How do Tax deductions work?

There is a lot of misconceptions about how tax deductions work, and we want to help demystify this a little bit.

We at Wilson Lake don’t recommend purchases solely for the purpose of obtaining a tax benefit. There are times where it can be beneficial to make a purchase because there are tax benefits, but there needs to be a business case. A rule of thumb is to ask the question:

Would we make this purchase without the tax benefit?

If the answer is yes, or even maybe, then the purchase decision should be moved forward. But if your answer is a flat “no,” then don’t make the purchase.

How does a deduction work?

We think of the tax code as a complex version of the financial reporting standards for normal operations. The IRS recognizes that there is some wiggle room inside of the financial reporting standards, so they have created their own rules to decide what is and is not deductible. In the end businesses and people are left with what is called their Adjusted Gross Income (AGI).

Are we oversimplifying this? Yes.

For a sole proprietor, here is an example:

Taxable revenue of: $100,000

Tax Deductions of :    $30,000

AGI of $70,000

Tax bracket of 25% would make their tax liability approx:

13,238.75 = 5,226.25 + (8,012.5 = 25% x (70,000-37,950))

I picked up the tax brackets from the Tax Foundation here.

For the purposes of consideration, lets consider the above individual owns a small construction company and decides that they want a big shiny new truck, which will be a great tax deduction. So, they decide to buy a $20,000 truck. (We recognize that is cheap for a big shiny new truck)

So, our owner deducts their $20,000 for their truck to arrive at their new AGI. (Note that it isn’t a straight deduction, there is depreciation and other considerations, but this is a simplified example)

New AGI: $50,000

Same tax bracket, but new liability:

8,238.75 = 5,226.25 + (3,012.5 = 25% x (50,000-37,950))

There was a total of $5,000 savings.

We want to highlight that this illustration shows it isn’t a one for one swap on these purchases. But there was a tax savings.

Now, the net for this business owner for the purchase of the truck is $15,000, which is the purchase price less the tax savings.

It is still $15,000 cash outflow.

If there had been a business need for the truck, perhaps the old one was having maintenance issues, and was not presenting a professional appearance to customers than it would be worth it. But if it was a purchase for the sake of deductions and vanity it would be a poor decision.

As you are making decisions throughout the year, consult with your accountant. They can be invaluable for advise on large purchases.
Would you like our help with this? Click here to schedule a call.

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

The Most Successful Small Business in the World – By Michael E. Gerber

If you are an entrepreneur, and you aren’t reading regularly. Not prolifically, you don’t have time for that, but regularly. You are limiting the size of your toolbox and not growing as a professional. You owe it to your customers and yourself to continue to grow as a business owner.

I picked up Michael Gerber’s book “The Most Successful Small Business in the World” at the library. Those still exist, and they are still free. Finished it in a few hours on the weekend.

I recommend everything Michael Gerber writes, he is that good, and he will change the way you think about your business. Or reinforce the good things you are already doing.

He outlines 10 principles, which I will summarize, to wet your appetite for learning more, not to supplement his writings.

  1. A small business built rightly can grow 10,000 times its current size.
  2. A small business is no more effective than the idea upon which it is built.
  3. You must recognize that a small business is a System in which all parts contribute to the success or failure of the whole.
  4. A business must be sustainable through all economic conditions, in all markets, providing meaningful, highly differentiated results to all of its customers.
  5. A small business is a School in which its employees are students, with the intention, will, and determination to grow.
  6. A small business must manifest the Higher Purpose upon which it was seeded, the vision it was meant to exemplify, the mission it was intended to fulfill.
  7. A small business is the fruit of a Higher Aim in the mind of the person who conceived it.
  8. A small business possesses a life of its own, in the service of G-d, in whom it finds reason.
  9. A small business is an economic entity, driving an economic reality, creating an economic certainty for the communities in which it thrives.
  10. A small business creates a Standard against which all small businesses are measured as either successful, or not.  All small businesses should aim to thrive beyond the standards that formerly existed, whether stated or not.

