All right, taxes, and more importantly, how do we minimize them? So,
I know this, uh, isn't an exciting topic in general, uh, but trust me,
this is going to probably be one of the more valuable units that you might want
to refer back to multiple times. There's a lot of stuff in here.
I went through some very, uh, detailed number examples to give you the concepts.
Uh, but definitely take note of this is this could save you thousands of dollars
each year if you're doing this correctly,
or it could cost you thousands of dollars if done incorrectly.
So disclaimer, hire cpa. Um,
basically then all the liability for taxes being done incorrectly kind of shifts
over to them because getting tax penalties are not fun and they can be
extremely expensive.
So the purpose of this is to make sure you understand the basics so that
you can vet a competent cpa. Not all of them may know this,
they should all know this,
but it's better that you have the background knowledge to make sure that you are
getting all of the different deductions and selections, uh,
along the way that are going to benefit you the most.
There's also a couple things in here,
especially if you're getting ready to start your own business,
you will want to pay attention to, uh, which comes down to the business setup,
which can impact things as well. In most cases,
basic record keeping should not be extremely time intensive.
If the system and software is set up correctly,
it will calculate a lot of this stuff for you.
So a full-time accountant might not be necessary, but it's always good, uh,
probably to have like a quarterly, uh,
review or e at least a semi-annual review of this stuff to have someone
go through and double check. So different types of taxes.
First one is sales tax.
So this is separate from your income tax in the us Yes,
you get tax multiple times in multiple different ways.
So this sales tax is remitted to your local government. Um,
and the frequency is gonna depend on your annual total of basically sales
receipts that are eligible for sales tax.
So in the first year,
they typically want you to just do estimates and then moving forward you'll kind
of look at, you know, the previous year, um, and do some calculations to, uh,
estimate how frequently you need to remit this sales tax. So, um,
if you're running a successful business,
you're gonna be doing at least quarterly. Um, if you're really doing well,
it's gonna be monthly.
So some items are exempt from sales tax,
so make sure you double check your local laws.
So sometimes items that you're buying to resell.
So if you're buying clothing to get it printed on, um,
that may be exempt from tax because once you sell it,
you are going to be charging tax on it and then sending that tax to the
government. So that does give you a little bit of work around. Same thing for,
uh, supplements. If you're, you know, buying, you know,
a bunch of supplements to stock your personal training studio,
you can often get those at what's called wholesale. Uh,
and then you won't have to pay tax on that either as long as you have your
resale certificate. So remember that resale certificate from, uh,
one of the first units we talked about. When you're registering your business,
you'll need to have that number and that information to submit to get a tax
exempt status.
Some sales that are actually exempt from sales tax are basically,
uh, typically gonna be exclusively for services. So again,
double check this cuz it will, it can vary by region and country. Um,
but for example,
sometimes online coaching or something where you're actually providing an
in-person, uh,
or real time service may be exempt from sales tax,
not income tax though. So, uh, downloadable items.
So PDFs and stuff are usually still subject to sales tax even though they're
intangible. So sales tax are not just on physical physical goods.
Uh, the local,
your local department of revenue portals are often really easy to submit this
stuff in just a few minutes. Uh,
you probably don't need to have someone do this for you. Uh,
when I do this every month, it takes, you know, maybe four minutes if that.
It's pretty easy.
So the next thing is are the prices that you're listing, you know,
quote unquote what they pay, right? When you go through the sales process,
if you put a hundred dollars,
is it going to add tax on top of that at the checkout or is it just typically a
hundred dollars is a hundred dollars, that's what you pay, uh, all the time.
Now, typically in the fitness industry and kind of the standard for most, uh,
online stuff now is what you see is what you pay.
They're not adding taxes on top on the backend usually.
So you can make that decision for yourself,
but basically we need to account for are we adding V A t or sales tax or
accounting for that in some way? So if you're doing the,
what they see is what they pay, here's how we need to look at this.
Are you basically going to, um, consider when you're accounting for this stuff,
the, uh,
processing fees are on top of or included in the price?
Meaning if we pay, uh, you know, uh,
if the product is a hundred dollars and we pay a 3% transaction fee,
when you account for that in your system, are you, you know,
accounting for the whole a hundred dollars? That's what's getting taxed.
Or are we saying,
well we were expecting this 3% fee and we're not paying taxes on
fees,
we're paying taxes on the revenue that we are getting for our product,
so I'm only gonna pay my 8% sales tax on $97
instead of a hundred dollars. Now it's a very small difference.
Obviously we're looking at, you know,
a quarter of a percent in extra taxes that you would pay if you were doing in
this example with 8% sales tax on 3% transaction fee.
But this isn't the only way that this kind of comes about.
So we need to look at how this stuff stacks on top of itself.
