So let's talk about a couple of these other categories um product development this is one that I had to come up with on my own when I was running my own business because I bought all kinds of you know materials and supplies to make things that I didn't actually sell to people like this ham um I made many exactly like it that I did sell to people but this one I needed to make for a photograph so like I never finished it I never sold it to anybody I just kept it as um a prop and because I didn't sell this to anybody and I didn't have any plans to sell it to anybody um it was not part of my cost of goods sold because it was not sold right I hung on to this for other purposes for photography and whatnot um so when you make things that you don't sell for whatever reason that's product development um so you would want to separate out the materials and the patterns and the tools that you use for that from any cost of goods sold it's still in expensive your business for sure um but it's not pa...
rt of your actual finished sellable products and then there's also professional development um things like this glass where you are today if you purchase this class you get to deduct it on your u s tax there's a benefit for you all right um conferences subscriptions to trade publications or websites are online communities that have to do with your business all part of professional development yes questions from the earlier category product development yeah um so question about tools so is this where we would put things like consumable tools even like the example to give of needles or for me would be like sandpaper things like that that all it gets put into product development yeah you could either put that into product development or you could put it into your office expenses and whatever makes more sense for you as a trackable thing um you know you have plenty of consumables that you'll go through in your office just in the daily running of your business like pens and paper um that kind of stuff stamps uh so you can either put your needles in with that or you could separate it out into product development and you khun separate product development out two into further categories like maybe it's actually um maybe you've got product development that's for um you know, marketing or administrative purposes like that ham was for photographs um maybe you've got product development that's just really research and development maybe you went through a ton of needles and fabric and thread just getting the pattern right on this thing you made like you know, eight different versions of this ham before you got the one that was correct that was right um so it's up to you again how you want to track that from a business standpoint if you feel like you're going through way too much stuff just to get a product right before you actually start making it to sell um that may be something that you wanna track separately all right so let's get back to it this next one is a really really meaty one the home office so many people work out of their home so many crafters especially um another creative professionals too so how do you deduct that how do you deduct the stuff that you use in your house for your business I was talking before about wanting to keep everything separated personal and business and that's still true we definitely definitely want to do that. Um so the answer I mean the short answer to this is that you have to have everything physically separated um I work out of my apartment um my husband does too and we have a studio it's the front room of our apartment um and on lee work goes on in there we do not also host dinner parties in there it is not also you know my daughter's playroom um it's just an office space where we both work um and it's I think twenty two percent of the square footage of our apartment so I can deduct twenty two percent of my mortgage twenty two percent of my utilities um well the utilities that makes sense the electricity for example um the plumbing I do not deduct it does not have a sink or a toilet in there so I don't count that as a business expense right um but any of the things that I'm actually using in my home for my business I count as a business expense and because we both share that space um when it comes to actually deducting that stuff on our taxes we either can each only deduct half of it or we can give it to one or the other so depending on whose head you know figure income that year we might yes question yeah so like for example you said your space is twenty two percent of your house so if you could you deduct like your internet cost like twenty two percent of your internet costs or is that considered something that if you would use that for your home that's you know you could totally deduct twenty two percent of your cell you work it out and if you use your internet exclusively for your business deduct all of it right um you know that's a business expense so yeah absolutely internet electricity the heat you know, my uh pg and e my gas and electric um yeah I've got a heating vent in that office I used at least twenty two percent of the heat in my home for my business uh yeah and all the stuff associated with the with the apartment itself so the mortgage interest on the mortgage my property taxes all that stuff is actually a business expense while twenty two percent of it is a business expense and it's part of my home office so and I've even put it up there rent utilities insurance taxes interest um it doesn't matter if you own your space or you rent um if you have a separate space and that is so key it has to be physically separate um and we actually had to go around like measure the studio with the measuring tape you know, we got on the floor and went around the perimeter of the room and figured out like how many square feet is it how many square feet is the whole apartment? Um and then I figured out the percentage and that's what I track as a home office expense. So when that p jeannie bill comes in every month I take a look at it, take