In this episode. Ash welcomes Lorraine Kent, the current tax manager at Edwards and Associates, to discuss essential tax strategies and tips specifically for dental practitioners. They start by discussing topics like deductible expenses, common tax mistakes, and audit red flags. Lorraine shares insights on what expenses are deductible for rental properties and the implications of depreciation recapture when selling such properties. She also provides guidance on loss harvesting strategies and the importance of tax planning while reviewing personal and business investments.

They also explore common tax mistakes that can be easily avoided, such as the importance of sharing all necessary tax documents with accountants, and they discuss key audit triggers like meals, travel, and auto expenses. They round the conversation with real-world examples of tax horror stories they've encountered due to miscommunication or oversight.

If you have specific questions about embezzlement or if you'd like to have another question answered on a future podcast, please reach out to the Edwards & Associates team.

Key Topics Discussed:

• Deductible expenses for rental properties
• Depreciation recapture and tax strategies
• Harvesting tax losses effectively
• Common tax mistakes to avoid
• Audit red flags: meals, travel, and auto expenses
• Community property state tax impacts
• Business property tax explanations
• Impact of volunteer services on taxes
• Importance of communicating with your CPA
• Real-world tax miscommunication examples

Welcome to Beyond by Wings, the business side of dentistry, brought to you by Edwards and Associates, P. C. Join us as we discuss how to build your dental practice, optimize your income, and plan for your future. This podcast is distributed with the understanding that Edwards and Associates, PC is not rendering legal, accounting, or professional advice. Listeners should consult with their business advisors before acting on any of the information that is shared. At At Edwards and Associates, PC, our business is the business of dentistry. For help or more information, visit our website at e and associates dot com. Hello, and welcome to another episode of Beyond Bitewings.

In today's episode, we have a very special guest. Her name is Lorraine. She's the current tax manager at our office, and we will be doing an episode today called tax season survival guide expert tips from a tax manager. So without further ado. Hi, Lorraine.

Hi, Yash. How are you?

I'm good. How are you?

I'm doing well. Yeah. We got through our first deadline of the year and have to start pushing forward to April 15.

Yeah. I know. I mean, we're done halfway, I would say, for the first part of the season. Right?

Yeah. Yeah. For the traditional part that most people think of. There's the part two that most people don't think about September and October. But right now, yeah, all focus is on April 15.

That's true. And just to let our listeners know, so we are recording this episode post March 17 and before April 15. So that's why we're talking about, you know, the April 15 coming our way. And that was actually the main inspiration for us to record this episode because there are certain topics that we felt like would be best if we put it out there on an episode.

Guess we could start with some of your tax questions that clients have been asking you recently about what's deductible and what's not deductible.

Oh, yes. Yes. I do get asked that question quite a bit, especially when I ask them to send me a list of all the expenses related to, let's say a rental property they bought. And immediately before they could even answer my question, they're going to ask me, hey, what is deductible and what isn't? So would you like to add to that point? Like, what will be deductible, let's say, for a rental property? And what would

Yeah. One once the property is listed for rent, it becomes active. Sometimes there is a little bit of confusion if there's land purchased and building

Mhmm.

A property or building to be rented later. Those costs are not currently deductible. You still keep up with them. You capitalize them. And then when the property is ready to be rented and actually moved into, then you can start deductions and depreciation. But if you bought a existing single family home, perhaps even already has a tenant occupied. Right from that time, you could deduct all your ordinary necessary expenses for a rental property. So that would generally include your mortgage interest, not your full mortgage payment, but the interest part of it.

Also any property tax, insurance, general upkeep, repairs and maintenance. Major improvements will qualify for depreciation, but your your general repairs and cleaning, landscaping, and even your CPA fee. Right. Consultations on managing the property.

Because that is also deemed ordinary and necessary. Yes.

It is absolutely necessary.

I see. And on that note, let's actually add on a little bit just be just because I'm thinking of a few of my clients that use this strategy. So I have some real estate investors. As you said, they'll pull out a mortgage, buy a single family home to rent out for a couple of years, they'll wait for it to depreciate, and then they'll sell it. Right? Now there's a tax impact there if they are depreciating the building. Right? Because of the depreciation recapture portion. And that always throws them off.

Correct. Yes. To the extent that you received a tax benefit, when you sell the property, you pretty much give it

back. Right.

So depreciation sometimes turns into a timing deduction.

I see. So in other words, what you're saying is depending on how you're depreciating it, right? And I'm saying this without getting too technical because there are ways where you can further classify the building and then utilize accelerated depreciation. But aside from that, what one should do, a real estate investor, is essentially if they are going to depreciate whatever is depreciable, then they should hold on to the asset for at least five, maybe even longer, so they get the least impact of the depreciation recapture, right, upon sale?

