Financial Planning & Tax Tips for Fitness Pros: Pat Darby
Guest: Pat Darby
Podcast Release Date: 10/10/2021
Welcome to Trulyfit the online fitness marketplace connecting pros and clients through unique fitness business software.
Steve Washuta: Welcome to the Trulyfit podcast. I am your host, Steven Washuta, co-founder of Trulyfit and the author of the book Fitness Business 101. On today’s podcast, I speak with Pat Darby. You can find Pat at Pat Darby’s biz on Instagram. Pat is a certified financial planner and a tax advisor. And specifically, he helps fitness coaches optimize profits, reduce taxes and build wealth. Pat and I discuss exactly are the different retirement plan options? And why are each beneficial as personal trainers? Some of us aren’t in that world, we don’t understand the portlets and jargon of finance and retirement.
So we break that down into layman’s terms. Pat goes over if he believes fitness professionals should have a financial planner, if they should have a professional accountant, we go over what fitness professionals could potentially write off. He and I both talk about why it’s beneficial to find a company that potentially contributes a percentage to your retirement plan, and are given insights into how exactly to find a fitness company that may do this for you.
We go over standard tips for fitness professionals concerning taxes and a little bit of investment advice is Pat about so fantastic information here. I’m sure we’ll have another podcast down the road, maybe closer to tax season. With no further ado, here’s Pat. Pat, thanks for joining that Trulyfit podcast, why don’t you give the listeners a background on what you do professionally?
Pat Darby: Thanks, Steve, I appreciate you having me. So I’m a certified financial planner and a tax advisor. My financial firm is Darby business advisors. And we specialize in helping online fitness coaches build wealth, both inside and outside of their business.
Basically, we take on the CFO role, helping them to optimize the profits in the business, pay less tax and invest those cash flows both inside and outside of the business, which I think differentiates us from a lot of financial firms, especially the larger ones, that they don’t necessarily profit from you reinvesting and building the value inside your business. So we try to focus on that area as a personal and business CFL.
Steve Washuta: Why do you believe it’s important for fitness professionals to have an understanding of their investment opportunities and retirement and things of that nature?
Pat Darby: Well, like any, like any of us, really, I guess, they’re very similar to what the best example would be like wealth versus income. And you can really look at professional athletes who have a higher income than most people in like the Fit pros percent potentially.
The vast majority of them, I would say, 60 to 75%, I think they’re statistically they’re broke within five years. And that’s mostly because extremely high income, but never built wealth, never put the money to work and investments and really plan for the future.
For people in the fitness industry, you know, their business owners, just ones that I work with the philosophy that you want to build the value of your business, but there should be a hedge outside of the business as well. Because unfortunately, as small business owners, over 80% of us will never sell our business, even if we intend to. So it’s really important to have something outside of the business that you can rely on in retirement.
Steve Washuta: Yeah, and you know, a lot of fitness professionals, whether they’re small business owners, sometimes they’re kind of like a sole proprietor or they’re, you know, they’re working independently. Some of us may even work under the table, in some instances, working with clients and things of that nature.
So who knows there, it’s all over the place as far as how money comes in, as a fitness professional, but the one thing we don’t have is sort of typically anywhere in the corporate environment, where things are more structured, and you’re talking to other people about their retirement plans and things of that nature. It’s just you and your client working one on one in the fitness realm.
We’re so kind of out of that loop of what’s going on, I want to dive right into sort of a 401k. Ira, we hear all these terms thrown out for somebody who has no idea what these are, what is the difference between a 401 day and an IRA? And then what’s the difference between the Roth and the standard?
Pat Darby: Sure. So the basic way to look at it is an account so anyone can start one of those whether they work for somebody else, or if they are self-employed. Again, so that’s the IRA. There are basically two forms of it, the traditional IRA, meaning if you put your money into it this year, meaning we’re recording this in 2021. They can put $6,000 into a traditional IRA, and that will give them a tax deduction.
