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How to Finance a New Business – Part 1

Posted in Uncategorized on 11/16/2015   |  Comments Off on How to Finance a New Business – Part 1

Working too hardA common question people ask me is how they can start their own business if they earn barely enough money to live on. Being in the situation of having barely enough to live on means that some sources of funding for a new business, such as the earnings of a spouse or a savings account, are not available to you. If you’ve been in the same situation for your entire career, it’s doubtful you’ll have significant funds in an IRA or 401(k), so a self-directed retirement plan is out.

One possibility is to get part-time or full-time work in addition to your current job. I did that to get the money to purchase the first dump of a house I bought and fixed up, when I was 22.  I was working the evening shift at a restaurant in the Hyatt Regency Hotel in Houston, so I got a day job in an insurance agency. My job was to sit at a desk all day and talk to people who wanted to file a claim for a casualty they’d suffered. It was very different from the evening job, and it was interesting to listen to people’s stories about their casualties.  I don’t think I could have handled two shifts of the same kind of work, but since one job involved walking around all evening, and the other was sitting, it wasn’t too bad, except for the lack of sleep. I don’t recommend this for old people. I’m pretty sure I wouldn’t be able to pull off something like that now, but healthy young people can do it for a while.

When you have two jobs, there is no time for a social life, for going to the gym, going for walks, reading, watching movies — pretty much all you do is work, eat, and sleep. Think about it: 16 hours of work a day is longer than the 12 hour work day of Victorian era factory worker.

You do, however, usually get two days off per week from each job.  When the weekends came around and I only had to work my 8 hour shift at the restaruant, I felt as though I was taking life easy. I worked two full-time jobs for about 6 months, by which time I’d saved up enough to make a down payment on a house.

Another possibility is to save money you’d otherwise be paying in taxes. If you work as an employee, your scope for tax savaings is very limited. There are retirement plans, but that’s not going to work for you, since you have barely enough money to live on already, and it’s not as though you get a dollar-for-dollar deeuction for the retirement plan contribution. If you’re in the 15% tax bracket, your taxes only go down by 15% of what you paid.  You’re just out the other 85%, and that doesn’t get you anywhere.

What you want to do is to get deductions for things you are spending money on anyway. Say your employer requires you to have a cell phone and also requires you to purchase a uniform to work. In theory, you could deduct these as Employee Business Expenses, but in reality you probably won’t get any tax benefit at all since this is an itemized deduction with a 2% of Adjusted Gross Income “floor.” (more on this later)

If you can manage to work as an independent contractor rather than an employee, you can deduct busines expenses. The downside is employers pay 1/2 of your social security and Medicare taxes, as well as paying unemployment taxes. As a self-employed person, you will not be entitled to unemployment benefits, and you’ll have to pay 100% of your social security and Medicare taxes. You may also lose any help your employer was providing to pay for medical insurance.

In part 2 I will show you how to calculate how much extra you’ll need to earn in your own business to make up for the loss of benefits you received as an employee, and Part 3 I’ll talk about how to avoid the problems people often have when they switch from being employees to working as independent contractors.


Reporting Gains and Losses From Recreational Gambling

Posted in Accounting,Taxes on 03/07/2012   |  Comments Off on Reporting Gains and Losses From Recreational Gambling

Reporting Gains and Losses From Recreational Gambling

Here’s a common scenario: Gavin spends a weekend in Las Vegas. His overall position from gambling is negative, but he made a couple of lucky bets. He receives Form W-2G showing $3,000 in winnings. If he does not report the $3000 on his Form 1040, the IRS computers will be likely to catch the discrepancy between their records and Gavin’s tax return, and Gavin will receive a notice that he owes additional taxes.

If Gavin already has itemized deductions that total to more than his standard deduction, he can deduct up to $3000 of gambling losses on Schedule A (itemized deductions) to offset the winnings.

Here’s how it works:

Scenario 1 – Overall Positive Outcome From Gambling

Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines. Gavin also spent $645 on transportation and lodging.

Gavin can take the following deductions on Schedule A:

Gambling losses   $2,500
Travel Expenses    $   500

Taxable Gain         $   -0-

Scenario 2 – Overall Negative Outcome From Gambling

Gavin’s W2-G says $3,000, but this does not include losses of $2,500 from slot machines and $1,000 from other bets.

Gavin can take the following deduction on Schedule A:

Gambling losses   $3,000

Taxable Gain         $   -0-

In other words, you can offset gambling winnings with gambling losses and expenses, but only up to the amount shown on Form W-2G. A recreational gambler cannot use gambling losses or expenses to reduce his pre-gambling taxable income.

But what if Gavin’s itemized deductions total less than the standard deduction? In this case, Gavin will have to report his $3000 of winnings from Schedule W-2G. Period. He will not be able to offset any of the gambling winnings with gambling losses or other expenses, even though he had an overall loss from his gambling activities.

How to Deduct Entertainment Expenses Part 2

Posted in Accounting,Business,Taxes,Uncategorized on 03/06/2012   |  Comments Off on How to Deduct Entertainment Expenses Part 2

Can I deduct my wife´s dinner?

Ian is a software engineering consultant who works for a small firm of which he is a 25% owner. He much prefers working at his computer to going out on the town, but occasionally he finds it necessary to take clients or prospective clients to dinner.

“I can talk about software technology all day,” he told me, “but I´m a bumbling buffoon when it comes to socializing. The only way I manage to get through those ordeals where I´m supposed to wine and dine a client is to take Susan [Ian’s wife]. She´s just incredible. She can talk to anybody about anything. So … since the client would have a terrible time with just me there, can´t I deduct my wife´s dinner?”

The rule is that the cost of the dinner for both the host’s and the customer’s or client’s spouse is deductible if it´s not practical to entertain the client or customer without his or her spouse. But Ian needs Susan at dinner, regardless of the presence or absence of his client´s wife. Can Ian deduct the cost of Susan´s meal, even if the client comes alone? IRS would be likely to challenge this — the greater the amount deducted for Susan´s meals, the more likely it would be of interest to IRS.

For deductions of this sort that do not fit neatly within a section of the Tax Code or Treasury Regulation, you would want to have extra documentation. For example, Ian´s firm might want to record minutes of a meeting where they discuss the need for Ian to entertain clients and prospects, together with Ian´s difficulties in social situations and Susan´s social skills. If the other partners in Ian´s firm agree that Susan´s presence at client dinners will be very likely to help the firm increase sales and retain existing clients, it would be difficult for IRS to argue convincingly that the cost of Susan’s meals is not an ordinary and necessary business expense.

When is entertaining not entertainment?

In general, the deduction for meals and entertainment expenses is 50% of what you actually spend (75% for the transportation industry). But in some cases, the cost of a meal looks a lot more like a regular business expense than an entertainment expense.

Allan has a weekend business leading walking tours in Manhattan. A regular feature of each tour is a box lunch or snack pack for each participant, included in the price of the tour. In Allan´s case, the cost of lunch and snacks is 100% deductible, as Costs of Sales or Customer Supplies.

Likewise, for film or music critics, travel agents, food critics, certain costs that would ordinarily be 50% deductible as entertainment expenses are 100% deductible as regular business expenses. As always for costs of activities that people generally do for fun and pleasure, it is important to have abundant documentation of your profit motive and the relationship between the activity and the business. Calling yourself a film critic because you view lots of movies and tell your friends about them is probably not going to fly