Well, it depends. Generally, anything after a year is gonna qualify for the long term capital gain rates.

Mhmm.

Now real estate property depreciation kind of depends. There are some preferential capital gains treatments with regards to the recapture. Mhmm. You are gonna have to pay, ordinary tax rate on the extent of any, like, fixtures, like the furniture, the Mhmm. Kind of tangible property Mhmm. If that was sold separately. And yeah. So the majority of the appreciation is going to qualify for long term capital.

Okay. That's

good. In most cases. Yeah. Okay. That's good. There could be some element of recapture.

So in other words, you should really talk to someone who's knowledgeable on this, maybe your CPA Mhmm. Or financial advisor who can guide you through this and actually ask about the tax impact before you go forth with, let's say, an advice that your friend gave you, like, hey, invest your money in real estate. Because the net benefit from it could not be as high or may not be as high as you may initially expect it to.

Correct. And sometimes you can do a little bit of strategizing. If you have some other investments that are sitting on unrealized losses, you could time some of those sales to let's say you have some stocks in a taxable account. You could sell those in the year that you're gonna have a larger gain to help decrease the tax you're actually gonna pay.

Okay.

And yes. So that's tax planning is always one of my favorite things because that's when you actually get to do something about it. Because at this point, now that we're into March of twenty twenty five, if something happened last year, it's already happened. I can't change the past.

Right. Right. Okay. So let's talk a little bit about it because I actually have that on my list here. I believe you're talking about loss harvesting. Right? So what is that? So give give me a scenario. So let's say I already invest in some stocks and securities. Right? I have been for Right.

Yeah. You have a taxable account. You've got a mixture of stocks that possibly bought over several last several years. Some of them have probably gone up really well, and there's always a few that perhaps did not do as expected when you first purchased them. And, you know, sometimes you people tend to sit on those waiting for them to recover. And there are times where you're just like, okay. This is just not gonna recover within a reasonable amount of time, and this money could be reinvested.

Right.

But one of the tricky things with losses, though, for personal tax returns, the capital losses get limited to 3,000 a year. So let's say you bought something and you incurred a $20,000 loss. You're only gonna get to deduct 3,000 of that in the current year. And then each year, it's called the carry forward, you get to deduct your 3,000. But if you have other capital gains, then you can add those together. So if you had 25,000 of capital gains from a real estate sale and then $20,000 tax loss from stock sale, you're only paying tax on five.

I see.

So what

what if I have other kinds of income? Let's say income from my business. Can I not use that loss again?

Yeah. Business income is taxed differently.

Oh, okay. So let's talk

a little bit. Yeah. The investment income, and what's called ordinary income, I call them bucket. They go in different buckets for tax purposes. Mhmm. And there are some preferential tax treatments on investment income and gains that you don't necessarily have on business income, and you can't generally combine them.

Mhmm. I see. And you said earlier that even there are different tax taxing rates

Mhmm.

Depending on which bucket that income is coming from. Right? I mean, that's the advantage that Warren Buffett utilizes, right? Yeah. Mostly investing in capital assets.

So

that's interesting. So you're saying essentially if you've had, let's say a certain amount of loss, it can be used to the extent of capital gains you've had that year. Right? So if you are expecting on selling, let's say, rental property where you're expecting a certain amount of gain that you have to pay taxes on, you can essentially reduce that gain by selling some of your worthless or useless securities or, you know, just assets that's been sitting there in your portfolio for a while, not really growing.

Right. Yeah. It's ones that are have unrealized losses and you don't expect a a reasonable recovery anytime soon. If you've there is something you do need to watch out for. You can't just sell something that's temporarily down and buy it back within thirty days. That's a wash sale.

That's right.

And that will get eliminated.

Right.

That doesn't count. If you basically, if you buy something back in the thirty days, it's like it didn't happen.

I see. So it's like

It's a wash.

It's a wash. So for all the smart people out there that's thinking, wait, did I just hear that right? If I have 10 stocks of something that cost me, that's currently being sold in the market for 300, but I'm sitting at a loss of 200, I'm gonna sell it at 300, use that 200 loss towards other capital gains, and then immediately buy it back for 300. Mhmm.

Now, for that entire market.

That's what you're saying. So you have to wait for at least thirty one days till you can buy it again to avoid the wash loss sales.

Correct.

Okay.

Correct. And, you know, me personally, I would be looking at stuff that I'm just not expecting to recover. Like, I just wanna pick something new.

Right. Right. Yeah. And that's advisable. Right? I mean, you guys I don't think a lot of you guys out there are into day trading. So

No. No. Hopefully, I have generally not seen people be that successful at day trading.

Mhmm.

