Alright, I'm going to share with you a little hack,
a little test for you to really find out if something is deductible
or not. And what I use is an acronym,
and the acronym is POND. So P-O-N-D.
And this is the test that I use, and what I explain to clients
in trying to determine or trying to figure out if something is a deduction
for their business or their rental property, if they can use it to actually
reduce their taxable income. That's what a deduction is,
it's reducing your taxable income. So the acronym is POND,
and you're like, well you might be wondering, why would I use POND?
And I'll get into actually what it means, but just something kind of funny
to help you remember it. So I think of it like,
think of like an IRS agent, and like if you try to deduct something
that's not deductible and you put it on your tax return,
just imagine an IRS agent coming to,
coming and picking you up. and throwing you in a POND,
and I think that might help your brain remember that acronym.
So think of POND. So the first one, the letter P, is a deduction,
or like a specific, if you're spending money on something,
it needs to have a purpose. It needs to have a business purpose for
you. For it to be deductible, that's what these,
this test is. Like for me,
as a CPA firm owner, would I go and buy a kite?
Or would I go and buy something that's just not even related to the
CPA firm? If there's no connection to it,
then it's likely not a deduction. But POND.
Cell phones and travel and software and computer systems and equipment,
employees, like things like that,
using my home office, like things like that could be deductible because there's a
link to the business. So that's P,
business purpose. And the second one is A.
Ordinary. So it needs to be ordinary in amount.
So if I go and buy, like if I go and take a client
out to dinner, that's a deduction, right?
Say it's a $25 per person dinner and we spent 50
bucks on dinner. But say it's say if we went to dinner and we
spent $5,000 on one dinner for two people,
would that be ordinary in amount? No, it wouldn't be ordinary in amount because
it's one meal. There might be a, maybe it's a team meeting or a
team event, maybe a $5,000 deduction would make sense but for that,
no. Circumstance with two people,
it's not ordinary in amount and you can apply that to software,
to computers. If I go and buy a $1,000 computer,
that's pretty ordinary for a good computer but if I go and spend $10,000
on a single, a single computer,
that likely wouldn't make sense. So that, that likely would not be deductible.
So that's ordinary, ordinary in amount but you can apply that to all sorts
of different things. So then the third one is the N,
is it necessary? Like and I think of it as is it necessary to
produce profit? So instead of like oh that would be nice.
To have, which can get a little confusing,
you can have nice to have things as employee perks but that actually
is necessary or it can be necessary for employee retention,
employee happiness, like helping your employees.
But if it's necessary to produce profit,
to increase profit,
to retain customers, to retain employees like I mentioned,
uh or even increasing your brand awareness,
like think of marketing and promotion. Uhm, it's not all about dollar
ills. It's not immediate dollars and cents, sometimes it's the long term value,
it's just increasing the value of the business.
That's definitely possible as well when you're thinking of if it's necessary or not.
And then the last one is the D and that's documentation,
so make sure you've got documentation for it.
So, it just is a really rough recommendation on how to
keep good documentation. Make sure with your business,
with your investments, with rental properties,
make sure you have it. I'd highly recommend that you have it in a
bank account for that specific entity or that specific business.
Because when you go back to try to track it, having it in a
bank account, having it next to all your other deductions make it,
makes it so much easier. And then I would set up to continue
the talk of the documentation. So, one part of it is like the bank
statement, the credit card statement. The other part is the actual invoices,
or the receipts, or the emails related to that specific transaction.
I would have a secure, like a file drive,
like a Google drive, or a OneDrive,
or a Dropbox, or a Box. Save your receipt.
Just have a place that it's so easy to just take it.
Take a picture with your phone of these receipts, or have your accountant,
or bookkeeper, or one of your employees doing it.
Just put them somewhere, and then just regularly scan them.
Once a week, minimum of once a month, and just store them there.
A lot of times you don't even need them, but if there's an audit,
whether it's an IRS audit, or if you have partner disputes,
or vendor disputes, having that documentation will help.
And just put it away in a secure file drive.
So that's it, that's the POND method for just trying to figure out whether
or not something is deductible. So remember P-O-N-D.
If you've got a business card, if this purpose, if it's ordinary in amount,
if it's necessary, and if you've got good documentation for it.
So if you want additional information, or if you've got specific questions on this,
or you want like some of the templates on tracking the documents,
or if you want to dive into the tax code,
so it's section 116 of the tax code,
if you want to dive into that and get a lot more information on
it, join us on the Wealth Game Alliance,
or the Wealth Game Basic, just over there at wealthgame.io,
but we'd love to have you there, and uh yeah,
well have a great rest of the week.
