LIVE | Business Deduction Framework

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Okay, so today I want to talk about business dedu business deductions. Okay, so this is for if you own a business. So when you think of a business, it's so many different things. You've got your short-term rental, that's a business, right? If you're a real estate professional, that's a business. If you of course run an accounting firm, plumbing, HVAC, whatever it is, it is for businesses. I want to go through the framework of whether you can deduct something. Okay.

So, first off, when you think about I I always reference things on social media because that's a lot of times what people are watching, right? So, a couple of the things you hear on social media that I think are ridiculous. One is um you'll hear people say like there's 70,000 pages in the tax code and like you're so dumb and like I'm so smart and like you're never going to understand it. You're never going to read it. And of course, it's some guy like in a cowboy hat who's not licensed telling you that um you know, there's some proprietary knowledge he's got. Um I'm here to show you this. This framework is from just one page. It is so simple. It is so straightforward. And what it covers is it literally is I would say like 96 98% of deductions you're basically going to have as a business owner. Okay? So, not to say there aren't other code sections. There are. You know, there's things like R&D, home office, right? There's these other code sections, but this one code section, it covers almost everything. Um, but there's a framework to it. And so then the second thing you'll hear online is people will say 162A, ordinary necessary business expenses. And um, that is the code section we're going to cover, but it's so much more. It's a full framework. Um, the reason I always make fun of people saying that is when you look at the code section, right? So it is IRC 162 little a. Um, what you what you what you think it means doesn't matter, right? And so when you read it, it's super vague. It's basically saying, hey, um it it it quite literally says here, we'll read it. It quite literally says ordinary necessary business expenses, right? It must be ordinary, necessary, paid or incurred during the taxable year and on for an ongoing trader business. And so that sounds super straightforward. And so what people end up doing in social media is they say, you know, what's ordinary? Well, I got to look good. That's ordinary, right? Like maybe you're a fitness trainer, you're a personal trainer. You're like, it's super ordinary for me to have to look jacked. So me going to the gym's deductible, right? And that makes a lot of common sense. Um, but that's where the framework comes in today, right? And so the idea is instead of hearing the snapshot or that like little red straw like uh straw man argument, we want to go through what's the actual law. It's not that complicated. It doesn't require 70,000 pages. It also doesn't require you diving into every court case. There's really like a very standard formula we can go through. So, I want to go through that with you guys. All right. I'm just looking at the comments real quick. Cool. Okay. So, you guys can still hear me. Perfect.

So, um I want to give you this is just how I view it as a framework. So, there's four things. Okay. Let me see if I can Okay, perfect. Um you have to have a business. We're going to talk about that one. Um, you have to be open for business. And these sound simple and easy, but it can't be inherently personal. Okay, this is basically the four things and then it must be ordinary necessary. Okay, the sake of using the board, those are the four. This is the framework. It's pretty straightforward.

Okay, so what I want to go over first is whether you have a business. So, um it sounds silly, right? Um you're like, well, I said I had a business, so I have a business. And unfortunately, that's not how it works. And so, when you think of So, first off, um I think the best example is always you think of short-term rentals, right? People will say, "Well, I heard on social media you can just deduct like I bought a beach home. I put a couple people in it for a few days. Like I have a business." That that's that's a hard argument. So, I'm not going to say you do or you don't. Um, so this is a facts and circumstances test. So, this is the first hurdle that you need to get over is whether you actually have a business. So, what do we know about whether you have a business from a tax perspective? It is that you are primarily in it for profit. Not only in it for profit, but primarily, right? And so that's where you end up seeing a lot of problems with things that have a very likely personal element. So you if you know, again, common things would be I travel for my YouTube channel. It's a business. Maybe, maybe it is, maybe it's not. Um I, you know, rent out I charter a yacht and, you know, when I'm not using it, I I rent it out. It's a business. Maybe, maybe not. Um, and then the most common one is short-term rental. I mean, it happens for everything. It's basically anything that people would ordinarily do for fun gets extremely high scrutiny, um, and tends to not do super well in court. And so, um, so that's the first hurdle. So, so it's facts and circumstances test. And they, and why is it? Basically, they need they need to read your mind, right, as far as intention. But um but they can't read your mind and they don't trust what you say. Um, so when you think about like verbal, we call it like self-s serving testimony. Um, when you say something like like for example it's a business. Um, it's just kind of thrown out usually. Not to say I don't know really it's basically thrown out. They don't care. Um, and so what do they do? They look at your actions. So if you were to start a business, what would you if you were start a business? Remember a definition primarily in it for profit. What would you do? If I, for example, had a short-term rental, I would advertise it. I wouldn't just advertise it to two people, I would probably vigorously advertise it to a lot of people, right? I would I would make sure it's licensed with the county or city. If it's not licensed and it's an illegal business that I can't yet operate, that's a very bad fact. A very bad fact and circumstance. And so, I see a lot of people doing that, too. Um, and then I would make sure everyone knew about it. And then if it's being unsuccessful, right, and it's not renting out, um, I also would have done due diligence before I bought it, right? If I wanted to truly have a short-term rental that was going to be a successful business, I wouldn't have bought it in the middle of an area that doesn't have short-term rentals that has um, nobody wants to visit, right? It's like an area that nobody wants to visit except you. Um, you've got a really bad fact that you ever started a business. Now, the reason again for frame, why is this the framework? Because if you don't have a business, you're not going to have deductions under 162A. We are literally not in the code section. And so people will say ordinary necessary business expenses, that's all you need. But you're literally like we're just not even in that code section if you can't first prove you have a business.

