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Ralphs. Fresh for everyone. ♪ Happy Friday, Radicals. Today, we are going to do Q&A. I have one comment from somebody who's actually taking the advice of the show, which just thrills me. And I have a question. Joshua, I have money and time. How do I start a business and how do I account for it?

And Joshua, I've got a bunch of student loan debt. What do I do? ♪ Welcome, ladies and gentlemen. Welcome, Radicals, to the Radical Personal Finance Podcast. Today is Friday, October 31, 2014. Today, we're going to have a Q&A show. I anticipate it being fairly short. I have one comment from a listener and two questions to answer.

Of course, you never know. Two questions for me, that could be four hours. But frankly, this one, I don't think so. I think it'll be a little bit shorter. ♪ Actually, it should be a little bit shorter for a couple reasons. Number one, I only have a couple of questions.

So those of you who want to get your questions answered on the show, this is the time to do it. I anticipate it will become much harder in the future to get your questions on the show. But frankly, the show, I guess, is not that popular yet. I keep thinking, because I keep watching the numbers, and I say, "Man, I would think I would get more questions." But I've wound up with two voicemail questions called in and then one email question, which I'm going to handle on today's show.

So if you want to get your question on, if you want me to answer your question, hopefully I can do a good job with it. And if I can't, I'll tell you, "Hey, I don't have a clue." But if you want to get your question on a show like this, on a Friday show, come by and leave me a voicemail on the show page at RadicalPersonalFinance.com, and I will answer it for you.

I will do my best to at least give you some way to start or where to research your question or how I would approach it. I'll do my best to give you an answer. So we only have two today, so two actual questions and one comment from a listener.

And so that's partly why the show is going to be a little bit short. But second, it is late in the day as I sit down to do this, so many of you will not get this even until Monday. So I just need to get it done before I've had a busy, busy day.

But I'm thrilled to be able to get down and do the show. So let's get going. I am going to start with a very nice comment from Miss Melissa. Hi, Joshua. My name's Melissa. I'm a stay-at-home mom in Pennsylvania, and I've been listening to your podcast for about two months now.

And I wanted to comment on the cash flow statement podcast. I've been keeping a cash flow statement for probably about six years now. So I thought I was keeping good track of knowing where all my money is. But I would always use our net income, not our gross income.

So I was floored to find out that when I put in the taxes line item to see that our taxes were our largest line item in our cash flow statement. We were paying more in taxes than even all of our housing expenses as a whole. So thank you for that.

And I think my next plan of action is to max out our HSA account and see where else I can place our money. So thank you. Keep up the good work. Melissa, that makes my day. It does. I just--it's--as a teacher, it is the most heartening thing in the world.

The best experience you can have in the world is for somebody to take your advice. It just--and to take your advice, it makes me feel really good. And I'm glad that you can know, so now you can put some planning in place. And, I mean, I feel so strongly about this being my--you know, the number one piece of advice.

And, frankly, I've got a hidden agenda, which I'll now tell you about, so therefore it won't be an agenda. But I would love to see us as a country change our tax code and the tax system. Unfortunately, I don't see it as being possible and probably not in my lifetime.

Most people seem pretty happy with the status quo. But I'm trying to do my little part to just simply make people aware. And then if you're aware, you know, and, hey, you want to pay taxes, that's fine, awesome. And if you're aware and you decide you don't want to, that's great.

I think many people, if they actually knew how much they were paying in taxes and had any idea instead of actually getting a tax refund every, you know, March or April, whenever they do their taxes, then it might change, you know, some of the systems of government. So there's my little hidden agenda.

But that's up to you. I don't care what you do with it. I just want you to be aware of the actual numbers. And if you're aware of them and you say, hey, thank you, U.S. government, you're doing a great job, awesome, cool. That's great. If you're aware of it and you say, come on, this is, I am not getting my money's worth, then that's great.

Now, I'm glad that you took the advice. And I would encourage anybody tuning in today for the first show, what Melissa's referring to is I've done several shows on how to actually sit down and where to start with your planning. And one of the big things that I talk a lot about is actually building a cash flow statement.

And the biggest mistake I see that people make with financial planning is they do their planning on a net basis. They don't look at how much money is being pulled out in taxes. They don't look at what their group benefits are that are being pulled out. They start with just simply what the net number is, the number that actually shows up in their bank account.

And that is a huge mistake because there are a lot of things that you can do after that number, but there are a lot of things that you can do before that number as well. So if you're interested in listening to the show that Melissa's referring to, start with episode 26 of the show, which is entitled An Introduction to the Cash Flow Statement, the one-page document that shows whether you will be rich or poor in the long run.

I like long titles. You can find it at RadicalPersonalFinance.com/26 if you want to listen to that. But in essence, start with your gross number. Start with whatever your salary is. Start with whatever your actual pre-tax income is. And then make sure that your cash flow statement includes all of the taxes that you're paying.

This would be your employment taxes, Social Security and Medicare taxes. If you're self-employed, it's about 15%. If you are working for somebody else, it's 7.65% by the time you bring in the Social Security and the Medicare taxes. Factor that in because this is a big deal for you when it comes to doing your planning.

Social Security wages are capped. So once you make over the Social Security wage base, which is roughly about $115,000, if you make over that number, then you won't pay any Social Security taxes on that additional income. Under that number, you will. Medicare taxes do not have a cap, so you won't be able to get out of that 1.45% on any wages.

However, one of the tax planning things that you can do, and we're going to talk a little bit about tax planning in a few minutes on one of the other questions, but one of the tax planning things that you can do is you can avoid that through transitioning some of your income away from earned income, which is the tax base upon which you pay those Medicare wages.

