Under the Radar

74: Taxes & Accounting


00:00:00   Welcome to Under the Radar,

00:00:01   a show about independent iOS app development.

00:00:04   I'm Mark Orment.

00:00:05   - And I'm David Smith.

00:00:06   Under the Radar is never longer than 30 minutes,

00:00:08   so let's get started.

00:00:11   So today, as the specter of April 15th rolls around,

00:00:15   we thought it would be a delightful topic

00:00:17   to dive into some accounting and tax discussion.

00:00:22   - Everyone's favorite topics.

00:00:24   - Everybody's favorite topic.

00:00:25   I mean, you know, and if you don't like it,

00:00:27   you can just put this on and it'll help you fall asleep.

00:00:29   It'll be a nice sleep aid for you.

00:00:31   - You gotta fall asleep quickly though.

00:00:32   It's only 30 minutes.

00:00:33   - Yeah.

00:00:35   So, probably worth,

00:00:37   as many of you dive into topics like this,

00:00:40   it always seems like it's a good idea

00:00:41   to have a brief disclaimer that neither Marco or I

00:00:45   are accountants, tax lawyers.

00:00:48   - Any kind of lawyer, really.

00:00:50   - Any kind of professional qualified advice.

00:00:54   - We have no idea what we're talking about.

00:00:56   - Basically.

00:00:57   But we have some experience,

00:00:58   and I think what I'm gonna hopefully,

00:01:00   I think makes sense for us to emphasize

00:01:02   isn't so much to give specific advice about,

00:01:05   these are the four things that you should do.

00:01:07   There's a few things that I think universally

00:01:08   like are good advice, but more is to say,

00:01:12   here's the kind of questions you should be asking

00:01:14   when you're setting up your business,

00:01:15   when you're looking at your business

00:01:16   and seeing if it's set up correctly.

00:01:19   These are the kinds of questions to ask,

00:01:20   and then if you don't have a good answer for them,

00:01:23   go and find help.

00:01:24   Either research yourself, get professional advice,

00:01:27   however that makes sense for you,

00:01:29   but these are the kinds of things

00:01:31   you should be thinking about

00:01:32   from the accounting and tax side

00:01:34   of setting up a small independent software business.

00:01:37   And my number one piece of advice

00:01:39   that I wanted to start with is,

00:01:41   goes all the way back, I mean,

00:01:43   I set up my first LLC almost 10 years ago, I think it is.

00:01:48   And the thing that I did back then

00:01:53   that I was very glad that I did,

00:01:55   and the advice I'd give to anyone starting out now,

00:01:57   is that it's very important

00:01:59   that you understand what you're doing.

00:02:01   And if you can't, if you can't work out

00:02:04   what you should be doing,

00:02:05   then you need to pay someone to explain it to you,

00:02:07   because it's very easy to kind of just make a few guesses

00:02:12   or read a few articles online

00:02:15   and then just kind of go for it.

00:02:17   But if you do that, take that approach

00:02:21   of just kind of winging it,

00:02:23   you can be setting yourself up down the road

00:02:26   for some very big problems,

00:02:27   both in legal problems, financial problems,

00:02:30   like there's lots of things that can come out of this.

00:02:33   And what you don't wanna ever do,

00:02:34   you know, like I just recently got my big stack

00:02:37   of paperwork from my accountant.

00:02:39   So I use a qualified CPA to do my books,

00:02:43   'cause it makes it much easier.

00:02:44   When she sends that back to me, I go through it,

00:02:48   and I know enough about all the various taxes,

00:02:52   all the various deductions and exemptions

00:02:54   and credits and things,

00:02:55   that I can go through it and it makes sense to me.

00:02:59   I can read it with some competence.

00:03:02   And that has come from, I've sat down

00:03:04   and I've read through IRS publications and documentation

00:03:06   and things that, you know,

00:03:08   if I was just trusting someone else

00:03:10   to always be giving me good advice,

00:03:12   I would be setting myself up, you know,

00:03:14   for potential problems down the road.

00:03:16   Because at the end of the day,

00:03:17   I need to sign my name on the bottom of this document

00:03:20   and just, you know, send it to a government entity.

00:03:22   And I'm affirming that everything in there is correct,

00:03:25   that I agree with it, that I'm okay with it.

00:03:28   Because what you'll find in a lot of things in accounting

00:03:31   and taxes, you know, sort of the interplay between them,

00:03:34   is accountants use terms like conservative versus aggressive.

