In this insightful episode of the Wealth Witches Podcast, host Katelyn Magnuson sits down with Tyler Russell, a seasoned tax strategist, to explore the essential steps toward achieving tax savviness. Together, they dive deep into key strategies every entrepreneur and small business owner should know. The conversation begins with practical tips on maximizing mileage deductions, ensuring listeners are well-equipped to claim the most from their business travel expenses—a straightforward yet effective way to cut down on taxes.

As the discussion continues, they explore the complexities of health insurance for the self-employed, highlighting crucial deductions that are often overlooked. Tyler also offers expert advice on making smart retirement contributions, helping you navigate the long-term benefits of various retirement plans, and ensuring you’re on the right path to financial security.

A special focus is given to the Augusta Rule, where Tyler explains how business owners can rent out their homes to their businesses for up to 14 days a year without paying taxes on the income—a powerful tax-saving tool when used correctly. Throughout the episode, Katelyn and Tyler provide actionable insights and clarify common misconceptions, making this a must-listen for anyone looking to optimize their tax strategy and enhance their financial well-being.

Key Takeaways

• Learn how accurately tracking and claiming business mileage can greatly reduce your tax bill.
• Discover how self-employed individuals can access health insurance tax deductions and why eligibility is key.
• Find out how smart retirement contributions can ensure long-term financial security and tax benefits.
• Learn how the Augusta Rule allows business owners to rent their homes to their businesses for up to 14 days tax-free.
• Understand how choosing the right business entity, like an S Corporation, can lead to significant tax savings.

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Music credit: Neon Fairies by Wolves 

Hello, and welcome magical creatures to the Wealth Witches podcast.

This is the place where we brew up financial empowerment and mix in a little

sprinkle of magic. I'm Caitlin Magnuson, your guide on this

enchanted journey to financial enlightenment. Here, we honor all

identities and invoke our inner witches to create holistic wealth and prosperity.

So grab your crystals, open your minds, and let's get ready to conjure some

financial clarity clarity.

Hi, and welcome back to the Wealth Witches podcast. I'm your host, Caitlin Magnuson. And

today we have a very special guest, Tyler Russell from TF

CFO. Tyler, welcome. Hi, y'all. A little

bit about Tyler. He's a tax strategist and a problem solver. With over a decade

of experience in tax planning and financial strategy, Tyler brings a wealth of

knowledge and a knack simplifying complex tax issues. His approach is all about

empowering entrepreneurs and individuals to make informed financial decisions.

Tyler's expertise lies in uncovering hidden tax saving opportunities and

translating them into actionable strategies for his clients.

Okay, Tyler, today, we're gonna be talking all about your roadmap to tax

savviness, and that includes a few

things to do and to not do potentially. Right. So we're gonna be

covering maximizing your mileage deduction, health insurance for the self

employed smart retirement contributions, choosing the best

business entity and navigating the Augusta rule, which is

something that's been coming up pretty frequently for us in the last couple of years

with our clients and with TikTok. So Tyler, tell us a little

bit more about the mileage deduction side of things. Like what

are things that listeners here should be paying attention to if they're business

owners? If you're gonna be using your vehicles

for business, The first and most important thing that you do

is track the miles that you drive for business

purposes. This could be driving to meet potential clients,

driving to a job site, driving to the store to get

supplies. It does not include commuting

to your principal place of business from your household. And

this becomes very important. If you have a vehicle that you use

for both personal and business use. As

a sole proprietor or a partner in a partnership,

you can deduct auto expenses for business based upon

a standard mileage rate set by the IRS every year, which

is normally increased for inflation. And most of our clients take

the standard mileage rate. The alternative being you can take

actual vehicle expenses in proportion to the

business use of that vehicle based upon the

business mileage driven for the year over the total mile.

That's why it's so important even if you take actual or the

standard mileage rate to track your mileage.

And the more miles you track, the better you are at this bigger

deduction you'll receive. There's a lot of rules around

deducting auto expenses that people get confused

upon, especially watching short videos on social

media that sensationalize being able to expense

your car. Or if you buy a luxury vehicle above a certain

weight, you can write it all off. Sure. In certain situations, you

can do that. But that doesn't mean that the best strategy

for you, if you are taxed as a corporation and you're taking the mileage

rate, that is actually a employee reimbursement

because corporations have to use the actual

vehicle expenses. So this is an important thing

to note because only individuals

can take the mileage rate. Most of our clients take the standard mileage

rate. And over the life of the vehicle,

that generally results in that greatest deduction.

