Under the Radar

Under the Radar 74: Taxes & Accounting

 

  welcome to under the radar a show about

  independent iOS app development I'm

  Marco Arment and I'm David Smith under

  the radar is never longer than 30

  minutes so let's get started so today as

  the the specter of April 15th rolls

  around we thought it'd be a delightful

  topic to dive into some accounting and

  tax discussion everyone's favorite

  topics everybody's favorite topic I mean

  you know and if you don't like it you

  can just put this on and it'll help you

  fall asleep it'll be a nice sleep aid

  for you if also you quickly though it's

  only thirty minutes yeah so probably

  worth anything we do dive into topics

  like this it always seems like it's a

  good idea to have a brief disclaimer

  that neither Marco or I are accountants

  tax lawyers anywhere really any kind of

  any any kind of any kind of professional

  qualified advice what we're talking

  about basically but we have some

  experience and I think what I'm gonna

  hopefully I think makes sense for us to

  emphasize isn't so much to give specific

  advice about this is these are the four

  things that you should do but there's a

  few things that I think universally like

  our good advice but jmo more is to say

  here's the kind of questions you should

  be asking when you're setting up your

  business when you're looking at your

  business and seeing if it's set up

  correctly these are the kinds of

  questions to ask and then if you don't

  have a good answer for them go and find

  help either you know research yourself

  get professional advice however that

  makes sense for you but these are the

  kinds of things you should be thinking

  about from the accounting and tax side

  of setting up a small independent

  software business and my number one

  piece of advice then I would wanted to

  start with is go all the way back I mean

  I've I set up my you know my my first

  like LLC you probably all most ten years

  ago I think it is and the thing that I

  did back then that I was very glad that

  I did and the advice I give to anyone

  starting out now is that it's very

  important that you understand what

  you're doing and if you can't if you

  can't work out what you should be doing

  then you need to pay someone to explain

  it to you because it's very easy to kind

  of

  just make a few guesses or you know read

  a few like articles online and then just

  kind of go for it you know that's like

  you kind of under you but it if you do

  that take that approach of just kind of

  winging it you can be setting yourself

  up down the road for some very big

  problems both in legal problems

  financial problems like there's lots of

  things that can come out of this and

  what you don't want to ever do you know

  like I just recently got my big stack of

  paperwork from my accountant so I use an

  ad you know I use a qualified CPA to do

  my books because it makes it much easier

  you know when when she sends that back

  to me I go through it and I know enough

  about you know all the various taxes all

  the various deductions and exemptions

  and credits and things that I can go

  through it and I'm yeah it makes sense

  to me I can read reread it with some

  confidence and that has come from I've

  sat down and I've read through IRS

  publications and documentation and

  things that you know if I was just

  trusting someone else to always be

  giving me good advice I would be setting

  myself up you know for potential

  problems down the road because at the

  end of the day I need to you know sign

  my name on the bottom of this document

  and you know send it to the government

  entity and I'm affirming that everything

  in there is correct that I agree with it

  that I'm okay with it because what

  you'll find in a lot of things in

  accounting and taxes is sort of the

  interplay between them is in accountants

  use terms like conservative versus

  aggressive right so you can't there's a

  lot of deductions or games you can play

  where you know you get into grey areas

  and it's like it does this really count

  as a business expense or does it not

  well it depends on who you ask

  and ultimately you know those are

  personal decisions that you have to make

  but if you don't understand the law or

  you don't understand the policies you

  can't be making those choices within an

  informed way and your accountant might

  be making choices that you would

  disagree with that could come back to

  bite you and so at the the most

  important thing I think with accounting

  even though it's out of our comfort zone

  even though it's not something that I

  think most developers you know have a

  lot of expertise or talent in it's

  important at least at a basic level

  understand what you're doing and if you

  do you know if your accountant is coming

  to you with some very complicated

  sophisticated

  and you don't understand it it's

  probably in my opinion not a great idea

  to pursue something like that it's like

  if you can't understand it it's probably