So then when you think about it, this is one of the easiest arguments for the IRS. So you think about in an audit, you may say, "Well, I've got all these receipts and I've got all this stuff." If they can come in on your short-term rental and you made whatever $500 of income, you rented it to your aunt and you have all of these expenses, they don't need to prove like they don't need to prove that it wasn't ordinary and necessary. They just need to prove you didn't have a business. And that's right now what I'm seeing. Again, I keep mentioning short-term rentals because it's just so so common. It's like one of the most biggest problems right now. Uh, but it applies across the board. That's where you think about things like a YouTube channel for travel, right? People are like, "Oh, it's genius. I'll just start a YouTube channel for travel and call it a business and and maybe maybe it is a business. The best way to prove that you're in a business is make a profit, right? And so, but it's hard to do that. You might be a lot of times starting YouTube. I mean, if you've ever done it, the the AdSense is not that exciting. Um, unless you have extreme viewership, right? And so, the reality is you're going to be losing money in the beginning. Um, and if you're doing something that looks fun, like I don't know, exploring hotels, exploring, travel, and then um, eating and like putting all your experiences online, realistically, you probably like are very weak here. You just haven't even made it into the code section. In which case, if you don't have a business, you don't have a business deduction. And and that's it. So, okay.

So, questions that they'll ask, um, and these are from court cases. Let me just look at the the comments real quick. Um, okay. Yeah. So you're some one person said so you need to keep your receipt to show what you have been doing aka intent. I would say the receipt's not really I would I would say things like receipt is just substantiation. That's like you have to make it through that hurdle first. Um, what you would want to keep is things like a business plan, right? What research did you do? You know, how hard did you try to advertise it? Did you send out flyers? Did you put it online? Did you you know what I mean? Like you want to document all of your efforts. So the more that you know you're going to be in a loss and that it is especially a personal activity or likely to have personal elements to it, you need to show no no no like there's no scenario I would have done this for um, I mean for fun even though I think that that's going to be hard. Realistically what you need to show is just the fact that you really were trying to make a profit. So showing due diligence if you have a related background experience, right? So the difference between two people, one person does a charter yacht. um both people can do it and have the same results from the business and even your own credentials matter right so if you for example love to sail boats in your free time as a personal activity that's a bad fact but if you for example are a broker in the industry and have I you know what I mean like some I don't know something related to an actual business element of making a profitable business in that area that's also going to help so that's the type of support you would need.

All right. Questions that the courts ask if whether you this again remember whether you have a primary purpose of earning a profit. How much research did you do before entering into the business? How much experience do you have? Sorry, I got some cool core cases to share with you guys on there. How much um how much experience do you have in this area of business? They're going to look at how much time do you spend, right? Because people a lot of times are like, I'm going to spend as little time as humanly possible. But realistically, most people that run a business, yeah, we we spend a lot of time um okay, how how do you react to losses? Right? So, it's not just the fact that you're in a loss, but a person who is primarily in an activity for profit when you have a loss is not going to just like sit and chill, right? You're going to be like, "Oh, this is a loss, right? Like, I have to do something about it." Um, so they're going to also look at that. Are there any income sources or assets that you can rely on without needing to turn a profit in this activity? Because that that influences and says maybe you don't really need to do make a profit here. Um, and then of course are there personal motivations to keep this activity around without a profit. Okay. So maybe it sounds boring, but this is a huge problem for people right now. This is a very easy IRS argument, right? Because they can just look at it. The way I always explain it for audits, um, especially if you're on the smaller side for audits and you just the IRS has less resources to to pursue your case once it's open, what they do is they go for the easiest argument, right? They're humans and they have a checklist and they're going to go for the easiest argument. That's the problem with this entire like even this one we'll talk about soon, but they don't need to get all complicated, right? They could say, "Hey, give me 8,000 receipts." and they and they will ask for it. But instead of going through those receipts to see is this ordinary necessary, if they're able to come in and say you just don't have a business, that's such an easy argument. They just reverse the whole thing, call it a day. Um, you never want to make it easier for the IRS to agree against you, right? You want it to always be easier for them to agree with you.