So, here is a brief explanation of each:

  1. Be Scalable, if you are a necessary part of every process, or there is no process there isn’t a business, it is you helping people.
  2. Have a big idea. Is your idea to make some side money? Or are you trying to fill a niche for a community in need? If your goal is to make a few extra bucks, your customers will feel it.
  3. Be a System.  Think in terms of how every part contributes to the whole, a flow of information, goods and services by the people and processes you have in place. And every step needs to positively contribute to that end goal.
  4. Sustainability. Is your business riding a short term wave of interest or a long term solution to a problem or need? Think Fidget Spinners vs household cleaners.
  5. Growth. Your business should be constantly learning, reassessing and improving. If that culture isn’t cultivated, it will grow stagnant and fade away. Think Blackberry, they used to be a powerhouse, now they are a joke, because they didn’t evolve.
  6. Vision. It is more than a business, look at the top companies in the world and their mission statements. They aren’t talking about maximizing shareholder value, they have a higher purpose. Think Toms, where “every purchase has a purpose.” We recently connected with an apparel company, Sovereign Apparel who operates under the same premise of Tom’s but with shirts. Which they give to the homeless. That is vision, they don’t just sell shirts, they support their community.
  7. Purpose. Your business can’t be an entity designed to support only yourself, if it is to survive past your professional life cycle, it has to be built with that in mind. Otherwise, when you are done. So, is your business.
  8. Autonomy. In the beginning the business relies upon the owner for everything, but the owner must in addition to actively working within the business be working on the business. It needs to function without the owner.
  9. Profitability. As much altruism as we want to have within our business, if the business doesn’t make money, there is a limit to how much good it can do. It should be financially rewarding for the owners, and employees. When it does that everyone has more resources to do good within the community.
  10. Standard. The best businesses in the world don’t measure their success upon their peers. If that is the case, they are a follower, not a leader. Be a leader in your industry.

This book was not written to solve a business owner’s problems, but to help them improve their mindset for the mission and purpose of their business. By following these 10 principles they can grow a more profitable business and make a greater contribution to their community.

We hope that you enjoyed our brief synopsis of Michael E. Gerber’s book, if you have any book recommendations we want to hear them, and we wish you the best of luck with your business.

If you have any questions or would like to see how Wilson Lake can help you grow your business set up an appointment with us. We would love to talk to you.

 

3 Tips to Avoid Surprises at Tax Time, for Real Estate Agents and Independent Contractors

Independent Contractors, and other 1099 type individuals such as Real Estate agents are in a unique position compared with more traditional employees. They are not subject to normal tax withholdings, and are responsible for managing their own tax payment and planning. This can create a surprising burden for those focused on the day to day challenges of keeping up with their professional responsibilities.

We offer the 3 steps to help you prepare. These are the same steps that we follow to provide services for our Agents and independent contractors to help them be successful throughout the year and at tax time.

1. Get organized

There is a lot to this, but something is better than nothing. Your organization system should be automated, and pain free. The easy way to do this, is to have a separate; card or bank account (Preferably) where all business transactions flow. This means only business, if it is a separate personal checking account, or a business checking, separating personal from business will help a software solution to easily classify transactions without you having to identify all the personal ones to exclude.

We recommend Freshbooks. It was designed for low complexity businesses, real estate agents, and independent contractors. It uses a feed from your bank to capture transactions. Easy ones like your morning coffee it classifies itself, other ones can be classified quickly and easily. It also integrates with MileIQ to track mileage automatically.

By getting organized you can more clearly identify how much money you have made and your deductible expenses. Which leads us to tip #2.

2. Plan ahead

There are a couple ways to do this, a simple method is to use a tax calculator to estimate your taxes and set the cash aside in a savings account. You can use these calculators, but recognize your final tax liability may be more or less. The goal here is to have cash available to pay your taxes, and reduce the impact of your tax liability at year end.