It also makes tracking way easier. Because when you

take actual expenses, it's incumbent upon you to track all of

your gas, all of your repairs, all of your maintenance that goes into your vehicle,

you know, on top of your models. And a lot of small business owners just

don't have the desire to be as thorough as they should be if

they want to optimize the actual vehicle expense

deduction. So when it comes to tracking miles, because

regardless of whether you're taking actual or you're doing the mileage rate,

what are the best ways to track or, like, what would recommendations be that you

would have potentially for someone that's like, I'm a business owner. I haven't been tracking

my mileage. What do I need to be doing? What kind of proof do I

need to have? You can either use an app or

you can have paper in your car or add up the miles at

year end. I always advise people to look at their odometer

beginning of the year and the end of the year. And that gives you your

total miles. And then all you really gotta track is your business mile.

So many of our clients use MileIQ. Many

use tracking miles through QuickBooks. What was very important

here is establishing where your principal place of

business is. Because commuting is

not business mileage. So if you

conduct and manage your business primarily from your

home, your home is your principal place of business. And this

is a big tax advantage because then

your business mileage starts when you leave your house to when you

come back to your house minus any ancillary personal

trips that you might take on that journey.

Whereas if you have an office outside of your home that you

rent or somewhere else that you drive to on a

regular basis, and that's where you manage and connect your business, That would be your

principal license business and driving there and back from your

home is not business mileage. Another thing I'd like to touch

upon is section 179 and bonus depreciation

on vehicle. There's various limits that apply

to different classes of vehicle generally based upon their

GBW. But then also bonus depreciation

is changing year by year.

So, whereas in 2022, I believe you could

deduct a 100% of a vehicle with bonus depreciation. I believe

in 23, that was 80% and it's being reduced.

But taking section 179 or bonus depreciation, which I believe is

section 168, allows you to accelerate

the depreciation on your vehicle if you're taking actual expenses

on your vehicle into the 1st year that you place it in

service, which is great. If you have a high income

in that year, you can get a big deduction from your vehicle.

And that's what people are attracted to. But the drawback of doing

that is you lose the ability to take depreciation.

In future years, you lose the ability to ever use the standard

mileage rate in the future. And if

your business use of that vehicle ever drops below 50, there's a good chance

you'll have to recapture that accelerated depreciation as income in that

year when the vehicle's use drops below 50%.

So it's great that you get a large depreciation

deduction in the 1st year, but you definitely need to be aware

that in future years, you are stuck using the actual

expenses. You can never use the mileage rate again, the

standard mileage rate. And your deductions may

be quite limited apart from that 1st year that you placed

the vehicle in service. And you definitely wanna be sure that you're gonna use

that vehicle more than 50% for business use

over at least the next 5 years. And then also, if

you are going to accelerate depreciation on a vehicle, you

need to be prepared to track all of your vehicle

expenses to maximize your vehicle

deductions in the future. What happens too if you were to sell that

vehicle? Let's say you were to use section 179, and then 2 years later, you

were to sell that vehicle and you take in most depreciation on it.

What happens from the business standpoint with expenses? If you sell the

vehicle at a gain, you pay capital gains

tax on that. And it depends on the type of

property, but I believe it would be there may be some sort of depreciation

recapture at your ordinary income rates. And then

if you do have capital gains, that might be taxed at a lower

rate. Depending on your household income and yeah. But

so if you purchase a vehicle and you take 50,000 of depreciation on

it and your cost basis in that car is 0, and then you turn it

around for $50,000 and see sell it for $30,000 2

years later. You're gonna have to pay tax

on that $30,000 as income because you have no basis in the vehicle. And that

would all be a depreciation recapture, which is taxed

at ordinary income rates. What about with rental vehicles? So I know that

when we're chatting with clients, a lot of times, they might get confused around, like,

what the requirements are. We're like, if you fly somewhere for a

conference and you rent a vehicle, are you supposed to be tracking mileage

for that? It's not a bad idea. The only time where you really

would need to track mileage for that is if you were running that car and

using it for both business and personal purposes on

that trip. If it's a mix business personal vacation,

you better be tracking that. But otherwise, if it's a strictly business

trip, the car rental, I would just sit out to this. Perfect. I think

that's great. So moving on to our next topic,

talking all about health insurance. So, Tyler, when it comes to

health insurance as a self employed individual, I know that we get a ton of

questions, and we're not health insurance brokers. We're not here to advise you on