Not long term. It usually morphs into some what appears to be a gambling addiction at

Yeah. Sometimes. It is, honestly. Especially in the virtual currency world.

Yeah. I've seen seen, like, people just turning

Yes.

Just crazy losses on that. Mhmm. I agree. Yeah.

Now what are what are some of the big tax mistakes that you you'd say you've seen that could have easily been avoided?

You know, the biggest mistakes that we run into or I see that get caught so easy because the IRS is electronically matching everything? Like, they get the ten ninety nines and the w twos. And when you file your tax return, they're going to run-in your tax return through the computer and compare it to what the IRS has. Mhmm. So anything that doesn't match up is going to create a tax notice. So the most common ones we see are investment accounts that somehow you forgot about to give us the ten ninety nine. And so, we had one time, and, you know, I could see why this happened, but this client, we had asked where the $10.99 was. It was one that was on their prior year tax return because we do compare

Mhmm.

Of what did we have last year? What do we need to ask for this year?

Mhmm.

And the client said, oh, that account was closed. And so we said, okay. That's reasonable. And they had opened a new account too. So problem was is it they wasn't quite closed for that tax year, and they sold, let's say, a hundred thousand dollar they had at least a hundred thousand dollars of gains on the sales right before they closed the account and moved everything. So, of course, the IRS noticed that big difference, and, you know, you had to do some begging for penalty forgiveness. Of course, they owed the tax on it and the interest. The IRS can be forgiving, surprisingly, if you get the right person and you ask nicely and you don't have a history of, getting in trouble.

Mhmm. They'll often give, like, forgiveness of a penalty at least one time, the first time you make a mistake like that. And that in that case, it was an honest mistake. They weren't trying to hide the money. They just got confused on exactly when the account was closed.

Right. Right.

And what happened right before they did close it.

Right.

Right. And I

can see that, you know. And these days, I feel like with most of these, brokerage companies where they force you to do no paper file, you know

Right. Yeah.

The Go Green initiative, you know, it's hard because in the past, and I'm talking about before this Go Green initiative was a thing, you would always get something in the mail. Right? But that was one way to know that, oh, there's that, oh, there's a ten ninety nine that I need to send to my account. Yeah. But now you have to be proactive about

Yeah. Remember to print it from your account and go there. You gotta remember your login. You gotta

What? And then what happens when the account is closed and you can't access it anymore?

Yeah. That that does cause trouble sometime. And then, last year, I did notes, and some of you may have had a the TD Ameritrade accounts Mhmm. Got bought out by Charles Schwab in, like, May of twenty twenty three. So I've personally had accounts that were affected, so I knew that if somebody had a TD at October, they were also going to probably have the Schwab ten ninety nine. So because they did it, of course, in the middle of the year. I can't tell you how many people, weren't giving us the Charles Schwab ten ninety nine. And if I personally hadn't been aware of that change myself because of my own accounts

Right.

I was like, I know you probably have it because all the accounts, the whole country, changed

Right.

Into Charles Schwab. So and then, sure enough, oh, yeah. Here it is.

Right. Right. And

some of them were had significant amounts. So, yeah, that's the biggest common mistake is forgetting to give us $10.90 nines.

Mhmm.

Happens also with retirement distributions for some reason, especially if you're not retired age, but maybe you needed to take a distribution for a short term emergency, but then you forgot to give the $10.99 to your CPA.

That's right. Because you usually don't have to pull a ten ninety nine from there.

Yeah. So it's not an annual thing that we're not asking for unless maybe we had done tax planning, and that's on the question here.

Now I can also see it from their end where one may forget to do something like that. Is there a way maybe to make sure that nothing gets missed?

Missed? Well, if you go to a little bit of an extreme, you can sign over power of attorney, allow your CPA to have full access to everything. Right. We don't generally recommend that.

Right.

Plus we do church by the hour. So you do have to kinda keep in mind. There are some cases where we have had to do that Right. For people, but it's usually

In an extreme situation.

Yeah. Pretty extreme

Right.

Unique situations.

But on your own, though, I mean, I would imagine they could log in to the IRS transcript.

You can't. Yes. Personally, anybody can set up their own account with the IRS and double check the information that the IRS has because we already know the IRS has most at least they have the income. Anything with the w two, ten ninety nine, and the k ones, the IRS has their copy

of.

And, also, they have your tax payment. That's another thing surprisingly challenging to get is people's tax payments.

Mhmm.

We're always asking, did you make your estimated tax payments?

Right.

And do you have any support that you made it? And because sometimes they come back and say, well, I did what you told me to. And it's like, yeah. I'd like a little proof because doesn't always work out exactly that way. And the IRS is definitely going to notice if your payments reported on the tax return don't match.

That's right.

What they showed.

That's right. And let me add on to that just a little bit because there are various ways to make tax payments online.