HR Block calculator

TurboTax Calculator

The other way to manage this is to make quarterly tax payments to the IRS, there are some rules related to this, so do your due diligence, but you can fill out a 1040-ES and make your payments online to the IRS here.

3. Maximize deductions

Know your deductions and track them throughout the year. We have more details on them in our blog 10 Tax tips for Real Estate Agents to Start Saving Right Now, you need to know them, track them throughout the year, and have all the supporting documentation consolidated in one place. Using software like Freshbooks, can accomplish this for you.

A final, rarely discussed method of tax savings available to independent contractors is called the Simplified Employee Pension or SEP IRA is available to Real Estate Agents, and other 1099 individuals. This can be a powerful way to both save for retirement and create a truly significant tax deduction. That deduction can be as much as $54,000 in 2017, based upon your contributions.

To summarize

  1. Get organized
  2. Plan ahead
  3. Maximize deductions

However you accomplish this, you will be better off than if you hadn’t.

It is important to do this sooner rather than later, it takes time to get it right, and the year end is less than 2 months away, or less depending on when you read this.

Our Pitch

At Wilson Lake we recognize a few things about Real Estate Agents, and independent contractors, specifically about their time:

  • It is the most scarce resource
  • Everything above still takes time to learn
  • No matter how easy, it takes precious time to execute
  • Time spent on tax preparation is time not selling, or caring for clients
  • Time spent working is time spent away from living your life

We do offer services to Agents and independent contractors, where we manage the above so that you can focus on higher return tasks. When someone buys our services they aren’t paying for compliance and planning, they are buying their own time back, and getting a financial partner to help them be successful.

If you are interested in learning more about how we can help you, download our one-pager, which describes our services:

Wilson Lake for Real Estate Agents

You can also contact us directly by filling out the short form below.

[contact-form][contact-field label=”Name” type=”name” required=”1″ /][contact-field label=”Email” type=”email” required=”1″ /][contact-field label=”How can we help?” type=”textarea” required=”1″ /][/contact-form]

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

Shark Tips from Daymond John

I recently attended a Chase for Business event. I’ll start off by saying that it was an exceptionally well put together event, and the information provided was invaluable. If you have the opportunity to go, I recommend it.

The high point of the event was Daymond John, of Shark Tank, presenting. In addition to having a great story, he is a fantastic presenter. He presented his 5 shark tips.

  • Set a goal
  • Do your Homework
  • Amor
  • Remember you are the brand
  • Keep swimming

These tips simplify, but accurately capture the hard work that goes into running a business. They also spell out shark, and lets be honest, that is a part of the branding message a business owner should also consider. It is a bit cheesy, but it helps people remember.

Set a goal

How do you know how to get somewhere if you don’t know where you are going? It is simple, but not. Setting a goal is the start of the planning process. It is the first step in building a business plan, establishing a marketing strategy, and gathering the resources you need.

Do your homework.

This step . . . More than so many others, this step is the difference between a successful entrepreneur and a person with a string of failed businesses. Daymond has an entertaining method of presentation and speaking which is drawn from his hip hop roots. Some of the most valuable information flowed so quickly as he built up to the climax of what he was saying that it was easy to miss. But it could be the difference between success and failure.

He talked about how when he started his business his mother made him right out his balance sheet, but it wasn’t the traditional financial statement. She made him clearly identify his strengths and weaknesses, his resources and what he needed. This forced him to understand the skills he didn’t have and start pursuing those with those skills, and it forced him to recognize the resources he had available, and did not have. This was his business plan, and helped him to identify blind spots he may not have otherwise had been aware of.

Homework doesn’t just mean looking inward, it means looking outward, FUBU, Daymond’s first business, was built because he recognized that there was no one who understood hip hop culture deliberately designing clothing and apparel for it. He knew his market, he knew what and how people wanted to wear his clothes, he knew where they shopped and how to communicate with his market. This isn’t to be underestimated.

Amor is love in french.

