Welcome everyone to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care and more. This show is an extension of the book, How to Retire on Time, which you can grab today on Amazon or by going to www.howtoretyearontime.com. My name is Mike Decker. I'm the author of the book, How to Retire on Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much cover it all. Now that said, please remember this is just a show.

Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Fransen. David, thank you for being here today.

Hello. Thank you.

David's gonna be reading your questions, and I'm gonna do my best to answer them. You can send your questions in right now or anytime this week by either texting them to 913-363-1234. Again, that's 913-363 1234, or email them to hey mike@howtoretyme.com. Let's begin.

Hey, Mike. I was told that I should turn my hobby into a business so I can lower my overall taxes each year. Is this legit?

It is legitimate if your business is legitimate. So let me ask you this question. Are you trying to get clients? Are you trying to run a business? Are you trying to generate income from your, quote unquote, hobby?

Because I know many people that do generate income from their hobby. There are people that have hobby farms and they sell their produce. So that's a legitimate business.

Alright.

I'll use, like, an example of quilter. I know there's a large quilting community here in Kansas City.

That's right. Yes.

So if you're building quilts and then trying to sell them, that that would be a legitimate business. There has to be a legitimate exchange of goods and services for money. If there is not, I would caution you heavily against this. So the idea was a bunch of financial advisors who probably didn't know really the extent of tax law got the idea of, well, if you're gonna spend the money already, why don't you just buy it and write it off? Just get some LLC going or whatever and open up your business account and fund it there and just write it off in the taxes and no.

Okay. The IRS is not someone you should mess around with. No. You can't cheat the IRS. And I've never heard of someone doing this without running a legitimate business and getting away with it.

You don't take shortcuts. So, no. If it's not a legitimate business, please don't do this. It is something that I've seen and heard I should say I've heard people getting in trouble for. I've never had a client do this because I told them not to.

I won't work with people doing sketchy things. I just I I can't be bothered by that. But, yeah, don't cheat the IRS. Don't try to how much for the risk you're taking of an audit, okay, with the IRS, which you'll probably get in a lot of trouble for if if they audit you when you're doing this. What's what's it worth?

Because a deduction, you might get what? 20¢ back on every dollar you spend. I mean, is it really worth the risk that you're taking? I just have a hard time with this. But, no, I would not say it's legitimate if your business is not legitimate.

Now if your business is legitimate, then yes. Deductions are great. Make sure you're double checking on what you can spend and what can be deducted. Some things can, some things can't. Make sure that you're doing it appropriately so you're not taking your family out to dinner saying that you're on some sort of meal per diem Okay.

Situation. Like, don't take those shortcuts. K? If you have a small business that you wanna start in retirement, a lot of people do this. So executives or people who are higher up, they just they love what they did, but they wanna do it with more freedom.

Maybe they're a consultant now just to stay busy because you wanna you wanna keep the mind sharp. You wanna have a little bit stress in your life when you retired. Here's a great way to set it up. Just get an LLC. K?

And then you're gonna file it as an s corp. So here's why. If your side hustle legitimate business that you're gonna do in retirement is earning, let's say, 60, 70,000 a year. Uh-huh. Then you might wanna get an LLC and file as an s corp.

And what you can do is you can pay yourself a salary of, let's say, 35,000 a year or so. It's all with ratios. So please don't actually just do 30 to 35,000. Talk to a CPA. Talk to someone like us who can help you find the right balance.

Because again, you don't mess with the IRS. But let's say 30 to 35,000 of it is your wage and the rest of it might be profit. What you've done is you've been able to generate income and your salary that you're paying yourself is subject to FICA tax, but the profits are not. You're still having to pay income tax on it.

Okay.

You can still write things off with your expenses. You can still do a lot of things. But you wanna make sure that you're generating income tax efficiently, and there's all sorts of strategies like the LLC that files as an s corp. But again, make sure you're paying yourself a reasonable salary. Make sure you're doing things by the book.

Make sure that it's a legitimate business. But, yeah, running a business in retirement can be a really fun thing to do. You've got to have purpose in retirement. Now if your legitimate business, let's say, is like 10, 20,000 a year of profit, that's kind of it, you might not need to do the LLC with the s corp. Maybe you just are a sole proprietor assuming that there's not a lot of risk.

If there's risk, make sure you have the insurance. Make sure maybe you do the LLC to separate yourself from liability because you still need to protect your assets in there. But but yeah. I mean, there's a lot of fun ways to to go about this. Is it legitimate business?

If yes, then great. If no, steer clear from it. This is one of the shortcuts that people like to recommend that make them sound smart. Uh-huh. When really I I think, and again, it's just my opinion, it's just kinda risky.

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