what sort of plans you can or cannot get into. Something definitely worth

looking at. But in terms of what our

clients are looking at and what we've been helping them with the last couple of

years, what are some tax deductions for self employed individuals when it comes

to health insurance? Generally speaking, as a self

employed person, you are eligible to take a deduction for the

premiums that you pay out of pocket

that are in excess of any credits that you might receive, you know, if

you have a premium tax credit. But there are limitations to this. If

you're married and you're eligible to participate in your spouse's health

insurance plan through their employer, you are not eligible to deduct

self employed health insurance. Or if you are

eligible to have health insurance through another employer, you're

not eligible to deduct. If you're a sole

proprietor or a partner and they're up entity taxes a

partnership, then you can take the deduction

on your 10.40. If you are a

greater than 2% shareholder of an s corp, there's

specific rules that the s corp can either

reimburse you for the health insurance that you pay out upon it,

the health insurance premiums, or the s corp can pay the health

insurance premiums directly for greater than 2%

shareholders of an s corp. Those health insurance premiums have to be

reported as wages on box 1 of the w two,

meaning that they're subject to income tax withholding, but they're

not in box 35, which is Medicare and

social security. So they're not subject to Medicare and Social

Security withholdings. And then what happens is your s

corp will deduct the premiums they pay on your

behalf as a salary deduction on the 11 20

s. And then the weight it'll be included in your income as wages on your

10 40 and then deducted as an above the line adjustment

against income taxes on your 10 40. But if

the premiums are not on your w two, you can take a

deduction for them, which is often missed. And

then if you have health insurance through the marketplace and you're

receiving a premium, there's a calculation that has to be done on,

I think it's form 72 203 on your personal return

to calculate the amount of premiums that would qualify for the self employed

health insurance deduction. I do think that this is a really good point to have

brought up though, because especially if you're needing to edit a w two or add

this information in there, a lot of our listeners that might have salaries or are

managing their own payroll may not know that they even need to be adding this

to box 1. So this is definitely a reason that you should be checking in

whether it's with our firm, whether it's with another firm about your

individual tax situation to make sure that you're not missing out on potential

deductions here and to have time to make corrections to your w

two before the end of the year that you're in.

Retirement, my favorite topic, I think, to chat about. I get

really excited. So I feel personally, Tyler, it'll be interesting to hear your thoughts on

this, but I feel like retirement is something that has really slept on because

especially coming into q 4, I know we get bombarded with

the question of, do I need to spend more to save on my tax?

And the answer to that is generally a no in my opinion, unless there's, like,

really specific situations. You have a high end of year. There's things you actually need

to buy. We're not just frivolously spending because you're not getting a one to one

return on the money out versus tax saving. However,

if you do have money to burn or extra funds, you feel really

confident that you have enough save for taxes, I think that retirement is one of

the best things that you can be spending on to save yourself tax

money if you do have extra cash available. But in general, I

think it's a really good thing to be setting up and contributing to even if

it's a really small amount for now. So I'll hand you the floor here, Tyler,

but let's chat retirement. Generally speaking,

there's limits as to how much an employee can

contribute to an employer sponsored plan and then limits to how

much an individual contribute to an individual retirement.

Based upon the plan, there are limits to the amounts that

employers can contribute to the employee's retirement

account. And there's so many different types of retirement accounts. But

broadly speaking, you have employer sponsored plans. You have individual

plans. Then for employer sponsored plans, you have employer

contributions and employee contribution, which would be

a salary deferral for the employer sponsored plan. That's an

employee contribution. Then there's

generally 2 types of retirement accounts being

traditional and Roth. And the idea is that

traditional retirement accounts are tax deferred,

meaning you contribute the money. And in the year that you make the

contribution, you get a deduction on your tax return or

a reduction of your income subject to income tax.

Whereas a Roth, you make

contributions with after tax money, but then

you take withdrawals that are tax free. And,

generally, the idea with traditional tax deferred

retirement accounts is that if your

marginal tax rate is greater now than it will be when you're

taking distributions in retirement, you'll get more tax savings now

than you would receive with a Roth IRA. Because with a

traditional tax deferred retirement account, distributions

are taxed as income when you're retired and taking

distributions from the account. Then for a

Roth IRA, those are more advantageous for people

in lower income tax brackets now. The idea being

that your tax marginal tax rate will probably be higher

when you're in retirement than it will be now. And a lot of that

has to do with the uncertainty of what future tax rates will

be, but that's the general idea. And

then the big benefit of these accounts besides tax savings on either

the now or later on the contribution of the distribution

is that your returns grow tax free. Your investment

returns grow tax free in the account. It's also

important to be aware that there are situations where you can take

early distribution. Normally, with a traditional

tax deferred retirement account, you cannot take distributions until I believe you're

59 and a half without a penalty, without a 10%

penalty. You can always take your money out of the account. But if you just

take your money out of a traditional retirement account with no that

has does not qualify for any exceptions before your age

59, say, you're gonna be assessed at 10% penalty and

pay income. For Roth IRAs, you can put money in.

You've already paid the tax on that money, and you could take your basis out.

The amount of contributions that you put in, you could take that out in time

without paying tax on it or without without paying any

penalties. So I really like Roth IRAs. If you think you might want that

money before you're 59, because then you can put the money into the

account. It'll grow investment income. You won't pay any tax

on that. As long as you don't take the investment income amount, you can still

access that money. Because I think a lot of times people may

not want to contribute to traditional IRA because maybe

they want that money to buy a house on the future or

other purposes. Maybe they just want access to it

before they're 59, which fair enough.

