Transcript: 158 – Charles Harris, CPA on Tax Prep Tips and FAQs for 2025
Transcript for 158 – Charles Harris, CPA on Tax Prep Tips and FAQs for 2025
[00:00:00] Andrea: Hey, it’s Andrea with Music Studio Startup, the podcast about the business of teaching music. Learn from the startup stories of music teachers who are doing incredible things with their studios. Be inspired by creative musicians who are branching out and thriving as entrepreneurs. Be empowered by the insights of experts who will help you grow your own studio.
Let’s get started.
Happy New Year. For a lot of studio owners, January represents the beginning of tax season. So I’ve got Charles Harris, a CPA, as our guest today to talk about all things self employment taxes. We’ll cover a bunch of things including the earning thresholds for when you need to start filing taxes, and what to do if you did not earn a profit in your business this year.
We’ll also talk about what’s different for the 2024 tax year and what we know and don’t know about expected changes for the 2025 tax year. Plus, we’ll share an exciting announcement about new services coming to Music Studio Startup this year and a new perk for hub members. Here’s my conversation with Charles.
Hi, Charles. Welcome to the podcast. Can you introduce yourself and tell us what you do?
[00:01:21] Charles Harris: Yeah. My name is Charles Harris. I am an accountant specifically for music schools.
[00:01:26] Andrea: Excellent. And right now this episode will be releasing in January, so people have lots of questions for accountants. I’m glad you’re here today.
Can you tell us a little bit about your background and how you came to the career you’re in right now?
[00:01:39] Charles Harris: Yeah. So I started off in college a long time ago as a music major and I made it through the theory core and was just struggling a little bit and seeing my career path going forward.
So I actually went back to school and got my master’s in accounting. I then worked at BDO, which is a large CPA firm. I worked on a hundred plus million dollar individuals and their taxes and their businesses as well. And then after a little bit there, I transitioned to a startup on the larger end. When I started, there were only three of us and it kind of grew as time went on and really got exposed to the whole gambit of accounting.
And then I just realized I wanted to focus on people and individuals that I felt I could actually make a difference for. Not that I didn’t love my work before, but it’s different when I can come to a music school and I can say, I can save you 5 grand this year. Like, that just makes a bigger difference.
And it’s just a lot of fun that way. And so I kind of started looking for clients on the side as starting up a side hustle, doing accounting and tax work. And one of my first clients was a music school. I’m a father of two and my oldest daughter was in music classes and I just offered my services one day and she really needed the help at the time.
And so I just realized, It was a lot of fun to work on music. I’m familiar with it. I grew up taking multiple lessons a week. So then I reached out to Andrea and here we are.
[00:03:10] Andrea: Here we are. Yeah. And you’ve got the music major side, you’ve got the accounting side and you’ve got the startup side too, which is kind of fun.
That’s like all my favorite things.
[00:03:21] Charles Harris: Me too.
[00:03:24] Andrea: Before we get into the meat of the episode, I want to share an exciting new development with Music Studio Startup. Helping music teachers understand their finances has always been central to Music Studio Startup and everything we do. And listeners are used to hearing finance discussions and economic discussions on the podcast and all of that.
And the things that you work with, like tax prep and clean records is a huge part of being able to have a clear picture and understanding of your studio finances and where you can save money and where you can afford to take risks and expand and all those things. Some listeners may have gotten here actually, because, you know, I’ve given my crash course on self employment taxes all over the place, and I get a lot of new listeners from that.
And I have really loved being able to share that general overview of taxes and how taxes work. But at the end of the day, I’m not a CPA, and so I have to tell teachers, you know what, this is as much as I can tell you. Your situation is going to be unique because, you know, your life is unique and you’ve got this income and that business and all these different things.
So at the end of the day, I am limited to how much I can help a teacher, especially when it comes to taxes and tax planning and things of that regard. So I end up having to send them to someone else. And that can be kind of a scary leap because teachers don’t necessarily know if the person they’re talking to is going to understand music teachers and that whole industry.