Then make sure that you factor in the income taxes. And so many people do factor those in, but factor in your federal income taxes and factor in your state income taxes, and factor in local income taxes if you pay local income taxes. Some people do in New York City.

And so factor those in, count them out, so that you actually know what those numbers are. Then that will give you the information that you need to figure out what you should do in your situation. You may decide that you're going to put money into an HSA, which is a health savings account.

That's what Melissa is referring to. And that account is, in essence, if you have what's called a high-deductible health plan for your health insurance policy, then you qualify to be able to contribute to a health savings account, which is an account that allows you to save on a tax-favorable basis money for the cost of your--for your health costs.

And that one will allow you to save up to about $6,000 for a family. It's a little bit over that, about $3,000 for an individual. And by the way, when I use these "about"--just let me tell you why I use when I say "about." If you are an engineer and you're listening to the show and you get annoyed by when I don't give you a precise number, the numbers change every year, and I learned long ago never to try to memorize numbers.

I do not memorize numbers. I don't--I'm not going to waste the brain power on that. A quick Google search, or what I do, a quick DuckDuckGo search, which, by the way, if you want a search engine that doesn't track you, try "duck duck go." "Duck" is spelled "duck," D-U-C-K, as in "quack quack quack." So "duck duck go dot com," that's what I use as I try to get my life disconnected from the Google machine.

Anyway, with a quick DuckDuckGo search, you can find every number that you need, and they change every year. So I don't see any reason to memorize those numbers. So it's about $6,000, and it's about $3,000 for an individual. Well, that allows you to put the money into that account, and you can put the money into the account on a pre-tax basis.

So that will save you, right off the bat, the income taxes, plus that one will actually save you the employment taxes. So under current law, you can avoid the Social Security and Medicare taxes on your contributions to the HSA account. That's very valuable, because if many of you are looking for a higher return on your money, I just saved you 7.65% if you put the money into the health savings account.

That health savings account you can then use to pay for many of your medical expenses, and there are a lot of medical expenses that will qualify. Look up the IRS schedule that will tell you which medical expenses, but many of you will be able to pay for many of your medical expenses through that health savings account.

So that's one little thing that can save you. So when you're talking about 7.65% from savings on your employment taxes, and then plus whatever your state or local or federal income tax bracket is, let's say it's 20%, there's a 27.5% savings if you can fund something like an HSA.

And then the benefit to the HSA, if you're not familiar with the account, the benefit to it is that you can use it any time for health insurance expenses, excuse me, health expenses, but you can also use it after the age of 65 as an additional retirement account, and you can take the money out without any penalties to pay for retirement expenses.

If you have long-term care insurance, this is one of the ones that you might consider using for long-term care insurance premiums. There are a number of other things that you can pay for out of this account. So, Melissa, thank you for taking the advice, and I would encourage many more of you, write the numbers down.

Oh, and the other thing that I wanted to say as far as how to calculate that account, or the reason why to know the numbers, is sometimes there may be some very little changes that you can make in your living situation that can save you a dramatic amount. But if you don't know what those changes are, then how will you know whether to calculate whether you should do it or not?

Maybe you live in a border between two states where one state has an income tax and one state doesn't. There are many of these towns and states all around the country where if you live on one side, you're going to pay the tax; if you live on the other, you don't.

If you don't actually know those numbers, so you can look back, you know, we're coming up to the end of 2014. If you can't actually look back and say, "Ah, at the end of 2014, I paid X amount of dollars toward my federal government, I paid Y amount of dollars to my state government, and I paid Z amount of dollars to my local government.

Am I getting the value for that, or is there a way for me to avoid that number?" The answer is up to you. I don't care what answer you choose, but no good information helps you to make a good decision. Next, let's go to Matthew, and let's hear Matthew's question.

Hi, Joshua. My name's Matt. I'm living in Minnesota, and I'm working as a paramedic right now. So I have to say that I love your episodes. I listen to them when I walk to work and then also when I'm at work if we're having a slow day. So because of your podcast, I've been able to learn a ton, and thanks to you, I have plenty of money.

I can't say that I'm rich, but I'm doing pretty well. But I also have a lot of time, so some of the things I'm thinking about doing are opening up my own business for some of the reasons that you've suggested. I see it as a way to increasing my wealth and also cultivating my hobbies.

So I have these hobbies such as photography. I like to travel. I like to build things. I like to do woodworking. I like to do yard work. I like to help other people. So I'm thinking of ways--we're coming up with ideas--of businesses that I could have and ways that I could generate income doing these, but I don't know how to set up the business side of it.

So my question would be whether or not I could open up something like an LLC or a type of a corporation where I could do all these different things but have it under one company so that I can have benefits from that. So I guess to summarize, my question is how many of my different hobbies can I do while having one business?

Or do I need to use broad language when making the business, such as I do art, like building things and photography? Or can I just have my company and find ways to do the things that I do or like to do as hobbies, but in a profitable manner under one company?

So that's my question. If you could answer it, that would be awesome. Otherwise, keep making the shows. I love hearing it. You're doing great things. And I really like how you're presenting the information as teaching people, or teaching people critical thinking and how to learn and how to think about things versus just what to do, because that would not work for many people.

So thank you, and keep up the great work. Matt, thank you for the question, and thank you for the very kind words. I'm thrilled that you're getting what I'm doing, so I thank you for that. One quick correction. It's not because of me that you have plenty of money and plenty of time, I promise.

I appreciate the sentiment. I know what you're saying, and I thank you for it. But it's not because of me, because I haven't sent you any money and didn't send you any time. It's because of what you did. So I do appreciate, though, the thanks. That means a lot to me, and it makes me feel really good to do this every day.