Now check with your accountant, because again, there are rules if you have a W two job, there are some rules whether or not that tax deduction will, will fit for you. But the same thing with a Roth IRA. So the way that Roth IRA works is there’s no tax deduction, you put the money in. And then when you take it out in retirement, you don’t pay taxes, again, versus the traditional IRA, you take the tax deduction upfront, but then you pay taxes on the way out. So the two ways to look at those is, you either pay taxes on the seed or on the tree, you get to pick right now, the Roth IRAs are very advantageous, because we’re in a pretty low tax situation, right now, historically, we’re in a great tax situation.
If you can do a Roth IRA, right now, a lot of people are considering those, but there are income limitations to using it. So there, they’re pretty good. And that’s the reason that there are restrictions on them. So there’s the two IRA. So there’s the traditional IRA and the Roth IRA. Now, when you get into the 401k, you need to be a business owner, whether that is a sole proprietor 10, nine, nine, if you’re a business owner, then you can set up a 401k.
Especially, it’s real simple. If you work for your senses, there’re rules and regulations as to how you can and cannot set them up. But if you work for yourself, and you have no employees, you can set up what’s called a solo 401k. Those are really nice, especially depending on where you set them up. Because they can be extremely low cost, but you can put more into them.
So when you’re talking about a traditional IRA, for instance, the limit is $6,000, as of 2021, with a 401k, and a solo 401k. Right now, the limit is 19,500. So it’s much so depending on what your income is, and how much your expenses are in your personal life, you can put way more towards your retirement into a 401k.
Steve Washuta: I was gonna say in my previous position, I had a 401k that was matched up to 4%. And you know, that’s, that’s wherein the fitness industry, people typically do not do that. But can you explain why that compounding is so important for long-term retirement?
Pat Darby: Yes, so if your company is matching you, that’s basically free money. So that’s usually one of the first places if you’re deciding like the hierarchy if you can only put so much money away into your future. Where do you put it, like which buckets you fill up first, because there’s so many you can choose from? And that’s typically one of the first questions we would ask a client is, what is your employer if you have an employer, you’re not self-employed? What are they matching, because, again, if you’re planning to put money into one of these vehicles Anyway, take the one where again, if you’re putting in 10,000.
Just to keep the math simple, if you’re putting in 10,000, for every 10, you put in your employer’s putting in 4000, that’s $4,000, that’s free money. And that’s yours forever, assuming you invest into it because most employers will have some sort of vesting schedule, meaning that it’s not your money until you’re there for X number of years. People may be familiar with that concept. Again, you usually have to check with your HR to get the details of what you need to do to earn that money, and then, more importantly, invest in it. But yeah, maxing out what your employer’s giving you for free, is probably the easiest thing you can do to maximize your retirement outcome. If you’re self-employed, that matching component becomes a tax strategy.
Because what you match for yourself like air, quote, match for yourself, basically becomes an expense of the business, which helps you lower your tax rate. So whether you work for someone else, or you’re strategically doing it for yourself, there’s a lot of tax strategies to help fund your retirement and lower your taxes, which obviously increases what you can put towards yourself.
Steve Washuta: That’s great information. And I just want to add something to that for trainers who are thinking about or hoping that they have an employer who will do something like that it’s very rare in the industry, you’re not going to find it at your box gyms, where you will find it typically is in more of your country club type atmospheres.
So if you go into these private clubs, personal trainers, these private clubs will sometimes do that and match and provide you with a 401k But you know, you have to seek these things out. It’s not in your traditional fitness jobs. So just understand that that’s not standard, but it certainly likes patchstick point it’s money that’s important. So it’s really advantageous for you to seek out, those jobs in those locations.
Pat Darby: If you’re working at one of those gyms, and they do offer a match. Ask them if they have what’s called a Roth 401k option. Those are becoming more popular, especially if you’re fairly new to the fitness industry. If your income is lower That means your tax brackets are lower as well. Putting money into a Roth 401k might be really helpful for you to ask, not every company is going to offer that.
But if they do look into that, again, double-check everything with your accountant. But those when you’re in lower tax brackets, and again, especially the one we’re in now can be really advantageous to your future if you’re putting the money away pre-post tax right now. So not to make it too confusing, but find out if your company gives you that option and then consider it.