  not worth doing and like I said if you

  can't understand it if you're having

  difficulty wrapping these around you

  know pay for someone to explain it to

  you you know to talk to your accountant

  like I've you know in the ER I don't do

  it as much now but in the early days

  when I had an accountant I would you

  know every every year or every quarter

  when we would sit down I asked her all

  kinds of questions about things you know

  what what is this what are we doing over

  here like what is this deduction mean or

  oh we know you said if I'd if I do this

  kind of thing then I can take this other

  benefit or like making sure that I

  really understand it and I think that is

  in general just good advice that getting

  good help you know finding some good

  accountant in terms of some of the stuff

  you might need a lawyer for you know

  setting up different business entities

  and I mean that's a whole massive topic

  that is so specific to your region to

  your state like I live in Virginia

  Markel you live in New York like I

  imagine even with state to state some of

  the laws are different so you go and

  find somebody who is local who's

  knowledgeable and ideally has some

  experience working with very small

  businesses yeah and and I would say too

  like in in the area of like making sure

  you understand it and and you know

  getting good advice from a professional

  I would say a little goes a long way

  like you you don't need to spend a lot

  of money taking up a lot of someone

  else's time to to get a good enough

  understanding of this to continue

  operating your business or to start

  operating your business like you know

  I've also have been running LLC's now

  for about two about ten years something

  like that and you know it's at first it

  was very intimidating well I I didn't

  know what I was doing it seemed like

  such a big deal to quote start your own

  business and that sounded that seem like

  an impossible thing that only other

  people do that that's not the kind of

  thing I do I'm just a person I don't

  know how to do that other people do that

  I guess and it only took you know a

  sitting down with a lawyer for like one

  hour who I haven't seen in 10 years and

  it's like it was like one meeting with

  the lawyer be like how do I do this and

  then he he he gave me an accountant that

  he worked with and now I go to that

  account

  a few times a year and I've asked a

  couple of questions here and there but

  for the most part if you set it up in in

  certain ways like like in the US I get

  for example if you do like a basic pass

  through LLC which is probably what most

  developers would do or would be advised

  to do rather than you know various

  corporation forms it's really easy you

  don't have to do that much and it's you

  basically get to just go back to doing

  your business as long as you follow a

  few very simple guidelines and we're

  gonna go through what some of those are

  again you should definitely talk to

  somebody who has the authority to tell

  you this not us I think we will simply

  serve as pointers for like here's the

  types of things you should be thinking

  about and the types of things that you

  should ask your accountant slash lawyer

  about but it really is if you make it so

  it is really a lot easier than you might

  think if you if you've never set up a

  business entity or a bank account or

  business accounting before it can be

  very easy and you you you probably won't

  have to be constantly meeting with

  lawyers and accountants and burning all

  that money to do that it's probably a

  lot simpler than you think and think -

  it's probably worth saying

  and then we say in a way that we also

  talk often on the show about structuring

  your products or structuring the we know

  the apps or the businesses that you

  pursue to minimize the amount of inputs

  that you have to put into them and the

  amount of maintenance they take and that

  type of a topic that if you're a small

  developer you don't have resources or

  not in terms of time is not something

  that you have a lot of it in the same

  way I think in this sense that it is

  important to structure things

  proactively at the beginning to take

  less maintenance and when you're talking

  to say you go to see it a lawyer to help

  you set up your business in the first

  place it's like being upfront about that

  it is probably something that is worth

  being explicit and saying you know what

  is it because they're gonna ask you all

  kinds of crazy questions about well if

  you set it up in this particular way you

  know if you're a an S corp taxes to C

  corporation or ov you know that you get

  this benefit because then you can have

  this thing and it's like

  well one of the if one of the biggest

  things that they're optimizing for is

  your time they're going to probably you

  know steer you in a different way and

  you may potentially be giving up on some

  you know some theoretical deduction or

