Accounting with Goats

Episode 19

For the Love of Goats

Accounting with Goats

 

 

Are your goats or goat expenses tax deductible? It depends! Learn the many ways goats can affect your taxes (or not) with Harley Raptor CPA and “Accountant Warrior” as she describes the different ways to treat goats on your taxes and what differentiates a business from a hobby.

2:00 What’s the difference between a hobby and a business.  

 9 factors from IRS

5:39 Do marketing expenses help create a legitimate business?

6:28 Contractors vs Employees

9:58 Additional accounting expenses to think about

12:00 What are quarterly taxes and why do people have to pay them?

14:35 What if you file as a sole proprietor, LLC, or S-corp? 

 Goat Law Episode 

20:50 How do we keep good records for accounting purposes?

26:00 What criteria must you meet to write something off as a business expense. 

 

For more information:

Independent Contractor vs Employee

Independent Contractor (Self-Employed) or Employee?

Understanding Employee vs. Contractor Designation

Household Employees

Topic No. 756 Employment Taxes for Household Employees

Hobby vs Business

Hobby or Business? IRS Offers Tips to Decide

Frequently Asked Questions

Business Expenses/Income

Income: IRS Definition & Record-Keeping

Business Expenses: IRS Definition & Record-Keeping

Farm-Specific Information

Publication 225 (2019), Farmer’s Tax Guide

Recordkeeping

Small Business and Self-Employed Recordkeeping

Topic No. 305 Recordkeeping

Discussing recordkeeping options: QuickBooks Online, Xero, Wave, and Excel

Quarterly Taxes

Small Business and Self-Employed Estimated Taxes

Top Frequently Asked Questions for Estimated Tax

Quarterly Taxes 101

Conquer Quarterly Taxes – Online course for US-based business owners who want to understand quarterly taxes without the stress and fear.

How to find Harley Raptor:

Facebook

HarleyRaptor.com

Listen right here by clicking on the player above, or on your favorite platform:

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TRANSCRIPT

Introduction 0:03
For the love of goats! We are talking about everything goat. Whether you’re a goat owner, a breeder, or just a fan of these wonderful creatures, we’ve got you covered. And now, here is Deborah Niemann.

Deborah Niemann 0:18
Hello, everyone, and welcome back to another episode. I’m really excited today to be joined by Harley Raptor, who is a CPA. And today, we are gonna talk about bookkeeping and accounting with your goats. Hey, Harley, welcome!

Harley Raptor 0:32
Hey, thank you so much for having me.

Deborah Niemann 0:35
I’m really excited to have you here today, because this is gonna be a very interesting and educational episode. And I have a feeling I am going to learn a lot, too. One of the things I know that we need to get out of the way right here at the beginning, just a disclaimer, is that no one should listen to this and think that they have all the answers, and they can just skip hiring a bookkeeper or an accountant to help them with their taxes or whatever other accounting needs that they have. What we’re gonna do today is really just talk about some of the things you need to consider if you have goats and you want to let the IRS know that you have goats. And this all got brought up because every now and then, somebody will say to me, “Hey, can I get a tax deduction for my goats?” So, let’s just start with that question. If somebody sent you an email, Harley, and said, “Can I get a tax deduction for my goats?” What would you say?”

Harley Raptor 1:35
Oh, that’s such a good question. So, I do kind of want to back up a little bit and do another disclaimer to just kind of emphasize that this is not advice, and it doesn’t create, like, an accountant-client relationship. This is just educational.

