a new garlic press.” It cost $3 dollars to land, $0.25 to get it to Amazon. It’s done. Now, every time you sell one, it goes in as a cost of goods. Your refunds are all tracked. If you want to add in a monthly expense like say you had TaxJar. You would put that in. It’s $39.99. It’s going to be a rebill. It’s going to automatically rebill every single month.
Same thing, like you said, you can automate some things but then also there are things you might have to manually do or semi-manually do. I like this one myself because you kind of grow with that software as well. So, it goes by transactions. So, depending on how many transactions you're running, your plan might only be $29.00. You start going to get more transactions. Let's say you go from 5,000 transactions to anywhere between 5 and 10, well, then it might go to 39 or 49, whatever the breakdown is. So, I would recommend checking that.
There’s like a 30-day free trial too if you go through my link, TheAmazingSeller.com/Fetcher. That is an affiliate link, but you guys know I only promote products that I’m a fan of. Xero I hear a lot of people rave about that as well. But like you said, just use something. Wave, I’ve used Wave as the free version but that’s a lot more manual doing stuff but when I’ve seen Fetcher, it was pulling in the data for me. I can go there right now and see exactly where I am pretty much today or even we just had Cyber Monday which was crazy. I can see what I profited that day pretty much which is pretty cool. So, just wanted to kind of throw that out there.
[00:10:23] Josh: Yeah. You told me a lot about Fetcher. I’ve had a few other clients that love it so far. I haven’t actually been on the backend of their system yet. Do they sync up with your bank accounts as well on top of syncing up with Amazon?
[00:10:34] Scott: That I don’t know 100%. I don’t believe so at least at this stage but that would be something that I have to dig into. We have not synced it up to our account as far as our checking or even credit cards at this point because, to be honest with you, a lot of our expenses are the Amazon fees and our monthly dues and all that stuff. So, like if we go out and get a printer, it would be the matter of us scanning something and then manually importing that.
[00:11:02] Josh: So, I love the fact that they sync up with Amazon and break that down because that is, honestly, even if you’re using accounting software, that gets super confusing because what’s going to happen is in your books it’s going to show only the amount that Amazon deposits where it sounds like Fetcher is going to show exactly what’s going on in Amazon.
[00:11:19] Scott: Well, yeah. It does refunds. It does even like miscellaneous storage fees that were there. So, like you said, normally what we used to do is we’d say, okay, we brought in $20,000 and they deposited, whatever, let’s say $4,000 while the rest of that is all Amazon fees basically. Now we got to figure out what pay-per-click is, we got to figure out what refunds are, we got to figure out all that other stuff to really get it down to like an accounting part where we can see a spreadsheet of that stuff. With Fetcher, it kind of does all of that for you.
[00:11:47] Josh: Perfect. No, that’s fantastic. I think even if you’re already using accounting software, it sounds like I would be looking into Fetcher just to break down that Amazon because the other accounting software out there isn’t going to do it.
[00:11:58] Scott: Yeah. So, anyway, that’s just my two cents on it. But anyway, all right so moving on so it’s important to just get a spreadsheet of some kind to get this stuff so this way here you can see what’s happening in the business.
[00:12:09] Josh: Yep. Exactly. There are several reasons for that. Number one, just forget about the taxes. How can you know what your business is doing? How can you know where to improve if you have no idea what your numbers are? You know what I mean?
[00:12:18] Scott: 100%.
[00:12:19] Josh: There are so many people that come to me at tax season and like, “Well, how the business do?” “I think I did pretty good,” and then I look at them like, “Dude, you lost $30,000 last year,” and they just had no idea because they weren’t monitoring it. So, yeah, huge there.
The third option I’ll throw out there is outsource it completely. So, if we’re talking about this you’re like, “God, this sounds like a headache. I’m never going to do this. I don’t want to do this. I don’t understand it,” especially if your business is starting to cash flow and you have the money to support it, outsource it completely meaning hire a bookkeeper. You may be thinking, “Now, that’s got to be expensive.” Yeah. If you bring in an internal bookkeeper, it might be, but there are so many companies out there that will outsource this completely for anywhere from $200 to $500 a month depending on how big your business is. They’ll handle all of this for you. So, if you’re not going to do a spreadsheet, you know you’re not going to touch accounting software, it’s got to be done one way or another, spend the money and have someone do it for you.
[00:13:11] Scott: Yeah. Now let me just, I know I’m going to get people asking this question. So, where would you recommend? Does your office do that? I’m not even sure if you guys do the bookkeeping.
[00:13:20] Josh: So, we actually just started this summer offering a package where we will do this on top of your taxes for you. We partnered with a company called Bench who is a bookkeeping business.
[00:13:27] Scott: I know Bench. Yeah.
[00:13:28] Josh: Yeah. So, we partnered exclusively with them. They handle the bookkeeping side. They get that information to us. We handle the tax side and we’re kind of all in the same team for you.
[00:13:36] Scott: Oh, nice.
[00:13:37] Josh: So, we can absolutely help you there.
[00:13:38] Scott: All right. Cool. Yeah. So, yeah. I’ll drop that stuff in the show notes and you guys can get the link and stuff if you’re interested in looking into the bookkeeping. Because I agree with you, at some point, if it’s like something you don’t want to do or someone on your team or in your business that doesn’t want to do it, maybe your wife does it for you, who knows? But if you don’t want to do it then definitely hire it out but I think that’s something that’ll just give you a little bit of peace of mind.
[00:14:03] Josh: Yeah. Absolutely. The bottom line is it has to get done. So, however, you know you're going to comfortably do it, do it. That’s what it comes down to.
[00:14:10] Scott: Sure.
[00:14:11] Josh: So, yeah, that’s the biggest thing to me. Get that bookkeeping in place one way or another. Start by getting those separate accounts and then figure out a system to track this. If you do that, come tax time your CPA is going to be happy. You’re going to have all those numbers. They’re ready to go. You’re not going to miss out on deductions. When people come to us and they haven’t done anything, it’s March and we say, “All right. What records do you have?” “Well, I haven't done anything yet.” Now they have to go all the way back do all of 2017, recreate everything that happened, and I can almost guarantee you, they’re going to miss out on some significant deductions because they’re trying to remember what they did a year ago. So, do it throughout the year and get it done. Be ready come tax time.
[00:14:46] Scott: Now, let's jump into this really quickly because I think that this is a big question a lot of people ask like deductions. Like what can we deduct? What should we be deducting that you might even say that some people aren't aware that they could be deducting? One of them that comes to the top of my mind and this is something because I've been recently doing it with my new partner here where we’re local is we have been traveling to the warehouse and then offloading and meeting with maybe the UPS or the FedEx or the DHL like mileage. How and what is allowed?
[00:15:24] Josh: I’m sorry. You cut out there for a second. Mileage is what you spoke?
[00:15:27] Scott: Yeah, mileage.
[00:15:28] Josh: Yeah. So, mileage is a big one and a lot of people think like, “Oh, I’m an Amazon seller. I do all my business online, so I don’t have mileage.” But start thinking about it, you run to the bank for your business. Do you run to the supply store for your business? Do you run to meet with people for your business? Anytime you’re in your car and you’re driving for any type of business purpose, that’s becoming a tax deduction for you. What it comes down to is the actual miles you’re driving for your business and the IRS says there are two ways you can take that deduction.