Same thing goes for sales tax. Are we including or excluding the sales tax?
So if someone pays a hundred dollars, 8%, are you accounting for, oh,
I got a hundred dollars and then you pay $8 on that,
a hundred dollars for your 8%? Or are we saying, well this price,
I was expecting to pay tax within this a hundred dollars.
So then we do a little bit of math and we find out, well, we're actually,
you know,
getting paid 92 59 and then my 8% on top of that
takes us to a hundred dollars.
So that is how I would recommend doing your sales tax stuff in,
in your book on your accounting side so that you're saving yourself a little bit
of money. Now on a hundred grand in sales, it's about $600. Again,
not a massive life changing difference,
but this stuff can start to add up. Uh, and you'll see, uh,
before I go through this example here,
it'll basically mean you're saving about $800 or making, you know,
making an extra $800 a year, not a bad thing to have.
So this is just, you know, a quick overview of what that would look like from,
uh, the accounting side of gross sales at 103% transaction fee,
8% sales tax.
If we're doing the inclusive on the right here, we're looking at,
when we calculate our, you know, taxable income, we're saying, well we,
this transaction fee, we were expecting to include that in our price.
So it's really, you know, $97,000,
but we were also expecting to pay a sales tax within that price anyway.
So we do our bit of math here and now our taxable,
our sales taxable income is, you know,
or our end result here is 89,814.
The total sales tax we pay is about a little over $800
less, which means we retain $800 more.
So this is just one of many things that it seems like a small difference,
but as you start compounding these things,
it can create a significant difference, uh, over the course of the year. Plus,
who wouldn't want to have, you know, an extra 800 bucks? That's always nice.
So now that we've talked about sales tax, let's look at income tax.
So this is the big one that everyone's trying to reduce obviously.
So in the US accounting system,
we have typically our itemized or standard deduction.
If you don't think you're going to be able to pick out, you know,
almost $13,000 of expenses,
and this is for an individual as of 2022, go with the standard deduction.
Um, most people aren't, unless of course you are buying, uh,
or paying a ton of stuff for business expenses.
But if you're itemizing that stuff,
that'll all be taken care of in your books because you'll be recording those in
accounts in your ledger.
If you're using an LLC with the S corp election where all the income is
reported on your personal return, it can be very easy to exceed this,
which is basically what we just covered.
So making sure we're ac keeping the books, uh,
organized throughout the year can really make tax prep at the end of the year
very easy. Again, having a CPA do this, uh,
to save you a lot of time so you can focus on other things,
but we need to know what can be expensed and how to track it so that it can
actually be qualified as a deduction.
So here's some things that maybe you might not have thought of that do count
as expense items for, you know, personal training, right?
Clothing you have to show up. Let's say you have, you know,
a printed shirt or an embroidered shirt that's, you know, your uniform, right?
You can expense, you know,
dry cleaning costs for that or even purchasing that clothing, uh,
buying new clothing to wear during your sessions. All that stuff can add up.
Internet expenses. You're running an online business, you can deduct that.
Car related expenses, this is where the tracking stuff comes in.
You might have to actually record, you know, mileage to and from the gym, um,
and stuff like that. But you know,
that means that you can take a percentage of everything you pay for gas,
insurance, um, those kind of things, repairs,
those can all be essentially expensed and kind of reduce your taxable income.
And then of course, marketing itself, uh, is an expense as far as, um,
the accounting side of things are concerned.
I know we talked about it can be looked at as an investment,
but as far as accounting's concerned, paying for ads is an expense.
So make sure we have all that stuff tracked.
And often if you're going through Facebook or something,
you can easily get that, uh,
report from them that you can then include in your taxes to reduce your
personal income possible once for gym owners, a lot of the same stuff,
but you also obviously have your utility bills. Um, purchasing equipment,
uh, and I have a double asterisk next to that one. Um,
we can depreciate it or do what's called a section 1 79,
which is a very important one, which will get to in a minute.
And then of course, marketing and rent and building improvements, right?
So rent rent's an expense unless you're have some kind of lease or lease to own
contract set up, uh, in which case that can be, you know,
needs to be capitalized. Uh, paying for building improvements, right?
So it's like you have a space that you rent but you want to remodel the bathroom
and they make you pay for it. Keep all those receipts, throw that, uh,
on your expense sheet for your income taxes.
Online coaches, obviously clothing,
maybe not as much of a concern unless you're producing a lot of content and you
have a specific uniform or clothing that you're using for that,
then you could possibly expense some of your clothing stuff as well.
Website development, maintenance, content development equipment, uh,
so software lighting, all of that kind of stuff. Again, double asterisks.
Keep that in mind as we get into an upcoming section here. And then marketing.
So depreciation, we've covered this, uh,
briefly so you can write off a part of the value of the item each year.