00:03:39   Right, there's a lot of deductions or games you can play

00:03:43   where, you know, you get into gray areas,

00:03:46   and it's like, does this really count as a business expense

00:03:48   or does it not, you know, it depends on who you ask.

00:03:51   And ultimately, you know, those are personal decisions

00:03:53   that you have to make.

00:03:54   But if you don't understand the law

00:03:56   or you don't understand the policies,

00:03:58   you can't be making those choices in an informed way.

00:04:00   And your accountant might be making choices

00:04:03   that you would disagree with that could come back to bite you.

00:04:06   And so the most important thing, I think, with accounting,

00:04:09   even though it's out of our comfort zone,

00:04:10   even though it's not something that I think most developers,

00:04:13   you know, have a lot of expertise or talent in,

00:04:17   it's important to at least at a basic level

00:04:18   understand what you're doing.

00:04:20   And if your accountant is coming to you

00:04:22   with some very complicated, sophisticated thing,

00:04:25   and you don't understand it, it's probably, in my opinion,

00:04:28   not a great idea to pursue something like that.

00:04:30   It's like, if you can't understand it,

00:04:32   it's probably not worth doing.

00:04:33   And like I said, if you can't understand it,

00:04:35   if you're having difficulty wrapping things around,

00:04:37   you know, pay for someone to explain it to you,

00:04:38   you know, talk to your accountant.

00:04:40   Like I've, you know, I don't do it as much now,

00:04:43   but in the early days when I had an accountant,

00:04:44   I would, you know, every year or every quarter

00:04:47   when we would sit down,

00:04:48   I asked her all kinds of questions about things.

00:04:50   You know, what is this, what are we doing over here?

00:04:52   Like, what does this deduction mean?

00:04:53   Or, oh, you know, you said, if I do this kind of thing,

00:04:57   then I can take this other benefit

00:04:59   or like making sure that I really understand it.

00:05:01   And I think that is in general, just good advice,

00:05:04   that getting good help, you know,

00:05:06   finding a good accountant in terms of some of this stuff,

00:05:10   you might need a lawyer for, you know,

00:05:11   setting up different business entities.

00:05:14   And I mean, that's a whole massive topic

00:05:15   that is so specific to your region, to your state.

00:05:19   Like I live in Virginia, Marco, you live in New York.

00:05:21   Like I imagine even with state to state,

00:05:24   some of the laws are different.

00:05:25   So you're going to find somebody who is local,

00:05:28   who's knowledgeable, and ideally has some experience

00:05:31   working with very small businesses.

00:05:33   - Yeah, and I would say too, like,

00:05:35   in the area of like making sure you understand it

00:05:37   and, you know, getting good advice from a professional,

00:05:41   I would say a little goes a long way.

00:05:43   Like you don't need to spend a lot of money

00:05:47   taking up a lot of someone else's time

00:05:49   to get a good enough understanding of this

00:05:52   to continue operating your business

00:05:54   or to start operating your business.

00:05:55   Like, you know, I've also been running LLCs now

00:05:59   for about 10 years, something like that.

00:06:01   And, you know, at first it was very intimidating.

00:06:05   I didn't know what I was doing.

00:06:07   It seemed like such a big deal to, quote,

00:06:10   start your own business.

00:06:11   And that seemed like an impossible thing

00:06:13   that only other people do.

00:06:15   That's not the kind of thing I do.

00:06:16   I'm just a person.

00:06:17   I don't know how to do that.

00:06:18   Other people do that, I guess.

00:06:20   And it only took, you know,

00:06:22   a sitting down with a lawyer for like one hour

00:06:25   who I haven't seen in 10 years.

00:06:27   (laughs)

00:06:28   So like it was like one meeting with a lawyer.

00:06:30   I'd be like, how do I do this?

00:06:32   And then he gave me an accountant that he worked with

00:06:36   and now I go to that accountant a few times a year.

00:06:40   And I've asked a couple of questions here and there.

00:06:43   But for the most part, if you set it up in certain ways,

00:06:48   like in the US, for example,

00:06:50   if you do like a basic pass through LLC,

00:06:53   which is probably what most developers would do

00:06:55   or would be advised to do,

00:06:57   rather than, you know, various corporation forms,

00:07:00   it's really easy.

00:07:01   You don't have to do that much.