Mhmm.

And I know that's the preferred way these days. Now, if you are using the direct pay link on the IRS site, you usually are not going to retain a history. At least not through that login. Every time you log in, you have to input like a prior year's tax return to verify your identity. You can make the payment, you will get a receipt. But again, that receipt almost always never has an amount. It just has a number there, a contribution number and that's it. So, the other method which is what I usually recommend my clients, and it's a bit of a tedious process because you have to wait for a pin to arrive in your mail and you have to punch in the pin number to confirm that you are who you are.

But it's through something called the EFTPS account. So that's also linked to the IRS. The advantage of having an EFTPS account is that when you set it up, anytime you make a payment from there, the history remains. So let's say if your CPA or whoever reaches out and asks you, Hey, can you tell me how many of your quarterly estimated tax payments have you made last year? You know, we suggested you to pay this much total for the four quarters. Can you send us a confirmation? All you, if you have an EFTPS account, you can just log in, click on the payment history section, print that part out and send it to your CPA and you're all done. It has the amount, it has the payment date, it has all the information that we're looking for. The other note that I have to give to you guys is that with the EFTPS account, they are set up by the tax ID number. So if you set it up using your social security number, that EFTPS account belongs to you personally.

If you use the company's tax ID, then that EFTPS account belongs to the company. I have had issues with this in the past, where the client set it up using the business tax ID, made the payment from there, and then later was like, I don't see this on my IRS transcript. Oh, no. But I'm sure I made the payment. So as it's just a note, just be wary of that, that when you set it up, and if you're a CPS saying you personally have to make the payment, then set it up under your Social Security number and not in on under any of the business tax IDs.

Yeah. And the IRS does sometimes get mixed up with spouses. So I do recommend whoever is listed as taxpayer on the tax return, whether it's, the husband or wife or whatever, whoever's listed in the box, taxpayer Mhmm. Kinda wanna use that Social Security number. Even if it's the spouse's business

Mhmm.

Self employment tax, it's still better to use the taxpayer Social Security number for your tax payments so that they do get applied to the tax the correct tax return.

Mhmm.

Because that's always boggled, maybe, is why the IRS can't just match up both.

That's right. Yeah.

Because that happens all the time. Because, you know, the spouses, you know, they just started a little business, and they're trying to do the right thing. They know they have to make estimated tax payments. Maybe they're even estimating on their own. They mail them in and write their Social Security number, then the tax return gets filed and the IRS is saying that they're underpaid.

Wow, okay. Mhmm. That's a very good point you just

raised.

Yeah. So let's say, and I'm going to draw a scenario just because I'm a visual person. So, let's say there's a husband, there's a wife, the husband is working somewhere full time, the wife was a homemaker, but later decides to become a realtor. You know, sells two or three properties, makes a little bit of money, and reports it on the tax return. So you're saying to use the taxpayers

Right. Numb Yes. And, you know, if we provided the the voucher, the $10.40 ES voucher, you're gonna notice it will list out both names, but the primary security number is gonna be the per linked to the person who's taxpayer.

Right. And this is all assuming

that the

tax return will be filed jointly.

Correct. Correct. Yeah. Especially being in Texas. See, there are some cases where we recommend married filing separate, but generally, married filing joint is more beneficial.

Right. Right. Right. Okay. Those are good points. Yeah.

Yeah. They and I will mention that. That's one thing in, Texas is with community property income. I think some people get confused that you could report his and hers income separately. But the way community property tax works is you take everything regardless of who made it and divide it in half.

Okay. Yeah. You know, I'm glad you actually brought it up.

Yes. And so in a community property state, it's really gonna work out to be fifty fifty. The,

Regardless of who made what.

Yes. The only thing that the self employment tax, if somebody had a real like, a realtor self employment tax filing a schedule c, the self employment tax will stay with the one who earned it, But the net income still gets split in half. It's interesting.

I see. Okay. Now, I'm glad you brought this up because, you know, there's been some changes to the student loan repayment. Mhmm. Right? There's one called income driven. And there are people out there that are advising a lot of these people with student loans to file separately. Even if they're in Texas. Yeah.

Thinking that, oh, that's going to be showing less income and that I can reduce my student loan payment.

Sure enough. The IRS even has a form for community property states, and the tax software knows where you live because we have to enter in your address. It generates that form on these married filing separate. So if that form's not done correctly, you're basically just saying to the IRS, alright. I'm intentionally not filing my taxes correctly.

Right. Right. Yeah. And oftentimes I've even heard that these lenders will reach out to you this next year. So maybe you can get away with it the first year with the lower payment amount.

Yeah.

But by the next year, they're going to say, hey, can I also get a copy of your spouse's tax return? Because I noticed you used the Texas address.