The first, the easy way, the way that 95% of people do it is the IRS standard mileage rate and all you do is say, “Okay. I drove 10,000 miles from my business in 2016. The IRS gave us $0.54 per mile,” so I got a $5,400 deduction from that mileage and that simply reduced your taxable income by $5,400.
The other way is what they call the actual expense method. In this method, if you're a very good record keeper, you can stay on top of this. If you track out all of your car expenses meaning every time you fill up for gas, every repair you make, every toll you pay, everything involved with your car and you take the percentage of business use versus personal, you can take that same percentage of expenses. So, if you drove 10,000 total miles through the year and you had 5,000 business miles, you use your car 50% of the time for business and you effort tracking all of those expenses that came up to $10,000, well, you get a $5,000 deduction in that scenario.
So, most people go to standard mileage rate. If you’re organized and clean with that kind of stuff, go ahead and see which one works out better but those are the options for that.
[00:17:05] Scott: Okay. So, again, I was kind of saying like I think I cut out for you was like if you drive over to maybe you have a warehouse or storage facility and you drive over there, that’s considered an expense because you’re going over there to either meet with a shipment or your, whatever. You’re picking up some to ship. If you’re shipping directly, well, then that’s a different story but we’re saying like what if you’re going to warehouse, that would account as mileage.
[00:17:29] Josh: Absolutely. Anytime you’re in your car and you’re going for any type of business purpose, it’s a business deduction.
[00:17:35] Scott: So, I mean, let me ask you this then. This might be a little tricky. Let's say, for example, I'm going to an event to help build my business. Is that a tax deduction?
[00:17:49] Josh: 100%, yep. You would not be in your car if you were not going to that for business purposes.
[00:17:54] Scott: Okay. Yes. To kind of put another little thing here in there is for like travel so then the travel of that would also be an expense to get there so that would be airfare, correct?
[00:18:06] Josh: Correct.
[00:18:06] Scott: And then your hotel stay and the event ticket that you paid for. So, technically you’re able to get a deduction for those things because you are learning to build your business?
[00:18:16] Josh: Absolutely.
[00:18:17] Scott: Yeah. Cool.
[00:18:17] Josh: Any type of travel you do for your business is a deduction.
[00:18:21] Scott: Okay. And I know a lot of people that are either, I don’t even know, maybe getting started but maybe people that are seasoned. I know one of my good friends goes like twice a year, three times a year to the Canton Fair. So, basically, that entire trip really, it’s a tax deduction because they’re going over there to really find suppliers and meet with them and even current suppliers and all that stuff.
[00:18:43] Josh: Yeah. Exactly. And this is where it gets cool because you can get creative here and you can say, “Hey, I want to take the family to Florida for a week this summer, but I also want to make a business deduction.” So, I look and see, “Oh, there’s an e-commerce conference while I’m there.” So, I’m going to go to that for two days and now at least it’s probably not going to make 100% of your trip tax deductible but it’s going to make a portion of that trip that you already are going to take tax deductible.
[00:19:06] Scott: Yeah. No, that’s great. Awesome. Good tip. All right. So, staying on deductions really quickly, anything else we need to know or understand about deductions?
[00:19:16] Josh: Yep. So, the standard you need to look at here is the IRS. If the IRS are ever questioning your deductions, the standard they’re going to go by is, “How did this improve the bottom line of your business?” Meaning how did spending this money either increase the income you brought into your business or maybe decrease the expenses that you are spending in your business?
Okay. So, like think of it like advertising. It’s very easy to prove. Well, I bought $10,000 worth of ads because it brought X amount of people more to looking at my listings on Amazon which brings in more money. Okay. That’s an easy one but then you start to think of personal expenses like expenses that you have before you had your business. Your cellphone. Okay. Your cell phone, yeah, you had a cellphone long before you had an Amazon business, but my guess is you cannot run that Amazon business without your cell phone. Now that is a 100% deduction in your business.
[00:20:00] Scott: Nice.
[00:20:01] Josh: Okay. Your home Internet. You obviously cannot run an Amazon business without home Internet. I don’t care that for half the time, for 75% of the time you’re using it for personal reasons. You cannot run your business without that Internet. That is a 100% deduction. Okay. So, this is a cool part about becoming an entrepreneur. All these “personal expenses” a lot of them now our business expenses. So, everything in your life that you’re spending money on, you’d be asking yourself, “Am I using this in my business? Does this increase the bottom line of my business somehow?” If the answer is yes, there’s a good chance that at least a portion of that is going to be tax-deductible.
[00:20:33] Scott: Yeah. It’s funny. I mean I’ve been doing that for years now because we’ve been self-employed even our brick-and-mortar business and stuff that my wife and I own, our photography stuff, and I always was doing that. It’s like, “Okay, we’re buying this or we’re doing this thing. Does this apply to the business? And can it apply to the business?” And like you said, does it help the business? And if it does, then it’s a no-brainer. So, that also another question that people get asked is I work from home. I have a home office. Where does that come in? How do I take – it’s a room in my house. It’s a 400-square-feet of space, maybe 300 or 150, whatever. How does that work for someone that’s thinking themselves, “I have a room that has – it’s a bedroom I converted to an office?”
[00:21:22] Josh: Yeah. So, actually, there are a few things here that applied to e-commerce sellers. The first is an actual home office meaning like you said, you turn a room in your home into your office. And the key with this one is it has to be exclusively used as an office. You can't go to your kids’ room and go put a desk and a computer in there and run your business there and call it a home office. But if you’re using it exclusively as your office, now you have, you turn a portion of your home into a tax deduction. And all of this is based on the percentage of the office versus the home. All right. So, if you have 100 square foot office in a 1,000-square foot home, 10% of your home is being used for an office. That means 10% of your housing costs are now a tax deduction. Meaning utilities, homeowners insurance, potentially property taxes and mortgages interest though you’re already deducting those probably on your Schedule A. And this gets even bigger. The big one here is if you rent because, for anyone else, rent is not tax-deductible. If you have a home office now in this scenario, 10% of your rent is tax-deductible. So, the big one here is it has to be exclusively used and then you just have to know the percentage of the office versus the home.
[00:22:27] Scott: Okay. And now I’ve got a garage that I use for storage. I’ve got a two-car garage and half of it is used for storage. I have boxes. I have shelves, I have maybe packing material, whatever.
[00:22:41] Josh: Yep. So, this is the special version for people that have inventory type businesses because the IRS says when you’re using it to store inventory, it does not have to be exclusively used for business meaning you can turn half of your of your garage into storage for the inventory and then same thing, take the square footage of half the garage so if you know your garage is 200 square feet, you’re using half of it, now you have 100 square feet of your home applied to the business. So, same thing as the home office other than it does not have to be exclusively used for the business. Now it can be partially used.