twenty two percent of it and I put it into my ledger. Yes. So the percentage of square footage is the measurement that used to calculate all of your percentages. So for instance, if I used twenty two percent of the square footage but I have two roommates who also sure the internet with me I go with twenty two percent of our internet bill or do I say one third of the internet bill. Twenty two percent of one third of your internet bill. Okay. What if one of the inmates also uses it for professional work? Yeah, but that's up to her to decide how she wants toe calculate that out as a bit like you each pay for a third of the internet in total. And then your business uses twenty two percent of your internet payment. Okay, got it. If that makes sense. Yeah, thanks. Yeah. So, um, this one is meeting. People are like, well, what if I have a dining room table and we eat dinner on the dining room table, but during the day, you know, all day it's my business. So, like, you know, two thirds of the day it's, my business area and one third of the day it's a personal area. Can I deduct two thirds of that dining room table space as a home office expense? No. No, you cannot. It is not a business expense. I'm sorry. It is not a separate place in your home. Uh, it does not get treated as such. Sad panda. What can I say? I'm sorry, um, there's just no way to track it accurately. I mean, maybe you say it's two thirds, but and if you really wanted to take two thirds of the twenty two percent and put it in your ledger is a business expense, I suppose you could just don't try and deduct it on your taxes but like just don't do that I don't want you to get audited on my behalf I am not going to condone anything like that um all right so let's uh move right through uh office expenses pretty self explanatory your pens and paper you're shipping supplies your postage and stamps uh your software um your internet uh if you're not doing the home office um this is a very general catch all category a lot of stuff falls in here when it doesn't go into anything else. Um some people like to put in a category instead of office expenses that's general and administrative expenses and then they further break that out into things like office supplies, postage shipping supplies um and that's absolutely great. If you want to track all of those things separately I highly encourage you to do that. Um when I was doing a lot of retail sales, I did break those things out separately I had a general and administrative category and then I put other little subcategories beneath it um I don't do very much of that anymore um retail is very time consuming I've been slowly moving away from that for a little while so couldn't really track those things as separately as I used to um corrine truck we talked about the mileage diary uh a little bit already um and so the current truck will basically work a lot like the home office at at the end of the month or however often you do your bookkeeping um if you sell a lot of things and you enter a lot of transactions you might want to do it weekly um you look at that mile a diary and you see how many miles did he drive? What percentage of that was for business and then you can figure out that percentage rate um and then you can enter in as an expense for your business that percentage of car expenses that you had so if you paid your registration if you got any repairs um of course gas tolls, parking er anything like that if you're a member of triple a or you know some other roadside service anything like that any questions about the car and truck you asked about transit and we're gonna get to that in a minute um short answer is that goes under travel assets and appreciation is the next big category and um we mentioned earlier that this covers big purchases um so like if you're a photographer maybe this would be, um a fancy new camera um maybe it's some sort of piece of equipment that cuts metal maybe you've decided it's too expensive to keep sending this out to be cut by other machine shops. I'm going to invest in a machine myself, you know that, like water jet cuts meddle into fancy shapes. Um, could be office furniture, um, printers things like this uh, the reason you would pull this out separately is that you can do what's called appreciate an asset, which means that you can, uh, treated as an expense over years over its expected lifetime, as opposed to treating it as an expense right up front. So, um, when you're first starting a business, you may need to invest in some of these big capital purchases. Thes big assets, um, like a new computer. Uh, but you don't want to skew your bookkeeping. You don't want to rescue the value of your business. So let's say you paid a thousand dollars for this computer you expected to last you about five years? Um, you can treat it as an expensive two hundred dollars a year as exposed to as opposed to a one time up front thousand dollar expense because you're going tohave startup costs when you've got a new business, right? Um, so you don't want to look at your your sheet at the end of the year and be like, oh my god I'll never make it I'm you know however many thousands of dollars in the hole um because those up from purchases are gonna last you for years and years and years, right? So for anything that's really big and it's gonna last you a long time in your business you can uh, categorize it as an asset and then depreciate it overtime instead and you have to keep track of that obviously you have to remember that if you put it as a two hundred dollars this year that you also mark it is two hundred dollars next year uh but this is a nice way to sort of smooth things out such that you can see what your expenses for the really huge upfront purchases actually even out to overtime does that make sense? Yeah. Okay, good. Well, is there any other reason besides like you want to smooth out what, like your initial best investments are that you wouldn't just put like that thousand dollar computer in the year that you purchased