When self employed individuals are looking, so we have a lot of businesses that are

by making under a $150,000 a year. Right? And they come in and

they haven't been prioritizing retirement. Maybe they've never been traditionally employed or maybe they

were traditionally employed for a few years, but they've been doing their business now.

What is one of the easiest ways? Like, if they come to you and they're

like, Tyler, I have an extra $200 a month. I really wanna be doing

something with it for my future. Like, where do I even look at starting? If

you're a high income earner, okay, you're probably gonna wanna do a

traditional retirement account. And I would say

maximize your personal retirement account if you're

below the threshold phase out. Because once your income gets too

high and you don't have to be that high of an income or I'm not

sure what the phase out limit is right now. But above a certain income,

you're unable to take deductions for contributions to a traditional

IRA, and you're unable to contribute to a Roth IRA. So

if you're a high income earner, your best bet is an employer sponsored plan. If

you're self employed, it's through your business. If you're an employee, max out

your 401 k. And if you're self employed, we like SEP

IRAs, especially if it's like late in the year. It's

August 2024. If you wanna contribute to

an employer sponsored retirement account through your business, Sep

IRAs are easy to set up. It's an employer only

contribution plan, and you can contribute to that Sep

IRA and take a deduction up until the

deadline of the filing of that corporate tax return, including

extensions. So if you extended your corporate tax return, you could make

a contribution to a SEP IRA for 2024 up until

September 15, 2025. And the limit

there would be up to 25% of your w two

wages. We also like really the solo

401ks, which go by many names, I four zero one ks, individual

401ks, one purchase 401ks because those allow the same

employer contribution as the SEP IRA

being up to a quarter of the employee's w

two wages. But in addition, that

employee being the business owner, the shareholder, can

contribute up to the 401 k limits, which I think is, like, $24,000

in 2024. So with both the SEP and the I

four zero one k's, if your wages are higher, you can contribute a lot

of money to your retirement account. I think it's maxed out, like, 60 some

$1,000 for an IFO one k between employer and employee

contributions for 2024. So if you're a high end income

earner that can't contribute to an individual retirement account,

that's the best option for just putting away money for

retirement. The caveat to the I four zero one k is that it

has to be a business with 1 shareholder, one owner.

And that so only it's only 1 participant in 401 k. No other

employees, one owner, one employee. That's an I 401

ks. There is one exception where if it's a

business where there's one owner and it's, 2

spouses. Then 2 spouses can have

an individual 401 k. There might be other

modifications, but That's the most common Yeah. Exception. I

do think I so I love the I four zero one k is for our

clients. It's a really good fit for, but I feel like it's a really good

fit for such a smaller group of clients. Because 1, you need to have the

disposable income to actually be able to contribute.

And 2, you do need to have payroll. Like, it it needs to be

refined through payroll, and you need to be contributing in the calendar year just

like a regular 401 k. Whereas with the SAP, you have so much more

flexibility with being able to contribute up until you file that corporate return, like Tyler

said, including the extension deadline. So with the I four zero one

k, and I'll give you an example of this year, we're chatting with a client

that wants to start prioritizing retirement. It's already almost q

4 in the year, and they wouldn't be able to get all the contributions

we'd like to see if they did an I four zero one k this year.

However, what we thought that they should probably do this year is do a sub

IRA. And then in 2024 or 2025, look

at either an I four zero one k or a simple IRA. And, again, that

falls because they're not spouses. We're looking at some different options for them. So most

likely, it'll be a simple IRA in their case. But, again, you're making

contributions as you go throughout the year with those versus the SEP IRA.

You can make contributions throughout the year, and then you can also lump sum it

before your taxes are filed. And then also, you receive

that same benefit for individual accounts so that you can make that

contribution to that account up until the tax filing deadline of your

personal return. So if it's April 1st and you wanna get your tax bill down,

you can contribute to a traditional IRA. I think it's fun too because we'll have

clients that contribute to SAP search of traditionals and, you know, they're kind of looking

for a magic number. Like, maybe they have $10,000 set aside for their tax

savings. Maybe their taxes came out to $8,000, and so they wanna see, you know,

hey. Of this pocket of money that I have, what does it look like if

I put $3,000 into a SAP or into a traditional? What does that change by

tax bill by? And so that's something that we're able to look at for some

of our clients too so that they can make an informed decision when it comes

to their contributions because that's another fear that comes up. It's like, what if I

need this money at the end of the year? I wanna be contributing throughout the

year. I recommend just setting it aside into a savings

account, and that way you have that at the end of the year. And you

should know, hopefully, what your quarterly estimates are looking like, what your

potential tax liability is looking so that you can be planning accordingly for both