Steve Washuta: I also believe, and I think you had made mention of this earlier, because certain the IRA, it does matter how much money you make which bracket you’re in, correct. So I think if you makeover, let’s say, $200,000, you can’t actually put money into a personal IRA,
Pat Darby: Into a traditional IRA, there’s never a limit, there’s no income component, the income component comes in as to whether or not you can deduct it. And that’s, that’s gonna sound complicated, but that’s based on whether you have your own.
If you do not use a 401k plan from your company, and you have, so you have no retirement plan happening for you, there’s no income limit, you can make a million dollars a year and still put money into it. If that same scenario exists, where you make a million dollars a year and you are maxing out your 401k with your company, then you could still use it, but you would lose the tax deduction.
It gets complicated because you definitely make sure an account is helping you with this. Because then you could end up in a situation where you have pre-tax and non-tax money sitting together and your retirement account becomes one complicated into, you’re probably likely to accidentally pay tax twice on the same dollar. And so you want to avoid that. But where the income limits are very strict are on the Roth IRA side.
So if you make too much money, you can’t use a Roth. Now, one of the reasons again, I always, especially if you’re a business owner, I always recommend you have an accountant because they’ll typically pay for themselves because there are so many levers you can pull tax-wise when you are a business owner.
But when you are over the income limit, and you’re trying to use a Roth IRA, potentially you can’t. But there is a strategy called a backdoor Roth. It’s an illegal tax loophole, it may get closed by Congress at one point. They don’t seem happy with it. But at the moment, there’s a thing called a backdoor Roth, where I won’t get into the details as your accounting because I don’t want you to hear what I say and then misunderstand because there’s a lot of ways that you can step on landmines doing this.
It allows you to make money when you’re a high-income earner and move it into a Roth. It adds there are a few extra steps that take some time, you got to check some of the compliance boxes to make sure the IRS will allow it. But it is a way to use some advanced tax strategies even as a high earner. Again, that’s why you need an account because you’re making enough money that they can do these things you’ll be happy when you’re over 60 years old, and it’s been growing for 20 3040 years.
Steve Washuta: That’s great information. And if you know we’re going to obviously continue on here and give some more great information. But I will throw a caveat here that the thesis of this would be that you need to work with a profession. It is very sort of esoteric, there’s a lot of steps. And it’s in-depth, obviously the tax codes and things of that nature. And it’s important that we, as fitness professionals, delegate.
Pat Darby: Yeah. And I would just say specifically on the tax side, you know, like I know a lot of people ask, like from the investment perspective, oh, I don’t need a financial advisor. And the reality is, it’s similar to fitness, like a lot of people walk around the gym, they know what they’re doing, and they don’t need a trainer. But there’s a lot of people that either has no clue what they’re doing. Or they’re really trying to maximize their output. And that’s why they hire someone to help them, but on the tax side, I highly, highly recommend not doing it yourself. For two reasons.
One, even as a tax professional, I think the tax code has changed like three times in 18 months. So it’s hard for tax advisors to keep up with the changing tax code. For someone who’s running a business and out their main focus, helping their clients and growing their business is really hard. And there are ways that you can basically that the fees themselves more often not pay for themselves, because they’re going to catch things that you’re going to miss.
And then, more importantly, there’s just a lot of record-keeping and documentation that you need that God forbid you ever get audited. A tax professional is going to say okay, this is what we’ve been keeping track of. So specifically on the tax side, I would not do it yourself. I would get someone who’s a professional to help you
Steve Washuta: I think that was a great analogy to concerning me, the financial planner side were similar to fitness. Yeah, if you’re, if you’re somebody who sort of knows what they’re doing in the gym floor, maybe you don’t need a trainer, but one training session, but that trainer to come to look at exactly what you’re doing and sort of poke at certain things and adjust a few things could go a long way.
Maybe you don’t need a financial planner long term, or you don’t need one for the rest of your life or for a year, but to meet with one for an hour or two and spend the money and sort of and learn a few tricks of the trade, I think is certainly well worth it.
Pat Darby: Yeah, I completely agree.