Okay, let's look at the comments real quick. I just want to see if you guys have any questions. Okay. How important is it to establish an LLC prior to your first business transactions for the overhead required to establish the business and how does that affect Yeah. So, that's actually a really good question. It from a tax perspective when what we're talking about here like whether you have a business an LLC like I would say it's like a very marginally helpful fact but but not very substantial because the definition of a business from a tax perspective is just not whether or not you have an LLC it's just a separate thing you can have a business without an LLC you can have an LLC and not have a business so it's not super helpful from that perspective on making it past the first hurdle now it's helpful for I don't know for legal protection Um, it's certainly helpful for like bookkeeping, just keeping it all in one bank account in one place. And so I do encourage people to if they're going to do an LLC, which usually people do, and you should, um, then go ahead and do it from the very beginning. But if you don't, then just reimburse yourself and keep the records.

Okay, let's see. Okay. All right. So, next second step, step two. Right. So, remember, I'm just going to recap. There's so many pages of the tax code when it comes to running a business. There's basically one very relevant code section that covers a 98% of deductions. Okay? It's 162A. We hear about it all the time. People just hop straight down to here. They say, "As long as it's ordinary, necessary, per my mind, uh, we're good to go." Not true. So, first have to have a business to even be within this code section. Next thing the business has to be is open. Because if it's not open per IRS def or per uh Congress definition then we are under 195. That's a code section as well. So we basically go from here and we say this is still not relevant because now you have to be under 195 and 195 is startup expenses. A lot of people have heard of that concept. Um, the short version is it basically limits the deductibility. So if you have a bunch of expenses. A lot of times you just what's going to happen is you're going to wait until it's open. Then you can take up to a $5,000 deduction in the first year that it's open, not when you spent it, when it's open. Um, and that's going to phase out if you spent over $50,000 total. Then the whole thing is going to be suspended and advertised over 15 years. Advertised is just like a fancy way of saying depreciated. So it's basically, for example, you spend $500,000, you're like, "This is going to be great. It's going to offset all my income." um if you haven't opened the business then it will not be deductible and then you'll basically take 500,000 divide it by 15 and then you'll only get that deduction for the first year and it's going to be across 15 years which is a terrible tax result.

Okay, so um let me see. Yeah, does open business mean having a store or operating in commerce? So it it means this is the thing all these things are are facts and circumstances right so for a classic like if you have a store it has to be open to the public right that's basically what it means and so again another problem with short-term rentals and I again I just use that example because it's so heavily abused right now but let's say you meet you meet I have a business or I'm going to have a business maybe you did the research you found that it's on the beach it's going to be amazing it's going to be profitable um you've spent all this money to renovate it. You're not even planning to stay there. Like you've got proof that you're planning to open a business. If you if you have like your aunt and your friend stay there, but you're not licensed to open the business, you've got I mean I would say I would say it's a just basically knocks out your argument. I would say um I'm not saying I wouldn't argue it. I would argue we just opened a business illegally. But whenever you've got basically a tax argument that is I broke the law or I breached a contract and that's why this is tax deductible, that's not a great argument. Okay? Like you're already basically saying like you're a liar or like you know what I mean? So um so bad tax argument. Not not that I wouldn't make the argument, but it's a it's a very bad argument. So, that's what a lot of people do cuz I mean there's right now there's a lot of licensing when it comes to short-term rentals, but you can again any business when you think of a restaurant, it's not the fact that you invited your aunt over and gave her sold her a fair market value meal. It's the fact that you opened like you formally said this is opening day. Anybody from the public can walk in and come to my restaurant. Um, you know, and usually you're advertising, you're doing all those things again because you're primarily in it for profit. So um so that definition of open is going to change per type of business but um it it really means like operating right so you think about software is a huge place where we have problems where people say well I'm developing this thing maybe you're developing a product whatever it is um are you selling it the realistically the easiest way to prove that you're open is that you have sales right and you have more than just like one sale you have sales now Again, can you argue we're in business, we're open, and we just nobody wants our stuff? You can. It's just a harder argument. You can. It's a harder argument. So, okay.