[00:23:13] Scott: Okay. Yeah. That’s good. Now the other thing is, and this is like I think this is an easy one but I’m going to throw it out there, if you have a storage unit and you’re paying monthly on that, that’s obviously a tax deduction because some people say, “Well, Scott, like I’m not shipping it all into Amazon. I need a place to store it so I’m renting out a storage facility which actually that’s what we’re doing in our new brand and we have like, gosh, it’s a pretty large unit but I think we’re paying like $200 or $250 a month.” So, that’s a deduction like period?
[00:23:44] Josh: Absolutely. Yeah, like you would not have that storage unit if you did not have this business, clear 100% deduction.
[00:23:49] Scott: Exactly. It gets a little tricky like you said if you’re taking a kid’s bedroom and converting that into an office and you have Star Wars on the wall behind you and you have bed sheets and all that stuff and then you have a little corner office or a little computer desk. That gets a little tricky that you’d have to use that for an office or you’d have to definitely make sure that you made sure it was an office if you ever got audited.
[00:24:13] Josh: The IRS came and knocked at your door.
[00:24:14] Scott: Yeah. “Hey, we got to see that room. We think you got a storage unit in there that’s really your kid’s bedroom with a whole bunch of Legos.”
[00:24:24] Josh: People really get scared about that. I will say I’ve never had a client that the IRS questioned their home office and came and looked at it. So, that’s not an implication to get crazy with it but, I mean, you don’t have to have sleepless nights and, “Oh my God, the IRS is going to knock on my door tomorrow and I have Star Wars wallpaper up.”
[00:24:41] Scott: And repaint it like midnight. All right. So, that’s that. The other one is, and I know this one we have to touch on because this is a big mistake and I think people think that they are able to take a deduction for their inventory that they have not sold, and this is a big one because even myself, in the beginning, I was thinking to myself, “Here we are. It’s December 29. I’m going to go ahead and buy $10,000, $20,000 worth of inventory and that immediately would become a write-off,” and that is not the case because until you sell it, it does not become a deduction. Correct?
[00:25:21] Josh: Yeah. So, this is where I gave the most bad news to Amazon sellers or e-commerce sellers in general. They do exactly what you said. They’ll get to the end of the year, someone will tell them that it’s a great idea to spend a bunch of money before the end of the year to lower their tax liability, so they go buy $20,000 worth of inventory on December 29th and they find out that’s not tax-deductible. Why? Because the IRS says – let me say this part first. With any other expense, if you're on cash basis, which almost everyone listening to this will be on cash basis, as soon as you spend the money, it’s a tax deduction. Okay. So, if I go on December 26 and go buy a printer at Walmart but I’m not going to use that until January, it’s still a deduction in 2017. With inventory, it’s a completely different scenario. It is not a deduction until you sell it. Okay. So, if you buy $10,000 worth of inventory and at the end of the year you still have $5,000 worth of it sitting there, you can only deduct $5,000. The other $5,000 will be deducted in 2018 when it’s sold. Does that make sense?
[00:26:24] Scott: Yeah. It does, and I mean, again that’s why I like Fetcher because what that’ll do is I’ve already loaded in the cost of the goods so when I see my number, that is my number, it's taking the deduction for the item that has sold but it is not accounting for I've got a thousand units still in inventory sitting there ready to be sold. That does not count. So, again, that's why you have to determine, obviously, your cost of goods but then you have to know that when you are putting in your deductions that you’re only putting in the items that have sold, not the stuff that is going to be sold. I mean, it’s great that you got inventory and it’s going to be sold and everything but you’re not going to really be able to take that until you sell which could be in 2018 or 2019, whatever year it is, but you got to be really clear on that.
Do not think that you’re going to basically get a deduction at $25,000 because you just put in this huge order and then you’re like, “Cool. Now I’ve done this and I’m not going to have to pay tax on $25,000.” That’s not how it’s going to work. Definitely, you do not want to fall into that trap. It does kind of stink because you’re like, “Well, I’m investing in my business.” You are but you haven’t sold it yet so they’re looking at it like that could sit there for years. Now, let me ask you this. We get people that say all the time, “I launched a product,” I had a guy just the other day, “I want to liquidate the product. It’s got 400 units, maybe $5 a piece, so I want to liquidate this. I mean, let’s say it’s $2,000, $3000, whatever, and I don’t sell it. I just want to take it as a loss.” Can I take that as a loss?
[00:28:00] Josh: Yeah. So, there’s what they call scrap inventory meaning it’s unsellable. You’re never going to do anything with it. You’re throwing it out. If you do that, basically, it’s treated the exact same way as if you sold it. It moves into cost of goods sold because it’s never going to be sold. And there are two ways you can do that. Some people just scrap it. It's worthless. They throw it in the trash. That immediately becomes cost of goods sold. Some people say, “Okay. I can’t sell it but there’s actually nonprofits that could use this so I’m going to donate this to a goodwill or whoever could use it.” Perfectly acceptable there as well. It just gets treated as a donation instead of cost of goods sold. Okay. Same deduction, it just gets marked differently. Yes, absolutely. And that’s actually a good point. I never thought of. That’s something to look at. If you want to look at how to maybe lower your tax liability at the end of the year, if you think that’s a possibility, look through your inventory before you ran and say, “You know what, this $2,000 worth of inventory is never going to sell. It’s bad. It’s junk. I’m going to throw it out. I’m going to take that loss this year instead of having that push forward as unsold inventory.”
[00:29:00] Scott: Okay. And so, my natural question would be like, okay, if I do that, let’s say that there’s $5,000 that I’ve got inventory and it’s just sitting there. I’m not going to do anything with it. I’m just going to scrap it. Like I take that deduction. Is there anything that I have to be concerned with to prove that I’ve actually destroyed it?
[00:29:22] Josh: No. I mean, the thing with the IRS is it all comes down to documentation. So, the more proof you have, the better. I would certainly note it. I’d maybe even make a note why it was scrapped like what was wrong with it. I mean if you want to get really crazy, go take a picture yourself dumping it in the dumpster. You take a picture of it in there. That sounds crazy, but you want extreme backup, there it is. But for the most part so if the – let’s say the IRS were to audit you and let’s be clear here like this is 1% of the people or less that get audited. So, don’t lose sleep over this stuff but if it were to happen to you and they’re questioning whether you use deducted inventory that wasn’t sold yet, all they’re going to do is come and take an inventory count so that they might come. If you have a storage unit, they’ll come to your storage unit and say, “Oh, wait a minute, you took this much of a deduction but there’s still this much inventory sitting there.” Okay. It is something that would be fairly easy to prove in my mind.
[00:30:16] Scott: Okay. And so, I’ve got actually a situation here, so I’ll ask you on the fly. I’ve got a situation. I think it was the middle of 2016 that we had some inventory. We started going into in our open brand, we were just going after this trend, and it got saturated but also there was some violations in trademark and also in, not trademark. I’m sorry. Patent. So, there was a patent pending type thing. So, we just said, “You know what, we’re just not even going to go down that road. We’re just going to scrap it.” I've got some units sitting there in a warehouse. So, that was back in 2016. Does that carry over even though because I could still sell it today?
[00:30:57] Josh: So, are you saying that you took it as a loss that year or you kept it?
[00:30:59] Scott: I did not. I did not.
[00:31:01] Josh: Okay. Yeah. So, it doesn’t matter. Now you could say, “That’s junk. Let’s throw it out.” Now you move it to cost of goods sold.