00:07:03   And you basically get to just go back

00:07:06   to doing your business as long as you follow

00:07:08   a few very simple guidelines

00:07:10   and we're gonna go through what some of those are.

00:07:13   Again, you should definitely talk to somebody

00:07:14   who has the authority to tell you this, not us.

00:07:17   I think we will simply serve as pointers for like,

00:07:19   here's the types of things you should be thinking about

00:07:22   and the types of things that you should ask

00:07:23   your accountant/lawyer about.

00:07:25   But it really is, if you make it so,

00:07:30   it is really a lot easier than you might think.

00:07:32   If you've never set up a business entity

00:07:34   or a bank account or business accounting before,

00:07:37   it can be very easy.

00:07:39   And you probably won't have to be constantly meeting

00:07:44   with lawyers and accountants and burning all that money

00:07:46   to do that.

00:07:47   It's probably a lot simpler than you think.

00:07:50   - Yeah, and I think too, it's probably worth saying,

00:07:53   in the way that we also talk often on the show

00:07:55   about structuring your products or structuring the apps

00:08:00   or the businesses that you pursue

00:08:03   to minimize the amount of inputs

00:08:06   that you have to put into them

00:08:07   and the amount of maintenance they take

00:08:08   and that type of a topic,

00:08:09   that if you're a small developer,

00:08:12   you don't have, resources or not, in terms of time,

00:08:15   is not something that you have a lot of.

00:08:16   It's in the same way, I think, in this sense,

00:08:18   that it is important to structure things

00:08:21   proactively at the beginning to take less maintenance.

00:08:24   And when you're talking to, say you go to see a lawyer

00:08:27   to help you set up your business in the first place,

00:08:29   it's like being upfront about that

00:08:31   is probably something that is worth being explicit

00:08:34   and saying, 'cause they're gonna ask you

00:08:36   all kinds of crazy questions about,

00:08:39   well, if you set it up in this particular way,

00:08:41   if you're an S corp, Texas, a C corporation,

00:08:45   or you get this benefit,

00:08:46   'cause then you can have this thing,

00:08:47   and it's like, if one of the biggest things

00:08:50   that they're optimizing for is your time,

00:08:53   they're going to probably steer you in a different way.

00:08:55   And you may potentially be giving up

00:08:57   on some theoretical deduction

00:09:01   or some benefit that you may have theoretically,

00:09:03   but in practice, I think,

00:09:05   you're gonna enjoy your life a lot more

00:09:07   with a business that is designed to optimize

00:09:10   for the lowest maintenance possible.

00:09:13   And so having something that basically,

00:09:16   my business entity's maintenance is,

00:09:18   I think I write a check to the state corporation commission

00:09:22   every, for $50 once a year.

00:09:24   And that is the extent of the paperwork that I have to do.

00:09:28   There's no board meetings I have to run

00:09:29   or all this kind of stuff

00:09:31   that you can sometimes have to get into,

00:09:33   because I chose the approach that was minimizing

00:09:36   the amount of time and maintenance going forward.

00:09:38   And so when you're getting a setup,

00:09:39   when you're getting advice,

00:09:41   be sure that you're explicit about that,

00:09:43   if that's important to you.

00:09:44   If you wanna just go crazy and optimize

00:09:46   for every possible deduction or benefit that you might get,

00:09:49   like, great, that's, by all means, go crazy.

00:09:51   But it may mean that you're doing all this busy work

00:09:54   down the road that isn't core to your business,

00:09:57   that isn't actually the thing that you want to be doing.

00:10:00   - Right, I think those kind of strategies

00:10:03   of taking every possible deduction

00:10:05   and having a more complicated corporate structure

00:10:08   to get certain rates lower and everything else,

00:10:10   I think that makes more sense

00:10:12   the bigger of a company you are,

00:10:14   because the overhead of doing that,

00:10:16   as you're a bigger and bigger company

00:10:17   with more and more people involved,

00:10:19   the overhead in doing that becomes a smaller percentage

00:10:21   of your total time output that you have.

00:10:24   And also, I think it matters more

00:10:26   if you're in a really low margin business,

00:10:28   where saving every possible penny in tax liability and stuff

00:10:33   can have a major impact on whether your business

00:10:36   is profitable or not and how much it's profitable.

00:10:38   But for individual software developers,

00:10:40   that's almost never the case.

00:10:41   Both of those are usually not true.

00:10:42   Usually it's just you or maybe you and a partner or two,

00:10:45   it's usually a very small group of people.