So, those are the two things. Let me see if I missed anything on this. So, under 195, basically, these are going to include investigating the creation or acquisition of an active trader business. So, think about people that are like, I'm I'm going to be a real estate professional because I'm looking for properties. That's not good. That's not a business yet, right? And that's also why you think about searching for new properties is usually not something you can include in your log because you don't have the business, you haven't started the business if you haven't acquired a property yet. Um, and then also the amounts paid or incurred with creating an active trader business. So, if you spent all this time forming your LLC, all of those things, it's like that's nice and like we can tell you're planning to start a business, but you're not there yet. Um, yeah, any activity engaged in for profit and for the production of income before the day on which the active trader business begins. So that's what it is. It's basically it's a timeline. If you think about it, it's just like if you open the business, the same expense spent here is not deductible. This this if the same expense was spent here, it it is deductible. And so this is a timing question. So that's where my when going back to revamping. Here's the rule. You want to make sure you have a business. Make sure you're able to prove that like I'm actually doing this for profit even if I don't have a profit. And then you want to open the business as fast as possible. And that's where I see a lot of people I mean that's literally tax planning. That's literally tax advice, right? And I know it's not the sexy stuff that people put online, but for like if you knew that you're about to spend $200,000 and the difference on whether it is deductible is if you've open the business from a tax planning perspective, you should do almost whatever it takes to open the business, right? That's basically the rule. Now, remember, these are for regular deductions. Now, if you're doing things like capital improvements, assets, those types of things, that is a separate code section. Um, and that's the type of thing that you would be then then able to depreciate once you open the business. That's not going to be under the startup rule. So, that's the one exclusion. If you're spending a bunch of money because it's like you're doing capital improvements, you're whatever, creating a building, something like that, that is um usually something you can do depreciation, all of that with.

All right, let's see what you guys are saying. Okay. For the open element. What if you have one location that is still operating for the business, then build out a second location, then move to the new location once the buildout is complete? So buildouts, like I said, kind of they are different. Like if you're doing a buildout, that's that's an a capital asset. That's not going to be a 195 expense. Um, basically 195 is your ordinary necessary um expenses just before you open. Uh, so in that case, if you're doing a buildout, you would capitalize those. Was still wood and you'd have to open that business. Um, but once you do, then you can depreciate rather than being stuck in 195. So, okay, let's see what else. Yeah. As a farmer, does buying additional land to expand production count as an expense? No. No. Land is Land is land, so it's not an expense. Um, okay. Because let's see what else. If you have a travel business and you travel a lot for travel a lot to visit the resorts that you market to your customers for the experience, are you able to deduct those travel expenses as a business deduction? So, you'd have to follow the framework, right? So, we'd have to have a business. You said you had a business. Okay. Business has to be open. Um, we'll go over this in a second. It's not an inherently personal item, so you'd be good. So then the question is, is it ordinary necessary? And for travel, there is always a little bit more law. This is the main framework. For travel, um, there are treasure regulations that that guide it. And it basically says if it's primarily for business rather than personal, uh, which is based on the time and significance of the activities. Um, so yeah, I mean that the idea is probably if it's just limited to like you're literally going there and just doing that business thing. If you start introducing personal elements, then maybe it's not primarily for business purposes, in which case you would run into some issues there. Okay, I think that's most of y'all's questions. Let me see if I missed anything. Um, yeah, preliminary expenses, how are they deducted? Yeah, so this is over 15 years if they're if they're startup expenses. Okay.