[00:31:08] Scott: Okay. I think I just got a deduction for the year.
[00:31:10] Josh: Absolutely.
[00:31:12] Scott: That’s pretty cool. I’m glad I had you on, Josh. Yeah. I’m not even kidding because we were actually talking about that. I was going to use it maybe as like a self-liquidating offer. But then I’m still putting it out there. We didn’t get sent a letter. We just heard that people were getting a letter sent so we just kind of said, “You know what, we’re going to remove it. We’re not even going to do it. We’re just going to scrap it.” And that’s what we did. And I’ve been meaning to just kind of maybe just self-liquidate it but on the same breath, I don’t want it kind of floating out there. So, that might be something to do. So, all right. Cool. Awesome. I’m glad we had this call. See you later, Josh. No. All right. So, again, I think that’s great. It’s a great real-life example of kind of the inventory just because it wasn’t deducted, it means that I still have it. I could sell it today. So, what you’re saying is it doesn’t get stale. It doesn’t get old. It’s been in my warehouse for two years.
[00:32:00] Josh: Right. Yeah. Exactly. It could be a situation where it gets stale and old and then you throw it out. Basically, the bottom line is, are you scrapping it for no matter what the reason is? Patent infringement. Is it junk? Was it effective? Whatever it is, if you’re not going to sell it, that’s no longer inventory.
[00:32:14] Scott: Okay. Cool. Love it. All right. Cool. Anything else on deductions before we move on? I know we covered quite a bit. I think asking yourself those questions help and maybe you can recap. What’s the question or the questions that I should be asking myself when I’m thinking about taking a deduction?
[00:32:31] Josh: Yep. So, the question is, is this improving the bottom line of my business? If the answer is yes, chances are there’s at least a portion of it you can deduct. I was on the podcast yesterday and we’re talking about this kind of stuff and they were saying, “Well, I’ve worked with an old CPA and he told me I could only deduct 50% of my cell phone.” So, one thing I would say is you need to work with a CPA that’s kind of in alignment with how aggressive you want to be because a lot of CPAs out there are super conservative, but this is the 78,000-page tax code with very little black and white answers and a lot of gray area.
So, I’ll tell you, take 100% whereas maybe a super conservative CPA says, “No, no, no take 25% of your cell phone.” What I would respond to him is I’ve been an audit and the IRS absolutely accept it 100% but you got to work with someone that aligns with your personality. So, if you yourself are conservative and you're going to sit there and be up at night thinking, “Oh my God, I took 100% of my cell phone. What's the IRS going to say?” Work with the CPA that's going to encourage you to take 25% or 50%. But if you’re someone that says, “I don’t want to break any rules, but I want to push the envelope a little bit and take as much as we think I’m legally allowed to take,” and if the IRS questions it then we know that we didn’t break any laws, but they could come back and say, “You know what, we don’t agree with that stance. So, we’re going to ask for little more,” then work with the CPA that’s willing to do that with you.
[00:33:49] Scott: Yeah. No, I agree. I mean you got to do what you in your own head is comfortable with. And some people are more nervous than others. I think through the years I’ve worked with, well, my accountant before you was kind of old school but he wasn’t a CPA. He was just a straight up accountant. Great guy. I had him for like, gosh, 16, 17 years and then when things started to change, I started to get more on the online space, it wasn’t really what he was comfortable in and didn’t really know a lot of the ins and outs. And then when I started working with you, I noticed that you do know those and you’re also one that’s not going to push the limits to where you’re not comfortable. So, you know that there are some lines that you can, not cross, but there are some lines there and you have to know that, listen, you are doing something that’s not legit.
Like my father had an accountant years ago. This guy was showing like a loss for their business for like the first four or five years and it’s fine, but it also hurt him because then Social Security, “You’re not paying any tax,” so it’s that whole thing. He was kind of shady. So, I think that you just have to get someone like a CPA whether it’s you or someone else and you have to get that relationship with them and understand that you’re on the same page.
[00:34:58] Josh: Absolutely.
[00:34:59] Scott: And I think that’s good advice. All right. Cool. So, we talked about the bookkeeping. I think that’s important. We talked about deductions. The other thing I want to talk about and this is another thing that a lot of accountants and CPAs might not agree on or maybe old school does is when you’re talking about forming the right entity.
[00:35:20] Josh: Yeah. Exactly.
[00:35:20] Scott: So, let’s address that.
[00:35:23] Josh: So, really there are four entities. There's the sole proprietorship or if you have a partner it's just called a general partnership. You never form any type of entity. You just hit the ground running. The next step up is an LLC, a limited liability company. Next up after that was an S corporation. The next after that is a C corporation. For 99.9% of people listening to this, a C Corporation will never make sense so let’s just eliminate that from the discussion. So, really when it comes to your business you’re choosing between a sole proprietor, an LLC, and an S corporation. And let's talk about where these three are all similar. They’re all what they call a pass-through entity, and this really throws people off a lot of times when they're first getting started in their business. Your business does not pay taxes in any of these entities. Never pays taxes. It's a pass-through entity meaning it passes through the profits of the business to you and then you pay those taxes personally on your personal tax return.
[00:36:16] Scott: Got you.
[00:36:17] Josh: So, if your business has a profit meaning after all expenses of $100,000, your business pays no taxes. That $100,000 is reported as income on your personal tax return, you pay taxes. And what really throws people off is it doesn’t matter whether you “pay yourself” any or all or somewhere in between of that $100,000. You still pay taxes on it. So, if it made $100,000, you have another job where you make money, so you didn’t touch any of that money. You left it all in the business, you’re still paying taxes on $100,000. Okay. So, starting from that, does that part make sense?
[00:36:51] Scott: It does. And so, I think people think that the business itself and again, we’re talking about your business, your business could just be your Social Security number and a name that you have, and you registered as a DBA like that could be your business, sole proprietor, right?
[00:37:08] Josh: Yep. Exactly. You hit the ground running in that but it’s still a business.
[00:37:12] Scott: It’s a still business. Right.
[00:37:13] Josh: So, that’s where they’re all similar. They’re all pass-through entities. You’re going to pay taxes on 100% of those profits whether you touch them or not. Okay. So, the other thing that confuses people, a sole proprietor and an LLC for tax purposes are the exact same thing. An LLC saves you absolutely no taxes as opposed to a sole proprietor. So, where an LLC comes into play is potential legal protection. As a sole proprietor, you and your business are one and the same. Like you said, it could operate under your personal name. It’s probably operating under your Social Security number. Even if you were to get a separate name and an EIN for the business, you and the business are still one and the same.
Once you form an LLC, it’s called a limited liability company because it limits your personal liability within the company. So, now it almost acts as a wall so there’s you, there’s a wall, and there’s a business. So, if someone sues the business, in theory, they’re not suing you personally. Look, I'm not an attorney. You're not an attorney. Talk to an attorney about this. There are limits there on how much you’re protected but that’s the idea of it. It places that wall between you and the business. But again, understand this because it’s a big confusion and LLC changes absolutely nothing when it comes to taxes. The IRS does not even recognize an LLC.