00:10:47   And also, you usually have a pretty large profit margin.

00:10:51   Like, either you're making it or you're not.

00:10:53   And if you're not, you know, the extra, like, 15%

00:10:57   from a tax change might not help you.

00:11:00   And if you are making it, you probably have more room

00:11:02   to play with in the profit margin.

00:11:04   So, like, optimizing for your time, as you said, David,

00:11:08   like, you know, optimizing for needing as little

00:11:11   from you as possible, keeping things as simple

00:11:12   from you as possible, so that you can actually spend

00:11:14   your time improving your products and making more money,

00:11:17   is usually the better trade-off for most small developers.

00:11:21   - Yeah.

00:11:22   And so I think probably the next place that it works,

00:11:26   makes sense to dive into, is a little bit of just

00:11:28   some high-level advice, things that I know have been

00:11:31   very helpful for me from an accounting perspective.

00:11:33   And the first one, and this is, I think,

00:11:36   the most universally accepted, like, good advice

00:11:39   for starting a business, is that your business needs

00:11:42   to have separate accounts from your personal accounts.

00:11:44   - Yes.

00:11:45   - Like, if you do nothing else, like, that will almost,

00:11:50   like, that solves, like, half the problems in accounting.

00:11:53   - Oh, at least.

00:11:54   - That's like 90% of what you have to do.

00:11:56   (laughs)

00:11:57   Just have separate accounts.

00:11:59   - Yeah, and so I think for most, for most kind of businesses

00:12:03   like ours, it means you'll probably need to set up

00:12:05   a checking account and a credit card,

00:12:09   are probably the two things that you'll kind of

00:12:11   need to have set up.

00:12:12   - I don't even do that, I just do a debit card.

00:12:14   Like, I just, like, the account comes with a debit card

00:12:16   from the bank, I just use that and charge everything

00:12:18   to that, because, again, it's like, trying to keep things

00:12:21   as simple as possible, I don't even want to worry about,

00:12:24   like, a business credit card that I have to, you know,

00:12:26   set up some kind of new auto-pay thing, it's like,

00:12:28   no, just use the debit card.

00:12:30   Like, again, over time, if I was a big company,

00:12:33   maybe getting the extra 1% of benefit from having

00:12:36   a credit card with some kind of reward system might pay off,

00:12:40   but at my scale, it doesn't make sense to make things

00:12:42   that complicated.

00:12:43   - Perfect, yeah, that's even simpler.

00:12:46   So you just need to create an account,

00:12:47   and the main reason why you want to create that account

00:12:50   is because then your bookkeeping, which is, like,

00:12:53   one of these big, remember when I was starting out,

00:12:55   with, like, this big scary term for, like,

00:12:56   what does that mean, am I need to need, like,

00:12:58   double-entry accounting, do I need to balance my checkbook,

00:13:01   and all these things that I don't do in my own, like,

00:13:03   personal finances very much, it's, like,

00:13:05   becomes incredibly straightforward,

00:13:07   because essentially, all I'm doing each month,

00:13:09   you know, it's like, all of the income are all of the credits

00:13:12   to that account, and all of my expenses are all of the debits

00:13:15   from that account, and that is my books.

00:13:18   Like, the statement I get from my bank each, you know,

00:13:23   each month, that is essentially my books,

00:13:25   and I take that data and it goes into QuickBooks Online,

00:13:28   it's the service that I use,

00:13:29   'cause that's what my accountant likes,

00:13:30   but it'll ultimately find its way into there

00:13:33   for, like, the actual accounting side of things,

00:13:36   but it makes everything really straightforward.

00:13:39   If all of the money that comes in to the business

00:13:41   is going through that account,

00:13:43   and all the money that's coming out, you know,

00:13:44   all of your business expenses are coming out of there,

00:13:46   and if you're not doing this,

00:13:48   like, you're just asking for trouble.

00:13:50   I mean, you're asking to be audited,

00:13:51   and when you are audited, that all of a sudden,

00:13:53   everything becomes super problematic,

00:13:56   and I'll have a link in the show notes too.

00:13:58   There's a great episode of the Free Agents podcast,

00:14:01   which is another show here on Real AFM,

00:14:02   talking about sort of starting up new businesses,

00:14:04   and they had an interview with Andrew Carroll,

00:14:07   who's a CPA, and this was his, like, number one advice,

00:14:10   was you absolutely have to have separate accounts,

00:14:12   and he says, I remember him saying

00:14:14   that the biggest benefit of it is

00:14:16   it changes the dynamic if you're ever audited.