Steve Washuta: So are there companies or services or sites you recommend, you know, the big ones like Fidelity and things of that nature, other smaller ones, too, they are some more advantageous if you make less or make more,
Pat Darby: Do you mean from an investment perspective,
Steve Washuta: From and I guess I would say from an ease of use perspective because we’re talking about people here who don’t necessarily have the knowledge of all these investments. So if I was somebody who for the first time, let’s say I get a job, they’re offering me a salary of $75,000, they’re giving me 401k, and their matching 1%, all that stuff, but I get it. So sort of the services to use, what company would I use.
Pat Darby: So if you’re okay, so if you’re at a company, from the 401k, side, you’re probably not going to get a choice, they’re going to have it with whomever they have it with fidelity is a big one. So let’s, for hypothetical purposes, they’re at Fidelity, you would just speak with your HR. And they’ll give you a list because that’s part of how 401k works. Its blessing and its curse is its simplicity. So typically, they’re low cost, and simple, meaning they’re going to give you a menu of choices that investment choices and those may only be five to 10, sometimes on the high end, maybe 40 choices.
Again, that is going to be helpful for someone who doesn’t really know what they’re doing. And they want something simple, they’re going to have a list of choices. Typically, there’s going to be somebody with investment expertise, linked to that account, there may be an advisor or somebody that works at the big firm that you could call up and say, Hey, this is what I’m trying to do. So in theory, that’s already going to be established for you. If you don’t have something established, or you’re trying to do some more on your own, I don’t personally have a preference.
I am very familiar and comfortable with TD Ameritrade just because that’s where my clients sit on the institutional platform. So I’m very comfortable even with the retail side. But the one thing I would caution people about when you’re trying to pick like your IRA, and things like that is to Be cautious of using your local bank. Because sometimes now this doesn’t sound very broad, because not all banks do this.
But sometimes when you open up your IRA at a local bank, they don’t give you the same investment choices, as if opening it at like a fidelity or TD Ameritrade where they basically open it up to everything. So you have literally over I think TD Ameritrade has over 250,000 investment choices. Whereas that a bank, sometimes you get pigeonholed into what’s quote, unquote, like a banking product.
So what a banking product would mean is what we’re all familiar with, like money market accounts, CDs, the things that are fairly safe and conservative, which is appropriate for certain things like if you let’s say you’re saving for, to put a down payment on a home or something like something that you need that money to be reliable. Typically, that money should not be in the stock market, it should be in something conservative.
But if you’re 24 years old, working at a gym, and you’re trying to put away $6,000 A year into your IRA, typically that time horizon is 3040 50 years until you’re actually going to need that money. It should be in something with a little more upside potential. And not all banks will allow you to do that. So where you can open the account doesn’t necessarily matter.
But out ask those questions to make sure that you have access to the full range of what the stock market, the bond markets, and even bank products do. But typically, the stock market choices aren’t always available at all the banks and credit unions. So just be careful with that.
Steve Washuta: Can you do a true layman’s breakdown for those who don’t know, you started to describe it if you have a 401k account? You’re you have to put sort of percentages in different areas, right? So you have maybe you put some money in an index fund if you’re trying to be more conservative and then you have some money in bonds here to be conservative and then some stocks and there are percentages.
Can you kind of explain that and should also explain if you need to reach out to professionals or do you think people can do this on their own?
Pat Darby: Well, there are two ways you can do it, especially inside of a 401k. A lot of what’s popular now are those target funds. And for my clients, I don’t like them, because we can be much more strategic. But if you have no idea what you’re doing, I actually think they’re pretty good. And they’ve gotten better over the years and the costs have come down. So a target fund is basically you say, well, in 40 years, this is when I’m going to retire. And so the fund will automatically start out with something at a risk level that’s appropriate for your age.
As you get older, someone’s investment portfolios should change as they get older, because the investment portfolio of someone who’s 25 versus someone who’s 60. And they’re five years and they plan to retire at 65 is completely different, because the market is obviously unpredictable. That’s the fundamental of all, stock market investing, essentially, you don’t know what the stock market’s going to do. So you want to make sure you’re okay with the downside, I guess, is the best way to frame it. So if you are young, and you don’t need the money for 40 years, you want to have a little more upside potential.