I really appreciate that. To answer your question, it's relatively simple, but I'm going to try to give you a few ways to think about it. If you've never run a business before, and the majority of U.S. Americans have never run a business before, and this is a great travesty because I believe running a business of some kind is one of the most helpful things that you can do just in terms of learning how to think about investing, learning how to think about learning how taxes work, how your tax return works.

So this is one of those great secrets. You can have as many or as few businesses as you want, and it is amazingly easy to start one. All you've got to do in most instances is just simply declare yourself to be in business. So if you're interested in the hobby of woodworking and paint--I can't remember all the things you said-- but woodworking and painting and, let's say, metal sculpture and yard work, you've got all these hobbies, you can declare yourself to be in business in any of those things, and you don't need to start a company in the sense of filing for an LLC.

You don't need to establish a corporation of any kind. All you need to do is just simply declare yourself to be in business. Now I'm going to give you a little more details to that, but before I do, I do need to make one important caveat that I am not an accountant.

I am not a CPA. I have never gone toe-to-toe with the IRS, and so this is the best information that I know of based upon the study that I have done, and I'm very confident in it. Otherwise, I wouldn't open my mouth. I would just simply say I don't know the answer to your question, but I would encourage you to do your own research, and this would be a good area where you would talk to a professional advisor if you have something beyond a simple question.

If I get anything in today's show wrong, any of you who are accountants who are listening, come by the show notes for today's show and correct me, please. Today's show will be episode 93, so you can find the notes at radicalpersonalfinance.com/93, and feel free to come by and correct me and amplify anything that I have said.

So there are two answers to the questions, though, and so specifically what you're primarily asking is a tax question, and I'm going to answer the tax question secondly, but first, you've got to answer the question of why are you going into business and what's your actual business plan? So the key to have a business succeed is to have a plan and a reason why your business exists, a specific USP, a unique selling proposition.

What makes you different and why are you doing what you're doing? Don't bypass that in favor of tax planning. The IRS doctrine that governs taxes on business is that your business must have a profit motive. If it does not have a profit motive, it will not pass the IRS's test for being a business.

That is their test, and I'm going to amplify on that in a moment. So make sure that when you're starting a business that you are doing it for a profit motive. Now, there's nothing wrong with gaining in other ways and benefiting in other ways, but you need to make sure that you have a profit motive, and there are going to be many ways that you're going to establish a profit motive.

One of the ways that you need to establish a profit motive is by having a compelling business plan. You want to have a compelling business plan that gets you excited and also that you could demonstrate that, "Yes, I have a profit objective, and so therefore I am working on this, and it's going to make money.

It's got to make money." So if you can't even demonstrate that from the beginning, your tax case is resting on a shaky ground. Additionally, business is probably just too tough for you to do it if you're not making a profit of some kind, but it's okay if not all that profit is financed, so I'd encourage you to pursue some of the hobbies.

As far as setting up a company, it is so stinking easy to set up a company. Again, all you need to do is declare yourself to be in business. So if I wanted to start Joshua's Woodworking Shop, I would simply declare myself to be in business, and I would say, "Joshua's Woodworking Shop is in business," and that's it.

There is in many places nothing more than that that I need to do. Now, in some states, and depending on whatever state you're in, you need to check your local state regulations. In some states, you will need to file what's called a DBA, Doing Business As. So if I open Joshua's Woodworking Shop, I might need to file a Doing Business As.

Basically, Joshua J. Sheets is doing business under the name of Joshua's Woodworking Shop. And if I establish that with my state, if my state required that, I just file a paper, and I'm done. There's nothing more to it. Now, what you technically own now is you technically have what's called a sole proprietorship.

It's a business. And that sole proprietorship will now file on your taxes what's called a Schedule C. Schedule C. That's where all of the income from a sole proprietorship will go. If you look at that form and just Google it--Duck, duck, go it. Excuse me. I'm going to quit saying Google it because I want to get people off of Google to use Duck, duck, go.

If you Duck, duck, go that and you go to the IRS, pull up the IRS website, you will see that it says profit or loss from business, sole proprietorship. That's all you need to do. It doesn't cost you any money. You don't need to go to some legal website or file a corporation or any of those things.

You just need to just simply do it. Then at the end of the year, you'll file a Schedule C for that business. And you can have really any number of these. Now, the challenge would be in your bookkeeping. So for each of the businesses for which you're going to file a tax return, you're going to need to list what was your income, what were your gross receipts, what was your sales, what were your expenses, and at the end of it, do you have a profit or do you have a loss.

So you need to have a set of books and some kind of bookkeeping system that can work for you for this business. Now, that can be as simple as a notebook. You could have a notebook that simply you just simply track. Hey, I've got Joshua's Woodworking Shop and I've got Joshua's Lawn Care Service.

And on Saturdays, you go and you mow lawns and you write down what you're doing in that notebook and you write down any money that you spend and you could just simply record it that way. Probably would be a better idea -- it would be a really good idea to make sure you have a separate business checking account.

That would be simple and that would be important to help you prove your transactions. Anytime -- it's a good idea to get in the habit of being able to prove what you're doing. You want to establish a paper trail for your business. If you're going to take expenses, you want to prove that.

And so, for example, you want to make sure you're not in a situation where you say, "I spent all this money at the gas station on gas for my lawn business," and the IRS says, "Wait a second. That's a lot of gas. Can you prove that it was for your lawn business?" Well, you would want to be able to prove that you have the receipts and that it's associated with the lawn business.

But it's really pretty simple. You don't need to do that much of a big deal. You could just manage this. You could technically manage it all out of one business account. Checking accounts are free these days. I would just simply set up a separate one and it's easy to do.