Think of this as the energy, or driving force behind your business. You need to love it. To care about the customers and clients you serve, and care about the product or service you provide. If you don’t than you will run out of energy because your business will become another job to you.

Remember you are your brand.

How you present yourself directly represents your business, if you are fun and engaging, your companies brand will have that image. If you present your company as serious and professional but you are known publicly as a drunk and a flirt you undermine your company’s professional image. Be cognizant of how your behavior represents your company.

Keep swimming.

Businesses fail. Most of them in fact, and it isn’t hard to find many situations where a business that is now a staple of its industry, or that ended up creating an industry could have failed but didn’t. Because the owners kept swimming. They didn’t give up. The looked at their business, their goal, and found a different way to solve the problem. As a result they thrived because every obstacle they overcame they left their competitors further behind them.

I was grateful for the opportunity see Daymond John live. If you haven’t read them, check out his books:

The Brand Within

The Power of Broke

Display of Power

Best of luck to you and your business.

As you grow and build your business if you identify finance, accounting or bookkeeping as a weak spot for you. Don’t spin your wheels, set up a call with us. 

Cloth vs Disposable Diapers – The Accountant’s Way

One of the reasons I chose to be an accountant was because it is a career with a set of skills. Which I can use to benefit me both professionally but also in the home. One of those is the ability to perform a cost benefit analysis. And with some changes coming in my household I applied the same type of cost benefit analysis strategy I would to helping a business owner make a decision, to making a personal decision within our home. Cloth vs Disposable diaper.

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I read 15 to 20 articles comparing the cost of cloth to disposable diapers. And I’d be lying if I said that over half of them were diaper retailers (Cloth or disposable), because everyone wants to sell you something. So, in the interests of doing my own due diligence, I performed the following analysis, and thought I would share it.

I’m simply a curious accountant who is going to be a dad again. And I wanted to get some real answers. In that spirit, if you find a major hole in my analysis, let me know. I did this to learn, and will be happy to continue to do so.

My disclaimer, before we begin:

  • The question of diapers, relates to a lot of other topics related to parenting which are quite sensitive. Including but not limited to: potty training, breastfeeding, and carbon footprint. I have briefly touched on them, but more than anything, I have not made any assumptions within based upon my ideas of the right or wrong way to raise a child. If I went earlier or later on a particular area of interest, it is because I’m estimating conservatively. I would rather err on the side of spending more in an estimate than not. This is an estimate after all. The size of your baby or the speed it grows could throw this entire analysis off base, it is meant to be a guideline to help aide in making a decision.
  • My hope is whoever reads this understands the bulk of my analysis is fiscal, not moral or ethical. This topic is convoluted enough without getting into all that stuff. And I wanted to lend some clarity to one aspect of the conversation.

Key assumptions

  • Baby wipes not included
  • Child in diapers until 3 years old. We are projecting conservatively, and based upon normal American babies. Based upon culture or region age of potty training can change. Some believe that cloth diapers potty train children earlier. And we gradually reduced diaper usage from full to near zero by the 3rd birthday. Again, please don’t be sensitive, we erred conservatively.
  • Based upon children in 50% quartile
  • Does not account for premature babies
  • Reasonable effort to find best deals made, not accounting for big box stores, or coupons. Nor does it consider buying used, or selling when your baby outgrows their diapers. But those could affect your decision.
  • Brands we selected were meant as a benchmark for market niche, each representing a market segment: discount, organic, baseline or other. We don’t have a preference for any brand. For disposable pricing we did go on Amazon, and in full disclosure, we have a Prime membership. This is mentioned because we understand lower income families don’t have access to discounts through Amazon, or Big box stores where they can leverage the heavy discounts, but for the purposes of picking a price, we needed to start somewhere.
  • Assumes perfect inventory usage, and by unit cost. If you over purchase, or purchasing in large containers there may be excess. Let’s be honest, there will be excess, because in inventory management, and especially with babies, we are making our best guess.
  • Cloth diapers purchased in the beginning are used throughout entire span of child’s life. Additional purchases will change this potentially significantly. What this means is, keep your wife out of Target and off the internet from buying “really cute” diapers and trying to tell you they are an investment.