And as you get older, you want to take some risk off the table, because pretty soon you’re going to need that money. So the target funds are nice because it’s going to do all that math for you. And it’s going to change it for you as you get older. So if you this, all of this is very overwhelming to you look at Target funds, understand those ask questions about those to your HR team, and I would lean towards that. If you have a better understanding, and you want to be more specific with your intentions, there are two ways to look at so inside of a 401k, you may not even get individual stock options.
So you’d be looking at index funds for probably everything. And again, if you’re designing a 401k plan, that’s what you’re trying to do, you’re trying to make it fairly vanilla because you want to make sure people understand that they don’t accidentally take a risk that they didn’t understand. So most of the time, you’re going to see pretty vanilla index funds, I would recommend you lean towards ETFs, which are exchange-traded funds versus mutual funds, which they, they do essentially the same thing, except inside of an ETF, you have a little more liquidity, which is nice. But also, more importantly, the fees are typically lower.
If you’re looking to invest what they call, so there are two types of investing active or passive, active is when you’re out there, trying to beat the market. Passive means you’re focusing really on your business. And you’re going to let the ebbs and flows of the market over historical time periods work hopefully in your favor. So when you’re going in the passive route, you’re more cost-conscious because you just want the investment choice to follow the index that you’re interested in.
To give you an example, there’s a lot of different indexes, like ones that I think are helpful are like you’ll follow the large-cap, United States stocks, and then you could do another one that follows international large-cap funds. And then for diversification purposes, people look at things like emerging markets, fixed income. Depending on your age, you may not have an interest in a fixed income. But those are the different types of ways that you would diversify with still not having access to individual stocks, because inside of a 401k, you most likely won’t have access to individual stocks.
Steve Washuta: So from staking to sort of the investment competition here before I go into some more tax-related stuff. This is a general question. But do you believe that with inflation, which obviously is hit us, is it better to have your money and assets, let’s say a house rather than save it and have it in a 401k? Do you have a particular stance on this?
Pat Darby: Yeah, in general. I guess it all depends on what your goals are. Most of the stock market, in general, has it’s own trying to think how to phrase it, but most of the stock market basically has a little bit of a buffer against inflation, because the products are being sold on the market. So they’re increasing with inflation.
It’s the fixed income markets that tend to have a little bit more of an issue with inflation. But most of your audience is probably not looking too much at fixed income because their age and fixed income historically have been a hedge, excuse me a hedge against the stocks in your portfolio. So as you get older, let’s say a typical retiree, their portfolio 60% stocks, and the purpose of that is that when you’re seven years old and the stock market crashes 20% 40% Your portfolio is not impacted at that 20% level, it may fall a little bit.
And unfortunately, we saw that during COVID, there was nowhere to hide, everything fell in the month of March of last year, but fixed income fell a little bit less. And so the goal is in retirement is where is your money going to come from? What assets whether it’s real estate or your investment portfolio? Or if you’re owning a business, and there’s money coming out of there? The question is, where are you going to pull your money from? Typically, the fixed income is where you, you know, like, essentially, your quote, unquote, war chests are like, okay, no matter what happens in the stock market, the fixed income, we’re going to be pretty confident will be there for us to pay the bills for X number of years while we come out of whatever economic downturn we’re in.
So when it comes to inflation, the stock market itself has a lot of buffers against inflation. If you’re hoarding cash, that’s where you get hurt the most. But I’ll say that with a caveat, because obviously, cash, even in even in good times, inflation exists at around 2%. And so when you hold money in, in a savings account, typically you’re losing money overtime in that scenario.
Now, there is a time and place for hoarding cash, for instance, emergency fund, you need to have liquid money in the event that your roof needs a repair or your car breaks down or whatever it is, or God forbid you to get sick or hurt and can’t work, and you need two or three months worth of income readily available.
So you don’t have to put on a credit card or quickly borrow it from a bank. Because banks don’t lend if they, only lend to people who don’t need money. So if you’re in financial hardship, it’s not the right time to go to ask a bank for money. So there’s time and places where you say, okay, my money sitting in cash right now. And I’m losing money to inflation. But that is an acceptable risk. Because I’m preventing, you know, rolling $20,000 on a credit card. If God forbid, something happens to me.