Correct. Yeah.

And that's when they're going to combine it and raise your payment again. So why get into that hassle when you know that they're not going to let it fly?

Correct. Yeah. Now if you're in a non community property state, it's, you know, it's a different case. We actually had and I was actually, pretty impressed with California one time because we do have clients that maintain families in California, but they're still working in Texas. So there's some question about whether of course, they wanna be a Texas, resident for taxes. And, you know, we've spent a lot of time there's a lot of court history and precedent on things that make you a resident. Now how do you determine where your residency is? But California got smart. Instead of taking people to court and stuff, they're like, well, your your nonworking spouse is here, so we're gonna at least tax half.

Something is better than nothing.

Right? So I was like, alright. So that was several years back. So now we know if yeah. We've got some question about California residency, and both spouses are not, equal time in each state.

Right.

Yeah, they there's at least gonna get half.

Yeah. And I think they have some kind of connection with DMV. I feel like if you have a California driver's license, they'll know.

They'll know. And a lot of these people are maintaining a Texas driver's license, and they even have a home here. And, you know, you don't remember California with all the, celebrities and stuff. It's probably not that uncommon for spouses to live in other states.

Yeah. Yeah.

They they look at where your kids go to school, where you shop. They can see your credit card. Unless you're spending cash all the time and doing all your withdrawals in Texas, it's a little hard to hide these days when

you are. Oh, yeah.

And but and then sometimes there is legitimate questions. We do have people who are legitimately still commuting, like, back and forth.

That's right.

And now the IRS does go by where you work is your home. Your so they do take that position is where do you maintain your primary office

Mhmm.

Or perform most of your services. And then the states, of course, are gonna be, like, everybody's a resident, whoever, like, slept here Mhmm. More than two nights.

Right. Oh goodness.

But, yeah, fortunately in Texas, that's one thing we don't have to deal with the state income tax.

I just remembered something. And this always helps out our new clients or people that are just starting out their new dental practice. Okay. Can you talk a little bit about what BPP tax is?

A a little bit. It's PP stands for business property tax. And they're just the county like, Texas does have property taxes in lieu of income tax. So every year, there's an annual assessment of what your business property is worth, and they're gonna pay tax on that. Now it can be argued. With new practice, it's kinda hard because you just bought everything. And if you try to argue that it's less than what you paid for, it's not really going

To fly. Yeah.

Yeah. It's not gonna fly. Yeah. It's not gonna fly. Because it's like but, you know, ten years down the line. Mhmm. Let's say you've retired some of that old equipment or replaced it or technology, but the county may still have some of that listed. That's when you can, like, reassess what you still have and make sure that you're not paying taxes on something that you don't actually have in anymore you're not using.

That's true. Yeah. Yeah. That's true.

Sometimes you just haven't gotten away to actually getting it to the recycle or wherever old dental equipment Yeah.

Yeah. But those big equipment pieces is hard.

I know. It's hard. I have I have pieces of old computers Still sitting there. In random spots in my house. Right. So I get it. It's like it's it's useless. It's not worth anything.

Right. But yeah, you should pay tax on it.

Right, exactly. So it's essentially a tax that's assessed by the county of where you're practicing out of, right? So don't think it's a spam or somebody's trying to, you know

I think what you do get some people trying to sell, like, what I just described, like kind of an appeals process. Yeah. You don't wanna

be the disputes.

Yeah. The disputes. Generally, I'm I would not advise doing that with some unknown third party giving them

Mhmm.

Important financial information. Check with your CPA first.

Exactly. And your CPA should be able to help you with that. If there is a valid reason for a dispute Yeah. But without getting too technical, it's this additional tax, and you will get a letter. Send it to your CPA if you're ever unsure just to verify, hey, is this real?

Mhmm. And does the assessment look right? Right. For my practice?

Right. Exactly.

And may say, yes. That's very fair. Because sometimes the counties don't wanna argue with everybody.

Uh-huh.

So often their appraisal value assessment is a little on the low side.

Right.

But if you legitimately think it's too high, then you definitely wanna appeal it.

Right. Right.

And I often recommend having the depreciation schedules and the fixed asset list be reviewed at least once every ten years to identify stuff that's not being used anymore. So we can get it off the list.

Right. That's a very good point. So maybe whoever is doing the tax return or is keeping up with your list of assets, review them once in a while. The more frequent the better. Right? Yeah. And then retire the ones that are no longer being used or were thrown out or just, you know, just broke loose. Recycled or sitting there in your office doing nothing.

Yep. And sometimes there's the trade ins. So if you try to identify the trade ins, there are that happens sometimes too where you're upgrading to a newer model with something that was still had some value.

So you you actually brought up a good point because that's also something I feel like as a business owner, if you buy an equipment by trading in an older one, that is an a piece of information you definitely need to let your tax preparer know.