00:14:18   I mean, and hopefully you're never audited,

00:14:20   but it's like suddenly, all of your,

00:14:22   if you're running any amount of business stuff

00:14:25   through your personal accounts,

00:14:26   suddenly, now you have to justify

00:14:28   every single one of those expenses

00:14:30   to prove that they're not personal,

00:14:32   because they're intermixed with all your personal things,

00:14:34   whereas if your accounts are super clean,

00:14:36   and it's just all these very basic, obvious things,

00:14:39   then it sort of changes it, and the IRS,

00:14:42   or whoever's auditing you,

00:14:44   they then sort of in a different way

00:14:46   need to prove that that's a personal expense,

00:14:48   like it changes the burden of proof a little bit,

00:14:50   in a good way, and like, it's in a very,

00:14:51   it both makes your life easier,

00:14:53   it makes you better in that regard,

00:14:55   and so, number one thing, if you're starting a business,

00:14:58   it needs to have its own business account,

00:14:59   and it's very straightforward and lightweight, typically.

00:15:03   I mean, I remember, it's been a long time

00:15:04   since I set up my business account,

00:15:06   but I basically, you know, once I went through the part

00:15:08   of forming the business, and you know,

00:15:10   got my LLC number, and my tax identification number,

00:15:13   it was basically just a question

00:15:14   of going into the bank that I chose,

00:15:16   which for convenience is this, you know,

00:15:18   the same bank that I bank at personally,

00:15:20   and I just like created a free, basic business account,

00:15:23   like it's just a checking account,

00:15:24   it doesn't do any, you know, there's no,

00:15:25   there's nothing fancy about it,

00:15:27   and it was just, you know, filling in a few forms,

00:15:29   and now I have a checkbook with, you know,

00:15:31   my business's name on it, and I can go from there.

00:15:34   - I've done this so many times that now,

00:15:36   whenever I walk into my bank branch,

00:15:37   the account manager is like, hey, start a new business?

00:15:40   (laughing)

00:15:42   - I don't know if that's a good thing, but.

00:15:43   - Yeah, right, no, I mean like,

00:15:45   and I would also say too, like, you know,

00:15:47   regarding like your, you know, accounts

00:15:48   and personal versus business, you know,

00:15:51   regarding what we said earlier about keeping things simple,

00:15:52   one of the, one of my flaws I've operated on

00:15:56   for the entire time I've been running business accounts is,

00:16:00   I, if there's any question about whether something

00:16:03   is business or personal, or whether it's mostly business,

00:16:07   'cause like, you know, the IRS has all sorts of guidelines

00:16:09   and requirements on like, what qualifies

00:16:11   for a business deduction, and if it's something

00:16:14   that is for both business and personal use,

00:16:17   or if it's mixed, like, if you went on a vacation

00:16:20   and you happened to talk business with one person

00:16:22   while you were there, like, that's a part business trip

00:16:25   or something, but my philosophy is always,

00:16:28   if there's any ambiguity about whether something

00:16:30   is business or personal, just charge it personally

00:16:32   and don't deduct it from the business.