Disposable Diapers:

  • Disposable costs at year 1
    • Luvs – 447.6
    • Huggies – 785.4
    • Seventh Gen – 1,247.40
    • Bambo Nature – 1,496.40
  • Disposable costs at year 2
    • Luvs – 324
    • Huggies – 626.4
    • Seventh Gen – 885.60
    • Bambo Nature – 1,144.80
  • Disposable costs at year 3
    • Luvs – 156
    • Huggies – 382.20
    • Seventh Gen – 366.6
    • Bambo Nature – 390
  • Disposable costs overall
    • Luvs – 927.60
    • Huggies – 1,794
    • Seventh Gen – 2,499.60
    • Bambo Nature – 3,031.20

There are both fixed and variable costs associated with Cloth diapers. We accounted for a toilet sprayer, and spray reducer for initial purchases in addition to the diapers. Liners come in both disposable and reusable we included both options in our considerations. We also calculated in the additional laundry requirements. Because you will not be throwing them in with the normal wash.

For the purposes of calculating initial number of diapers to purchase we assumed about 40 diaper covers. For inserts, our projection was 40, because babies are small waste factories. For cloth diapers without inserts we selected 40, based upon 18 being used every 2 days, which is a reasonable wash cycle, with a lot for flexibility. The number of diapers used daily will go down, but the wash cycles won’t go down proportionately, as dirty diapers need to be washed. Additionally, with a set of 40 being purchased, there will be flexibility if some are damaged for whatever reason down the line.

We also know that life happens, and that disposable diapers are not going to be eliminated so we calculated a 90% success rate on usage of cloth diapers and used Luvs brand for those 10% times we aren’t using cloth diapers.

  • Fixed costs
    • Spray hose – 40
    • Splash guard (Spray pal) – 25

Cloth Diapers

Cloth diaper costs include the fixed cost of the purchase of the first 40 covers, and 40 liners, or if no liner is required, 40 cloth diapers. Variable costs of disposables used, laundry, and disposable liners were also added in. As the choice of liner is separate and based upon individual need or preference, that has been broken out as a separate fixed cost.

  • One Size (No liner requirement)
    • Rumparooz
      • Initial investment – 560
      • Year 1 – 874.76
      • Year 2 – 212.40
      • Year 3 – 195.60
      • Total – 1,272.76
  • All in one (Liner required)
    • Laimala
      • Initial investment – 159.93
      • Year 1 – 587.02
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 1,244.77
    • Bumgenius
      • Initial investment – 1,078
      • Year 1 – 1,505.09
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 2,162.84
    • Blueberry Organics
      • Initial investment – 1,318
      • Year 1 – 1,745.09
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 2,402.84
  • Pocket Diaper (Liner required)
    • Mama Koala
      • Initial investment – 266.6
      • Year 1 – 639.69
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 1,351.44
    • Thirsties
      • Initial investment – 733.33
      • Year 1 – 1,160.42
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 1,818.17
    • Bumgenius
      • Initial investment – 742.13
      • Year 1 – 1,169.22
      • Year 2 – 395.89
      • Year 3 – 261.86
      • Total – 1,826.97

Liners

We considered Disposable liners to support solid waste when the baby begins to transition into solid food. Disposable for solid waste, reusable liner for liquid waste. We marked it at 6 months. Every family is different, this was just a very early point, leaning toward being conservative.

  • Nora’s Nursery (10 pack)
    • Initial investment – 99.88
  • Naturally Nature Charcoal reusable (12 pack)
    • Initial investment – 131.88
  • Naturally Nature Bamboo Reusable (12 pack)
    • Initial investment – 103.88
  • Grovia Disposable Liner (200 pack)
    • Year 1 – 123.33
    • Year 2 – 183.49
    • Year 3 – 66.26
    • Total – 372.08

Variable Costs

Cost of laundry assuming .75 per load and laundry 20 times per month. We played with the numbers on this, it is the largest continuous expense related to cloth diapers after the initial purchase and anything that can be done to keep it down, either considering efficiency of laundry machine, or cost of soap, looking at it from a per load perspective. But if you aren’t conscious of the costs related to laundry than the savings from cloth diapers can be lost. As well as any environmental impact.

