Why? Costco doesn’t allow me to use my business credit card. And since most of my car use is for business, I get a deduction for the gas if I use my business credit card (plus I get frequent flyer miles). That deduction is worth 20 to 30 percent to me in lower taxes. So it’s worth paying a little more at the gas station down the street in order to get the tax deduction. It’s the little decisions like these, made every day, that add up to big savings in your taxes.
By now you’re probably dying to find out how you can start paying less in taxes every day.
| CHAPTER 4: KEY POINTS | |
| 1. | There is one way to put cash in your pocket almost immediately: reducing your taxes. |
| 2. | Learn how to make everything you do decrease your taxes. |
| 3. | Learn how to change your expenses from a personal expense to a business deduction. |
Tax Strategy #4 – Deduct your Meals
Almost any expense can be deductible in the right circumstance, including food, cars, travel—even your house, if you change your facts so that the expense is a business one. What’s a business expense? In the United States, the tax law requires each business deduction to meet three tests. First, the expense must have a business purpose, which means the primary reason for spending money was for your business. Take meals as an example. To be deductible, the purpose of a meal must be business. This means you need to have a conversation about business with your dining partner before, during, or after the meal. The other valid business meal would be if you were traveling away from home on business. Second, the expense must be ordinary. An expense is ordinary if it is “customary and usual.” This means that within your industry, the expense should be typical of what would be spent, both in the amount of the expense and how often a person in your position would have the expense. Suppose, for example, that you go out to dinner with a business associate. In your industry, what would be the cost of a typical business meal? If you’re a truck driver, the typical business meal is going to be different than if you’re a movie star or professional athlete. An insurance agent might go to lunch with a client or business associate every day, while an auto parts manufacturer might only go to lunch on business once a week. The key here is that whatever is typical in your industry and your position within the industry is what the IRS will allow as ordinary.
Third, the expense must be necessary. Necessary means that the purpose of the expense is to make more money for your business. It’s not enough just to go to lunch with someone and talk business simply because you are friends. Your conversation at lunch must have the intention of increasing the profits in your business. These three rules are not difficult to meet. Let’s say, for example, that your business partner is your spouse. If you’re like most business partners, you’re always talking about business and always looking for ways to improve your business. So pretty much every opportunity you get to have a quiet meal together in a restaurant you will discuss business. Just don’t be extravagant about it on a regular basis. One rule of thumb here is that “pigs get fat and hogs get slaughtered.” If you are greedy and go out to expensive restaurants on a regular basis, the IRS may not look so kindly on your deductions for meals. Still, one of the most common mistakes I see is couples who are always talking about business when they go out to dinner but not paying for their meals with their business credit card.
Entrepreneurs and Investors Get All the Breaks
“If you want more of something, subsidize it.”
– Milton Friedman
In March 1995, I started my professional accounting practice. Over the years, my partners and I have enlarged the firm through marketing and acquisitions. My most notable acquisition was that of a Phoenix-area tax practice in 2001. Earlier that year I’d been through a nasty partnership breakup with three other CPAs. Fortunately for me, about 50 percent of the clients stayed with my new partner and me, and all but one of the firm’s employees stayed with us, meaning we had more workers than work.
On top of this, later in the summer one of my former graduate students came to me looking for work. She was a good student, and I thought she’d make an excellent employee. We took the advice of Jim Collins in his excellent book, Good to Great, to put the right people on the bus and find them seats later, and despite having more workers than work, we hired her.
The end result was that we had far more people to do work than we had actual work to do. So I started looking for a practice to acquire. One day, a card came in the mail from a business broker indicating that he had a couple of practices for sale in the Phoenix area. I called the broker and soon learned that one of the practices was a good fit for us. The practice did a lot of high-end tax planning and had some high-quality clients. One of the clients was a good friend of mine, Kim Butler. Another client was Robert Kiyosaki.
I hadn’t previously heard of Robert Kiyosaki or The Rich Dad Company, but wanting to be well versed on my clients, I immediately went out and purchased his best-selling book, Rich Dad Poor Dad. I loved the book. Then I had lunch with my friend Kim Butler who I knew had been doing some work with Robert and asked her about him. She had nothing but good things to say about Robert and his organization. About the same time, I received a notice in the mail from one of my friends, George Duck, telling me that he had just changed jobs. Amazingly, his new job was CFO of The Rich Dad Company.
Was it a coincidence that all of these occurrences leading me to a great business relationship with Rich Dad happened at the same time? I don’t really know. What I do know is that I’ve learned an enormous amount about teaching, money, and the economy from Robert and Kim Kiyosaki. One of the first things I learned about was the CASHFLOW Quadrant.
What I do know is that I’ve learned an enormous amount about teaching, money, and the economy from Robert and Kim Kiyosaki. One of the first things I learned about was the CASHFLOW Quadrant.
The CASHFLOW Quadrant separates income earners into four quadrants. On the left side are the employees (E) and the self-employed individuals (S). On the right side are big business (B) and investors (I). When I first saw the diagram, my thoughts naturally went to the tax consequences (and benefits) of being in each of the quadrants. I quickly realized that those who earned their income from the left side of the quadrant pay much higher taxes than those who earn their income from the right side of the quadrant.
The reason why those on the B and I side of the quadrant pay so much less in tax than those on the E and S side has become clear to me. It’s because that’s what Congress wanted.
Over the years, since first learning about the CASHFLOW Quadrant, I’ve continued to look at the tax law and apply it to the diagram. The reason why those on the B and I side of the quadrant pay so much less in tax than those on the E and S side has become clear to me. It’s because that’s what Congress or Parliament wanted.
Think about the goals of Congress, Parliament, or any other governing body, for that matter. The government wants to encourage certain activities, and they have two ways of doing that, either by force or by policy. And, as we quoted at the beginning of the chapter, it was the great economist Milton Friedman who said, “If you want more