00:16:34   And again, this is one of those areas where I could

00:16:37   very easily take more deductions and keep more money

00:16:41   from being taxed, but that would then increase my risk

00:16:46   at audit time, and it would also increase the complexity

00:16:50   if I ever got audited, and so, the way I do it now,

00:16:53   where I don't deduct every possible thing I could,

00:16:57   because that's just complicated, and things like,

00:16:59   you know, a home office deduction,

00:17:00   I don't deduct that either, because the office is mixed use,

00:17:03   home office deductions are historically known

00:17:05   to be massive audit red flags, because so many people

00:17:08   cheat them, you know, cheat their taxes,

00:17:10   or don't follow all the rules by using

00:17:12   home office deductions, same thing with vehicle deductions,

00:17:15   like, I'm a software developer, I don't need

00:17:16   to drive anywhere, so there's all sorts of things

00:17:20   that a lot of people try to do if they're trying

00:17:22   to max out every deduction, but that puts you

00:17:24   at a higher risk, and I don't want to live my life

00:17:27   in fear of an audit, I know, because of the way I do things,

00:17:31   that if I ever get audited, I have nothing to hide,

00:17:35   I'm not scared of anything, I'm not ashamed of anything,

00:17:38   there's nothing that I hope they don't find,

00:17:40   or that would even be vague as to whether

00:17:42   it should be deducted or not, as far as I'm concerned,

00:17:44   it's like, this is incredibly clean, and like,

00:17:47   and you know, there are just certain things

00:17:49   that I don't bother, things like, you know,

00:17:51   if I go out to lunch with somebody to talk business,

00:17:53   I don't deduct that, if I take the train to the city

00:17:55   to get a meeting, I don't deduct that,

00:17:56   'cause it's like, I'm gonna save like four bucks

00:17:58   because of deducting that, and at the risk of what,

00:18:01   and at the complexity of what, and so,

00:18:03   by doing it the way I do it, the business account

00:18:07   has so few transactions, really, like there's so few

00:18:10   actual expenses charged to my business,

00:18:13   it's basically like, you know, Linode hosting bills

00:18:16   every month, and occasionally, like, you know,

00:18:19   a domain renewal or an ad I bought somewhere,

00:18:22   or something like that, but for the most part,

00:18:25   I have so few transactions that everything else

00:18:29   becomes easier and cheaper, so accounting is really simple,

00:18:33   I don't pay a bookkeeper, I don't have bookkeeping services,

00:18:36   I too use QuickBooks Online, which is terrible,

00:18:39   but it doesn't matter, it's what everyone uses

00:18:41   and it's what the accountants know, and all I do is,

00:18:44   my account doesn't even need to log into my account,

00:18:47   I just export the reports of the profit and loss statement

00:18:51   and give that to him when he has to file taxes,

00:18:52   I go in a few times a year and go through all the imported

00:18:57   transactions that are automatically imported

00:18:58   from my business bank account and just classify them,

00:19:01   just, all right, this is this, this is this, you know,

00:19:03   and that's all I have to do, so I'm saving tons of money

00:19:07   and time and stress by keeping things this simple

00:19:10   that I think make up for any possible smaller deductions

00:19:15   that I'm missing by doing this this way.

00:19:18   - Yeah, and I think too, I remember when I was first

00:19:20   getting started, it's easy to kind of have this feeling

00:19:23   that like, a business deduction is like,

00:19:26   it's like it makes things free or whatever,

00:19:30   like, I remember I would have that person,

00:19:31   oh, it's like, wow, it's a business expense,

00:19:33   and it's like, well, sort of, it's, you save the,

00:19:38   whatever your marginal tax rate is on those dollars,

00:19:43   which is, you know, so at best, you're maybe,

00:19:46   like, lowering your tax bill by a third,

00:19:49   or a third of the value, and so, you know,

00:19:52   it's a relatively, like you're saying,

00:19:54   with like, small expenses, which are the ones

00:19:57   that tend to be most questionable,

00:19:59   like, a train ticket, right,

00:20:00   you buy a $10 train ticket, you're saving $3

00:20:04   if that's a business expense, say.

00:20:06   I'm like, fair enough, that's $3 in your pocket,

00:20:08   like, I'm not saying that's not valuable,

00:20:10   but it's not that the entire trip became free,

00:20:15   like, you're still paying for the whole trip,

00:20:18   and so having that mindset, I think,

00:20:20   it definitely makes a lot of sense that,

00:20:22   and also probably it's fair to say that you,

00:20:24   anything that you do, any deductions that you do take,

00:20:28   you then will need to have the means to justify them later,

00:20:33   and have a record of that, you know,

00:20:34   so for things like Linode bills, like, that's easy,

00:20:36   I have, you know, a folder in my email

00:20:39   that just has all the Linode bills I've ever gotten,

00:20:42   so if I ever need to justify it,

00:20:43   and it's a lot easier than, you know,

00:20:45   if you are trying to keep, you know,

00:20:48   pictures or scans of every receipt

00:20:50   for every little thing that you ever did,

00:20:53   that becomes a much more complicated thing,

00:20:54   and you know, like I said,

00:20:55   this is very much just a personal choice.

00:20:57   If you like that kind of thing,

00:20:58   and you wanna push every little thing, go for it.

00:21:01   If you wanna do something simpler, like, that works too,

00:21:03   and it's just that balance of your time

00:21:06   versus the money, probably.