Correct. Correct. And we do try to get the invoices that go along with major purchases. We don't always have success getting every single one. But that way, we can take off the old one and report the full cost of the new one.

Right. And, again, that's the reason why we ask for the invoice along with the finance agreement. A lot of times, you know, clients will say, I just sent you the finance agreement. It has all the information you need. Well, it tells me how much you financed.

Mhmm. Right. It doesn't include the trade in or any down payment.

Yeah. Now some of the lenders will include that in a in a description box.

Yeah. If you only have the finance agreement, often that is only the loan amount.

That's true. That's true. Mhmm. So that's the main reason why, because we want to see the actual cost and the trade in value of the asset that was traded in. And then, you know, the final net amount that you have to pay for our finance. Okay. That's good. I would like to also have you talk about some of the common audit red flags that we see.

Oh, yeah. Anything that has potential to be abused personally or over expensed. Mhmm. Meals is a is a good one. Business meals. Most business meals require at least two people, having a meal and discussing business.

Okay. So if I see a transaction from Starbucks for $4.

Yeah. That that doesn't

That's not a business meal.

Not a business meal. That's just you got yourself Starbucks. Now if you, yeah, if you picked up Starbucks for the entire office on the way, that would be really nice of you. And I said that would be in meals.

That's true. Yeah. Yeah. Starbucks, donuts, all of that. Yeah. Okay. That's a good point. Somebody else what would be some of the other?

Travel. Travel is so overused because, you know, some people legitimately do think everything is business related, and you're thinking about your job while you're on vacation. Right. You probably even talked to your someone about it, your spouse.

So

so, yeah, we talked about business, but the travel has to be ordinary and necessary. So there's a big difference. Your family vacation, calling it a shareholder meeting, Cancun Mhmm. Versus traveling to a convention, a dental conference, or any professional association Mhmm. That's related to what you do in Vegas. You know, obviously, one has a clear business reason, the other one. Is it can I have that meeting here where I live or Mhmm? Down the street? Was it necessary to travel that far? Then there's also big restrictions on cruises. I've seen few people, like, trying to deduct cruises, and the IRS has does not like cruises for some reason.

It's you're better off if you are legitimately having a a work conference and other employees are going, say, to management team or team building, you're better off going overseas on land, like, going to a resort. But anytime you have international, if you're thinking of a business trip that's overseas, check with your CPA first before assuming the whole thing is going to be deductible because it it really depends on how many days of business it is, who's attending, if it's a cruise.

Yeah.

There's there's a lot of variables that can be easy to, trip up

Right.

And lose the deduction

I see.

Or lose a lot of it.

I see. So Now well, so so those are the two most commonly scrutinized accounts. Right? Meals and travel.

Yeah. And auto.

Auto? Okay.

Uh-huh. Personal use of auto. Certain industries require constant use. Mhmm. Sales, real estate agent, especially certain industries that are less dependent on needing a vehicle to be legitimate. Test. Like yeah. With a single location, that's probably not going to be audit proof.

Yeah. Like, % business use of a vehicle.

Yeah. And things have changed a little bit, you know, from even when I first started working. People don't physically go to the bank every day or No. Don't have to go buy supplies or Yeah. Everything's online. Even meetings at Zoom and Teams, there's so much less actual travel, like, local travel required that it's very hard to justify

That's true.

A deduction, especially if you're trying to write off, all or a full vehicle.

Right. But what if I tell you, but I just bought this car and I only use it to go to work, go back and forth

to work? Commuting doesn't count. That's excluded.

See? That's why.

Yeah. So if you only have one location, there takes out your in between home and work. Okay. It's not included. Now if you have multiple locations and you have to go site to site to site, that's different. Totally different back case and much more likely to be supported.

Mhmm. Okay. And then also the one off giant expenses, I would say. Just make sure you don't have a giant expense without enough support. Right? That usually offsets the typical benchmark of the category Mhmm. Of expense. That's a very easy red flag, like an item that can be red flagged by IRS. Because you guys have to understand that just like how we are using AI or we we've entered into that world, so has IRS.

Oh, yeah. And they they've been using their computer, which is much less sophisticated than AI to do this matching.

Mhmm.

And but then they're they also have, like, char you know, charity is one of those.

There we go.

We have seen where the IRS will generate a letter. A lot of these are computer generated letters that people receive. It's not talking about intelligent sources generating these letters. But the IRS may say, we need to see your charitable receipts because your total charity donation you reported is much higher than the standard percentage for somebody at your income level.

Mhmm.

So but, actually, I had that comment on a review note last week. One of our taxpayers and I know it's a real donation. They have a history of making large donations, very faithful, apparently. But I was like, I'd like to have a copy of this because I know the IRS is going to Mhmm. Be sending a notice asking for the receipts Mhmm. Because this is stands out.