Harley Raptor 1:52
So, in order to answer the question on whether or not a goat could be a tax deduction, you kind of have to look at tax deductions from a more vague perspective and then slowly get more specific. So, the first thing that we would have to discuss is whether or not they have a hobby or a business. And unfortunately, like most things in the IRS, the taxpayer doesn’t get a choice in that. It is totally regulated by the IRS. And, the IRS has nine factors that they look at to determine whether or not you have a business or a hobby. And most people have probably heard about hobby versus business rules, and have heard, you know, you have to have a profit in the last three out of five years in order for it to be a business. And that’s not the only thing they look at. You know, as I mentioned, the IRS has nine different factors. And granted, having a profit focus and making a profit definitely helps, but they’re also gonna look at other things, like what you do with your time, you know, as far as the activity. Are you treating it in a businesslike manner? Are you maintaining books? Are you putting a lot of time and effort into the activity? If you have losses, are you trying to make changes to become profitable? And a whole bunch of other factors. So, if you have a business, and we determine based on the way you treat the activity as a business, then we would go down the path of determining if they were business expenses, if they were ordinary and necessary for your business. And, if it’s a hobby, then we would have to look at other factors. And generally, a hobby, you’re limited on the amount of expenses you can take up to the amount of income that you have earned. So, if you go to the farmer’s market, sell soap or gelato, and you make $500, we’ll say then generally, your expenses would be limited to that $500 as a hobby, whereas a business, you could potentially take all the expenses you had.

Deborah Niemann 3:55
What would you need to look at, then, to figure out if it is a hobby or a business, and, you know, if you can just take the $500 off of your taxes, or if you could write off the full $5,000—if that’s what you spent to make your $500?

Harley Raptor 4:11
Yeah, it would go back to those nine factors that the IRS has put out to determine, you know, if it is a hobby versus business. So, if you are… You know, your livelihood depends on the income of this activity versus if you just kind of enjoy doing it, like, you got the goats so you could sell some soaps and go to the farmer’s market, and you just want to have a good time; it’s not something that you’re putting a lot of time and effort into. It’s just… a hobby. Like, I don’t know how else to phrase that, because it’s such a… Granted, the IRS has its own definition, but we also, as a group of people, a society, have a definition of a “hobby.” You enjoy doing it. You love spending your time with the goats. You love making the soap or the gelato, and it’s not something you’re trying to actively make enough income on to, like, support yourself or your family. And, you are not trying to adjust anything to, you know, get advertising out there, to get more revenue. You’re not trying to adjust your sales and your marketing to get more people to buy your soap. You’re not doing all of these other activities that a business would typically do. And you’re just kind of doing it on the side for fun, with no goal of making a profit. You have no goal of having an actual business that you would register with the state and do all of that stuff with.

Deborah Niemann 5:39
So, when somebody has, like, a website and a Facebook page and an Instagram page, and they created a big banner to put in their farmer’s market booth, and that kind of stuff, does that help make it look like a business? Or not necessarily?

Harley Raptor 5:55
It can. I mean, absolutely. You know, a lot of businesses—especially if you’re looking at the online business space and e-commerce—they all kind of have that social media, the website, maybe an Etsy shop, or something along those lines to help encourage the sales and to encourage people to come purchase from them. And that is going to be more consistent with an online business versus a hobby. Most people who do things as a hobby aren’t going to go out of their way to get people to come buy things.

Deborah Niemann 6:23
Okay. Now, kind of along those same lines, if maybe somebody doesn’t necessarily want a tax deduction for all of their goat expenses, but maybe they have a bad back or something, and so they need to hire somebody to muck out stalls or trim the goats’ hooves or something like that. And so, then they are not necessarily looking to write that off, but it’s more similar to somebody that’s cleaning your house. What exactly would they need to do in terms of taxes? Or, would they need to take care of workman’s comp, or anything like that, if they had somebody coming to their farm to help with their goats?

Harley Raptor 7:07
It definitely depends on the relationship between them and the person helping with the goats. So, if you bring somebody in, and you’re telling them how to work, and when to work, and how they need to actually do the work, then it’s going to be a control thing, which is one of the main factors when determining contractors versus employees. It’s kind of similar with the household employees. If you can control the work that they are doing, how they do it, then it’s more along the lines of them being a household employee versus, you know, potentially just a service provider that does this for other individuals; they have a business providing that service. In which case, that’s not a household employee, and it wouldn’t be that big of a deal. Likely, if you aren’t doing it for, like, a tax deduction, you wouldn’t really worry about it. But if it is, you know, the household employee, then you’re going to have to potentially report that on your tax return, pay the Social Security and Medicare taxes for that individual, potentially pay unemployment taxes for that individual, and maybe even do income tax withholding if they request it.