00:21:07   - Yeah, because any time you take all those deductions

00:21:11   and make, and basically add more to your system,

00:21:14   you need supporting costs around that,

00:21:16   you need a way to, you know,

00:21:18   save these receipts and track them,

00:21:19   you need possibly more bookkeeping expense,

00:21:22   you need possibly down the road more time

00:21:24   if you ever get audited, you know,

00:21:25   like the amount that you're gonna have to pay somebody

00:21:27   to go through all this stuff,

00:21:29   you might actually wipe out all the savings

00:21:30   you had in the meantime if these are all small deductions.

00:21:33   Like, you have to account for the costs

00:21:37   of even tracking this stuff,

00:21:39   and taking the risks on some of these

00:21:40   kind of questionable ones.

00:21:41   So for me, it's very simple,

00:21:43   I just keep everything very simple.

00:21:44   I don't, you know, I pay more in tax

00:21:46   than I need to technically,

00:21:48   but I consider that trade-off worth it

00:21:50   for what I'm getting out of it.

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00:23:54   - So the last area that it seemed like

00:23:56   probably worth winding up our discussion on

00:23:57   is just a little bit about the actual,

00:24:00   like actually the tax side of these things.

00:24:03   You know, the not so fun part

00:24:04   where you write a check to the government.

00:24:06   Though in some ways I always do kind of like

00:24:08   when I have to write a big check,

00:24:09   it means that I had a good year.

00:24:11   So it has a slight upside to it.

00:24:16   But the thing that I was trying to think about

00:24:18   in terms of like basic advice for taxes,

00:24:21   and I think the biggest thing that I've learned

00:24:23   is the importance of planning for taxes ahead of time.

00:24:27   That it shouldn't be something that

00:24:30   you get to the end of the year

00:24:32   and suddenly you're trying to work out

00:24:34   what your tax bill is going to be.

00:24:36   That I check in on my sales about once a week.

00:24:40   I go through and I have my big crazy spreadsheets

00:24:42   we've talked about before where I'm looking at my income

00:24:44   and kind of getting a sense.

00:24:45   And on about a monthly basis,

00:24:47   I'm kind of doing overall kind of how the business is going.

00:24:52   And on a quarterly basis, I do like a proper analysis of it.

00:24:55   And that's sort of where I'm going.

00:24:57   And while I'm doing that,

00:24:59   one of the things that I'm always looking for is,

00:25:02   you know, how is the business going

00:25:04   and how is this going to affect my tax bill?

00:25:07   There's a bunch of reasons for this

00:25:08   in terms of like, you know,

00:25:09   you have things like estimated taxes

00:25:11   that you may have to do to make sure,

00:25:14   'cause the government doesn't want all your money

00:25:16   just at once.

00:25:17   They want it throughout the year.

00:25:18   So either you're doing payroll withholding

00:25:20   or estimated taxes.

00:25:21   But most importantly, I think is the reality of,

00:25:25   you know, it's easy in some ways

00:25:26   when you're running a business

00:25:28   that you have this money in your bank account.

00:25:31   And in your personal life, typically,

00:25:33   you know, when you have money in your bank account,

00:25:34   that's yours and you can spend it.

00:25:36   And it doesn't behold into someone else

00:25:39   because all your taxes were taken out of your paycheck

00:25:43   before it got there.

00:25:44   But when you're a business, like,

00:25:45   there is often, you know, non-substantial amounts of money

00:25:48   in my business checking account

00:25:50   that is essentially earmarked to go off to the IRS one day.

00:25:54   And exactly when it goes that,

00:25:56   there's, you know, a whole discussion

00:25:58   about the way in which you pay your taxes.

00:26:01   But it was just the importance

00:26:02   of thinking about that ahead of time.

00:26:05   Yeah, that, you know, when you,

00:26:05   it's like, hey, wow, this is awesome.

00:26:07   I landed a consulting client.

00:26:10   They're gonna pay me $10,000.

00:26:12   It's, at that very moment,

00:26:14   it's important to keep in the back of your mind,

00:26:16   they didn't pay you $10,000.

00:26:18   You know, maybe they paid you $7,000

00:26:20   or they paid you $6,500 or whatever it is.

00:26:22   And take that, you know, take that money out

00:26:25   that you are going to have to pay to the IRS

00:26:27   or to whatever your local, you know,

00:26:29   if you're listening to this outside of the United States,

00:26:31   whatever your local, you know, tax entity is.

00:26:34   'Cause I'm sure somebody's gonna be coming

00:26:35   and taking a chunk of that.

