Organize Your Life to Maximize Net Worth and Minimize Taxes

The following post is based on a presentation I gave at Camp Mustache SE in Gainesville, Florida on January 15, 2017.

There are several ways to convince someone to speak at your event. Stephen Baughier used the most sure-fire method ever. Stephen noticed I wrote a blog post back in August listing some people I would like to meet someday. He checked two people on the list and found JD Roth open to attending. He then called me and said, “Hey, Keith. I saw on your blog you wanted to meet JD Roth. Well, he is speaking at Camp Mustache SE in January. We would love to have you speak as well and you can meet a man you admire.” How could I say no?

Picking a topic of discussion is something I allow the event organizer to decide. If they have no preference I choose something currently exciting to me. In this instance Stephen thought something about organizing your stuff in preparation for meeting your accountant/tax guy would be a good choice.

I grimaced. My organizational skills are not legend. However, I do keep a tight fist on in financial organization.

Bookkeeping is not a topic which lends to filling an hour presentation. My first thought was to stand in front of the group and yell, “Shut up, and sit down!” while I stabbed my finger at them. “Enter your paperwork once a week and stop bitching about it.” Then I would grab a beer from the fridge and sit down. My first inclination had a slight flaw I thought might turn off the crowd and upset Stephen so I moved to plan B.

After considerable thought (somewhere in the neighborhood of three or four minutes while I was feeding the chickens one day) I decided to expand the idea from organizing your stuff for the accountant to organizing your life in a manner that reduces the workload, stress, and procrastination inducing part of record keeping to include maximizing net worth while reducing taxes. Who doesn’t like saving on taxes? I surmised. And who would argue with growing their net worth at the fastest clip possible? Since no one threw anything during or after the presentation I assume the audience was either kind or mildly receptive. My ego demands I tell you it was the later.

The Ugly

After a brief attempt as humor I discovered I was no George Carlin reincarnated so I moved on to the topic at hand. The best place to start is the ugly.

The worst thing you can do is drop a crate (happens more often than you think)/shoe box/envelope stuffed full of receipts on your accountant’s desk. From your viewpoint you watch a box disappear from your home/office and magically reappear as a neat tax return and a box of papers neatly stapled together in a few weeks. Here is what really happens.

We are so excited to have the extra work we take that box of papers and dump it on the conference table so the room is unavailable for normal use for a day or so. We bring a temp with a bad attitude to the room and, under threat, demand she take the mound of papers and separate it into piles: office expense, cost of goods sold, utilities, et cetera. When she is done she takes an adding machine and creates a z-tape of each pile. The z-tape is stapled to the top of the pile with an industrial strength stapler. The remaining pile of receipts she doesn’t know how to classify is neatly tucked on the bottom of the box and those deductions, if legitimate, are missed. The remaining piles stapled together are used to prepare the tax return.

I suspect most accounting firms around the world use a similar practice in such extreme instances. Time is tight and after a 687 hour workweek during tax season, we are in no mood for bullshit. If you want all your deductions, might I suggest bringing your books into my office in proper order? My job is not to guess what a receipt means; only you can answer that.

The Proper Way to Keep Records with Almost no Effort

The process of organizing your business and personal life should be simple and with modern technology it is fast, simple, effective and low cost.

Small business, a few income properties and personal life: When organizing only requires the documenting of a few items there is no need to go crazy buying software to manage the 17 items needing a place in the data fields. Old fashioned guys can use the old columnar pad or Excel. (Yes, I have a few clients with beautiful records brought in on a columnar pad.) Excel is an awesome tool for managing small amounts of data for personal finances, up to five or so income properties or a very small business without any employees. Fast and simple are the key words here.

The time required to keep your life in order is about one hour per month. In most cases once a month is enough to enter your data.

Medium sized company and more than five income properties: A medium sized company is defined as a business with bookkeeping requirements of between three and ten hours per month.

Once you have more than a token amount of data to manage it is time to open your wallet and invest in some form of accounting/recordkeeping software. QuickBooks is the largest. QB has a robust program with enough features to handle most businesses. The downside is that the payroll module is expensive and limited. (In a few weeks I will publish a post on how to get your payroll done fast and easy with low cost and no additional paperwork headaches for you.)

QB is not the only game in town. You might want to consider other software, including: Freshbooks, Xero, or Sage (the old Peachtree). Each program has its strengths and weaknesses. Space (and my time) requires I move on without reviewing each software package.