retirement and your taxes. Another thing I find to

be very advantageous is currently qualified

dividend and long term capital gains rates are

essentially 0 for

low income earners. So if you're making, like, below $65,000

a year in total, you can get qualified dividends

and have long term capital gains and pay zero income tax on

it. Meaning, what's the point of even putting money into a

retirement account? Also, if if your income tax

rate is low, then there's not much tax

savings benefit anyway because your investment income is not

being taxed and you're not getting much of a deduction by

putting the money in to the retirement account. So that point

would potentially be looking at, like, a taxable brokerage account. Yeah. Yeah. And making contributions

to there, which you can then pull out at any point in time, and there's

not the restrictions on that there can be with retirement account. I do think

that regardless of what account type you look at moving forward with,

that starting small and automating what you're able to, whether that's with a Roth or

traditional or a SAP, a lot of times we make the recommendation that,

like, hey. Take something that you wouldn't miss. Right? Maybe you can go spend

$25 on something frivolous, and it's not a big deal for you.

Let let's just take $25 and set up something that's automated. You know, you're contributing

to something, whether it's a taxable brokerage account, you know, your sub IRA, your

Roth IRA, and then review that every 3 to 6 months.

Increase it as you want or as it aligns with your financial goals. But the

other really big mistake that I see happen is people that

have been managing their retirement or their investment accounts on their own,

generally, that money just goes into a holding account when you transfer it from

your checking or savings account into, let's say, Schwab or

Betterment or Vanguard. Those funds need to

be invested. And actually, as recently as 2 years ago, we were working

with a client and she was like, hey. I wanna really prioritize my retirement.

Can you guys take a look at where we're at? And I went and looked

at it. I was like, oh, none of your funds have been invested. They've been

sitting here for 5 years in this holding account earning a a nominal

amount of interest, but not having the gains that they could have by

being invested in the market. And that's something that I feel like is not talked

about enough. So make sure that you're either checking in with a fiduciary or a

financial adviser. You're doing your research. You're I mean, even asking your

accounting firm to take a look at it. We're not here to advise on your

investments, but we can say, like, yes, it looks like everything's invested. You know,

continue whatever your strategy is there. I also

wanna make the point that it's important to know what

you're investing in because a lot of mutual funds or

managed funds have a hefty management fee associated with

them. So the return that they might be advertising

might be exaggerated because it's not being

reduced by the management fee. Oftentimes, you get a better rate by

just investing in an index fund, something with that gives you

diversification with a low administrative fee. Mhmm. And

then also it's important to know if you're if you're an employee

and the options for investments

when your employer sponsored retirement account might be limited. And

they might be limited to these managed funds that take large

management fees. So oftentimes, especially if you're an employee,

you'll have better options for better

investment options in an individual retirement account

than you can invest in through your employer sponsored account.

But it's always best to at least take the employer map if you're an

employee. Absolutely. Okay. This is another

hefty one. So entity selection. So

many of our clients aren't even aware of what entities are

potentially available to them, or they've seen something on TikTok or

Instagram reels, and they pop in and maybe they have an s

corp election and they shouldn't be. They're not even turning a profit yet, or maybe

they're making a $150,000 a year in profit and are a great

candidate, but had no idea that it even existed. So how

does business structure I mean, this is a very broad term. We're not gonna go

super deep into it, but how does business structure impact your taxes?

Yeah. That is a complicated question. Okay. So by default, if

you're someone who's in business for yourself, it can be a side hustle or it

can be your full time thing, but you're gonna be classified as

a sole proprietor. Your your tax entity. It

it's important to realize that there's legal entities and there's tax

entities, and they can be different things. The default for

someone who's self employed is to be taxed as sole proprietorship, which files a

schedule c to report their income and expenses. And that's goes

with their personal tax term, their form 1048. Then

if 2 people are in business together with

or without a legal entity, they are tasked

as a partnership by default. And

we really like, and most people do, LLCs,

especially for small business owners because LLCs are

a legal entity, which are organized at the state level.

And every state has different rules around their LLC.

LLCs have the advantage that they can elect to be

classified as an S Corp or a C Corp for

tax purposes. Or if they're a multi member LLC,

be taxed as a partnership. And,

there's different tax advantages to being an s corp, being a c corp, or

being a partnership, depending upon your ownership structure,

your business operations, the type of partners

or investors that you have. And so it's really

can be endless, but just single member LLCs, if someone if you set up a

single member LLC for liability protection,

for tax purposes, that's a disregarded entity. And

it's you're just a sole proprietor. Your taxes is a sole proprietorship.