All right, perfect. So, those are the first two. Now, this is the fun one. This one. I have a couple court cases for you guys. So, um, okay. So, so where are we at, right? Because what ends up happening on social media is people will say, um, 162A, ordinary necessary business expenses. So, they say, I got to look good. I got to go to the gym. I got to wear my Rolex. It's ordinary and necessary. My clients are rich. You know, my clients are rich. They're expecting me to be rich. like maybe I need to show up in my suit and I need to show up with my haircuts and um what else do people say? I got to go to the gym. I got to look buff. Um, you know, and you could take this to its logical extreme, right? So, first off, that I mean there's a common sense argument. I don't want to say there's not a common sense argument. A lot of these things like if I showed up on this live stream and I was like bald and uh, you know, looked homeless like would you guys trust me as much? Probably not, right? And so taken to its logical extreme though, we think about things that we do to live, right? So I wear contacts. Um, if I wasn't wearing my contacts, I wouldn't be that great at tax because I wouldn't be able to read the tax. Um, you know, I have to sleep every day. If I weren't sleeping in a house, then that too would be a problem for work, right? And so quite literally everything can start becoming a business argument if you were to interpret ordinary necessary yourself and you were to say well I mean everything's like I have to have a house cuz I got to sleep and then I got to wear shoes you know and I can't show up without clothes and like all these things would start becoming ordinary and necessary right and ordinary we'll get to the definition soon but it's basically like custom like or like regular for that business and necessary is actually just appropriate and helpful and so um so we have a problem Right. And basically what happened in the courts is we do have 162A, right? But we don't ever look at anything in a silo. What we look at is all of the code. Well, we being tax court will look at all of the code sections. So they said, well, we've got 162A, and 162A says ordinary necessary business expenses are deductible. What we've also got is 262A, and that says personal living and home expenses basically aren't deductible. So, we've got these two conflicting code sections for things like what we just mentioned, right? I have to go to the doctor to make sure I don't have allergies and if I have allergies, my allergies will, you know, prevent me from being on camera as well, you know, whatever the the connection is there. And so, and a more direct connection, of course, would be things like if I was a personal trainer, then going to the gym is sure great for my health and great for personal purposes. It's also great probably for getting clients, right? You do generally want a personal trainer who looks like they actually work out. And so that's the problem the court saw and they were very quick to solve it. And I just want to be clear here because this is not a gray area. I think a lot of people online um that don't read anything uh think this is a gray area because I always say like it's gray in their mind like they think it's gray. They they just don't know. Um this is as you can imagine something that has been an issue for decades. So going back I mean 1950 I don't know the cases go back pretty far and um it's something that people thought of long time ago long time before social media came into existence and so the courts came up with what they call inherently personal expenses and we're going to go over that. This one's fun. Okay, so where do I want to start? Um, so first off I just want to like summarize at high level right? What does it mean? um something basically is is so personal in nature even if it's also used for business it's personal right and so and and the logic behind this and I I'm going to cover it in a few different areas even like meals and clothing and just everything that's also not an inherently personal expense because we're getting to the same thing which is and I'll just read it. They're looking for what would you like what we want to deduct under 162A is what would have been in excess of what you would have done personally. That's what they're assessing out. Now, for some things that's that's possible to figure out, right, for meals, it it's much more standard and and um I'll tell you how the courts deal with that in a second, but it's much easier, right? It's like I probably would have stayed home personally um and ate but because I took out a client and I went to a steakhouse with them. You know, technically they would want only the difference to be deductible but they just kind of make it a deduction because it's negligible. So, um that's generally how it is unless you abuse it. So, that's what we can do for things, right? So, you think about things like um think like I don't know a desk chair. Well, it's just I mean it's at the office. It's it's for business use, right? But then if you start thinking about things like um clothing is as a good example. So it says well if I am a doctor and I'm wearing scrubs you know that that like I wouldn't be wearing that for personal purposes. I know some people do but you know realistically you bought it because you need to go to the hospital and you're required to wear scrubs. Um, but if I'm wearing you know a $10,000 diamond necklace I don't know. Seems like maybe that's what you would have done personally regardless and you probably just like Rolexes and diamonds. Um, and so what they do is they basically looked at certain items and they said that they're basically saying there is no access like and the examples would be, you know, help all these things I just mentioned, right? Contacts. Yeah, they help me read tax code. Um, if I wasn't reading tax code, I would still have contacts because I like to see and that's for personal reasons. For personal reasons, I just need to see, right? And so things like I mean there have been court cases on dentures, right? It's like I mean you you do need to be able to like have all your teeth for business. Like realistically you also need to have teeth for life. And so they just started labeling a lot of these things. One of the main common denominators is that it's related to your body. I would say those are like the most like health and just actually like body like Botox or you know like skin care like all these things directly impacting you as a human. Haircuts that's a really good one. Um, realistically they just say like this is so inherently personal. There's just not there's not an excess like you would have done this for personal reasons anyways.

Okay. Just going to stop real quick and see what you guys are saying real quick. So okay. Okay cool. So that is what inherently personal expenses are. Um, and that's why when people run here and they say it's really ordinary necessary for me to get a haircut, it might be, but it's an inherently personal expense. And so because it's inherently personal expense, it's not deductible under 162A. It's non-deductible under 262A. Okay. So that's the high level. See if I missed anything. Um, okay. Yeah. So, it's just some things are just so inherently personal that they're non-deductible, even if used for business.

Okay. So, I wanted to cover a couple court cases just for fun. Um, okay. So, there's one um and for you guys that love I don't know if some accountants in the in the crowd, but um it's Batal versus Commissioner. So, we'll just spell it. Um, and so this is this is an example. So what this guy did is he um was he was an English major. He had done like English and writing his whole life and career and then he basically uh wanted to write a book and so he'd written several books and he he wrote a book and actually published it. And let me just get the title because I can't make this stuff up. Let me see. Okay. So um so it was about experiences of two men who travel cross country to patronize a legal brothel in Nevada. That was the book and um yeah and yeah I mean it's everything you would think of with writing a book except the additional thing was he basically wanted to visit brothel and visit prostitutes to use them as like characters in his book. And so he basically did all of this due diligence to do that. And I wanted to there's nothing better than a quote. So, let me just So, in a journal describing his experience at the brothel, he recorded the brothel he visited, the dates and sometimes the hours of the visits, the prostitutes he met, the amount of cash he paid each one um for each entry. He wrote about his visit with the prostitute and about the happenings at the brothel in general, whatever. So, basically, um he went through the whole thing and he spent all of this time with prostitutes for um and he and he paid them and so he deducted it. And so there were a couple arguments in this case that the IRS was going for. The first one, back to our framework, is that you don't have a business. So that was the first argument they made and say, you know what, none of this is deductible because you just don't have a business. Uh, because it did it didn't do so well. It it flopped. And so the second argument they said even if you do have a business, they're not ordinary necessary. And they said that they are in inherently personal expenses. And um the IRS lost this argument. The guy won that he had a business and the guy lost and it wasn't inherently personal expense. That's the short version. But I just wanted to find there was something in here where it was basically like he had only allocated like three-fifths of his um of his money spent on prostitutes as like business use and the other two-fifths was uh personal. And you know the court basically was like this is just so inherently personal. This is absolutely not deductible.