[00:38:28] Scott: Okay. Yeah. That’s a big one. A lot of people think, “Oh, I formed an LLC. Now I’m legit and I’m going to have a little tax benefit here too because now I’m a business,” but you’re able to take those same deductions as sole proprietor.
[00:38:42] Josh: That’s what people say all the time, “Well, I want to form an LLC, so I can take all these deductions now.” No, you can take the exact same deductions as a sole proprietor.
[00:38:48] Scott: Right. That makes sense.
[00:38:50] Josh: Yep. So, sole proprietor, LLC, same thing other than potential legal protection.
[00:38:54] Scott: Which I think is important to note, though, really quickly, Josh, is that LLC is important like I would say do that as soon as possible. Like, do that as soon as possible because, number one, you want that limited liability and even, again, talk to your attorney. We’re not attorneys, that whole thing. But for me personally it’s just another barrier, another thing that it would be in the way of me not saying that they couldn’t still come after me because I know that there’s probably some attorneys out there that could make it, so it does get to me. So, it’s just one of those things and that’s why I’d say have your liability insurance like try to protect yourself as much as possible but also, I think it’s important.
This is kind of going back to what you said, in the beginning, is have those separate accounts. If you have an account that’s even labeled with your name, now it’s your LLC or now it’s even just your brand name on the check or on the checking account, that account is technically what the business has. But if you’re mixing things, how would they know where they would be able to go to pull or sue? So, to me, that’s another reason why you want a separate account. Like, hey, the business has got $20,000 in the account. Sue the business. You’re going to go after $20,000 or maybe any inventory that we have or whatever. That’s me thinking common sense wise. I don’t know if that’s 100% accurate. But it just makes me think that keeping things separate.
[00:40:10] Josh: Absolutely. That’s a good point. If you formed the LLC with the idea of separating you from the business but you’re still co-mingling your funds, guess what, that LLC is completely worthless because you guys are not separated in that. So, great point there. The other thing, I agree completely with what you said that I would from day one just go ahead and form an LLC. For another reason, it’s extremely flexible meaning as an LLC, you can operate as a sole proprietor. You can operate as an S corporation which we’ll talk about next and you can even operate as a C corporation which, like I said, is extremely rare but if you fall into that, that’s an option. So, the LLC has a flexibility to be taxed as any of those entities. So, to me, from day one or if you’re listening to this now, I would just go ahead and form the LLC for several reasons. In most states, it’s pretty inexpensive. You might pay someone $500 to $1,000 to do it. Maybe your state charges a couple of a hundred bucks but go ahead and do it. It’s going to make your life simpler.
[00:41:02] Scott: Yeah. And going back to deductions, it’s a deduction. So, if you pay $500, you get to deduct it off your taxes.
[00:41:08] Josh: Exactly.
[00:41:09] Scott: All right. Cool. So, let’s talk about the other forms.
[00:41:12] Josh: Yep. So, the last step up here that people should be considering is the S corporation. This one and it offers the same type of legal protection potentially than the LLC does but it has potential tax benefits. So, let’s go back to how a sole prop and LLC work. Scenario, you make $100,000 profit and again, when we say profit I know people get confused sometimes with this terminology. If your business makes $100,000 total, you got $50,000 and all your expenses, your profit is $100,000. That’s what you pay tax on. Your tax personally at your ordinary tax rates on that $100,000 and then it turns around and gets hit with what they call self-employment tax which is an additional 15.3% tax. All right. So, if you’re doing the quick math there, $100,000, that’s an additional $15,000 in taxes. And all that is Social Security and Medicare taxes.
If you’ve ever had a paycheck before, you’ve seen they take out Social Security and Medicare taxes. What you probably don’t know is or you may not know is your employer is also matching those Social Security, Medicare taxes that you’re paying, and the IRS just get a total of 15% on those. When you have a business like an Amazon business, guess what, now the IRS considers you both the employer and the employee and you’re paying both sides of that. So, it’s an additional 15.3% tax. So, huge, huge hit. The S corporation works the exact same way. That $100,000 passes through to you. It gets hit with all the ordinary taxes just like the LLC and the sole proprietor, but it does not get hit with that 15.3% self-employment tax. So, you’re doing the math there. That’s an immediate $15,000 tax savings in that scenario. Sound pretty good?
[00:42:51] Scott: That sounds really good. Here’s the concern that I hear. You know what I’m going to say. They say, “Yeah. Isn’t the government like the IRS aren’t they aware of this?” Like aren't they aware that that's going to happen and like maybe someone's going to go ahead and just say that their pay is all of the profit and they're not going to pay anything on it? Or, I'm sorry, that they're not going to take anything for a pay and they're just going to take and say that the business made the full amount and they're not going to pay tax on that. So, why don't you answer that question?
[00:43:22] Josh: You’ve hit the snag. The S Corp is fantastic. We’ll talk about how, but it can still save you a ton of money, but the IRS recognizes that you’re getting rid of all those taxes. So, they come in and say, “Okay. Fine. You can treat all of that S corporation income as what they call passive income, so it doesn’t get hit with self-employment taxes. But as an S Corp owner you have to treat yourself as an employee of the business and you have to pay yourself an actual salary and the reason we're going to require you to do that is because, on that salary, you're going to pay payroll taxes which is, guess what, 15.3%, same as self-employment taxes.” Okay. So, that’s how they’re going to recoup the portion of it. So, the question becomes, well, if the IRS makes me do that and I’m paying 15.3% anyways, where does the tax savings come in? Well, the key is the IRS says you have to pay yourself a reasonable salary.
[00:44:12] Scott: Highlight that.
[00:44:13] Josh: Reasonable. That means that the salary does not have to be 100% of your profit. Okay. So, let’s run the scenario. You make $100,000 profit and you look at it and say, “You know what, if I want to pay someone else to replace me and run this business, I can do that for $50,000 a year. So, my reasonable salary is $50,000.” So, yeah, I'm at $50,000. I'm still paying 15.3% but on the additional $50,000 of profit, I am not paying 15.3%. So, I am saving, what does that come to you? $7,000, something in that range in self-employment taxes. So, that’s where the tax savings come in. Yes, you have to take your reasonable salary but you’re still saving the difference between your profits and your salary.
[00:44:57] Scott: Yeah. And I would say because some people would say, “Well, okay, then let’s say the business makes $500,000 so does that mean I have to pay someone a reasonable salary of 250? The answer is no. How much would it cost you to pay someone to run your $500,000 profit business? It might only cost you $100,000. Might 75. I don’t know. Whatever it is. And then that’s where you can really start to see that tax break in a sense because now you’re paying that employee, yourself maybe, $75,000 or $100,000 and now you’re only paying tax on the $400,000 or, I’m sorry, you’re not paying the tax on the 400. You’re only paying on the 100 that’s coming out of that. Is that correct?
[00:45:35] Josh: That’s exactly right. Yeah. So, in that scenario, you make $500,000. You pay yourself $100,000 salary. That $400,000 difference is where you’re saving the money on self-employment taxes.