But we recommend setting up LLCs even if you're gonna be taxed as sole proprietorship

and getting an EIN because that allows you

the opportunity to elect to be taxed as something different in

future. Most often an S Corp and it

allows you to make late S Corp elections. If you

your income's higher than you think, or you find out about s corp elections

after the initial deadline, you can still be eligible

for that late election, which is never guaranteed, but

is often approved. Absolutely. I think that with s corps too,

Tyler, a lot of clients aren't sure what it even makes sense. And I know

that this varies dramatically by how much work they're putting into the

business, what their, cost of living is, what their industry is.

But as a very general rule of thumb for something to sort of

look at inquiring into further, let's say I come to you and I'm a single

member LLC, so it's just myself. I am a disregarded entity. It's

been relatively straightforward. My, you know, taxes have been on a schedule c.

And I come to you and I'm like, you know, Tyler, I keep hearing about

these s corps, these s corps, elections. Like, what when should

I be looking at that? When does it apply to me? I know that our

plans are really conflicting information for when they should even have that on their

radar. So what's your kind of general rule of thumb for when they should look

into it further? Loosely speaking, if your

net profit after expenses is around 50

to 60 k, you could probably benefit from

an SL action. It it depends on

really what reasonable compensation you would have to pay yourself

as an officer employee of your business. So what

happens is when your LLC, if your single member

LLC makes an S Corp election, your LLC is

going from being a disregarded entity to being

taxed as an s corp. So you're setting up a tax entity, which is

corporation. And whereas before the

election, there was no separate entity for tax

purposes. Now there is a separate entity for tax purposes, and

you need to think of it that way. And as a

shareholder of an S corporation, you were

required to pay yourself reasonable compensation for the services

that you provide as an employee of your s corp.

And reasonable compensation is generally based upon what is the

market rate for the services that you're providing. So what kind of work

are you doing and how much work are you doing and

what would it cost to replace yourself? That

was what would be considered reasonable. And that generally

involves having an idea of how much time you're

working and what sort of tasks you're doing and what it would cost in your

area to hire someone. And so that can be

a pretty complicated analysis. The the best

practice would be to do some sort of reasonable compensation study. And if

you have a reasonable compensation study and our audit hit

our your s corp is audited and the IRS wants to look at how did

you determine reasonable compensation, that's what you provide to them. And that's what

they would be looking for. So the tax

reduction that comes from being classified

as an s corporation is not a reduction in income taxes, but it

is a reduction in employment tax. So as a sole

proprietor, all of your business profits will be

subject to self employment tax. That's the money that goes into

Social Security Medicare. So, ultimately, the idea is you're still gonna

get that money back. But I'd

rather have the money now invested if it was me than

rely on the government to invest it on my behalf. So

the tax savings of the s corp come from the

profits that come through the s corp after you've paid

yourself officer's compensation in an amount that's

reasonable. So, basically, you get about 15%

reduction in self employment taxes on that portion

of s corp profit after your salary.

So to give a real world example, right, using your $60,000 in profit

and, again, when you say it's time to kind of start potentially looking at an

s election when you're around the 50 or $60,000 mark,

it's income minus expenses. Expenses do not, at that point, include what you pay

yourself when we're looking at profit. Correct. I think a lot of small business owners

factor their owner's draw, their owner's compensation into that

number. So if we have $60,000 after expenses,

and let's say that you do a reasonable compensation study and that reasonable compensation

study, you feel really confident that $36,000 a year for

your salary is realistic. So that would leave the

additional $24,000 of that $60,000

to be passed through to you as profit. So that

$24,000 would not be subject to the

15.3%. Percent.3. Self employment

taxes that it would have been subject to had you remain taxed as a sole

proprietorship. So quick numbers, 15%

of 24,000 is $36100 So that would

basically be your tax savings, your tax reduction

of the employment taxes in the situation where you're a single member LLC

electing to be taxed as an s corporation with profits of

60,000 that they're then reduced by $36,000

of reasonable compensation. So that $36100 of

tax savings that you realize then

also comes with the added responsibility of

filing a S Corp tax return and running payroll,

which comes with additional expenses. That's why there's a

certain threshold at which it becomes a

net positive to make an S Corp election when the

tax savings exceed the hassle and added

expenses, basically. The hassle and the added expenses of

filing payroll and filing an s corp tax return.

That's why it's kind of dependent ultimately on what is your

reasonable compensation so we can determine what are your tax savings gonna

be after that amount is paid. Right. Because we don't want and I

I know we've seen it before, but we've seen businesses come to us that are

you know, we're single member LLCs. They have an s selection, and they're not

even turning a profit yet. And so you're having all of these extra

costs and requirements that don't necessarily make sense to your business

yet because either they thought that they needed to be. They, again, saw something on

TikTok somewhere that wasn't applicable to their business yet. So I do think

it's really important to be having a conversation with someone that knows

your financial situation, whether it's your accountant or

your bookkeeper or your tax preparer. You need to be chatting about what this

looks like in your business before just jumping into it. And, also,

I know that, like, we both go through and we wanna make sure that you're

going to be saving money because I don't want you making an s election

if you need to be paying yourself an $80,000 a year w two

compensation for it to be reasonable, and you're making $80,000 a year in

profit right now. All of your profit would be swallowed up by that. You'd have

some extra requirements, and it really doesn't make sense at that point. Again, super

general guidelines that you want to be having a bigger conversation

with a professional when you do get to the point that you think it might

be worth it. You also need to be ready

and willing to make sure to stay on top of your accounting

records and do the necessary bookkeeping

and running payroll. So you're able to prepare

the s corp return. It's more responsibility.