And then the same thing, like I know, a lot of people now they’re savvy with real estate. And they’re hesitant to buy into the real estate market that’s been going on for an opportunity. So if you’re putting money strategically in cash to wait for an opportunity, I think it’s fine. But what I do see, as a mistake a lot is young people hoarding cash as an alternative to investing. Because they don’t feel comfortable. Or they’re like, I’ll just do it later.
There, and the cash is earmarked for the retirement. But they’re just sitting on it. I think that’s where they should start looking at asset classes to deploy it into. Because you don’t need the money for 40 or so years. You don’t want that to get eaten up by inflation.
Steve Washuta: You have a general set of tax tips for small businesses, obviously, specifically fitness small businesses.
Pat Darby: Sure. So when it comes to taxes, the main strategy is basically twofold. One, obviously when, in theory, you want to pay as little tax is possible. But let me give that a caveat. You want to pay as little tax as possible over your lifetime. So there are times when you strategically want to pay more. So I want to make that point important because there’s a difference between tax strategy and filing your taxes.
Because you file your taxes. Like they’re just your account is going to go through historically in March or April. Whenever you sit down with them and just tell you what you owe. Whereas if you’re doing tax strategy. Throughout ends on 12/31, because you want to do these things during the year. Not when the year ends, because then there are only a handful things left versus having everything at your disposal.
So I just want to make that point. Because sometimes your tax advisor is going to come to you and say, okay, strategically, we’re going to pay more this year. And X, Y, or Z is the reason. But one of the top goals that I think any business owner should have. And this is why I think anyone should try to be a business owner.
Because just to step back again, you look at really what makes the economy thrive. And it’s really two main buckets. You know, people need jobs, and people need a place to live. Historically, the government is wanted to incentivize people to be landlords, be business owners and create jobs. That’s where the entire tax code sits. If you’re doing one of those two things, or both the tax code is actually your friend.
And so, one of the main things that we try to sit down. Help people do is what can you move in from your personal life. Into, for instance, as your personal cell phone, like some of that is business use your personal vehicle. Some of that is business use moving some of those expenses into tax deductions.
The same thing with your gym gear. If you’re wearing gym gear to help your clients. That’s a personal expense unless you put your logo somewhere very prominent on there. And again, it has to be prominent can’t make it small letters like on the inside. But turning your gym gear into marketing material makes your personal attire tax-deductible.
So those three things there again, I would look at what’s in your personal life. Even travel, there’s a good reason why you have friends or spouse or boyfriend or girlfriend. As either working in the business or doing something in the business. Because if you’re going to travel somewhere, to meet a client, whatever it is. Turn your vacations into business, legal legally business travel. So again, that’s why I always recommend having a tax professional help you with this.
Because those are just a handful I run my clients through. I think that list is up like 52 or 53 different points on their filter. To see like how can you lower your taxable income legally. In 2021, because of COVID. One of the new changes that came along is that you can expense 100% of your meals. Typically, it’s only 50%. There are some rules around it as to what counts as a restaurant and what counts as a meal. But the same thing, if you have a team of people. And you’re going out to dinner now you can take 100% as a business deduction.
Steve Washuta: Oh, questions concerning donations are really. This is a topic that I’ve tried to research but I couldn’t really find a good answer. And you know, deducting donations, is this just cash-related? What if I bought, you know, let’s say 300 jackets, and I gave them to the homeless? Is that considered a donation? Or does it have to be cash?
Pat Darby: No, it doesn’t have to be cash. But I mean, it can be anything but there are catches. Quote, unquote, the easiest. The IRS has a bunch of different rules as to what percentage of your income you can deduct. If it’s not cash. So it’s like one bucket. But this is the short answer. Your question is you can all of that stuff is deductible just add a percentage. For most people, we don’t even notice the problem.
Because it only becomes an accountant’s issue to deal with. What how much you can deduct of it. When you’re giving, like over 50% of your income away things, things like that. Because like there are certain percentages that you lose a deduction, you roll it forward. Again, most people don’t have to deal with that. They can deduct 100% of it because they’re giving typically a lot less than they’re making. But the short answer is yeah. You can donate furniture, clothing, whatever it is. Just keep the receipt, give it to your accountant, tell them exactly what it was.