Mhmm.

And so I just wanna be prepared because it's easier to get it now than if that notice comes out another year from now. Right. It's like, where'd the receipt go? Or That's

right. That's right. Yeah.

Well, who knows? We, we had some problems getting backup for one of our clients that was out of state that was affected by a hurricane. Last year, we had a a noncash donation, which those do require additional support.

Mhmm.

And the whole area was flooded. The church is closed. I Yeah. So we had to do a little extra attachments and pleading with the IRS be and citing the federal disaster area that for some of the support.

So in other words, if you guys if any of you guys live in Louisiana, don't dilly dally.

Yeah. Just please get, please give us a copy and we'll keep it safe and electronically stored and away from, fires and floods.

Right. Oh goodness. That's a good point. Yeah. Now in charity, you know, I just thought of a question that I once or twice got asked. As a lot of you listeners may know, you know, we're a CPA firm that, specializes in the business side of dentistry. So dentists sometimes like to volunteer their services, right? So maybe we can talk a little bit about that. So let's say we have a client that wants to donate his or her services to a charitable organization, right? Is there any part of that service? Now let's say, right, just to, I guess, improve the scenario, the quality of this picture that I'm trying to paint here.

Let's say this person had to travel out of state, had to buy plane tickets, right? And it was just him or herself, flew there, got a hotel, stayed there for the two days, there was an event that this organization was hosting and he or she provided their services there. And then came back again, bought the plane ticket to come back. Now while they were there, they rented a car, you know, had to buy food for themselves. Now in this scenario, what would be deductible?

Well, direct expenses related to volunteering can be considered a charitable deduction as an individual if you are itemizing.

Mhmm.

Because the IRS does allow for volunteer expenses.

Mhmm.

There's even a reduced if you were driving your own vehicle, there's a a lower rate than the business miles for charitable. Mhmm. And then to the extent, yeah, direct travel, any supplies that you may have needed to perform your services, those would be deductible if you can itemize.

So what about the time that was spent there?

For a cash basis taxpayer, it's not, the time is not deductible.

I see. So even though let's say this person was there for two days, say worked there for sixteen hours, right? And maybe this person also had to provide the dental supplies needed to perform the procedures. What they would charge for those procedures, that amount, those amounts, estimated amounts or amounts that they can pull from their fee schedule cannot be deducted?

Correct. Now your out of pocket cost for supplies that you used while doing the volunteer work, that is deductible, but there's no additional deduction other than your actual costs.

Okay. Good. So I'm glad you brought that up. And I hope you guys paid attention to that. And I can completely understand how the justification comes, because I do talk with you guys, but in reality, those are the rules.

Correct. Right. Because, you know, you could, you have an opportunity cost.

Right.

But opportunity costs are not deductible. Mhmm. Mhmm.

Now on

the other hand, you weren't working, so you had two days less of income to report.

To them, that's not a good thing.

I know.

You know? That's We always look at it from a tax standpoint.

That's how the IRS is looking at it. It's like you didn't include the income. You can't take the deduction. Yeah.

Assuming you don't have other associates or local tenants or IG this. And you're the only sole provider in your practice.

Yeah. No. That's unfortunately, that is yeah. Those are the rules. Yeah. And, you know, with with the higher currently, the higher standard deduction that but it gets not a lot of people are currently itemized. So it might not your out of pocket and other itemized deductions would have to be high enough to exceed the standard.

So we are coming close to the end of our episode. I I wanted to skip to the best part, which is, maybe sharing a few tax horror stories with our audience.

Well, from our perspective, including, like, yesterday, we found out we had one more tax return that we didn't know about actually and found out it existed for the past two years.

Mhmm.

Sometimes people get into a partnership or another business arrangement with another person, and nobody really communicates with each other about who's responsible for the tax filings.

Yeah. That's true.

And is this how does this activity get reported? Is anybody doing any accounting? Well, oftentimes, it's a joint purchase of real estate when this happens. Obviously, you know, two people opening up a dental practice are very aware that

Oh, wow.

What has to but is more of a passive investment, like Right. Real estate. Mhmm. But, yeah, all of a sudden, we're like, oh, what? We need the, the tax ID number. Little things like that. We had another client, recently we had some questions about, the partner names, and they gave us the names of some trust we never heard of. And we were like, we're when did these come around? Oh, 2019.

Wow. Yeah.

And then we're like and they're like, oh, this is the same partner for this and we're like, no. This is all news. But, fortunately, we were able to get a phone call scheduled with the estate attorney who had set up these trusts. Yeah. And, we're able to kind of fix it going forward. I see. But a lot of people were doing some strategic estate planning, getting setting up these complex trust to avoid the potential decrease in the estate exemption Mhmm. Which there's a lot of uncertainty what was gonna happen after 2025.