it? Uh, there can be tax advantages to it in the us at least um in that year when you're starting up, you're probably gonna have a ton of expenses relative to your income um and obviously you can on lee deduct up to the point where you have made a profit right um so if you'd appreciate that over time then you'll have fewer expenses in that first year when you've already got plenty to deduct you already got more than enough then you can get credit for right? Most likely, um, unless by some miraculous turn your first year in business, you've like made a fabulous profit. Um then you can stretch that out into other years when you do have more profits but fewer big expenses and you want to be able to offset that doesn't make sense. Okay, a lot of people who are joining us online do actually work from home, but they tend to be sprawled out throughout the whole house. Or is there a limit to how much you can claim in terms of the percentage of space you're using there? I don't know what if there's a limit legally in the u s to what you can claim a ce faras your taxes for your own bookkeeping purposes, you can claim whatever percentage you want. Um, but I, uh I would recommend again keeping it to a place where only business happens. Um if it's a section of your home like your dining room, where the dining room table is both where your family eats and where you you know, do your crafting, um you're really muddying the waters as faras what's, a personal expense and what's a business expense, and I that starts teo make it really difficult to keep track of how your business is doing and to make those business decisions so I would really on li keep it to areas of your home where on ly business is taking place um and and I mean yeah you may have used every area of your house uh to make things and to keep things into store things but um for tracking purposes in order to allow you to make those really good business decisions again it's really good to keep the business and the personal stuff separate as much as humanly possible sorry who's in the greeting cards business I think they've posted two questions and a lot of people voted on these they have not yet registered their business do you need to have a register business in orderto make these claims or is that not part of it I mean yes uh you know I don't if you don't get audited I don't know who's checking but it's always my advice to know the law where you are located and to follow that law um if you are running a business and you want to claim deductions here in california you know in san francisco you need your san francisco business license um if you're selling things retailing collecting sales tax, you'll need your california sellers permit and this is different in every state in every town in every country um again, I'm not really going to be providing any kind of like legal advice or anything like that but uh it's definitely up to you to find out what forms you need to have in place what paperwork um and to to follow to follow that law and I also do not advocate cheating on taxes people always ask me questions like, well, could I deduct this thing that's not really a business expense and then, you know, get a break on my taxes like first of all, no just don't it's not it's not cool it's not right and and secondly like taxes pay for things they pay for street lights and schools and all this other stuff and everyone's like and cheat on my taxes and it's it's like I don't know it's like part of the american culture to like, you know, hire the accountant that can get, you know, find you the loopholes teo, you know, help you get away with as much money as humanly possible but like it pays for stuff like we all pay taxes for a reason, right? So um I am not going to help you evade the tax man I'm not gonna have you cheat on any taxes uh during this class I'm going to help you keep track of your expenses and your income and make great business decisions based on that I think that was a long way of answering that question did you say you had two questions it was to save they all said they are quite two different ways okay, great. Do you guys have any questions about what I have covered until this point? Okay, so we've gone through depreciation and assets taxes and we're gonna look at this in a little more detail as well but this is taxes just for your business so you can't do a lot of people ask me like can I deduct the income taxes I paid last year in my taxes section no no you cannot do that. Um if you pay employment taxes for your employees so like we talked about earlier social security medicare if you pay those for uh your employees you would put that in taxes that business license that I was talking about san francisco business license it's some ridiculous feels like fifty dollars a year or something um is technically attacks uh so you would put that in there too. Um if you're if you have a d b a doing business as a fictitious business name um that you've registered officially that would be a tax um and then you can also separate out if you want to track this sales tax you've paid on stuff um so if you want to separate out the cost of those scissors from the sales tax you paid on those scissors um you could do that I will personally find that super useful but um some people want to want to pull that stuff out especially uh you know, if you live somewhere where the sales taxes or either especially high and so you want to figure out well actually you know my materials or ten percent higher than they should be because of all that sales tax um or if you live someplace where you'd like don't have sales tax at all like if you live in oregon for example or montana um or alaska um where they don't have sales tax and you had to pay sales tax on something sometime and it's weird and you wanted to pull it out um I tend not to do that this is different than sales tax on things that you either bought wholesale and you shouldn't have I've paid the sales tax on in the first place we'll talk about that later and it's different