Deborah Niemann 8:24
So, if somebody has a business, say, for example, you know, a barn cleaning business or goat hoof trimming business or something like that, where they do this for lots of people, then would they be more like a contractor, you know, like a yard service, so that they just come by however often and they have a set fee, and you pay them based upon their routine fees?

Harley Raptor 8:50
Yeah, absolutely. That’s kind of… Because they have that business, and they’re doing it for a bunch of people, you’re not controlling how they do it. They know the way that they’re doing it, and they’re doing it for other people. So, it definitely puts them more into the contractor. And you wouldn’t have to worry about the household employee situation.

Deborah Niemann 9:08
Okay. And then, on the flip side, just to be clear for everybody, if somebody—like your neighbor or something—said, “Hey, I can help you with that.” They’ve never touched a goat in their life. And you have to teach them how to trim the hooves, and how to do everything, and you tell them, “I want you to be here at eight o’clock every morning to milk the goats,” or whatever. That is gonna be more of an employee situation, then, where you have to do all of this additional bookkeeping.

Harley Raptor 9:37
Absolutely. Yeah. I think that would classify them more along the household employee line, and then yeah, it would bring in a different kind of bookkeeping that you would need to do for those employees.

Deborah Niemann 9:47
Okay. Now, I know you are kind of transitioning your business from doing taxes for people to doing more educational things, which is why I thought it would be great for doing this, because you are starting to do more education to help people. What type of business decisions—because, like, I think I feel like I just covered it all. So, what kind of other business decisions do you help business owners make? What are some of the other things that people need to think about if they have a business with their goats?

Harley Raptor 10:21
Absolutely. So outside of anything tax-related, which is very vast on its own, coming to an accountant, you would want to talk to them about anything from how to set up your business to be in line with your goals and what you hope to create, as well as, you know, how to increase your profit, how to make sure that you are sustaining your business and making it last, making sure that your records are in order and kept up with, and you know, some of them will even do the record-keeping for you so you don’t have to spend the time trying to make sure you have it all figured out. And just basically anything relating to business, most accountants, especially if they own their own business, they’re gonna have a lot of just general business knowledge that they can impart on you. But, you know, they are more focused on the numbers side. Like, what does the story of your numbers say? Everybody’s numbers tell a story, and the accountant is the one that can decipher that story and give you the information so you can make the best decisions for your business. And that is a more diverse group of offerings that can come up and to help you grow your business.

Deborah Niemann 11:42
So, another thing that some people may have to think about: Like, if you do legitimately have a business with your goats, and you are making a profit, and if you’re making enough, you are gonna have to pay quarterly taxes, which most people may not be familiar with if they have been an employee their whole life. Can you talk a little bit about what are quarterly taxes, and why do people have to pay them?

Harley Raptor 12:03
Absolutely. So, if you think about what it’s like if you are an employee, you are having to pay in each paycheck. You know, they take out money for your income taxes, Social Security, Medicare for federal and potentially state as well, depending on where you live. And those taxes that are taken out are given to the IRS as you make the money. Now, when you’re a business owner, and you’re self-employed, you generally are not having that paycheck where you’re paying the income tax and the Medicare and Social Security as you go. So, the quarterly taxes kind of steps in and says, “Hey, you’re paying this in as you go through a paycheck, so why don’t you pay us quarterly as you go and earn this income?” Now, there are a whole bunch of different factors as to how to determine when you need to pay in, or, you know, how to pay it in, and all of that kind of good stuff. But the general rule is that, you know, if you look at the taxes you owe at the end of the year, it’s over $1,000, you have to pay in quarterly. And, for a lot of business owners, that shows up really fast, because they get surprised by something that’s called the self-employment tax, which is essentially the Medicare and the Social Security taxes that we pay on a paycheck, but as a business owner you have to pay that as well. And so, if you look at your net income for your business, and it’s around $6,500, just looking at that self-employment tax, you’ve already hit that $1,000 tax mark. And that comes so much faster than a lot of business owners realize.

Deborah Niemann 13:40
Okay. And if you don’t pay that quarterly, then, and you think, “Oh, I’m just gonna pay the whole thing at the end of the year,” you could also wind up with fines, too, right?