  • Laundry costs
    • Year 1 – 195
    • Year 2 – 180
    • Year 3 – 180
  • 10% disposable usage
    • Year 1 – 44.76
    • Year 2 – 32.4
    • Year 3 – 15.60

Final summary

Based upon our assessment:

On a cost basis, Luvs is cheapest overall. But not every baby can tolerate Luvs and it may not be as capable of handling the serious business of diapers that is needed to make it the core of diapering within your family. Family dependent of course.

The most expensive diapers are the disposable eco friendly and sensitive skin brands. If you have a baby with sensitive skin, it may be best to go with a cloth brand, for cost purposes. It will be important to wash thoroughly and consider laundry detergent with the cloth diapers though.

On a cost basis, we choose the Pocket Diapers over the All in Ones, there may be some non-cost based benefits, but when looking at the numbers we lean toward the pocket diapers, they are a few hundred cheaper. The One sized is middle of the road, but for hygiene reasons, we may lean away from these.

When it comes to liners, we would lean toward the charcoal, this is where the rubber meets the road (Or some other awkward analogy) and the extra $30 for a full 48 set isn’t a bad deal.

Our overall decision is a close call between Huggies and Cloth Diapers. They are within a couple hundred dollars lifetime cost, which could be flexibility on either end. Things that could impact your decision either way, is how hard do you want to work? Cloth is harder to maintain, between all the laundry, and rinsing, whereas disposable is a drop in the trash can. There is an argument, a really solid one for the impact upon the environment (A complex question, here is a link that discusses it.). If it were a simple matter of cost, were I comparing the two I would lean more toward Huggies disposables, they are similar cost and less effort. However, if the baby shower supplied a significant portion of the reusable diapers, or if our baby had sensitive skin I would definitely go with cloth.

It may also be worth considering, that if your family is worried about the initial investment in cloth diapers, buying early can save money. Stores take advantage of people in an emergency. So, look for families selling used cloth diapers or stores with big discounts and stacked deals prior to the birth of your child. Spreading out the initial cost in the 6 months prior to the birth of your child saves you money later on, than it is money well spent.

A few final questions we wanted to answer.

If you have been using disposable, when is it too late to switch?

Our simplified answer is that our numbers for disposable are based upon our assumption that it will steadily decrease from full to almost no usage from 2 – 3. This will be heavily dependent upon the child and the parents. If you are rolling with Luvs or Huggies don’t switch.

If you are using either the eco friendly or sensitive skin brands you could still save money if you switched in the first 6-7 months. This is purely a cost based answer, there may be some intangible reason to switch. The thing to keep in mind is that from newborn to 2 years old there is a 40% decrease in diaper expenditure per month, and potentially a 91% decrease from 2 to 3 years old. The sooner you invest in cloth diapers the better.

Does the answer change if the child potty trains sooner?

Yes, looking at Huggies to Pocket Diapers at the 2 year mark, it is cheaper to go with Huggies.

If cloth diapers potty train faster than disposable than are they still worth the difference in cost?

Yes, this because if you didn’t purchase the cloth diapers you would be using the disposables. Which would increase in total expenditure over time. If you were using Huggies for 6 months more in the last year compared with being satisfactorily potty trained in cloth diapers that is a difference of almost $300. Additionally, you would save the $149.82 worth of laundry, liners and extra disposables calculated into the cloth diapers.

Here is the link to my Google Sheets where I did my calculations.

 If you want to see how we can help you solve your business related problems, here is a link to our calendar. We would love to talk with you. No diapers, please. 

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.