Okay, I'm just going to see what you guys are saying real quick. Um, let me just see if there's any other I just This is the funniest case. Um, okay. I think that was Yum. Just trying to see if there are any funny quotes in there. Um, okay. So, so, um, what can we compare that to? To be honest, I think it's pretty comparable to traveling for a YouTube channel. So, I'm not going to say there's no channels out there that you can't deduct travel for like a YouTube channel about travel, but when you think about it, you've got something that's pretty personal. Um, and so you just have a really high barrier. Now, something like travel is not I don't know. I mean, it's it's pretty similar. So, I would say you've got um you've got a hard argument. Um, and you really the the best way to win the argument is to prove that you're in business is to actually make a big profit. Um, and then as far as inherently personal, this one's tough. I would say if it's truly to the core of your business. Um, just making sure it's not related to body is usually like my rule for inherently personal. Um, okay.

So, next, let's go over. Okay, so we got that court case. Um, okay. So, this is the other court case I wanted to go over. Um, so if you guys have heard of Hess Commissioner, this is a really commonly cited court case. Um, so there's different ways you can go to tax court. One is a regular just a regular tax court petition and the other is for small dollar amounts. Um, usually I just go the regular route. I don't see too much of a reason to go this the other route, but some people do, especially if you don't have representation or um you just need it to be like more simplified. And so when you go that other route, that's what we call a summary court opinion. So it's usually uh for these small dollar amounts and it's not precedential. So the the the result that comes out of it is not something other people can rely on. And so that's actually what this case is, which so what that what that means at base level is we can't even rely on this opinion for um for precedent is what we call it like for true legal support. But okay, so what this court case was is basically everyone talks about it cuz it was it was an interesting read. Um, so an exotic dancer basically got um cosmetic surgery, cosmetic enhancements um for work and so she actually won her court case. But I wanted to explain why because what people will say is well we have proof, right? They'll say an exotic dancer um got um let me just she went up to a bus size of 56N whatever that is and uh basically did it for work and did get paid more. And so what a lot of people say online is they'll say well if you could just directly tie it to income you're good. And they'll say, "Well, it's this it's this it's this threshold that um I see I see this for so many practitioners, like even honestly licensed CPAs, like so many people." What they try to say is that if you can very directly connect it to income, you're good. So, they'll say, for example, someone like Kim Kardashian can very directly connect it to income. And so, they're really focused on that connection between the enhancement or whatever the change was and the income. That's not the problem, right? The problem is that we have inherently personal expenses. That's what it is. And so in like 99.9% of cases, we it's basically so inherently personal. Remember what was inherently personal? Inherently personal is the fact that you really can't show that there's really any difference between what you would have done from a personal perspective and what you did for a business perspective. So it may help you for business. We don't care about that connection. That's of course like yeah it helped you for business assumed. But if it's also something that basically gives you a similar personal benefit, you just really can't prove there's a distinction between the two. Now, are there extreme circumstances under which you can? This is the extreme circumstance. Okay, so what the court basically said, I think it's it was also funny. Um, so they said in addition to the medical problems, they kind of go through basically she had like multiple bacterial infections. Um, she had to like get them out, get them back in. Um, what did they describe? Let's see. Yeah, so they they rejected the implants due to bacterial infection. She had them removed, put them back in. Um, in addition to the medical problems, they were subjected to considerable humiliation because of the size of her breast. Petitioner was ridiculed by people on the street. Her husband suffered off-color remarks and insults and she was ostracized by most of her family. So they said in evaluating whether certain expenses are personal or qualify as business under 162A the courts generally found they said generally found that it's inherently personal. Um, therefore they said costs paid by the taxpayer in enhancing one's health or personal appearance even though such costs were paid for business reasons have not been held to be a business deduction. But um what did they say? So they said for her they were detrimental to her health and contorted her body into a grotesque appearance um for all for the purpose of making money. So um they said they augmented her breast to such an extent that they made her appear freakish. They ruined her personal appearance, her health, and imposed severe stress on her personal and family relationships. Okay, I think those were all the good ones. Okay, and and they actually likened it to, and this is the final thing I want to touch on, what they likened it to is the clothing deduction. So, you guys may hear me talk about this a lot, but when we say, okay, is is clothing deductible? We've got a three-part tax court test. It's actually the same thing here. They just don't use it because they're basically saying it's never going to apply. But the three-part taxport test required or essential for work that it's not suitable for personal use and that of course it's used for business, not used personally. So we have the same test here. Think about it. So what is an inherently personal expense? It's basically those same three things. They're just presuming you don't meet element two. So when you think about whatever Botox or contacts or all these things, realistically what you would need to do is show that it's not suitable for personal use. And that that's what she showed. She basically showed, hey, I'm I'm dying. I have health issues. I look nasty. Like like that's basically what it is. It's like not suitable for personal use. And she's like, the minute I I if I could take them out every day, I literally would. Um this is horrible for me personally. So um and so she did win her court case. Even though it's a summary opinion, we can't actually legally rely on it. I would say that general rule I think does hold. So, if I thought about, for example, contacts, if I had maybe, I don't know, a branded business that was like a pink business and so therefore I wore pink eyes, like maybe instead of regular contacts, I had like I just pinkked out my eye with like a pink I don't know, whatever. I've never seen that before. But my point being like realistically not suitable for personal use and basically and and that test for clothing, it's not whether you would do it personally. It's an objective test of whether it is suitable for personal use in general. And so, for example, a haircut. Um, I I've never I haven't seen court cases on this just because they haven't gone that far, but I do think if you did something super freaky and weird with your hair that made you look awful from a standard person's perspective, I do think you probably could deduct it, right? And so, that's that's the rule.