Harley Raptor 13:50
Yeah, absolutely. The government loves getting paid money, just like we love making money, and, you know, when you have, like, a business that you are paying, you often see an invoice that says, “Hey, if you don’t pay me within 15 days”—or 30 days—”I’m going to add on some interest.” And the government does the same thing. If you don’t pay them quarterly, they kind of start a stopwatch on the due date. If you didn’t pay, say April 15, which is for Q1, and they start that stopwatch, and they’re like, “Okay, we’re gonna start accruing penalties until you pay us for that payment.” And then they stop it. So, if you wait until the end of the year, you’re accruing, you know, those penalties for each of those quarters through the date that you paid it.

Deborah Niemann 14:32
Okay, that’s really good to know. So, another thing that I think a lot of people may not be aware of is that if you decide to have a corporation for asset protection—which we talked about a couple weeks ago when we were talking about “Goat Law”—it doesn’t really stop there. Like, you think “Oh, that’s it. I’m gonna be an LLC.” I was really surprised, because I read three books about forming an LLC, and then I went to a lawyer to help us do it. And then he said, you know, “Okay, now you need to talk to your accountant about how you want to file your taxes. If you want to file your taxes as a sole proprietor or a partnership or as an S corp.” And that really surprised me; I thought that, you know, the lawyer was gonna have all the answers, and he was like, “No, taxes are not my thing. You need to talk to your accountant about that.” So, can you talk a little bit about the decision to either file your taxes as a sole proprietor or partnership or as an S corp after you’ve decided to become an LLC?

Harley Raptor 15:45
Sure. And I love that your attorney actually told you to go speak with a tax professional, and I think it’s so important for people to utilize both the attorney’s brain and the legal side of it, and then the tax side with a tax professional and their brain. And, when you look at the tax treatment of, you know, an LLC, it depends on how many owners there are versus if you made that S corp election. And there’s a lot of requirements that are in the tax law, especially if you go along the lines of an S corporation, where you are now responsible for having minutes of your meetings, you have to have bylaws, you have to pay yourself a paycheck. And it’s a lot more complicated and a lot more actual written, like, bookkeeping, not financial bookkeeping. But you have to have so much documented that you didn’t have to have if you were, like, a sole proprietor treated LLC. And that also depends on the number of owners you have versus, you know, an election or the entity type that you selected.

Harley Raptor 16:49
And, when you go and look at a partnership versus a sole proprietor, you know, depending on if you are married, or if you just kind of want to go and have this business with a friend—which is a different topic, whether you should do that. But, we’ll just say it’s a business partner, perhaps. And, you have to realize that when you add another person to the mix, it just became a whole lot more complicated, because you have to track basis in the business for each owner. Which, the basis is basically… It looks at how much you’ve put into the business, how much you’ve taken out, income and losses, to kind of come up with the value of your share of the business. is essentially what it is. And then other tax laws come in to help you determine on what you can and cannot do based on your basis. So, it gets so much more complicated in the tax aspect. And that’s why it’s really important to make sure that you are considering that side, to see if you want to deal with all of the extra reporting, and see if you want to have a tax professional help you with tracking the basis and filing an additional tax return and all of the other things involved with, you know, the selection of what business entity you have.

Deborah Niemann 18:09
Okay. And, if you are just a single person who has your business, then it’s not as complicated because you don’t have all these other people involved. But… So, I was talking to accountant a couple years ago who said that if you’re a sole proprietor, you know, filing as an LLC, or an LLC filing as a sole proprietor, that it probably doesn’t make sense to switch over to an S corp until your income—or your profit, actually—is, like, at least $50,000 to $60,000 a year. So, like, this isn’t something you need to worry about when you’re just starting your business. Like, you can create the LLC for your asset protection and then wait until you’re making a decent profit before you decide to start filing as an S corp. Does that sound right to you?