Current tax laws are in fact through the end of this current year that we are in. And now right. The path we're on right now, it does seem more likely that it will stay at the levels or near what it is currently. Mhmm. But there is a lot of fear that it was going to drop back Mhmm. To levels, like, ten

years. Pre

yeah. Yeah. Pre 2018. So people were setting up these trusts, but then they forget to communicate that to their CPA. It doesn't sound like that big of a deal. It's the the the good news is the end of the day, a lot of these, estate planning trust do flows back to your personal tax return.

Mhmm.

But you still if you've spent $20,000 on your estate plan, you wanna follow it and to make it legitimate.

Mhmm.

And, yes, it's probably gonna cost extra

Mhmm.

Because now you get to file this the extra tax returns. Right. But, otherwise, it's really it it might not stand up. And if, especially, if you ended up having a taxable estate at some time. But, you know, it's interesting times right now. Really don't know what's gonna happen. Lots of speculation.

Oh, yeah. Definitely. Especially after the end of 2025 Yeah. Next year. But, you know, you actually, highlighted a couple points there with both the stories, which is not communicating the change with their CPA.

Correct. Yes. Because, one of the things that was not on the CPA exam was, the psychic part. There was no section for testing psychic abilities

on the

CPA exam. So we have no

idea. Right.

It's easy for us

to, like, read someone's mind and just automatically know what's happening.

Yeah. No. So yeah. So we have to ask questions, and sometimes we don't know we have to ask a specific question. Right. And sometimes I feel like it's a little hide and seek.

Yeah. But Yeah. But I

do think people just, for the most part, get busy and forget to tell us.

Mhmm. No. That is most likely what happens. And anytime attorney related anything, just please let your CPA know. I know you're probably thinking, what does that have to do with anything? But let's say you had to pay a settlement amount for some kind of lawsuit. You would want to know if that's deductible or not by talking to your CPA. So anything business related, anything legal related, just talk to them and say, hey, is there is there a tax impact here for this and what should I be aware of? And then any kind of change. Right?

Yeah. Even little things like you bought a new house. Yeah. You just filed your tax return. Let's say you filed on time, even early, just filed this week. And couple months from now, you're moving. You're gonna you're gonna buy a new house, and you're gonna move. Well, the IRS is gonna have your old address.

Now the post office forwarding is usually good for six months.

Mhmm.

But if from the time you move to your new location is gonna be more than six months, you need to actually file a separate change of address form with the IRS to let them know where to send your tax notices.

That's right. Yeah.

Mhmm. And this applies for, personal, your home address or your business. Mhmm. Because sometimes we don't know. Like, it's not affecting the current year that because we're always a little behind. Mhmm. I get really confused on what year it is sometimes.

Yeah. Because when we say this year,

we're not This year, I'm talking about twenty twenty But so I'm not asking twenty twenty five questions.

Right.

That's not gonna fit, but it does the address is little things like that. The address is kinda important.

So little things like that. Just giving us the information or giving your CPA that information, they'll know where to apply that change. So those are great stories and I'm actually honestly glad we don't have really scary horror stories.

Yeah. Fortunately not.

That's good. That's

good. Some of my scary stories are just my own horror more. Like, finding out something last minute and

Uh-huh.

You know, just one more you think you're done for the day. You just made the deadline. You're just like, oh no, there's something else we missed.

I mean, if it's the larger things, they're easy to catch. Mhmm. But it's the smaller little things, and then Yeah. Maybe you're not seeing it cumulatively, but somehow later you do and you're like, wait. Oh, I just thought of something. Let's say you bought a piece of equipment in December, but the payment's not gonna kick in till let's say January or February of next year. How are we gonna know that you bought and placed it and serviced and equipment in 2024, let's say, unless you let us know. Right.

And we find that out, let's say, in 2025, we're like, wait, what are these monthly payments for?

Yeah. Yeah. We've had to go back and amend returns before to get the equipment in the right ear.

That's right. That's right.

Because we didn't we were we failed psychic.

Yeah. Yeah. That's true. We failed psychic. That's that's definitely the best way to put it. All right, Lorraine. Well, thank you so much for being on the episode with us. It was great having you here.

I'm sure the listeners loved hearing our points. And again, if you guys have any questions, you know, feel free to reach us. Our contact information will be listed in the description as well as towards the end of this episode. Thanks for listening today. Be sure to subscribe to Beyond by Wings on your favorite podcast platform. For more information, you can follow us on Facebook, Twitter, and LinkedIn, or reach out to us on our website. You can also shoot us an email at info@eandassociates.com.