  some benefit that you may have

  theoretically but in Mike you know in

  practice I think you're gonna enjoy your

  life a lot more with a business that is

  designed to optimize for you know the

  lowest maintenance possible and so

  having something you know that basically

  you know my business entities

  maintenance is I think I write a check

  to the State Corporation Commission

  every 450 dollars once a year and like

  that is the extent of the paperwork that

  I have to do you know there's no board

  meetings I have to run or all this kind

  of stuff that you can sometimes have to

  get into because I chose the approach

  that was minimizing the amount of time

  and maintenance going forward and so

  when you're getting a set up when you're

  getting advice be sure that you're

  explicit about that if that's important

  to you if you want to just go crazy and

  you know optimize for every possible

  deduction or benefit that you might get

  like great that's you know by all means

  go crazy but it may mean that you're

  doing all this busy work down the road

  that isn't core to your business that

  isn't isn't actually the thing that you

  want to be doing right I think that I

  think those kind of strategies of like

  taking every possible deduction and

  having a more complicated corporate

  structure and you know to get certain

  rates lower and everything else I think

  that makes more sense the bigger of a

  company you are because the overhead of

  doing that as you as you're a bigger and

  bigger company with more and more people

  involved the overhead and doing that

  becomes you know a smaller percentage of

  your total time output that you have and

  also I think it matters more if you're

  in a really low margin business we're

  saving all let's saving every possible

  penny in tax liability and stuff can

  have a major impact on whether your

  business is profitable or not and how

  much the profitable but for individuals

  with software developers that's almost

  never the case both of those are usually

  not true usually it's just you or maybe

  you and a partner or two it's usually a

  very small group of people and also you

  usually have a pretty large profit

  margin like either you're making it or

  you're not and if you're not you know

  the extra like 15% from a tax change

  might not help you and if you are making

  it

  you probably have more room to play with

  in the in the profit margin so like

  optimizing for your time as you said

  David like you know optimizing for have

  needing as little from you as possible

  keeping this as simple from you as

  possible so that you can actually spend

  your time improving your products and

  making more money is usually the better

  trade-off for most small developers yeah

  and so I think probably the next place

  that it works makes sense to dive into

  is a little bit of just some high-level

  advice things that I know have been very

  helpful for me from an accounting

  perspective the first one and this is I

  think the most universally accepted like

  good advice for starting a business is

  that your business needs to have

  separate accounts from your personal

  account yes like if you do nothing else

  like that will almost all the problems

  in accounting at least that's like

  that's like ninety percent of what you

  have to do just have separate accounts

  yeah and so I think for most for most

  come from for most kind of businesses

  like house it means you probably need to

  enter you need to need to set up a

  checking account and a credit card are

  probably the two things that you'll kind

  of need to have set up I don't even do

  that I just do a debit card like I just

  like the account the account comes with

  a debit card from the bank I just use

  that and charge everything to that

  because again it's like trying to keep

  things as simple as possible

  I don't even want to worry about like a

  business credit card that I have to you

  know set up some kind of new auto pay

  thing it's like no just just use the

  debit card like again over time if I was

  a big company maybe getting the extra of

  1% of benefit from having a credit card

  with some kind of reward system might

  pay off but at my scale it doesn't make

  sense to make things that complicated

  perfect yeah that's even that's even

  simpler so you just need to create an

  account and their main reason why you

  want to create that account is because

  then your bookkeeping which is like one

  of these big I remember when I was

  starting out with like this big scary

  term for like what does that mean I

  might need to need like double entry

  accounting and 20 to balance my

  checkbook and all these things that I

  don't do in my own like personal

  finances very much it's like becomes

  incredibly straightforward because

  essentially all I'm doing each month you

  know it's like all of them all of the

  income are all of the credits to that

  account and all of my expenses are all

  from my that account and that is my