So, let me see what y'all's comments are. Um, okay. So, let's see. Okay. I don't think those are relevant questions. Okay. So um so that that's one of the most popular cases. Hilarious case. Um, and it teaches us about inherently personal expenses, right? And then finally we get to ordinary necessary. And this is honestly pretty straightforward. Um necessary. So there so actually I mean when you think about when you go back in history here and when this first came out right when it was new law the IRS went against it right they basically said we think necessary means that it's like you you can't it I mean normally our regular definition of necessary right what does necessary mean necessary means like I can't live without it like you have to have it it's not helpful it's like absolutely indispensable and so the IRS did have cases where they basically said, "We don't think this is deductible because it's not necessary." Basically, the courts came in and they said, "No, no, no. We're going to define this differently." So, we define necessary as appropriate and helpful. And they define ordinary as like customary basically for what you're doing. Let me see if I got the Yeah, common and accepted. Common and accepted, appropriate and helpful. So, this actually is defined very broadly. The problem for most expenses is that we haven't made it through the three hurdles to even get here in the first place. Um, but then once you are here it's pretty defined broadly. Okay. So a couple of final things I wanted to go over was we just talked about the clothing test. So you can you can really use that test for a lot of the things that are personally amazing, right? It's the it's the three-part test. Um, and and another example we use that in is meals. So um, so in general pigs get fed, hogs

get slaughtered, right? So, when you think about meals, it is one of those things. They're deductible 50%, you know, all the rules that we've heard.

Um, this is where people say things like, "Okay, well, I'm just going to like make my spouse my business partner, and then we'll just like go to dinner every single night for business."

Um, and so you're actually in the same zone here. Um, and so when you dive into all of the court cases, we've got what we've called the Sutter rule. And so it's literally from a court case back in the 1950s on someone named Sutter. And so the rule is the same rule. We're literally in the same place. Like I when I explain these types of things, I just to me it's like always understand the substance because um that's that's what drives the rules. And so we're in the same exact spot. Why are meals deductible? Well, they explained the reason that they're deductible is because it would it you're doing something in excess of what you would have done personally. But is it in excess of what you would have done personally if you're going to dinner with your spouse constantly throughout the year? Doesn't look like it.

So, what you find when you go into court cases is a couple things. One is that familiarity is a problem. So, not to say you can never have dinner. Like, I would say a couple times a year, sure, that's fine. Um, they look at who you're with and then they also look at frequency. And frequency is a big problem. the more even even when you're not familiar with the person. If you if you take your employees to lunch every single day for the entire year, the frequency alone is an issue and the and the logic for it in the courts is this looks like what you would have done anyways for personal reasons. Therefore, it's not in excess of what you would have done for personal reasons and kind of they've got that subtle rule there essentially to prevent abuse. So, it's not something that the IRS will bring up in a regular audit when you've just got a reasonable number of meals with different people that aren't excessive. But the minute it sticks out, they start saying, "Wait a second, maybe this isn't ordinary and necessary."

Um, and then we do have unfortunately, I mean, I would call it like bad law, like like not taxpayer taxpayer favorable law that does allow them to legally prevent you from taking those deductions.

Um, okay. Let's see what you guys have. Yeah. Why can't you deduct Rolexes if you sell it? That is a totally different. So, if you're in the business of selling Rolexes, then yeah, it would be cost of goods sold, but you wouldn't be under 162A. That's 471, like 471 for cost of goods sold. Um, so you're just in a totally separated bucket there. Um, but if you're holding on to them and using them, you've got a problem. That doesn't sound like inventory. Um, okay. So, yeah.