from the sales tax that you're collecting from customers um this is just sail sex that you paid on something for your business like the scissors like the sewing machine like whatever um and then there's travel eso this includes like real travel like airfare hotel gas rental car, etcetera it also includes public transit if you take transit I'm a transit girl myself yes question I had a question could make the taxes yes so would like customs fees without bender taxes so would that be under shipping like if you're getting something shipped to yourself you have to be custom international customs fees that's under taxes uh so depending on what it is if if um like for example, if I have these made overseas and I have been shipped to me I'm putting those customs fees is part of my cost of goods sold I would put that probably in the other expenses cost of goods sold category if you're having a piece of equipment or some other things sent to you that you are not then reselling to a customer then yet I would definitely put it under taxes for sure the cost of goods sold category kind of trumps every other category right? If it goes in cost of goods sold and maybe somewhere else I always put it in cost of goods sold yeah um yes or travel airfare hotel gas, et cetera, et cetera, et cetera. Um the only thing you can not put in the travel category is meals and entertainment and um mostly this is a u s thing again for tax purposes. You could certainly put it in there if this is not the case where you live um, but meals and entertainment in the u s when you have to keep it separate on your tax return because only half of it is deductible I don't know why it's the only category that's like this um but you can't deduct the whole expense the way that you do in literally every other category except for like the home office car thing where you're taking a percentage um so you always need to separate that out here in the u s just for tax time purposes I don't know why it doesn't make any sense to me but um people always ask you like well, so if I you know go to a restaurant while I'm at this conference do I put it in travel or do I put it in meals entertainment and the short answer is if it's a meal if it's food if it's entertainment it always goes in that meals and entertainment category as opposed to any other category it's another one of these sort of like trump categories okay insurance again business related stuff not personal you don't deduct your personal health coverage here um so if you have liability insurance for your business if you have, um if you have like a home office and you have a separate rider on your insurance that's just for your business you could deduct that under insurance rather than under home officer because you're not going to deduct twenty two percent of your business insurance all of that is for your business so you would put that under insurance um, interest payments again business stuff on lee this is, uh, interest payments on your business credit cards if you have a small business loan and you're paying interest there um if you have a mortgage on uh commercial space they're using either is a studio or that you're using is a retail shop um you could put that under your interest payments um a similar thing goes for rental payments so if you're renting space either studio space retail space if you're renting equipment uh if you're renting storage space somewhere um and it's not part of your cost of goods sold you could put that under rental payments yes to interest payments just are just things that have, like enters what if your parents like give you a personal loan or something and it's not there's no interest attached to it if your parents give you a personal loan their investors and that's investor equity that's neither income nor in expense okay that's money that you have to work with um but if it is actually it, well, so is it an investment or is it alone you might have to talk to them about because those are two different things right alone has a guaranteed pre pay guaranteed return uh with interest right? I'm lending you this money and in return I expect to get this amount back plus interest or if it's your parents maybe they don't expect any interest or is it an investment I am giving you this money in the hopes that your business will grow to a point where I can cash out with x percent right usually an investment is like I'm going to give you ten thousand dollars in return for a one percent stake in your business or whatever it is and if your business does really well then they get one per cent of whatever that business makes hora um if it goes bust they lose that money whatever that was their risk um so alone and an investment are very different things um so if it is alone and there is interest on that loan you would put it under interest investments are part of equity we talked about owners equity a little bit earlier but this would be investors equity so it's the money that they could walk away with at any time according to whatever your investment agreement is um the money that they could pull back out uh but its effects on ly the cash you have to work with no bearing on whether your business is profitable or not um yeah that's a good question though. Okay uh any other questions about any of this stuff before we breeze through where we're running a little short on time so I wanna make sure we finish this list uh we've got a rental okay legal and professional services lawyers, accountants and association memberships er that's basically all that goes in legal and professional services anybody else you hire is a contractor is going to go in contract labor? I don't again. I don't know why this is separate. Um to me, it's all the same, I'm paying somebody to help me do something with my business. Um, again, this is one of those categories that is just pulled out separately for the u s for tax purposes if you were outside of the u s you can set this up according to whatever tax form you have or whatever makes the most sense for