  books like the statement I get from my

  bank each you know each month that is

  essentially my books and I take that

  data and it goes into QuickBooks Online

  is that the service that I use because

  that's what my accountant likes but it

  will ultimately find its way into

  therefore like actually actual

  accounting side of things but it makes

  everything really straightforward if all

  of the money that comes in to the

  business is going through that account

  and all the money that's coming out you

  know all of your business expenses are

  coming out of there and if you're not

  doing this like you're just asking for

  trouble I mean you're asking to be

  audited and when you are audited that

  all of a sudden everything becomes super

  problematic and I'll have a link in the

  show notes to there's a great episode of

  the free agents podcast which is another

  show here on real AFM talking about sort

  of starting up new businesses and they

  were had an interview with Andrew

  Carroll who's a CPA and he this was his

  like number one advice was you

  absolutely have to have separate

  accounts and he says the I remember him

  saying that the biggest benefit of it is

  it changes the dynamic if you're ever

  audited I mean and hopefully you're

  never audited but it's like suddenly all

  of your if you're running any amount of

  business stuff through your personal

  accounts suddenly you now you have to

  justify every single one of those

  expenses that make to prove that they're

  not personal

  because they're intermixed with all your

  personal things whereas if your accounts

  are super clean and it's just all these

  very basic obvious things then it's sort

  of it changes it and in the IRS or the

  you know what whoever's auditing you

  they're they then sort of in a different

  way need to prove that that's a personal

  expense like it changes that burden of

  proof a little bit in a good way like

  it's in a very both makes your life

  easier it makes you better in that

  regard and so number one thing if you're

  starting a business it needs to have its

  own business account and it's very

  straightforward and lightweight

  typically I mean I ever been a long time

  since I set up my business account but I

  basically you know once I went through

  the part of forming the business and you

  know got my LLC number and my tax

  identification number it was basically

  just a question of going into the bank

  that I chose which for convenience is

  the scene of the same bank that I bank

  at personally and I just like created a

  free basic business account like it's

  just a checking account it doesn't do

  any no no something fancy about it and

  it was just you know filling in a few

  forms

  and now I have a checkbook with you know

  my business's name on it and I can go

  from there I've done this so many times

  that now whenever I walk into my bank

  branch the account manager is like hey

  start a new business I don't know if

  that's a good thing but yeah right I

  mean like and I would also say to like

  you know regarding like your accounts

  and personal versus business you know

  regarding what we said earlier but

  keeping things simple one of the one of

  my philosophies I've operated on for the

  entire time I've been running business

  accounts is I if there's any question

  about whether something is business or

  personal or whether it's mostly business

  because like you know the IRS has all

  sorts of guidelines and requirements on

  like what qualifies for a business

  deduction and if it's something that is

  for both business and personal use or if

  it's mixed like if you went on a

  vacation and you happen to talk business

  with one person while you were there

  like that's a part business trip or

  something but my philosophy is always if

  there's any ambiguity about whether

  something is business or personal just

  charge it personally and don't lead octa

  from the business and again this is one

  of those areas where I could very easily

  take more deductions and keep more money

  from from being taxed but that would

  then increase my my risk at all the time

  and it would also increase the

  complexity if I ever got out of it and

  so the way I do it now where I don't

  deduct every possible thing I could

  because it's just complicated and things

  like you know a home office deduction I

  don't need out that either because the

  offices of is mixed-use home office

  deductions are historically known to be

  massive audit red flags because so many

  people cheat them you know cheat their

  taxes or don't follow all the rules by

  using home office deductions same thing

  with like you know vehicle deductions

  like you know I'm a software developer I

  don't need to drive anywhere so like

  there's there's all sorts of like things

  that that a lot of people try to do if

  they trying to max out every deduction

  but did that put you at a higher risk

  and I don't want to live my life in fear

  of an audit I know because of the way I