Absolutely. And if you don't wanna do the bookkeeping, you don't wanna hire someone

to do the bookkeeping, even if the s corp election could save you

tax money, it might be more of a headache than it is.

Absolutely. I think that's great, Tyler. Thank you. Last but

not least, the Augusta rule. And this is something

that you and I had chatted about quite a bit over the last year and

some change. So the Augusta rule, I know I've seen

touted all over TikTok as one of those Tyler, you've shared

that reel with me forever ago. It was like, hey. How did I write this

off? How did I write that off? How did I write my house off? It

was tax fraud. And the Augusta rule, I feel like, is an absolutely legitimate

option, but it can fall into one of those things that can feel too good

to be true and can be really misused because I think there's misinformation around

it. So can you tell our listeners a little bit more about the Augusta rule

and potentially who it could apply to? And, also, a lot of our business

owners, I don't think it's applicable for. So who does it not apply to?

Let me give some background. The Augusta rule comes from

Augusta, Georgia, and the Masters Golf Championship.

That's where the lobbying generated this rule,

but basically you can rent out a

residence for up to 14 days a year and

not pay any income tax on the rental lease.

But if you rent out 1, a residential property that you

have for more than 14 days, you cannot qualify.

So, you know, that that can be, if you have a vacation

home, you can rent it out for 14 days, take the income

from it and not pay any income tax on it. You still have to report

the income on schedule leave your personal return. Or if you hold it in

an LLC, you still gotta put the income on the schedule E.

You still have to report the income, but then you can take a deduction. And

that's where you get the Augusta rule exclusion. Business

owners also. So you can rent out your house to any up to

14 days and not pay any income tax on the

rental. And it doesn't have to be consecutive, right? A 100 days, any calendar year.

If you rent it out more than 14 days, you cannot qualify for the EHUS.

Now if you're a business owner and many business owners do this,

if you own if you're a primary residence, if you own your

primary residence or you own a vacation that is

not rented out more than 14 days a year and

is not your principal place of business, you can rent out your primary

residence or your vacation property for up

to 14 days to your corporation

and qualify for the same rule. If your home is your principal place of

business, you cannot rent it out and qualify for the Augusta. If you could have

a home office and then also have a vacation property and

take the Augusta rule on the vacation property. Say for instance,

you have one house, you own your primary residence. It is not your

principal place of business, meaning you have another place where you

commute to on the daily and conduct your business.

Your business could rent out your home at a fair market

value, meaning pull comps from Airbnb. Up

to 14 days, use your home for legitimate business

reasons. All of that should be documented. The comps, the

business use of your own and your business, your

corporation can pay you. Fair market

value rent for 4 up to 14 days. And there should be an

actual cut check cut corporation to you as an

individual. You should invoice your corporation.

And then that amount of rent that your corporation pays you to

rent your home can be excluded. So you still have to put the

income on Schedule E, but then you could take the deduction, the the

Augusta rule exclusion on Schedule E and

0 out the income, essentially. And that's the Augusta rule.

But if your home is your principal place of business,

you do not qualify to take the Augusta rule on your house

if paying from your business. But you qualify for the home office deduction,

which is also fantastic. And the other benefits of the home office deduction is

that your home being your principal place of business is your

mileage, your business mileage. Accrues from when you leave your

house to when you get back for business purposes, which is a bid

deduction in and of itself. And owned that office deductions can be pretty

lucrative as well. They seem less sexy than the Augusta

rule, but they're way more functional. I think that's so much

of taxes and accounting. Like, the sexy quick fixes generally aren't the sexy

quick fixes. It's more being consistent over time or the

documentation required because, like, let's say you can do the Augusta rule because you have

a situation that works. You need to have documentation. You're not gonna be if you

have a 2 bedroom house, you're not gonna be running it out to yourself for

$8,000 a night unless that's what the actual market comps look like or you're

doing it during the era's tour or doing, you know, there's a Super Bowl there.

Like, you can plan things strategically. But, again, you have to have documentation to

back it up for why you're doing this. And I think the documentation

is sorely lacking for a lot of individuals because they just don't know that they

even need to have it. You know, they're they find some information somewhere and run

with it. If you wanna use the gastro, you need to

plan ahead of time and follow through with that

plan. You can't just look back and take the Augusta rule.