[00:45:44] Scott: Exactly. Okay. That still could be a reasonable salary because, again, there might be more responsibility. It might be, whatever, but still $100,000 for someone to run a business and then for a $500,000 profit business, that is probably right. You know what I mean? So, you have to look at those numbers and I’m sure you have some type of percentage that you like to see it to where it’s comfortable and all that stuff, but I think you got to be smart about that. It’s the people that are saying like, you know what, the business is growing and I’m still only going to pay myself 25,000 and the business is doing 500,000. That’s where you could draw a red flag.
[00:46:17] Josh: Yeah. Absolutely. It comes on a little bit of common sense. A $500,000 business should not be paying their head employee $5,000 a year. So, you absolutely go for all the tax savings you can but use common sense like what would you have to pay someone to replace you in the business? That’s what you should pay yourself.
[00:46:36] Scott: Okay. Cool. All right. So, is that pretty much it on those and then we can kind of talk about these two new things that I want to talk about but is that pretty good on the entities? We’re not even going to really go into the other entity because that doesn’t really…
[00:46:47] Josh: Right. So, real quick. I’ll do a quick guideline of when to start considering each entity.
[00:46:52] Scott: Sure.
[00:46:53] Josh: If you are making less than $30,000 per year profit and for whatever reason, you have no concern about the legal liability side of things, you’re fine to go with the sole proprietor, quick, easy, no hassle there. If you’re making under $30,000 profit and you do want to get that legal separation, that’s when you go with the LLC. And if you are making over $30,000 profit per year in the business, that’s when the S corporation starts to become into consideration. If you’re at 50,000, to me that's when it becomes a no-brainer. So, those are general guidelines. Each business is different. It's very specific to your business so definitely talk to somebody but use those guidelines and I would actually go back to what you said, and I agreed with. If it’s me, go with the LLC from day one because it’s very easy to transition from an LLC to an S corporation. Transitioning from a sole proprietor to an S Corp takes a little more work.
[00:47:39] Scott: Okay. All right. So, I think we covered all that good stuff. I did want to touch on this really, really quickly and then we’ll move on to this 330 days thing which kind of goes like what we were just talking about in a sense as far as different tax deductions or just different taxes that you would pay. Sales tax, I know that people kind of want me to ask you about this and I don’t want to go into a huge discussion. They can go back to some of our past episodes of what we’ve talked about but I think it’s pretty much the same as we’ve said before but why don’t you just address the sales tax, I guess, the big question that everyone wants to know like, “When do I start collecting sales tax?” and all that stuff.
[00:48:19] Josh: Yep. It’s a tough one with this business. So, the first thing I would say is you have to be collecting and paying sales tax within your state. So, if you’re located in Ohio like me and you’re selling on Amazon or selling any type of physical product, you have to be collecting and paying sales tax in Ohio. Whatever your state is, you’re operating from that state. You have to be doing that. The big question for Amazon sellers is, do I need to be collecting and paying in all these other states? And it comes down to the word they call nexus. If a state says that you have nexus in their state, they say that you should be collecting and paying sales tax on sales within that state. And the big one when it comes to Amazon is, is inventory in the state considered nexus? Because Amazon, what is Amazon, up to 22 different states?
[00:49:05] Scott: Yes. Something like that.
[00:49:06] Scott: Yeah. Somewhere around 22 different states, Amazon has warehouses in and they can and probably eventually will store your inventory in all 22 of those states. So, the question is, does that create nexus in all 22 or however many states they have you in? And that’s the big debate. Some CPA, some attorneys say, “Absolutely, yes. You have nexus. You need to be collecting in all those states.” Some say, “Absolutely not. Amazon selling on consignment. That does not create nexus in those states.” What I would say is you got to use a little bit of common sense and you have to do a little bit of risk-reward. So, if Amazon is storing your inventory in Ohio, you’re located in New York and you’re having $500 in sales in Ohio per year, I would not worry about that. On the other hand, if they have your inventory in California and you’re having $100,000 of sales per year in California, it’s probably time to go register in California and start collecting and paying sales tax there.
[00:50:04] Scott: Yeah. And that’s exactly what they say over TaxJar. I had TaxJar on and we talked all about that and the thing is we’re not giving you that legal advice and they won’t either. No one really will because it’s really kind of gray, but it is something that I think you have to use your own head, but you have to do what you’re comfortable with again. That’s what we talked about. And if you do use TaxJar which I’m a fan of and I use them, they will actually show you where your sales are coming from the most. And they basically said the same thing like you might just want to start with the ones that most of your sales are coming through that you have inventory in. So, if it’s in Texas, that’s where you’re going to want to go. You’re going to want to go to Texas and register there. If it’s California, that’s where you want to go and start working yourself backward.
I think eventually, and this is just my little prediction here, I think eventually Amazon is going to collect the tax and I think they’re going to submit it. I think that’s going to happen in a matter of time. I think because the states all know that they’re losing a ton of money that they could be getting and not everyone’s going to conform. This is a way that Amazon would control everything. Everyone would be collecting in the states. They would have a record of it because they're going to know the warehouses that they have inventory and that's yours and then they are going to have to do that in your behalf or there's going to be another division. Something has to happen. And I think, I mean, the states would be silly not to want to work with them on doing this. It’d be a no-brainer, but I mean there’s got to be, gosh, tons of money.
[00:51:31] Josh: Does Jeff Bezos listen to this podcast?
[00:51:33] Scott: I don’t think so.
[00:51:36] Josh: Jeff, if you’re listening, this is a no-brainer, man. You have a great platform for Amazon sellers. You make life so much easier for them if you guys started doing this so that’s my plea to you, Jeff.
[00:51:46] Scott: Yeah. I agree. I’m going to be right there with you. We’ll have a petition sign. So, yeah, I mean, it’s something that I know it’s a headache for a lot of people and it’s also a thing that people get a little nervous about. And again, I think you have to do what you feel is right in your own gut and I think the first thing is we all know common sense wise, if you are in South Carolina like I am, that’s where you want to first start and that’s where you want to start collecting.
[00:52:14] Josh: That’s where there’s no gray area.
[00:52:15] Scott: There’s no gray area.
[00:52:16] Josh: It’s black and white. You have to be doing it there.
[00:52:18] Scott: Exactly. You have a business in that state, you have inventory that is being shipped to that state for the most part, so you want to do that and to me, that's just a no-brainer.
[00:52:31] Josh: I have a question for you on this one. Have you heard of a single Amazon seller that’s had a state other than their home state come after them for this yet?
[00:52:39] Scott: I personally have not.
[00:52:41] Josh: I have not either and we have at this point hundreds of Amazon sellers and I have not. This is not to say that it will never happen, but I have not heard of it yet.
[00:52:49] Scott: Yeah. I haven’t. The one sticking point that I see or the one thing that could be a snag for people that are selling a business right now and they’re not collecting in all the states or the states at least that they have a lot of inventory or that they’re making a lot of sales, that could be a hang up for a buyer.
[00:53:07] Josh: That’s true. Good point.
[00:53:08] Scott: You know what I mean? Because then a buyer is like, “Wow, you’ve been operating…”
[00:53:11] Josh: You’re assuming that liability.
[00:53:12] Scott: Yeah. You’re assuming the liability of the company then they might come back and try to get $100,000 in back sales tax or whatever. And I’m just kind of curious how that would work anyway because that’s what you should’ve paid but you didn’t collect it. So, you’re not necessarily taking money that you collected and then not paying it.