  do things that if I ever get audited I

  have nothing to hide I'm not I'm not

  scared of anything I'm not ashamed of

  anything I'm not there's nothing that I

  hope they don't find or that would even

  be vague as to whether it should be

  or not as far as I'm concerned it's like

  this is this is incredibly clean and

  like and you know there are just certain

  things that I don't bother things like

  you know if I go out if I got if I go

  out to lunch with somebody to talk

  business I don't like that if I take the

  train to the city to get a meeting I

  don't do that because it's like I'm

  gonna save like four bucks because if

  you're looking that and at the risk of

  what and and the complexity of what and

  so by doing it the way I do it the

  business account has so few transactions

  really like there's there so few actual

  expenses charged to my business it's

  basically like you know Linode hosting

  bills every month and and occasionally

  like you know a domain renewal or an ad

  I bought somewhere or something like

  that but for the most part I have so few

  transactions that everything else

  becomes easier and cheaper so accounting

  is really simple I don't pay a

  bookkeeper I don't have bookkeeping

  services I to use QuickBooks Online

  which is terrible but it doesn't matter

  it's what everyone uses and it's what

  the accountants know and all I do is my

  counter doesn't even need to log into my

  account I just I just export the the

  reports of the profit and loss statement

  and give it to him when yes to file

  taxes I go in a few times a year and go

  through all the important transactions

  that are automatically imported from my

  business bank account and just classify

  them just all right this is this is you

  know and that's all I have to do so I'm

  saving tons of money and time and stress

  by keeping things this simple that I

  think make up for any possible smaller

  deductions that I'm missing by doing

  this this way yeah and I think too it's

  it's I remember when I was first getting

  started there was easy it's easy to kind

  of have this feeling of that like a

  business deduction is like it's like it

  makes the it makes things free or

  whatever like I remember I had would

  have that purse - oh it's like well it's

  a business expense and it's like it's

  like well sort of

  it's you're you save the whatever like

  the more whatever your marginal tax rate

  is on those dollars and which is you

  know so yeah that best you're maybe like

  having a lower to lowering your tax bill

  by a third or a third of the value and

  so you know it's a relatively like

  you're saying with like some small

  expenses

  the ones that tend to be most

  questionable like you're a train ticket

  right you you you you buy a $10 train

  ticket you're saving three dollars if

  that's a business expense say I'm like

  fair enough that's three dollars in your

  pocket like I'm not saying this that's

  not valuable but it is not it's not that

  the entire trip became free like you're

  still paying for the whole trip and so

  having that mindset I think it

  definitely makes a lot of sense that I'm

  also probably it's fair to say that you

  anything that you do any deductions that

  you do take you then will need to have

  the means to justify them later and have

  a record of that you know so for things

  like Linode bills like that's easy I

  have you know a folder in my email that

  it just has all that you know all the

  Linode bills I've ever gotten so if I

  ever need to justify it it's a lot

  easier than you know if you are trying

  to keep you know pictures or scans of

  every receipt for every little thing

  that you ever did and that becomes a

  much more complicated thing and you know

  like this is very much just a personal

  choice if you like that kind of thing

  and you want to push every little thing

  go for it if you want to do something

  simpler like that works works too and

  it's just of that balance of your time

  versus the money probably

  yeah because anytime you take all those

  deductions and make the end and

  basically add more to your system you

  need support and costs around that you

  need a way to you know save these

  receipts and track them you need

  possibly more bookkeeping expense you

  need possibly down the road more time if

  you ever get audited you know like the

  the amount that you're gonna have to pay

  somebody to go through all this stuff

  you might actually wipe out all the

  savings you had in the meantime if these

  are all small deductions like it you you

  have to account for the costs of even

  tracking this stuff and taking the risk

  on some of these kind of questionable

  ones so for me it's just it's very

  simple I just keep everything very

  simple I don't you know I pay more in

  tax and I need to technically but I

  consider that trade-off worth it for

  what I've been getting out of it anyway

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  cook so the last area that it seems like