For each business, that helps you to have basically a simple profit and loss in your checkbook register. So at the end of the year, you're going to file a tax return. And you can file a tax return on each of your businesses. The number of businesses that you file -- so there's basically an accounting problem here.

If you're going to file 18 tax returns because you've got Matthew's car painting, Matthew's house painting, Matthew's lawn gnome painting, then you've got Matthew's new installation landscaping, Matthew's lawn cutting installation landscaping, and Matthew's woodworking for chairs, you could do that. But there's really not going to be -- I mean, I can't even imagine a situation where you need to do that in the sense that your businesses, whatever they are that you're going to start, are going to be fairly straightforward and fairly direct.

So, I mean, you're going to have a lawn care business. You're going to have a woodworking business. And so you might file two Schedule Cs. That would be perfectly appropriate. And then the lawn working business might have installations and everything under one name. Now, there could be many reasons why you would have multiple businesses.

There could be -- and this is where you get a little bit fancier -- is you're going to have multiple divisions. You're going to have multiple businesses for -- some of it will be for tax purposes so that you can take certain losses in certain businesses. Much of it will be for liability purposes.

So when you see that, for example, what was it, in the last six months or so, when you see that Trump Casinos in Atlantic City filed for bankruptcy, that doesn't mean that Donald Trump as a man is bankrupt. That means just that one division just went bankrupt. Big deal.

You declare bankruptcy in that business and you move on. So when your business starts to succeed a little bit and gets a little bit better, you're going to start to have -- you're going to want to draw around you good business advisors who are going to be able to help you think through those certain things.

And that's beyond the scope of how I want to answer your question today as far as some of the tax reasons and some of the liability reasons why you would establish different companies. But all you need to do is file a Schedule C. I think I've filed -- one year my maximum was I filed four Schedule Cs.

And I had separate different books and records for each aspect of the business. And there were specific reasons why I was doing it. But you want to associate all of the expenses with whatever business that you have with a Schedule C. And there's no reason why you couldn't have three individual businesses that you have going on at the same time.

The primary benefits that you would get from an LLC or from a corporation would be -- the primary benefit is a limited liability. That's the primary benefit is limited liability. Now, many people will talk to you about the tax benefits. But there are -- there may be tax benefits for certain business structures.

But for a startup, you're probably going to be better off with a sole proprietorship unless you are getting into a line of business where you're going to expose yourself to a high degree of liability. The reason is because you may have losses in your business. And the Schedule C is designed to be -- it says at the top, "Profit or loss from business." Some of you get that and some of you don't.

So why is this abused? Because it's profit or loss from business. And if you have a sole proprietorship and you have losses in that business, that loss is deductible against your ordinary income on your personal tax return. So let's say that as a paramedic you're making $60,000. And let's say that you start a business and you lose $15,000 in that business.

Now, with that $15,000 loss, your taxable income on your personal tax return has now been reduced by $15,000. So now your personal income is going to be $15,000 -- excuse me, $45,000. So that's why there's a bunch of rules against this because that can be and has been abused by certain people -- by many people.

And this is what -- if you are continually taking losses in a business, then that can be a problem. Not necessarily a problem to take losses from a business as long as there's a profit objective or profit motive. But this is where it's going to be much more -- this is going to be where it's much more sticky.

And this is where most of the tax books are going to go. So one of the things -- if you remember back to the tax planning shows where I said there's three primary methods that you employ to save on taxes. And one of those is income conversion. So the idea here is can you convert income from one entity to another entity?

And so can you convert what would be -- excuse me, can you convert expenses from non-deductible personal expenses over into deductible business expenses? So the example would be if I were working with a client and this client had some kind of expensive hobby. In South Florida here, maybe this would be something associated with -- something associated with, I don't know, deep sea fishing.

Well, the question -- let's say this client is spending lots of money on this deep sea fishing. The question would be, listen, you're spending a lot of money on this hobby. Is there some way that we could turn this hobby into a business? Well, if we could turn the hobby from a hobby into a business, then now instead of you -- let's say you spend $50,000 a year on the expenses for your boat.

Now perhaps we could put some portion of those expenses over as business expenses. So instead of having to earn $75,000, then to pay $25,000 of tax, and then pay $50,000 out as a hobby expenses, we would need to only pay $50,000 towards that hobby, and that would be expenses from -- that would be business expenses.

So you can see the opportunity for abuse. And I want to make this crystal clear for you. You cannot deduct personal expenses wrongly in a business. You cannot do it. So if you are using your boat for personal purposes, you may not deduct the -- if you're using a business's boat, you may not deduct those -- let me start again.

If you are using your business's boat for personal use, you may not deduct that personal use and the expenses associated with it. You may not deduct those as business expenses. It's very clear. Now obviously people abuse that all the time, and thus the reason for the audits, and thus the reason for the IRS catching people.

So you get into the whole tax system, but the tax system is probably going to be better off for you as a sole proprietorship, so that if you do have some sort of loss, that you can take that loss against your income. Over time, there might be reasons for you to go ahead and establish an LLC.

There might be reasons for you to go ahead and establish a corporation, most likely an S corporation, so that you can save on some potentially of your employment expenses. But you've got to look at your actual situation. Now, here's what's important for you to do. You've got to run the business in the perspective of -- so that you have a profit motive.

That's the key. The test for being able to deduct business expenses is not actually making a profit. This is a big misconception that people have. There's something called the Hobby Loss Rules, which what that means is that you cannot deduct -- if something is just done as a hobby and it's not done as a business, you can't deduct the expenses in excess of the income.