Harley Raptor 19:00
Absolutely. And I think that’s one of the luxuries of an LLC is that it gives you that opportunity and that flexibility to select when you’re ready to bump your business up to an S corporation. And, you know, you can look and talk to a bunch of different accountants, and a lot of them have different, like, criteria, like $50,000 to $60,000. I’ve seen $100,000; I’ve seen a lot of different statuses or amounts that they put on. And it’s really gonna depend on your specific situation. I’m very huge into not having, like, a blanket amount to, you know, have everybody decide their business based on. It’s really great to kind of look and see if the savings that you would receive by shifting over to an S corporation is worth all of the extra expenses that you’ll have for like payroll, and you know, what we talked about with all of the recordkeeping and, you know, documenting everything, and if that’s worth it to you. And one of the things that’s really important to note here is that, you know, because you have that flexibility as an LLC to determine when you want to become an S corporation, it is vital to make sure that your record-keeping is on point, and you’re keeping track of everything. Because, when you make that shift to an S corporation, it is going to change a little bit on how you do your books and how that shows up on a tax return. You know, every S corp return that I do, I would always add a balance sheet, and LLCs as a single owner do not have that. So, you want to make sure that you’re doing the proper recordkeeping, so that way, when you make that shift to an S corporation, it’s gonna be done smoothly, and the transition is not going to be a headache for whoever you hired to do that for you. And they will greatly appreciate it.

Deborah Niemann 20:44
Oh, that’s a really good tip! Thank you. Can you explain a little more what you mean about keeping good records? Because I’m pretty sure most people probably think they’re keeping good records, but you’ve probably seen a lot of records that did not look so good. So, what do we need to be sure that we have?

Harley Raptor 21:01
That’s fair, absolutely fair. I have definitely—not to point any fingers here—but if it’s a box of receipts, that is not good recordkeeping. So basically, what I mean is, you want to kind of have everything organized by… You know, if you do have receipts, put them in a folder, make a copy of them, because we know receipt paper fades. But put them in a folder for that month. You know, label what it is. And then, if you’re more digital, then, you know, have this done digitally, where you save an email that you received as an invoice and put that into a folder. Make sure you have some sort of recordkeeping software, or, like, an Excel spreadsheet that you’re doing. The software definitely makes it easier, because it’s linked to your bank account, and you can, you know, snap a picture of that in-person, a receipt that you received, and attach it to a transaction so you have that backup information, because the IRS wants you to have at least two pieces of proof when it comes to each expense or each income item. And the bank account statement, that line item, that’s one example. The other example would be an actual receipt that you received to prove it. And, as an accountant or a tax professional—or, as a tax professional—they don’t need to see all of those receipts, generally. They may ask for a couple here and there. They just want the lump sum numbers and maybe some details that tell what those transactions are. So, when you have, like, a bookkeeping software, or a really fancy Excel spreadsheet that does this for you, then you’re able to have the documentations that a tax professional would like to see. But on your side, you want every piece of information, because if the IRS question something, you want to be able to pull out that packet and be like, “Here is why I claimed that expense.”

Deborah Niemann 22:51
Okay.

Harley Raptor 22:52
“So you can go.”

Deborah Niemann 22:53
So, why is it not good enough… Like, if you have a bill to, say, for example, Tractor Supply. You know, your credit card says “Tractor Supply, $65.” Why is that not good enough if you should—God forbid—get audited by the IRS? Or, why do you need to have the receipt?

Harley Raptor 23:14
So basically, what the receipt does, it shows the line item—itemized detail—of the purchase itself. Your credit card statement, or the bank statement that says “$60,” that could be anything. You could have gone there and gotten some soil to grow, you know, your vegetable garden, which is completely unrelated to your goat. I mean—maybe there’s a chance that that’s related. But I’m gonna say they’re unrelated, for this example, because that’s the first thing that I thought of.

Deborah Niemann 23:40
Yeah, well, Tractor Supply also sells clothes. So, you could kind of go crazy there if blue jeans are your thing.

Harley Raptor 23:46
Oh, okay, I didn’t know that! I don’t frequent our Tractor Supply very often, but… So yeah, if you bought the jeans, and you bought $60 worth of jeans, that’s obviously not for your goat. I think. Sorry—I’m cracking myself up right now.

Deborah Niemann 24:04
That’s okay! I had an accountant tell me one time he has had farmers try to write off their underwear, because they wear them when they’re at work. And he’s like, “You can’t write off your underwear just because you’re wearing them when you’re at work!”