So how about a highly profitable YouTuber whose channel is about expensive cars like Lamborghinis, Ferraris, argument is with no cars, no YouTube revenue. Yeah. So I would say in instances where right I we go through the framework he the the biggest thing is he's going to be able to make it through the hurdle that he's in business and that's the worst hurdle for most people, right? So when you're buying nice things that you're like um he can show I'm literally making a profit. So I'm obviously doing this primarily for business purposes. And so that's the reason a profitable channel is going to have a much easier time now. Okay, he's open for business. Um I think there's always this risk, but things like cars, like going back to what are inherently personal items usually related to? It's usually your body. So it's like you think about a car, like we just have different code sections for that. So that is um he actually talked about his audit and so he um he was able to deduct his cars and that's that is what I would expect in an audit but he deducted them wrong because he read the tax code himself and um didn't follow the rules and so yeah so that's why something like that would be fine. Um, it's very rare. You know, you think about, I don't know, again, travel channels. I It's not something I follow, but it's one of those things you're just going to have such a hard time unless you really are like the top 1% truly making money in the industry.

Um, and realistically when you look at people like probably Stradman, I mean, I don't know him, but um, you can look at other people in general, if you really were starting something for business purposes, even if you're starting something fun, like travel, you wouldn't necessarily go below a ton of money, you know, like if you were saying, "Okay, I'm going to do this for a profit," you can travel places that are closer, that are cheaper, right? You don't necessarily have to go stay at the nicest place with the nicest rooms, bring your family, right? So all of these things start influencing realistically if you're starting much cheaper, much more prudently, that is going to be a beneficial fact showing that you actually are trying to make a profit. Okay, let's see. Yeah. Yeah, he did a video about it and said bonus depreciation was disallowed. That's right. Because he he didn't follow the rules.

Um, okay. So, what else do you guys have? Any any final questions? That's basically what I've got. High level. Just going to recap one more time. You want to have a business. You want to open as fast as humanly possible. And then you want to ignore social media advice and realize that there's this whole concept of inherently personal items. So, you want to just be careful there. And then finally you're under ordinary necessary business expenses. This is really broadly defined. Um things there is additional law. You know this is the main framework. So when you think about things like travel okay ordinary necessary yes but then we have to look at the treasury regulations. There's a little bit of additional guidance there. But otherwise this is going to apply to almost every business deduction. Sometimes though it's just not the only hurdle. Right? you think about things like a vehicle, you have to follow the framework and then we have to hop over to IRC 274 and meet those requirements as well.

What else do you guys have? How to avoid double taxation in a C corp. C corps are, you know, you don't pay double tax if you don't take the money out. So, um, really corpses work really well for rein businesses that need reinvestment. Um, so otherwise, a lot of times we don't we don't go to CC corps, but um, if your business, for example, buys a lot of inventory and then that inventory very often, not always, very often is not deductible. So, you're still going to have a huge tax bill. A lot of times it makes sense to be in a CC corp. You only pay the 21% tax bracket and then eventually when you sell that inventory, it is taxdeductible. Um, and then you won't ever pay that double tax, right? You're you're building the business. And so, it works really well for businesses that continue to reinvest. Um, if you're just trying to take the money out and avoid CC Corp double tax, I mean, that would that that would just be what happens when you take it back out. Okay.

trying to choose related questions. Let's see. Um I don't know if I understand that one. Okay. Yeah. If I have a sole proprietorship LLC, can I deduct costs on family, vision, dental insurance for me and my family? Very often you can. You'd want to make sure it's for the business, self-employed health insurance deduction. Um, but yeah, that's where I would expect to see that on schedule one for the self-employed health insurance deduction if done properly. Cool. Cool.

All right, we are going to wrap here. Um, this this applies to so much stuff, guys. Think about it. I want you to think about people are like, "Hire your kids." And they're like, "I know this special code section with these special pages in the code that say it's okay to hire your kid." Hiring your kid is just hiring an employee. It's an ordinary necessary business expense. So, as long as you have a business, that's open. It's not an inherently personal expense and it's ordinary necessary to the business, right? That's why people say, "Okay, well, how much are you paying them because if you're overpaying them, then that's not ordinary necessary to the business." And so it's always it's always the same framework, whatever you buy. You buy a desk, you buy a chair, you buy um I'm trying to think like it it literally is like 99% of your deductions for your business. And it's really when people try to get funny with it that you need to do a couple things. One is sometimes you just need to keep better support, right? You need better support that you actually have a business. Um you need to keep better support that it's not an inherently personal item. Um or it's not deductible sometimes, right? And so um that is how this works. I will let this I will wrap this one and thank you guys so much.