So if you -- let's say in my boating scenario, if you lose $50,000 in year one, and $50,000 in year two, and $50,000 in year three, and $50,000 in year four, and all of a sudden you're taking that loss against your income every year, good chance you're going to get a knock on the door.

Now, when you get that knock on the door, you need to prove that your business is actually in business to make money. And if the IRS illustrates that you are actually just running a hobby, then your business expenses are only deductible to the point that they match your income.

So the example here, let's say that you won $10,000 in a deep sea tournament fishing -- in a deep sea fishing tournament, and now the IRS says, "Well, you can deduct that $10,000 of expense against that $10,000 of income, but the other $40,000 of deduction is now disallowed." So the key is don't try to -- don't cheat the system.

Just simply arrange your affairs in such a way that you're using the system to your benefit. So start your business and run it with a clear profit objective. Now, so this rule -- so different ways, how can you actually establish a profit motive? Well, a very easy way is the IRS presumes that if you make a profit, earn net income, make a profit, in any three out of five business years, you are automatically running a business.

So if you actually do this and you make money in three out of five business years, you're making money. There's actually an interesting little exception. It's two out of seven years for horses. If you're in the horse business, if you're racing horses or breeding horses or doing something like that, then it's two out of seven years, then you're covered.

But any three out of five years, you are automatically presumed to be making money. So that can be really valuable, just make money in three out of five years. And again, if you are running a business, you need to make money, so you might want to consider it. Now, a lot of people take that and say, "Well, you have to make money then to be able to deduct your expenses." No, that's not true.

In fact, you never have to actually show a profit on a business as long as you can show a profit motive. And there's good IRS legal precedent and some tax cases that you can research to demonstrate this to yourself. So the major test to be able to deduct expenses is not whether you actually make a profit, but whether you have an actual and honest, bona fide profit objective.

The rule for one of those IRS doctrines that we've talked about on previous tax shows is that the IRS will look at the substance of the transaction, not at the form. So if something is just simply done for the purposes of cutting taxes, that's not going to fly. So what you want to do is you want to establish a profit motive.

And the key is that it's just got to be a reasonable chance to make a reasonable profit. And so if you have an intent to make a profit, then the IRS, if you are challenged, will take into account all of the facts and circumstances. Now here are the facts and circumstances that will be taken into account.

Number one, the manner in which you carry on the activity. Do you carry it on in a business-like way, or is this clearly not a business-like manner? Number two, the expertise of you and your advisory team. So me, as an example, I have never been at all involved with horses.

I've ridden a horse probably a dozen times in my life at these trail ride things that you do, and I got bucked off one time and it wasn't a good experience. I've gone horse riding since then, but I've never ridden a horse. So if all of a sudden I decide I'm going to start a horse racing business, that would probably be a problem, unless I could prove that I was actually going about it and getting expert advisors.

So that would be very different because I don't know anything about horses. I can't prove any expertise with horses. Now, on the other hand, if I wanted to start a dog training business, I've trained my dogs. I'm interested in dog training. I've read on dog training. I haven't published anything on dog training.

But if I were someone who started a dog training business, there's a good chance that that would actually be more appropriate because it fits my actual experience. It doesn't mean that I have to have experience. If you want to get into racing horses, that's fine, but you better have a good advisory team or there better be these other factors in play.

Number three, the time and effort that you actually expend in carrying out this activity. So the example here would be if all I did was say I'm going to have this boat, and I use it three times a year with paying clients, and that's the only three times in a year that it gets used, I'm not actually working on it on a weekly or regular basis.

It just sits there, and every now and then I take my friends out and they pay me money. Probably a hobby, right, because I'm not carrying it out in a business-like manner. So if I were able to prove that, yes, I actually work on this business a certain number of hours per month, there's no necessarily what they call a bright line test that I'm aware of that says you have to work one hour a week, but I would need to demonstrate that I actually spend time working on this business.

Now maybe that's you spend time documenting, writing articles, going out, making sales calls, and you just simply have an activity tracker of those activities. That would be key. Number four, the expectation that assets used in your business may appreciate in value. So again, the question is here, why are we doing this?

Number five, your success in carrying on similar or dissimilar activities. So if you have a track record of--let's say you have a track record of racing horses. Let me switch to a different example. Let's say that you have a track record of running--I was going to say restaurants, but I don't want to use an example here that is--I want to use an example that's kind of be where you'd be crossing-- you'd be kind of on the line.

The business--let's stick with my boat example. If you have a track record of actually running a successful yacht chartering business and then you run into hard times and for whatever reason your yacht chartering business just hits a bad spell and you lose money for three years, well, if you've got previous success and previous affiliations and previous connections, that's going to run you-- that's going to be much more likely that you can--the IRS will allow your losses to save on your other taxes than if you didn't have any prior experience.

Number six, your history of income or losses with respect to the activity. So you're going to look at the actual history. Number seven, the amount of the profits, if any, that you earn. Number eight, your financial status. And number nine, the elements of personal pleasure or recreation. Now, in this key, there's a famous quote that comes from Jackson V.

Commissioner that says, "Suffering has never been made a prerequisite for deductibility." So it doesn't mean you have to be doing a business that is just simply terrible. You don't have to be doing a business that is just horrible for you to be able to deduct it. You can be in a fun business.

You can be in an enjoyable line of work that really many people would consider to be fun and enjoyable, but it doesn't--but, you know, that is going to be a factor in it. So the key is you want--those factors are actually far beyond what you are asking, but I know they'll be of interest to other people in the audience.

Just because you're working a full-time job--incidentally, just because you are working as a full-time job as a paramedic doesn't keep you from being in another trade or business. So that's not actually any problem whatsoever. You could start other businesses. So this is an effective tax planning technique that oftentimes we will employ if we're doing tax planning.