At this level you have some additional considerations. Doing your own recordkeeping is an unproductive expenditure of time. Hiring a bookkeeping/accounting firm is a low cost way of getting the rote process of bookkeeping done. Bookkeeping firms know how to optimize the process. What takes you a day takes the bookkeeper an hour or two. While the bookkeeper may charge $60 an hour, the time you take to get the same work done translates into your time valued at $20 or less per hour. And the bookkeeper will get it right.

Large businesses and large numbers of income properties: At this level hiring an accountant to handle your workflow no longer is efficient. You need an in-house bookkeeper/accountant to handle all the paperwork daily. Payroll can be handled internally if you have qualified staff or outsourced.

The Good

There is an animal in the tax world called the non-cash deduction. Things like mileage, per diems and depreciation fall into this category. Depreciation is a phantom non-cash deduction since it is related to actual expense. Mileage and per diems are either a hybrid or true non-cash deduction.

Mileage logs: If there is one area that drives accountants mad it is in the area of mileage logs for business owners and landlords. These people are notorious at keeping accurate records. The IRS requires a mileage log be contemporaneous, which means it needs to be recorded reasonably close to the time of the event. The day you get the IRS letter for an audit is not a contemporaneous record.

Contemporaneous records can be easy to keep if you follow my advice. Miles can add to a large deduction fast. The mileage rate for businesses and landlords is 53.5 cents per mile in 2017, down from 54 cents in 2016. Keeping an accurate record assures you take advantage of the entire deduction. You deduct the entire 53.5 cents per mile even if your actual cost is less! Using a low-cost vehicle is the perfect way to legally stick it to the IRS. I can see you are feeling better already.

The reason so many flub on the mileage log is the requirement you write it down. There are apps available to simplify the process. MilesIQ is a paid app which meets all the IRS requirements for your deduction. A free app from Google Play that provides the same service is TRIPLOG.

Let me clear up the requirement. Your records need to contain the beginning and ending odometer reading for each vehicle for the year. Each day you have business miles you need to record the business miles traveled, the date, where you went and the purpose of the trip. The above apps allow you to enter this data. The printout/record produced by the app is adequate substantiation for tax purposes. You simply enter the deduction into your accounting software and the tax return. No additional horsing around necessary.

Per diems: The per diem is an awesome tool in reducing taxes without a real world expense. Under the hi-low method the IRS allows you to deduct a per diem for meals and incidentals (M&IE) without any additional substantiation. You must record the number of overnights, the business purpose and the location only to qualify.

The hi-low method is easy to use. Most locations within the U.S. have a M&IE allowance of $52 for meals and $5 for incidentals. High-cost locals get $63 for the meal per diem. There is also a chart where you can pick the per diem rate per location instead of the hi-low rate. Rather than muddy this post with long charts you can use this link to determine the hi-low rate localities and the per location rates.

The hi-low rate is simplest and only a limited number of taxpayers will benefit enough to justify the additional time of breaking out all the travel locations separately. Only half the expense is allowed as a deduction and DOT (ie. truck drivers) get special rates and can include 80% as a deduction.

Let’s keep it super-simple. Keep track of how many overnights you have for business purposes and where you went and turn it in to your tax preparer. She will take care of the rest.

Note: business owners and landlords need actual expenses (receipts) for lodging.

New World Order

Modern technology has made it easier than ever to track your expenses/deductions. Your time is precious. So is your money!

Whether you do your own recordkeeping or hire it out, you can use apps to get the maximum deductions with almost no effort. These apps allow you to photograph your receipt and forget it. The receipt is automatically downloaded to your software and saved in the cloud should you need to review the expense later or for proof during an audit. No more lost receipts or sleepless nights over an audit. Your books are so clean it will bring a tear to the eye of your accountant. I’m getting misty just talking about it.

Apps in this category to consider are: Expensify, NeatReceipts and Wave.

Clean, accurate records have two significant advantages. First, accurate records allow for an accurate tax return bulletproof in an audit. Second, accurate records allow you to manage your investments and company by visualizing progress or area of concern. Bookkeeping isn’t a crazy idea thought up by geeks to create gainful employment. Records show where you were, where you are and help project where you are going. You can’t fix what you are unaware of. Keeping accurate records is like driving with your eyes open. Or you might take a chance on the alternative.

Yeah, I thought so.