[00:53:31] Josh: Actually, that’s another good thing to bring up. That is a big, big deal. I’ve had some people that had turned on the sales tax on Amazon thinking that handled everything. If you’re collecting sales tax and you’re not paying it, that’s a big deal and you could be hit hard for that. So, just because you checked for Amazon to start collecting sales tax, it’s not being paid. You have to handle paying it to the state.
[00:53:55] Scott: Yeah. Because they’re collecting it on your behalf because you check the box but it’s up to you to take that out of your pay that they give you and separate it and then pay that to the states. That’s kind of how that works. Again, going back to that, like as of right now like if you’re collecting in six different states, you’re going to get all of that money that you’ve collected on the front end from Amazon. They’re going to pay you in your two-week payout. You got to know what that is and by going to TaxJar you’ll have that and then you can separate that, and I think that’s smart to do. And then in your checking account or whatever account that you’re using, you want to make sure that you separate that, so you can say, “Okay, a thousand dollars of that is sales tax. That’s got to get allocated for this,” so that when your sales tax is due, it gets pulled and you’re not surprised.
[00:54:37] Josh: Yep. To me, if you’re an Amazon seller, TaxJar is a must.
[00:54:41] Scott: Absolutely.
[00:54:41] Josh: It’s simply an expense that’s a must.
[00:54:42] Scott: Absolutely. Yeah. And, guys, I’ll leave all the links and all that stuff on this page here, so I’ll give you guys that here in a minute. But let’s wrap up with two things. I want to talk about this 330 days thing that you were telling me before we jumped on and then I also want to just touch on this new tax plan without getting too political.
[00:55:01] Josh: Yeah. Absolutely. So, the 330 days thing, the cool part about a business like an e-commerce business and Amazon selling business is what they call location independent. You don’t have to go to your office and work from your office every day. You can work, your business can be run from wherever you are as long as you have your laptop. The IRS has a cool little rule here that says if you spend during the year at least 330 days in another country, they will write off just over $100,000 of your income for that year, meaning you will not pay taxes on that income.
So, and this especially like me and you probably aren’t going to do this right now because we have kids that are still in school or whatever but especially for people who are either young and single or newly married and don’t have the kids or older and the kids are out of the house, you can go and spend a year in another country and that’s going to get you $100,000 tax deduction for doing nothing other than spending less than 30 days in the United States that year. So, and we’re actually starting to see this not as much in e-commerce, though, it’s starting to hit there as well. But all these location independent businesses, these Internet marketers, these bloggers, these podcasters especially the younger ones are saying, “How freaking cool would that be to go spend a year in France or Germany or wherever you want us go spend it and get $100,000 tax deduction?” I mean we’re talking that could save you $15,000 to $20,000 alone in taxes that year so you’re going to basically pay for your stay over there with the tax savings.
[00:56:33] Scott: Yeah. My question would be this. So, now what if you had a house here? You know what I mean? Like do you have to cut ties with like what you own here in the US if that’s where you’re currently living?
[00:56:45] Josh: No. Absolutely not. So, there are other things here like the John Lee Dumas going to Puerto Rico. That one, Puerto Rico has to be your home in that scenario. You have to cut basically most of your ties with the US. In this scenario, it doesn’t matter. You’re saying US is still your home but you’re spending over 330 days of the year in that other country and now you get that tax deduction.
[00:57:09] Scott: And so, again going back to how do you prove that, just by you can have like receipts of that? You have a place there and you stay there and travel and stuff like that?
[00:57:18] Josh: Yeah. I mean, certainly, it's something you want to be careful of document where you are. I mean, if you’re staying in the same place, that’ll be super easy because you’ll be living somewhere, and you can have someplace to prove that. We have a lot of people who are traveling all over when they’re doing it, so you want to take care for records of where you’re going and when but, yeah, I mean, it’s as simple as showing them that I’ve never personally had anyone get questioned but I assumed it be just like any other tax deduction like, “Look, I was in Germany from this to this and I was in France from this to this.”
[00:57:45] Scott: So, technically, you could bounce around. You don’t have to stay in one location?
[00:57:48] Josh: Absolutely. As long as you’re not in the US for more than 330 days during the year.
[00:57:52] Scott: Got you. Okay. Cool. Well, maybe I’ll talk to my wife and we’ll go on a little excursion here when the kids are all grown up. That would be fun.
[00:58:01] Josh: You know, I’m talking to my wife about it like we want to build a house eventually and I was like, “You know what, how cool would it be if we sell our house while our new house is being built. Let’s go live in another country for a year. How cool would it be for our kids to say, “Yeah, I spent second grade in Germany,” or whatever country you want to go to? How cool would that be?”
[00:58:18] Scott: Yeah. Yeah. No, I would. That would be awesome. All right. Cool. So that’s that. That’s awesome. So, obviously, as we get more details on that, I’m sure you’ll fill me in and we’ll keep people posted on that. And then the last thing is the new tax plan. Why don’t you talk about that real quick?
[00:58:32] Josh: Yeah. So, the first caveat here is nothing is official yet. This tends to be what they reveal to us as to be a fraction of what actually passes and goes through, and even if it does go through, we don’t know if it’ll hit for 2018, 2019, whatnot. But we just want to go over some details of how this is looking like it will impact specifically Amazon sellers. And there are a few things that I think are important for them to note. The number one thing is it is going to have an impact on pass-through entities. And if you remember from before, pretty much everyone if you’re a sole prop, an LLC, an S Corp, you are a pass-through entity. And the way that’s normally taxed is it’s taxed at whatever your normal tax rates are.
Under this plan, it could potentially lower that specific income. And I think the latest scenario I’ve read is the first $75,000 of profits from a pass-through will only be taxed at 9% and then the next bracket is going to go to 25% and I think when it’s high is in this scenario, 35%. But that is something that depending on where you’re at could potentially save you a good chunk of money. So, that’s one thing I want you to pay attention to when you’re hearing, because people want to know what impacts me when I’m hearing all these things. If you’re an Amazon seller, e-commerce seller, take note of what they’re saying about pass-through entities because that specifically applies to you.
[00:59:51] Scott: Okay.
[00:59:51] Josh: All right. A few other things that are impacting the average person here is if you have student loans. This one is getting rid of the student loan deduction. On the positive side, it’s going to double the standard deduction meaning, we go deep into the woods here of standard versus itemized deductions, but for the average person doubling the standard deduction would increase almost every average person’s deductions are taking on their tax return. It is going to potentially double the child tax credit. If you have a child that’s under 17 years old, you get a $1,000 tax credit for that. Under this new tax plan, that could go up between $1,600 and $2,000. That part is a big deal.
The other big deal with that is that child tax credit phases out completely if you make $130,000 or more. That limit is going to go way up under this tax scenario. I think I said it would go up to as high as, like $250,000 per year, you can still take that. So, that’s a big deal for a lot of people reading this. It’s going to take away what they call personal exceptions. So, that one’s a little – you get $4,000, write it off for each person you claim on your tax return. That’s going away. But when I look at this plan and just, look, this isn’t talking about how it will impact the economy or national debt or anything like that. When I look at it strictly from a tax perspective, I would say that the average person that’s listening to this podcast that’s selling it on e-commerce, Amazon, they’re probably going to save between a couple of $1,000 and maybe even $5,000 per year if as they’re currently doing it, it goes through.