If somebody has an expensive hobby or something like that, the question would be, "Could you enjoy this in the context of a business as well?" And so perhaps instead of just simply, you know, going boating every weekend, perhaps you want to just make that into a legitimate, bona fide business.

And it has to be a legitimate, bona fide business. And if you use the business assets for any kind of personal expenses, then that personal use--you may not deduct the expenses that are associated with this. For many people, many small businesses, guaranteed all the time, this stuff flies under the radar.

You know, look at it practically. Can the IRS tell every contractor who drives a big old four-wheel drive pickup truck and the thing is lifted and it has big tires and he spent thousands of dollars on it and he deducts that through his business, is the IRS necessarily going to be able to track every single mile that he drives?

No. Now, he should have a mileage log and he should have a deduction unless it's just 100% used for business. But of course, you know, one time a year perhaps he gets in the truck and he drives to public, you know, to the grocery store, and he doesn't write that mileage down.

Of course it happens. But the key would be--it could--the rules are there that they could come back and say your mileage log is not satisfactory, so you want to make sure you have a good mileage log. So it happens. If you get into things--this is where, you know, things like private airplanes.

Oftentimes, you know, private airplanes have been just flat-out abused by some people. And so if you are--I have a friend of mine who actually works in a private family office, and one of the things that she makes--spends a lot of time doing with her clients is--who are wealthy families who have airplanes that they use for personal and business use, is she is very careful to keep them compliant with those rules so that none of the expenses that are associated with personal travel--bringing, you know, the kids and flying everyone to Europe and stuff like that--so that none of that is wrongly deducted.

You have to be careful with that. So that was a bit of a tax hike, you know, just as far as going through the tax information. But I know you weren't exactly asking about that, but the key I would just say is don't worry about, you know, what papers you have to file or whatever.

Just go start the business. And just simply keep track. Just for the sake of your own sanity, to keep things simple, I would encourage you to just simply start a separate checking account and toss whatever money--you know, $500 in there for the woodworking business. And if you're doing something, this certainly could be--could get multiple benefits.

You certainly could get multiple benefits out of this. So you certainly could get--you know, if you were starting a woodworking business and this permitted you to buy your woodworking tools for that business because you need that to establish the business, that would be fine. And that would allow you, where instead of having an expensive hobby, you could actually have a side business.

That would be fine. That's entirely fine. But just make sure you track it. Run it in a businesslike way. Get business cards. Put up a website. Track your expenses. Track the time that you spend on it. Track your clients. Just make sure that you're running it in a businesslike way.

I think that that is an effective enough of an answer for today. I think--I hope that gives you a little bit of information that you can use. But, man, go after it. Use the time and the money to start yourself a business, and who knows? Maybe you can build yourself an awesome business making, you know, fine shaker furniture that you love doing and you do for fun, and you can make money at it, or whatever the deal is.

But definitely pursue the business. And, hey, if you lose money on a business, then track what you lose and deduct it against your income. So it's likely that if you need to-- let's say that you're going to get into custom furniture making, and you are going to--if you're going to get into custom furniture making and you need some--I don't know--you need a new band saw and a table saw and something else, well, go ahead and buy that stuff, man, and deduct it as startup expenses in year one.

You're going to be just on a cash basis, and go ahead and deduct those expenses. Make sure you demonstrate your profit motive. But even if you lose business, actually, for the first few years, you can always--and the IRS comes back and challenges you for some reason-- you can actually always just defer that challenge until the five-year period is over when you are starting.

So you could show profit in years four and five. And, again, you don't actually have to have to show profit to do it. You just need to be running it in a businesslike way. Hope that helps. We have a question for today, and it comes from a listener who is a psychologist.

And here's the email. "Hey, Joshua. I'm a psychologist with nearly $200,000 in student loan debt. Yes, I used to be money stupid. Here's my predicament. Number one, stay at a current nonprofit for another eight years to get loans forgiven. Number two, start my own clinic but not get the loans forgiven.

Or number three, other options. Basically, I'm so inspired by your show and other shows to go out on my own but feel trapped by the debt. I have investments of $250,000 in Roth and taxable accounts. What would you do?" So the question from this listener is a good question.

And just a couple of quick thoughts that I think will be helpful. So because of student loan debt, if you're unfamiliar with the law on student loan debt, because of student loan debt, we basically have only two options-- well, actually, let's see--three options to get rid of this debt.

Number one is pay it off. Number two is die. And number three is move to China. I mean, those are the only three options I can come up with. Student loan debt is not bankruptable, so it has to be paid off. So unlike other things where you could look and say, "Is there some kind of way that we could discharge this debt in some way?" Number one, pay it off.

Number two, die. It dies with you. And then number three, move to China and go on the lam. Let's assume you're not going to do number three and you're not going to do number two. You've got to pay it off. That's clearly the question that you're asking. So how would you figure this out?

Well, first, you need to actually calculate how big is that benefit that you have for the student loan forgiveness. And this will vary depending on the program. So what I would encourage you to do is take the amount of the debt that you have, take the $200,000, and make a payment schedule.

So you know the interest rates of the debt if you don't look them up, and you know the monthly payments of the debt if you don't look up the monthly payments. And then use a spreadsheet or use a calculator. The best thing is to use a spreadsheet to actually run this-- use the spreadsheet to create an amortization schedule.

And what you're looking for-- I'll find one and try to link to it in the show notes if I can make the time. If not, a listener emailed me. Email me again and I'll email it back to you. But make a spreadsheet and make that amortization schedule. And look 8 years out and figure out what is the actual remaining balance of the loan if assuming that I pay it under the terms agreed.