And the organization because there is higher deductibility for certain organizations versus others. And they got getting the IRS is like guidelines for all of it as to which ones are the, like the top, I forget how they frame it. But how charitable deductions are done is overly complex for no reason. But it’s really to protect the IRS from the ultra-high net worth people giving away millions of dollars and trying to pay no tax. So that’s why they have certain limitations. But for most people, it’s not a problem.
Steve Washuta: Obviously, the goal of any business is to make money and provide value at the same time. But the first few years can be tough and business owners don’t always rake in the cash. A lot of times they lose money. How many years before the businesses declared, let’s say a hobby. Instead of a business and then you have to kind of adjust accordingly.
Pat Darby: The good part about the fitness business. Is that well, I guess depends like if you’re a brick and mortar. Obviously you have a lot more overhead in the online space. Often they are operable fairly quick.
But if you’re referring to the rule where the IRS wants to make sure you don’t have a hobby. And you’re not just doing it for fun and trying to write things off. Typically that that gets a lead alleviated? Well one, if you are profit within I think three or five years is the rule. But more than that, they just want to see that you’re trying to legitimately be a business. So if you’re, if you have a business entity, if you have a business plan, you have a marketing strategy.
If you’re bringing in revenue even if you’re not profitable. Like if you are clearly making an effort to turn a profit then You’re going to, you’re going to be fine. And they ask, I think it’s nine different questions the IRS asks. And again, there’s everything they do is, is not black and white, it’s in the gray area. So that is perfect, purposely vague. But if you’re out there running a business legitimately, you’re going to be fine. Even if it takes you longer to be profitable because maybe you’re focusing on growth.
So you, before you turn a profit, you’re building a team and scaling and doing all those things. Then again, you’re going to be fine. Because you’re gonna be able to show the IRS that you are doing your best. To be a real company and be profitable.
Steve Washuta: If I’m running an online fitness business. I have my laptop, lights, weights, and I’m paying for internet. I’m writing all those things off, is that correct?
Pat Darby: Most of it, the where it gets into the gray area is the weights. Other tax professionals like, again, it’s a gray area. As too if you are buying home gym equipment. To do video tutorials for your clients and potential clients. That’s a gray area. If you have clients coming to you and you’re doing personal training in your home gym. Then it’s much easier to claim that as a deduction. I have not found an accountant that will give a definitive answer. On if you have a home gym that you’re using for video tutorials or like it’s that’s a tougher one.
Like you could make the argument for it. But it would be based on how aggressive your particular accountant is. Some of the more conservative accountants would say no you can’t deduct that. Versus if they’re more aggressive they’d say you know we can justify it. You’re going to have all this video content. So I would just rely on your accountant’s approval on that. But the rest of it Yes. Like when you have a home office. You’re allowed a home office deduction. So the way that works is it just needs to be an exclusive room.
So if you live in a one-bedroom and your bedroom is your office. The IRS is not going to allow that. But if you live in a two-bedroom and one-bedroom is your office. One bedroom is where you sleep. Then that home office is exclusively used for your business. Then you would just as to like let the percentage of the house. Like there’s more than a way to do the home office deduction. So I don’t want to tell people how to do it.
But if you have an exclusive use then yeah you’ll be able to go a percentage of your Wi-Fi. Percentage of your utility bill. And so yeah, your per again that’s how more of your personal life becomes a tax deduction.
Steve Washuta: This has been fantastic information. Where can the listeners find more about you if they want to contact you directly to work with you. Or just see exactly what did you do? What’s the best way to see everything that Darby
Pat Darby: The best way is probably my Instagram. So I put a lot of content out it’s at Pat Darby’s biz. And my website is Darby D A, DARBY be like boy alike apple.com. But most of my content and waking to get in touch with me is Instagram.
Steve Washuta: Thanks for joining us on the Trulyfit podcast. Please subscribe, rate, and review on your listening platform. Feel free to email us as we’d love to hear from you.