And then that goes towards basically reducing your taxable income.
So make sure we have those depreciation schedules set up. Um,
and it's going to basically vary on the useful life of the item. Uh, again,
you can Google or search this very easily if you type in, you know,
useful life of and then insert an item whether,
and it's gonna be an item category, uh, you know, like furniture, equipment,
software, that kind of stuff. And there's generally accepted, um,
schedules that can be used for accounting for that if you're doing that
yourself. Otherwise have your accountant do it. The depreciation method, right?
So there's straight line, uh, you have declining balance,
double declining balance basically that just is shifting.
How much of it is written off at what point in that lifespan. So some stuff,
uh, like technology related things typically depreciates faster initially.
So maybe use like a double declining balance.
You can write off or expense more of the value of that thing early on,
which is of course going to, uh, affect your taxes, um,
especially if you have a larger income in one year. Um,
and then we can use this for both tangible and intangible items. So like I said,
we can use it for, uh, software, website, uh,
all that kind of stuff rather than just physical items.
Here is the big one. This is called section 1 79.
This is of course the US tax code. I'm sorry, I don't know if this, uh,
something is similar to this, uh, in other countries,
but here's the, uh, the important thing.
It can allow you to deduct up to a hundred percent of that item in the first
year rather than depreciating it over multiple years.
So this is one of those things that you may have a year. If you buy, you know,
a bunch of equipment,
you could essentially reduce your taxable income to zero.
So you would pay no additional taxes in that year,
or you could space it out over the year. So if it's, you know,
a low income year, um,
and you're expecting your income to rise rapidly over the next couple years,
maybe you don't use this and you use that, uh,
depreciation to kind of offset some of your taxes later on to kind of keep
you out of those higher tax brackets,
which you will pay a higher marginal percentage on the top bit of that
income. So here's how the qualifications work, has to be tangible property,
which means it doesn't work for website development and stuff like that.
So this'll be, uh, you know, hard drives, computers, video equipment,
cars potentially that's actually a thing. Um,
and it has to be used more than 50% in your business.
So if you buy it for personal use and you sometimes use it for business,
it may not qualify. You actually you will need to document, um,
how this is used in your business and it has to be purchased, not leased.
You have to use it in the first year of your business.
You can't just hold onto it. Uh, you can't buy a piece of equipment. Uh,
but then you don't actually have your gym belt for another, you know,
six months and it falls in the next calendar year.
You wouldn't be able to write that off in that year.
You would have to wait a year. And the deduction, of course,
cannot exceed the annual taxable income.
You cannot have a negative taxable income.
The government will not pay you for buying equipment, unfortunately.
So if you're on a tight budget when getting started and you're really trying to
minimize your taxes and you're, you know, investing to get things started,
this can be a very valuable thing to reduce that taxable income.
Uh, like I mentioned,
if you're expecting income to increase significantly overcoming years,
maybe not take this approach and use a declining balance or a straight
line method so that you can actually move this expense to other years.
And again,
keep that taxable income a little bit lower when you may be in a higher tax
bracket. Examples, like I mentioned now,
don't need to cover those again.
Then we have a qualified business income tax deduction.
So this is another one that most people don't know about,
but your accountant should, uh,
you can deduct up to 20% of your business income after your other
calculations. So this is where having certain, uh,
business types is important, right? So we have our LLC partnership,
so proprietor S-corp does not work for a C corp, hopefully,
or I would expect that after our earlier module.
You're not choosing a C corporation or if you have, you've take,
going to take the S-corp election. And then the limitations, of course,
you have to be under 170 grand for one person and that's as of
2022 where there's my citation down there. But as always,
consult with a CPA so you can deduct up to 20% of this business income from
your personal income, uh, amount.
So basically it's like a government subsidy for people trying to run
small businesses, which is a good thing.
So make sure you're checking on this with your CPA and you might be
able to get another significant discount, uh, or decrease in, uh,
the taxes that you are liable for. So our checklist,
are we doing our prices inclusive or exclusive taxes and fees?
And this is more so how you're accounting for it on the backend.
I would recommend doing it inclusive, uh,
going to reduce your taxes just a little bit,
taking advantage of all of those expense items that you can. Um,
usually if you have a, uh, a cpa,
you can ask them about those and they're pretty good at finding all the relevant
ones that you can use, utilizing your depreciation amortization
Schedules, uh, and manipulating those,
or I should say shifting those appropriately to make sure that you are
taking advantage of those, uh, cashless expenses so that you can, again,
reduce your income or your taxable income section 1 79 if
you choose to use it or if you should not.
And then you're qualified at business deduction.
So when you stack those up together,
that is potentially thousands and thousands of dollars you're saving not only
over the course of your career, but every single year.