And see what that actual balance is. That actual balance could be high or it could be low. Who knows? If that $200,000 loan, you were paying it in such a way that 8 years from now we're only going to be $160,000--excuse me--we're going to be $160,000 balance, and they were going to wipe out the $160,000, well, that would be great.

So you would want to know that. Now, on the other hand, let's say that your monthly payments are such an amount that it's going to be wiping out $50,000. Well, now all of a sudden that's less of a benefit for you. So find out what the actual number is.

Number two, calculate what the present value of that number would be. So $200,000 a number of years from now, 8 years from now, it may be that that's just simply not worth your sticking it out. So I don't know exactly what numbers to use, but if you understand the concept of present value-- well, let's run a quick example.

Let's say that if you pay it for another 8 years, you're going to pay that down from $200,000 to $100,000 balance. And now they're going to forgive that debt to you to be $100,000. So what I would do is I would use $100,000 as our future value. I would put in $0 of payments into a financial calculator.

I would put in 8 years, and we would have to figure out what interest rate to actually use. I'm sorry if you heard the snarling. My dogs are lying in their bed beside me. That's the way I can keep them quiet when I'm recording these shows. And it's the end of the day, and they are wanting to run.

Okay, back on track. So $100,000 8 years from now. Not sure what discount rate to use. I would use a fairly conservative discount rate because it's an 8-year time horizon, but it's kind of hard to figure out. You would have to figure out the way that I would think this through myself, as I would think, well, what would be my potential earnings in the business?

What kind of rate of return on my investment could I get in the business? And that would be more of a gut number. Probably the correct financial planning way to do this would probably just be figure out, well, what could you buy an 8-year bond for as an interest rate?

I'm going to use a 4% discount rate. So we're going to back that $100,000 up to today, and at a 4% discount rate, then that's $73,000. So the present value of the benefit that you're getting at the job is $73,000 under my example because you're going to pay $100,000 in principal off over the next 8 years, and then at the end of the 8 years they're going to forgive that $100,000.

So that's $73,000 of a benefit. Now, in today, in present value. Now, the next thing I would do in trying to figure this out is I would-- and this is not mathematically precise. I'm trying to answer you ways how I would think it through in my head. I would take that and I would say, well, that's $73,000, but I've got to work for 8 years to do it.

So I personally would just kind of consider, well, on an annual basis, if I divide that $73,000 by 8, that comes out to like $9,000 a year of benefit. So question, would I rather work here at the nonprofit under all of my current working conditions and my current salary and then just pretend that I have an extra $9,000 of income, or would I rather make some kind of change?

Your answer may vary. Again, some of these loan forgiveness programs are very generous, and some of them, when you actually run the numbers, are downright niggardly. Like they don't actually make a difference in your ability to do it. I ran one of these for a client one time, and the actual amount at the end was so tiny, it was like, why have I never run the math on this?

So that would be my encouragement is actually run the calculations. Now, that gives you the mental framework that you need to figure out your situation. Would I rather stay here and knowing that my contract is valued at this extra $8,000, or would I rather make a shift of some kind?

And by the way, this line of thinking is actually how we really should mentally calculate all workplace benefits. That's why it's important to track whatever your workplace benefits are, and that's why it's important to know, you know, if I'm getting a big health insurance reimbursement, what is that? So you can actually compare the benefits of things.

You would also think about the tax rates. I assume -- I've never researched this question, so I would encourage you to research it. I assume that that loan forgiveness would not be imputed income. Generally, if you have debt forgiven to you under, you know, let's say some sort of debt settlement, then that becomes what we call phantom income, where you would pick up -- you would pay the tax on whatever amount is forgiven.

But because I think you're probably referring to some kind of federal program, my bet is that that's probably not the case. If any of you know, come by today's show notes, please, and let me know, and also let the listener know for today, episode 93, so radicalpersonalfinance.com/93. That's how I would answer the math, and you'll have to figure that out.

Now, as far as whether or not you should start your own clinic, the question would be do you want to start your own clinic. So clearly from your email, you said, "I'm inspired by yours and other shows to go out on my own, but I feel trapped by the debt." Fine.

Look into can I defer the debt. So if you start a business, assume the worst-case scenario. Research, would I be able to defer these student loan payments? Maybe I could get a hardship deferral of some kind for two years, and that would give me the traction that I would need to go out on my own.

What can you reasonably expect to make on your own? That would be an important thing to know. If it's dramatically more, and there's a very high confidence in that, and you feel that you would really enjoy that, then go for it. If it's just probably about the same, but now you're going to pick up all the hassle of running a business, and you're not really going to get a lot of benefit from it, and you've got this benefit, then I would consider that.

So you need to figure out what is your actual likely chances. If I were going from, I don't know, staff psychologist, let's just say you make $100,000 a year. If I were going from the potential of $100,000 a year to $200,000 a year, that would be compelling as far as a difference of earnings, especially when I would work out the additional tax benefits that I could work in under the ability of running my own business.

Now, on the other hand, let's say that you have a nice retirement plan, and you have some other benefits. Again, you've got to look at the situation. What do you want to do? Now, as far as other options, that's where I would spend time. So calculate the actual numbers on the student loan, the forgiveness, and calculate what is my best-case scenario on the other side.

So a good mental model would be what's the best-case scenario and what's the worst-case scenario. If I take this action, what's the best thing that could happen and what's the worst thing that could happen? Then work towards the best and prepare for the worst, and frankly, it's probably going to be somewhere in the middle between those two.