00:26:37   And if you think about it that way from the beginning,

00:26:40   it makes it a lot easier

00:26:42   rather than kind of getting to the end of the year

00:26:44   and being like, oh man, wow, this is awkward.

00:26:46   Like, I have this huge bill that I wasn't expecting

00:26:50   or I wasn't aware of and now I have to deal with it.

00:26:53   That's just gonna be a recipe for pain.

00:26:55   - Exactly, and, 'cause yeah, I think the same thing.

00:26:57   Like, when a big chunk of money comes in,

00:26:59   like every month when the Apple deposit

00:27:02   comes in for math store earnings,

00:27:04   I just think of that as like,

00:27:05   okay, well, about 40% of that's not mine.

00:27:07   Like, here's all this money, I'm temporarily,

00:27:09   it's temporarily in my bank account,

00:27:11   but this isn't all mine.

00:27:12   And so one thing I did, I've done for years actually,

00:27:15   and it's changed a couple times here and there,

00:27:17   but for the most part, I've done this very successfully,

00:27:19   is that you, you know, in the US,

00:27:21   you have to pay estimated quarterly taxes

00:27:23   and then you get this big kind of settlement

00:27:26   at the end of the year every April,

00:27:27   and everyone's like, oh no, my taxes, I'm surprised by this.

00:27:30   But one thing I did for a long time with great success

00:27:33   is paying estimated taxes every month.

00:27:36   Because you can pay more and more often

00:27:39   than they require you to.

00:27:40   There's no downside except that the money is, you know,

00:27:43   not working for you, earning interest in your account,

00:27:45   but interest rates suck these days.

00:27:46   So you're not losing much.

00:27:48   So like, it actually made things very simple for me

00:27:50   to basically just estimate, you know,

00:27:52   kind of a high amount of what I, you know,

00:27:54   like, you know, look at your tax rate,

00:27:56   and you can say, all right, well, you know,

00:27:57   I'll give like, you know, 35% of this or whatever

00:27:59   to the federal government and, you know,

00:28:01   way too much of it to New York State.

00:28:03   And then, you know, every time that monthly big deposit

00:28:07   from Apple would come in, I'd do my estimated taxes

00:28:09   for them, all right, well, you know, here's, you know,

00:28:11   9% or whatever to New York and 35% to the federal government

00:28:14   and then at the end of the year, you know,

00:28:16   often I would have overpaid, but it was, you know,

00:28:20   you'd rather have that error than the error of,

00:28:23   oh crap, I owed them 50 grand, you know,

00:28:24   or something crazy like that.

00:28:26   And, you know, again, this is one of those areas

00:28:29   where it's not the most tax efficient way

00:28:32   or money efficient way to operate, but it is really simple.

00:28:36   And it's not that far off, like, you know,

00:28:38   you're not saving that much money

00:28:40   by not doing things like that.

00:28:42   And it keeps things not only, you know, safe

00:28:46   from the point of view of like the law and audits and stuff,

00:28:49   but it keeps things lightweight for your mind.

00:28:52   You know that you're not gonna have

00:28:54   a big surprise down the road.

00:28:55   You know that you're covered, you know that whatever money

00:28:58   is left over after you've done this kind of system,

00:29:00   you know that this is pretty safely yours

00:29:03   and it just makes things easier to get out of your mind

00:29:06   so you can focus on what you actually want to do,

00:29:08   which is definitely not taxes.

00:29:11   - Yeah, and I think the best point there is

00:29:14   the less you can think about this stuff, the better.

00:29:17   And so having a system in place that does that

00:29:20   is gonna be best, you know, in the same way

00:29:22   that if you're coming from a nine to five W-2 job

00:29:25   or where you can just get a regular paycheck every month,

00:29:27   like all of this work has been done for you, essentially.

00:29:29   Like this has all been taken care of.

00:29:31   And so now that this is your responsibility,

00:29:33   it works out really well in your favor to just say,

00:29:36   I'm gonna simplify this, I'm gonna make it easy,

00:29:38   I'm gonna make it nice and legal,

00:29:39   I'm gonna make sure I understand everything.

00:29:41   And if you do that, you know, then this can just be

00:29:43   one of these boxes you've checked

00:29:44   and you can just move on to the actual fun stuff.

00:29:47   - Thanks for listening everybody,

00:29:48   and we'll talk to you next week.

00:29:50   - Bye.

00:29:51   [ Silence ]