  probably why no any up our discussion on

  is just little bit about the actual I

  actually the tax side of these things

  you know they're not so fun part where

  you write a check to the government

  though in some ways I always do kind of

  like when I have to write a big check it

  means that I had a good year so it it

  has a slight upside to it but the thing

  that I was trying to think about in

  terms of like basic advice for for taxes

  and I think the biggest thing that I've

  learned is the

  Orton's of planning for taxes ahead of

  time that it shouldn't be something that

  you get to the end of the year and

  suddenly you're trying to work out what

  your tax bill is going to be that you

  know I check in on my sales about once a

  week you know I go through and I might

  bake crazy spreadsheets we've talked

  about before where I'm looking at my

  income and kind of getting a sense and

  on about a monthly basis I'm kind of

  doing base overall kind of how the

  business is going and on a quarterly

  basis I do like a proper analysis of it

  and that's sort of where I'm going and

  while I'm doing that I'm one of the

  things that I'm always looking for is

  you know how is the business going and

  how it is going to affect my tax bill

  there's a bunch of reasons for this in

  terms of like you know you have things

  like estimated taxes that you may have

  to you know do to make sure because the

  government wants to you doesn't doesn't

  want all your money it's just at once

  they want it throughout the year so

  either you're doing payroll withholding

  or estimated taxes but most importantly

  I think is this the reality of you know

  it's easy in some ways when you're when

  you're running a business that you you

  have this money in your bank account and

  in your personal life typically you know

  when you have money in your bank account

  that's yours and you can spend it and

  it's you know it doesn't it isn't

  beholden to someone else

  because all your taxes were you know

  we're taken out of your paycheck before

  it got there when your business like

  there is often you know not a

  substantial amounts of money in my

  business checking account that is

  essentially you know earmarked to go off

  to the IRS one day and exactly when it

  goes that there's you know a whole

  discussion about the way in which you do

  your you pay your taxes but it was just

  the importance of thinking about that

  ahead of time yeah that you know when

  you it's like hey wow this is awesome

  I landed a consulting cut you know

  client they're gonna pay me $10,000 it's

  at that very moment it's important to

  keep in the back of your mind they

  didn't pay you $10,000 you know maybe

  they paid your $7,000 or they had you

  sixty-five hundred dollars or whatever

  it is and take that mean take that money

  out that you are going to have to pay to

  the IRS or whatever your local you know

  if you're to listen to this outside the

  United States

  whatever your local you know tax entity

  is because I'm sure somebody's going to

  be coming and taking a chunk of that

  and if you think about it that way from

  the beginning it makes it a lot easier

  rather than kind of getting to the end

  of the year and being like oh man wow

  this is awkward like I have this huge

  bill that I wasn't expecting or I wasn't

  aware of and now I have to now I have to

  deal with it that's just gonna be a

  recipe for pain exactly and because yeah

  I think the same thing like when when a

  big chunk of money comes in like like

  every month when the Apple deposit comes

  in from a store earnings I just I just

  think of that as like okay well about

  40% that's not mine like this that

  here's all this money I'm temporarily

  it's temporarily in my bank account but

  this isn't all mine and so one thing I

  did I've done for years actually and

  I've changed a couple times here and

  there but for the most part I've done

  this very very successfully is that you

  you know in the u.s. you have to pay

  estimated quarterly taxes and then or

  you and then you get this this big kind

  of settlement at the end of the year

  every April and everyone's like oh no my

  taxes I'm surprised by this but one

  thing I I did for a long time with great

  success is paying estimated taxes every

  month because you can pay more and more

  often than then they require you to

  there's no downside except that the

  money is you know not working for you

  earning interest in your account but

  interest rates suck these days so you

  know you're not losing much so like it

  actually make things very simple for me

  to basically just estimate you know kind

  of a high amount of what I you know like

  you know look at looking for tax rate

  and you can say all right well you know

  I'll give like you know 35 percent of

  this or whatever the federal government

  and you know way too much of it to New

  York State and then and then you know

  every time that monthly big deposit from

  Apple would come in I do my own taxes

  for them alright well you know here's

  you know 9 percent whatever in New York

  and 35 percent to to the federal

  government and then at the end of the

  year you know often I would have

  overpaid but it was I you know you'd

  rather have that error than the error of

  oh crap I owe them 50 grand you know or

  something crazy like that and you know

  again this is one of those areas where

  it's not the most tax-efficient way or

  money efficient way to operate but it is

  really simple and it's not that far off

  like you know you're not saving that

  much money by not doing things like that

  and and it keeps things not only you not

  only you know safe firm from the point

  of view of like the law and audits and

  stuff but it keeps things light

  eight for your mind you you know that

  you that you're not gonna have a big

  surprise down the road you know that

  you're covered you know that whatever

  money is left over after you've done the

  this kind of system you know this is

  pretty safely yours and it just makes

  things easier to get out of your mind so

  you can focus on what you actually want

  to do which is definitely not taxes yeah

  and I think it it's that the best point

  there is the less you can think about

  this stuff the better and so having a

  system in place that does that is gonna

  be best you know in the same way that if

  you're coming from a nine-to-five w-2

  job or BIR you gonna just get a regular

  paycheck every month like all of this

  work has been done for you essentially

  like this has all been taken care of and

  so now that this is your responsibility

  it's just it's works out really well in

  your favor to just say I'm gonna

  simplify this I'm gonna make it easy I'm

  gonna make it nice and legal and make

  sure I understand everything and if you

  do that

  you know then this can just be one of

  these boxes you've checked and you can

  just move on to the actual fun stuff

  thanks for listening everybody and we'll

  talk to you next week bye