your business. Um and then, as I mentioned, contract labour is basically everyone else who helps you with something that is not part of your cost of goods sold and is not in this legal and professional services category. Uh, repairs and maintenance is self explanatory. I didn't even include examples of that because I don't really feel like you need them utilities also for your business office uh, not your home office that would go under home office. Uh, so if you have a separate studio, space office, space store, retail store, etcetera, that's where you would put the utilities for that otherwise in your home office um and then we've got employee wages on employee benefits again, this is outside of cost of good soul I'm not gonna be covering a whole lot about um employees because I've never really had any so I'm not an expert on that stuff um but if you are paying people salaries and benefits if they're helping you make the products that's their job that would go under cost of goods sold for production labor if they do other things if they work in the front office um if they help you with you know, finances, bookkeeping whatever you hire a part time bookkeeper um and they're an actual employees you would put it under there and then I've got miscellaneous expenses bank charges you know, get a fifteen dollars monthly serve it's for you to keep your checking account open. Um any business related gif ts you know, this guy at the new york times gave you an amazing piece and showcase your stuff to the world. So you sent him one of these plush hamza's a thank you. Um that would be a miscellaneous expense questions. Yes. So going backto employee wages do you hire yourself a zone employees and pay yourself a salary that depends on your business structure come so as a sole proprietor or in a partnership or um things like that you would not be your own employees, you just are your business or you are half of your business or have any partners you have, um inm or corporate setups you could treat yourself as an employee s oh really depends on your business structure and as far as like deduction purposes and all of that kind of thing um you definitely want teo check with a lawyer about that and or an accountant because that stuff can all get really tricky. Um you have to have shareholders and board meetings and all kinds of things it's very complicated and it's outside the scope of this class we could never cover all of that. Um but does that answer your question? Yeah. And I was just wanted even like for like, first instance for somebody who's like a sole proprietor yeah, like and they want to actually start taking money out of their business is like, how do they know when they do that? And how much is that still based on the first equation that we did us and how much you need to be sustainable and so that I mean that's an accounting equation that doesn't show you anything about how you need to be sustainable. That just shows you how your, uh, finances all balance each other out? Um it is part of owners equity, so it was that owners draw remember we have owners, equity has two components there's owners, investments and owners draw what you put in and what you take out um and none of that has anything to do with the profitability of your business it's just what you're walking away with or putting into it in order to help that keep running um so yeah, we're gonna look at that uh later on we're going to look at um for example, your cash flow forecast um that's something that will cover in day to where we will figure out like what are the good times too take money out how can you make regular payments to yourself um and make sure that you're not affecting your business's ability to pay for itself yeah, you said you had a few people in the chat rooms have asked about this when we get to molest miscellaneous expenses you said if you give a business related gifts that has become on expense about people awesome when you give a donation to a charity of your trade show and you give it away surprised is that also count in the same category? Um so no if you give it away um what you're basically doing is turning it into an owner's draw you're basically taking, um money from the business for yourself and then donating it elsewhere um and here in the u s like you khun deduct charitable contributions that you've made on your personal income taxes, so if you were going to do that um basically you're you're taking that out as a personal gift to yourself and then giving it away as a charitable contribution does that make sense? I hope I I answered that correctly that would be part of your your owners driving if you're giving stuff away that has nothing to do with your profitability as a business it's just you taking stuff out of the business for personal reasons even though their charitable and they're very generous. Um other other questions? Nothing but good. Okay, um so I just want teo actually, I think maybe we're going to cover this in the next yeah, we'll cover this in the next segment. Great. All right, so I think this is yeah, a pretty good place to stop. Does anybody have any wrap up questions about this in the next? Yes, one question. Um, if I organize a trade to help pay for, say, like my web designers are doing a trade, um is would that be considered a miscellaneous expense if I'm giving her a product in exchange for her design services? Uh, no that's, that's still contract labour? You're still paying for contract labour to design your website you're just paying for it in product or whatever it is that your business is is trading so you would need to assign a value to the product that you're giving away um and then yeah, basically like I mean, you could record it is to separate transactions. If it's a trade, it's, thie. You know, you could pretend that this web designer bought a thousand dollars worth of product from you. And then you paid as an expense a thousand dollars worth of contract labour to that web designer. And that would be one way to keep track of it. Yeah.