Tax Planning for Personal Trainer Business Owners
Fitness Entrepreneur: Understand the basics to save money on your income taxes.
Most people will agree that the amount of income you keep is more important than the amount of income you make. The difference between those two amounts, of course, is taxes.
No one likes taxes, but we all have to pay them. Supreme Court Justice Oliver Wendell Holmes once remarked that “taxes are what we pay for civilized society.” That may be so, but no one should pay more than his or her fair share. The key to paying less income tax is finding and taking more deductions. Missing or forgetting even $100 in deductions is the same as pulling $30 in cash from your pocket and throwing it in the trash. Yet if you don’t know what you can deduct, it is easy to miss out on hundreds or even thousands of dollars’ worth of deductions.
Do you know all the items you can deduct from your personal training or fitness entrepreneur income? Discover common categories that apply to your profession and learn other tips to make your tax prep easier.
My self-employed clients are always asking me this question when they come in to have their tax returns prepared. The Internal Revenue Service (IRS) says that you can deduct all ordinary and necessary expenses, but what does that mean? Is there some master list of deductible items? Unfortunately there isn’t, because every business and every situation is different. Things you need as a personal trainer will be deductible for you, but the same items may not be deductible for me as an accountant.
So, how do you know what you can write off? Actually, there is an easy way to determine if any expenditure is a deductible business expense for you. Just ask yourself this question: “Would I have spent this money if I weren’t a personal trainer or fitness entrepreneur?” If you answer “yes,” then the expense is most likely a personal item and probably not deductible. But if you can honestly answer “no” to that question, then it probably is an expense that you can and should deduct in calculating your taxable income.
The most important thing you can do is keep good records. The key to not paying more in taxes than necessary is creating a written or electronic record. Make it a habit never to pay for any business expense with cash. Use a dedicated credit or debit card so that all of your transactions are recorded. That way, at least you will have some written record from which to do your bookkeeping. You can also use a smart-phone app to help you do on-the-fly bookkeeping whenever you pull out and use that credit card. Keeping track of your expenses as you incur them will make year-end bookkeeping much easier.
One big red flag for the IRS is raised when you commingle your business life with your personal life. To avoid any questions about what is business and what is personal, set up separate business bank accounts and even get a separate credit card that you use only for business expenses. Don’t ever pay personal bills out of your business account; instead, transfer the money you need into your personal account. This habit can be hard to develop, but once you are able to segregate all of your business expenses, you won’t “forget” or “lose” valuable deductions.
Do you travel to your clients’ homes? If so, your automobile expense could be one of your biggest deductions. Here you have a choice of how to calculate your expenses. You can either deduct the actual costs of operating your vehicle, or you can take the simpler cents-per-mile deduction, whichever gives you the bigger deduction. The IRS sets the mileage rate every year, and in 2011 it started out at 51 cents per mile. When the price of gas jumped last spring, the IRS decided to increase the mileage deduction to 55.5 cents per mile for miles driven after June 30, 2011. You can calculate your deduction both ways—actual cost or cents per mile—but in most cases you will find that the cents-per-mile method gives you a larger deduction.
To take this mileage deduction, you need to keep track of your business-related miles using a log. Unfortunately, very few people take the time to maintain a mileage log. However, there is another way you can estimate your mileage records that will allow you to take this valuable deduction. Use your schedule. Your personal appointment book can serve as your mileage log. From this calendar you can figure out the number of appointments for each client during the year and then multiply that by the roundtrip mileage to his or her home. Obtain the roundtrip mileage by using a mapping program like MapQuest. As long as your estimated mileage can be supported by your calendar, the IRS will accept your calculation. Many personal trainers put at least 4,000 business miles on their car per year. For these trainers, this will mean a tax deduction of more than $2,000.
This deduction is available to any self-employed person who uses part of his or her home as an office. The only requirement is that the space in your home must be used exclusively for business. It does not even have to be an entire room—a corner where you store your equipment or have a desk and files and your computer will qualify. To take this deduction, you need to measure the square footage of the area used by your business. By dividing this area into the total size of your home, you will obtain the percentage of your home that is deductible. That percentage of your rent or mortgage interest, utilities, insurance, real estate taxes and any other cost of maintaining your home becomes a business deduction. This deduction is about the only one that violates the “Can I deduct that?” rule. After all, you have to pay rent or mortgage and utilities no matter what your occupation, but now you get to deduct some of it on your tax return. This deduction typically generates another $1,000 deduction.
These deductions are an often abused area, and one that generates close scrutiny from the tax authorities. Therefore, you need to be extremely careful, and recordkeeping is a must. Even so, meals and entertainment expense incurred with clients (or prospective clients) to promote or discuss your business are deductible. You are allowed to deduct 50% of the cost of your meals and entertainment. Just be sure to note the name(s) of the person(s) and the business purpose on the receipt. At a restaurant, you will find the easiest thing is to write this information down when you are filling in the tip amount. After all, you already have a pen in your hand, so why not make use of it to ensure that your meal expenses are deductible?
Do you have children? If so, you can put them to work in your business and deduct the amount you pay them. Of course the amount must be a reasonable value for the services performed. Have them perform some business tasks like cleaning your equipment, doing your laundry or organizing your office. Be creative, and be sure to document what they did to earn their pay.
As a self-employed individual, you are allowed to deduct 100% of your health insurance premiums from your income even if you do not itemize your deductions. And by establishing a Health Savings Account (HSA) you can deduct almost all of your other medical expenses as well. Money deposited into an HSA account is deductible from your income and can be used to pay medical costs not covered by insurance. Even if you never incur any medical expenses, you will be able to use the balance in your account to supplement your later retirement years. There are rules and restrictions, so talk to a certified public accountant (CPA) about the benefits of such a plan.
Even if you are well-versed in tax law, you can still save yourself time and hassle by hiring a professional tax preparer to file your returns. In your field of personal training and fitness, you are the expert, but when it comes to tax law, you are not. Leave that work to the CPAs. You will spare yourself time and headaches, and the fee you pay will probably be more than offset by the tax savings the CPA will find.
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Many personal trainers or fitness entrepreneurs never think about retirement. They are too busy keeping their business running and taking care of clients. Even trainers who do think about retirement often put off planning it for lack of funds. It is important to remember that you are responsible for your own retirement. By starting early and taking advantage of the retirement plans available, you will be able to accumulate the funds you need to live comfortably in retirement.
As a self-employed person, you qualify to establish your own retirement plan. Instead of being limited to an annual $5,000 Individual Retirement Account (IRA) contribution, you can establish one of several different plans. The simplest is the SEP-IRA. This plan allows you to contribute up to 25% of your business income (up to a maximum of $49,000 for 2011) and deduct the entire amount. This is a deduction you can still take today against last year’s taxes. Another favorite option for personal trainers is the SIMPLE IRA, which allows you to contribute more than $11,500 each year. There are other plans with different limits and options. Talk to a CPA about which is best for you, but don’t delay. Start saving for retirement now!
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