Okay? Whereas the home office deduction, you might have

qualified for it and never have planned it and be like,

oh, at young age, I have an office in my house. Office. Office

space. And I didn't plan that at all. And, hey, I get this

deduction. So it's like, home office deduction is way more

straightforward. In terms of the home office deduction, there's either the

simplified method or the actual

expenses. The simplified method is limited to, I believe, 300

square feet. You get $5 per square foot. So it's limited to $1500

The other way is you take the exclusive business use

square footage of your home and over the total square

footage of your home. And that exclusive business use square

footage can include storage. So if you have a closet corner of a

room where you store gear or supplies or equipment that qualifies

as part of your own office, business square footage. So you have the business

square footage of your home over the total square footage, and then you can

take a deduction in that percentage of

your mortgage interest, your real estate taxes, your homeowners

insurance, your HOA fees, your landscaping expenses, your repairs

and maintenance on your home. Am I missing anything? Utilities?

Utilities. Yeah. No. That's a big it's yeah. You can also

depreciate your home. But if you ever plan

on selling that home, you're probably gonna qualify for the homeowner's

exclusion of that gain. And if you previously

depreciated your home office, you're gonna have to reclaim that income and

it's not gonna qualify for the homeowner's exclusion. So I think it's silly

for people to depreciate their home 99.9%

of the time because they're gonna have to reclaim that deduction as income later when

it would have been excluded as a gain when when they sell their house. If

you're never gonna sell your house, then depreciate it. What

happens if you have a dedicated we have a couple of clients I know that

have maybe built a shed in their backyard, and that's their dedicated workspace.

Yeah. Yeah. That same. Add that square

footage, put it over the total square footage. You're good to

go. And when it comes to things like painting that or maintaining

it, all of those would then be like dedicated home office expenses at that point.

Yes? So then if when you have a home office, that is your

principal place of business. Any direct

expenses to your home office, furniture, fixtures,

repairs, or maintenance of that home office are direct home

office expenses. And those are deductible fully. They don't

need to be deducted as a portion of your

total home base. Now what happens because I this actually came up last

year. But what happens if you're you have a dedicated room in your house for

your home office, and you have to get a new roof, and

you lay out $30,000 on a new roof for a general that they're

that cheap. What happens? Do they get to take a portion of that expense? How

do they track that? That would fall onto the same as

depreciating your home. Mhmm. It would have a class life that you would have

to depreciate it over. You would depreciate it in proportion to the square

footage of your business, of your home office over the total

home. And again, I would Right. Right. So what are other expenses

potentially that you've seen pop up that are depreciable like that? I mean, a

new bathroom, a new kitchen, you know, you're replacing all the

floors in your house, a new HVAC system. Yeah. The

big A deck. Yeah. These are not repairs. Yeah.

Yeah. These are these are new yeah. New or larger

improvements, I would say to the home and the living space on the whole. I

mean, in for for businesses, they have the de minimis safe harbor

election where if you have audited financial statements, you can elect to

expense anything below any expenditure below

$5,000. And if you don't have audited financial statements, you can elect to

deduct any expenditure below $25100.

And they do change that limit with think it was somewhere that they might

be increasing it. But I don't know if that would

directly apply Mhmm. The diminished safe harbor to the home office,

but I think it's a decent enough guideline. If the expenditure is greater than $25100

definitely need to consider whether or not it should be capitalized and depreciated.

And that's great information. So to wrap everything up here,

we've covered how to maximize your mileage deductions, what you need to be tracking there.

We've discussed health insurance for self employed individuals,

smart retirement contributions, and when those are applicable

for you in your business or in your personal life, how to choose the

best business entity, and, again, navigating the Augusta

rule. So if all of this was helpful for you, I do

encourage you to check out the get your finance shit together mastermind.

Tyler will be a special guest in there. Oh. Yeah. I know. We're gonna be

talking all things taxes, and we will have

a lot of sports, a live group program for business owners that are

wanting to understand their finances better. We will have a lawyer

coming in. We have a fiduciary that will be coming in to chat all about

self employed retirement, and we have some other really special guests. This is a

10 week program that runs from the week of September 15th until the week

before Thanksgiving in the US. And I do encourage you all to take

a moment and check out the link in the notes or follow us on Instagram

to get more information. Tyler, thank you so much for joining us. I'm really

excited for this teaser for what will be covered in the Mastermind.

That's a wrap for this episode of the Wealth Witches podcast. I hope our

magical money talks have left you feeling empowered and inspired.

Remember, wealth isn't just about dollars in the bank, it's about abundance and

financial freedom in all aspects of your life. I'm Caitlin Magnuson

encouraging you to keep challenging the status quo and embrace your inner witch on

this financial journey. Until next time, stay

magical.