Harley Raptor 24:21
That’s great. That’s hilarious. I was really just picturing the goat wearing the blue jeans. So it’s a totally different visual and different hilarity to me. Okay! Sorry.

Deborah Niemann 24:33
I thought the underwear was pretty funny, too.

Harley Raptor 24:36
That is pretty hilarious. I haven’t heard that before, but it doesn’t really surprise me. People come up with some kooky things. But basically, that itemized receipt is going to show them, “Okay, so you bought feed for the goat. You bought other things that the goat needs,” you know, that isn’t blue jeans. It’s not soil for something unrelated. And that way it backs up your stance when you have that, you know 500 dollars of feed that you fed them, and you can back it up with different expense—or different receipts—to show that “Okay, that $500 really was feed for a goat,” whereas your bank statement just says “Tractor Supply,” which could be anything.

Deborah Niemann 25:21
Okay. So if somebody… All right, so we’ve established the fact that underwear and blue jeans are not—can’t write those off. Can you give us any more examples, does anything else pop into your mind, of things that people might think are acceptable deductions that are not?

Harley Raptor 25:38
To be counted as a deduction, it would have to fit the criteria of a business expense. And, in order for an expense to meet the business expense criteria, it actually has two points to it. The first one is that it’s ordinary. So, that means that it is common and accepted in your trade or business as an expense. And it has to be relevant, you know, and make sense. So, even if it’s not your specific industry, but it is related in some way, it could still be a business expense—which, I’ll give an example here in a second. And then, the other criteria would be that it’s necessary. So, this means that the expense is helpful and appropriate for your business. However, it doesn’t mean that it’s required. You don’t have to have that thing to function, but it is helpful and appropriate. So my example that I have, it relates to my business. Before I started my own business, I worked for a really large public accounting firm. And when I worked there, in order for a client to schedule an appointment, they had to call the office, talk to one of the admin assistants—whichever one was responsible for that calendar—and then go through them and go back and forth and try to find a time that works for both of them, which is fairly standard in the industry. So, when I became a virtual CPA, I realized that “This isn’t gonna work for me.” Like, I don’t want to spend ten emails back and forth trying to find a way to, you know, set an appointment together. So, I use Calendly. Not a plug, just, that’s what I use to—

Deborah Niemann 27:09
Me too.

Harley Raptor 27:11
So maybe it is a plug!

Deborah Niemann 27:12
Yeah, it’s an app. It’s cool. It works well.

Harley Raptor 27:15
It works really great. I love it. And I use that, so that way clients can go to my link, they can see what works for them, what time works for them, and just schedule the call. So, this isn’t common in the accounting industry. So, you know, looking at that “ordinary,” is a common and accepted—it’s not common in accounting. But it is common for online businesses to have that. And then it’s also, you know, it’s not required; I don’t have to have Calendly to accept calls. But it’s really nice. It’s helpful. It’s way easier than trying to do it through email. So, it does meet the requirement of “ordinary and necessary” in my situation because of those things. Now, the other side of that is, you know, even if you find something that could work as a business expense, in some cases, the IRS is gonna say, “Well, that’s partially not a business expense,” or “That’s not an allowable business expense.” So, part of it could be deductible, or a part of it—or all of it could not be deductible. It really depends on what it is and how it’s used in your business versus how it’s used personally, and it just gets… A lot of gray area shows up, as it does in the tax law.

Deborah Niemann 28:29
So, if people want to get in touch with you, how can they find you?

Harley Raptor 28:34
So, I am on social media, Facebook and Instagram @HarleyRaptorCPA, or online on my website at HarleyRaptor.com.

Deborah Niemann 28:44
Okay, great! Well, this has been great. And I’m sure that people have learned a lot. I know I have. So, it’s been fun, also, chatting about this. Thank you so much for joining us today!

Harley Raptor 28:57
Absolutely. And I’m really glad that I’ve been able to, and I hope it helps!

Deborah Niemann 29:02
And that’s it for today’s show. If you haven’t already done so, be sure to hit the “subscribe” button so that you don’t miss any episodes. To see show notes, you can always visit ForTheLoveOfGoats.com, and you can follow us on Facebook at Facebook.com/LoveGoatsPodcast. See you again next time. Bye for now!

 

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