[01:01:24] Scott: Got you. Okay. So, there’s a lot of like what ifs and this part might not be, but this part might be but at least you kind of gave us a little bit of kind of like how you’re seeing it and I think that’s important because a lot of times you’ll hear a lot of talk or you’ll read something, and it just doesn’t make a lot of sense. And you’re kind of like framing it for us, e-commerce sellers or even just online sellers, and then seeing like how that’s going to affect us.
[01:01:53] Josh: It’s just which parts to pay attention to, that’s what I would say. Pay attention to a pass-through entity, pay attention to the standard deduction, pay attention to the child tax credit. If you pay attention to those, you’ll have a good idea of how it’s going to impact you.
[01:02:04] Scott: Okay. No, that’s awesome. I appreciate you giving us a little bit of a clear vision of that because sometimes that can get a little hazy. So, I appreciate that. And the 330 days thing, that’s pretty cool. I’m interested to hear how that works and also to see what kind of people, or not even just what kind of people, but how they're doing it and how it's affecting them and if there are any other things that we need to learn. I know that you said that you're actually working with a few other people about that. How are you going to help people implement that 330 days, I guess?
[01:02:38] Josh: Yes. So, I’m actually working with a couple of other Amazon sellers. They were clients of mine and it was their idea. They came to me and said, “You know anything about this 330-day thing?” I’m like, “Yeah, I know about it.” Like, “Man, this would be huge for Amazon sellers. How can we get them knowledge about this?” So, we’re going to create a site. It’s still in the works. We don’t even have an address for you. We’ll definitely give it to you. When we do, it’s going to give you all the information on this, how you get this tax deduction, how it applies to you. Eventually, we will even have things like how to network with other people who are doing it, where you should stay in these various countries. So, it will give you all the information you need if this is something you’re interested in.
[01:03:11] Scott: Kind of like a little travel guide for people that want to kind of live that 330 days somewhere else.
[01:03:18] Josh: Absolutely.
[01:03:18] Scott: I think it’d be kind of cool. Yeah. That’s awesome. Who knows? Maybe one day I’ll be on the 330-day plan. All right. Josh, that’s going to wrap it up, man. This has been awesome. Always a ton of great information and just even a refresher for us to kind of be thinking and especially when we’re getting into the new tax season or even if you’re just listening to this maybe six months after this airs, it’s still great information to understand that your bookkeeping needs to be in place. You need to understand your entity, how to set that up and just some really cool things like inventory that you might want to liquidate or get rid of is actually deduction. I’m going to actually run writing that down like right now. That’s like a huge deal. All right. Man, so is there anything else you want to wrap up with or you want to tell everyone how to get a hold of you?
[01:04:01] Josh: I mean, I think the key that you said, what you and I talked about when we do this, we’re not going to give you any big sexy tax deductions that only the gurus are telling you. We’re going to give you the basics, the fundamentals. They’re going to apply now, they’re going to apply if you’re listening to this a year from now, and this is where you saved the money is by applying the fundamentals. Maybe every once in a while, you get a cool tax tip like the inventory deduction that we talked about, but for the most part, it's applying the fundamentals, doing the basics, and that’s where you’re going to save the money.
[01:04:27] Scott: Yeah. Great. Where can they find out more about you? I know you’ve got some services and stuff and did different education so just give them where they can go.
[01:04:36] Josh: Absolutely Yeah. Go to our website, CPAonFire.com. You and I talked about in the last episode we did start offering a complete full-service package for Amazon sellers that don’t want to touch the bookkeeping, the taxes, the sales tax. We’ll handle all of it for you. You can see that on our website. We have a free course that’s going to talk about that business entity stuff that we talked about. It’s going to go more in depth there. They can get that at CPAonFire.com/firenation.
[01:05:00] Scott: Cool. Awesome. Yeah. This has been great, and I appreciate you coming on and I’m sure I’ll have you back on. And you and I will be talking anyway because it is tax season and I got a fourth-quarter thing we got to be talking about here. So, all right, man. I appreciate it. Go take care of those kids. What do you say?
[01:05:15] Josh: I got to go back and do it, man.
[01:05:17] Scott: All right, Josh. Have a good one, man.
[01:05:18] Josh: All right. Thanks.
[01:05:21] Scott: All right. So, there you have it, another really, really great podcast episode with a ton of tips. In this case, it’s tax tips, business entity tips like all of that’s inventory, the liquidation thing that we talked about like all of that stuff really, really important stuff. So, again, you may want to bookmark this one and come back to it or you might want to go to the show notes at TheAmazingSeller.com/456 and, yeah, you might want to keep this one for reference because there’s a lot of big takeaways there. So, definitely do that. Definitely, go check out Josh. He'll be linked up in the show notes as well. Reach out to him if you have any questions or if, again, you want to hire him even to do part of your taxes or bookkeeping or any of that stuff or he can even guide you as to where to get this stuff done. So, definitely go check out Josh. Let him know I sent you. Let him know that you’re a listener of the show just because I want him to know that you guys are listening, and you guys enjoyed that episode.
Now, you guys know I don’t have, I’m doing air quotes, official sponsors of the show. I don’t say like, “This episode is brought to you by whatever.” I don’t do that. What I do is I have partnerships with people that I use their services for. That’s pretty much what I do whether it’s a tool or whether it’s a service. In this case, if I had a sponsor of today’s show, it would be Fetcher because that’s what I use for my bookkeeping and all of that stuff. So, if you guys want a free trial to Fetcher and you’ll be able to pull in all your data, see it all, even give that to your CPA or your accountant, even just for those 30 days because we’ll start pulling in even your back stuff, I would definitely check that out, 30-day free trial at TheAmazingSeller.com/Fetcher. Now, I will earn a commission from that, a small commission, a cup of coffee, and I’m totally transparent with you, guys. Whether you use it through my link or not, I definitely recommend that tool. It’s a great tool and it’s helped me know exactly where I am, basically, every second of the day.
[01:07:22] Scott: I could go in there right now and see exactly where I am. It pulls in all of the data live. I mean, it pulls in like your refunds. It pulls in your pay-per-click. It pulls in, if you had an order that was just disposed, it pulls in your coupons, your discounts like all of that stuff, and you get to import anything that you want and even make that a recurring so this way you enter it once and it’s done. It really does make your life a lot easier and not to mention I love the interface and the dashboard. It’s so easy to read and to understand the numbers at a glance or if you want to dig in. So, I’m a fan as you can tell. Go check it out.
All right, guys. That’s it. That’s going to wrap up this episode. Remember, as always, I’m 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, say it loud, say it proud, let’s say it for 2018, it’s about here right now, take action. Have an awesome, amazing day and I’ll see you right back here on the next episode.
LINKS MENTIONED IN THIS EPISODE
- Quickbooks Online
- GoDaddy Bookkeeping
- Bench Bookkeeping
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