As far as other options, I would say, is there any reason why you can't take on clients now? So you might have some kind of non-compete if you're working for a nonprofit. I don't know, but is there any reason why you can't take on clients? I personally would not want to go--I don't know a lot about the psychologist business, but I'd want to make sure that before I opened my own company that I had a strong, stable base of clients and a marketing mechanism that's going to provide me with clients.

So can you do that? Can you dedicate--let's say that you're working, I don't know, 40 hours a week at the nonprofit. Can you do another 15 hours a week on your own in private practice? And sometimes that can actually be some of the best way to do it because you can go after very profitable clients without the need to deal with maybe the bread-and-butter clients that are not extremely profitable on a per-hour basis.

It makes me think--I had a client that I worked with one time here in West Palm Beach, had this small drug and alcohol addiction recovery program where he helped basically wealthy families whose kids had drug problems. And I couldn't believe the money he made in that business. So can you work something like that out on the side?

If you're going to keep working for the eight years, make sure that you're laying the groundwork for a great business. So do you need to spend--would it be a better use of your time--instead of just saying, "I'm going to launch today and I'm going to go for it," would it be a better use of your time to spend the next two years doing original, groundbreaking research on some aspect of psychology, spending the next two years writing a book, spending the next two years marketing that book so that when you go out on your own, you're this noted expert.

You're this noted author who is speaking at the psychology conferences and is well-known in his field, that you've had all these articles written about you. So maybe that would be a better way--instead of going out into private practice, maybe you need to do some kind of groundbreaking research and put the education to use that hopefully you got with the student loan bill and use that.

And maybe you can make some book royalties or something. Who knows? I doubt--I don't know. Maybe psychology books probably don't sell very well. But who's Dr.--what's his name? The bald guy who does--Dr. Phil, I guess, right? Psychology guy? Psycho--I don't know. Anyway. Some kind of guy who made a bunch of money spouting a bunch of good-sounding stuff, which is probably pablum to somebody who knows.

I don't know. I don't know anything about what he--I've never seen him. I've seen his face on books at the bookstore. Other options--can you find the same deal but just negotiate it with a different nonprofit? Or could you negotiate a move to a different part of the country or a different part of your county or something like that where you could cut your living expenses in half, keep a comparable salary to what you have now, and keep the student loan forgiveness while just gaining a better standard of living for you and your family?

Or can you go ahead and make a jump to a place where you would actually want to establish a private practice? So maybe the city where you live has tons and tons of psychologists, but maybe you need to move to another city. So those are just some of the ideas that I can come up with off the top of my head.

I don't know much about psychology as far as a business, but that's how I would think it through as far as the options. And there's probably some creative other option that is working for you. And again, maybe the answer is--by the way, when you're calculating the value of that, make sure you are deducting the student loan interest.

Hopefully that is. So calculate the actual cost-benefit of doing that versus other investments. So that's probably the best I got for you, at least just off the top of my head, for our Friday show. 55 minutes? I thought this was going to be a 30-minute show. I should never promise in the beginning 30-minute shows because it will probably never happen.

Thank you all for listening to a Friday show. I'm in a good mood. I hope if you're listening to this over the weekend, I hope you have an awesome weekend. I'm so excited about this last month. I really feel like this was a great month for the show. The audience has been growing.

Let me give you a quick report because I owe you all a quick report here on the 31st. Let's sign in here and see how many downloads we've had for the month. So just finishing out the month of October. This was super exciting. I think we're averaging a little over about 3,000 downloads a day, so just under about 80,000 downloads for the month.

So that's super exciting. I feel like we've got the traction I mentioned in an earlier show. I'm going to launch a membership support. I'm going to try to have everything in line by episode 100, so that would be a week after next. That I'm going to do a little bit different than probably you've ever heard on most other podcasts.

I've got some strong feelings about the way I want to do it, and it's very important to me to do it in a way that is a win for me and a win for the audience and where our interests are fully aligned. So I'm not about to do some of these deals where it's like, "Hey, I built such a great show.

Let me just go and pit my audience out and sell it to the highest bidder," which is a bunch of nonsense. I'm not interested in that. But I do have a way that I'm going to work out a membership program. It's going to be voluntary, and I think you'll be glad to hear it.

I'll explain all the pros and cons of all the different methods that I've come up with and why I'm going to be pursuing this method. So I'll share that with you on episode 100 if I can do that. I had a listener write in and say, "Joshua, I'd love to hear kind of your story for episode 100." I don't know.

I feel like you should know my story by now. But if you want me to just talk to you and tell you kind of about me, he mentioned either me doing it or doing it as an interview. If you're interested in that, let me know. If there's a lot of feedback, maybe I'll try to plan that and do that for episode 100 too.

I don't know. I'm very much just learning. I don't think I'm that interesting. Anyway, thank you all for listening. Have a great weekend, everybody. I thank you so much for being here. I value your listening. I value the comments. I value the feedback. And I'm just thrilled that you're here.

It makes my day. I love doing this. And thank you so much for listening. Thank you for listening to today's show. This show is intended to provide entertainment, education, and financial enlightenment. Your situation is unique, and I cannot deliver any actionable advice without knowing anything about you. This show is not and is not intended to be any form of financial advice.

Please, develop a team of professional advisors who you find to be caring, competent, and trustworthy. And consult them because they are the ones who can understand your specific needs, your specific goals, and provide specific answers to your questions. Hold them accountable for your results. I've done my absolute best to be clear and accurate in today's show, but I'm one person, and I make mistakes.

If you spot a mistake in something I've said, please come by the show page and comment so we can all learn together. Until tomorrow, thanks for being here. With Kroger brand products from Ralph's, you can make all your favorite things this holiday season. Because Kroger brand's proven quality products come at exceptionally low prices.

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