I remember one time I was talking to a service provider. This was not a tax preparer or CPA, totally different industry. But, I said, you know, I’m a music teacher. And they could not wrap their brains around music teacher. They understood musician and all the recommendations were recommendations that they would give, like a gigging traveling musician.
And I was like, this just doesn’t make sense for me. And it was really frustrating because I knew what they were recommending wasn’t right for me, but I didn’t know what was, and I was wanting their expertise. And I think they were also inexperienced and that probably played a part, but anyway, so I can appreciate when a teacher is like, Yeah, I know I need to talk to a CPA, but I just, I’m scared or nervous that I’m going to end up spending a lot of money and not get what I need to out of it.
So all this is to say, I am super excited to announce that this year you and I are combining forces and bringing that tax prep capability and CPA and accounting services for music teachers together through Music Studio Startup. Welcome. I’m super excited to have you and can you talk about some of the services that you can provide for solo teachers and studio owners?
[00:06:07] Charles Harris: Yeah. So the, the most basic option is just tax prep. If that’s all you need, just come on through and this will mainly be for solo teachers and small studios. But yeah, so tax prep is, is the basic offering and then we’re offering several other accounting services. We are thinking pretty competitively priced and reasonable price because we don’t want you to go out of business either.
Right. That’s 1 of the big things that I feel like a lot of people go to an accountant and they’re scared. They’re going to build them out of house and home. So we offer more of like a DIY accounting service where you can use me as a reference point if you have any questions. If you buy a new piano and you’re like, how do I even account for this?
Right? This would be something that you can reach out to me about So that’s more of the DIY version and that also includes tax prep. And then we also include done for you accounting services, right? If you just don’t want to touch your bookkeeping or your taxes, and you just want it done for you, and then have me and Andrea talk to you about like how your business is doing and other ways that you can improve and just kind of get out of the financial side. We also have that offering as well.
[00:07:14] Andrea: And we’ll be talking more about the details of all of those. And again, like happy, just feel free to reach out to us and we can talk about them. But one of the things I think that as we’ve designed this program, we’ve really tried to figure out what features music teacher or studio owner, depending on if you’re solo versus a multi teacher studio, what you really need and not over prescribing some extravagant accounting package. That just doesn’t make sense for your scale of business. Which you might encounter if you’re going to someone who doesn’t understand the industry.
So I’m really, really actually quite proud of the packages we’ve designed, because I think they’re really going to make impacts in teachers lives. And that’s what it’s about. And yeah, we’ll be taking a limited number of clients this year. To learn more, you can go to musicstudiostartup. com. With that, let’s move into the main content.
So let’s cover some general questions first for someone who may be new to self-employment or teaching.
[00:08:11] Charles Harris: So Andrea has covered taxes in the past with Andrea Yahr and those are excellent episodes. I’ve listened to all of them and they have accurate and good information. Obviously things can change in the tax code and so we’re gonna go through and talk about a few other, the changes and upcoming changes that might happen.
But always feel free to go back and listen to those episodes with Andrea Yahr. She did a great job.
[00:08:33] Andrea: Yeah, and we’ll link up to those in the show notes as well, because one of them is about business structures and like an LLC and S Corp and all that kind of stuff. Generally good content there. So listen to those and then we’ll revisit some of those questions and talk about some changes that are coming up in the coming year.
What are the minimum income thresholds for filing taxes?
[00:08:55] Charles Harris: Right. So it’s going to be your standard deduction for this year. It’s 14, 600 or if you’re married filed jointly, so it’s double . Then if you’re self employed, if you make more than 400 as well, you have to file. I recommend filing no matter what. And we’ll talk about that more, I’m sure in the future.
[00:09:13] Andrea: And this surprises people, I think, because generally, like, when you’re talking to the general public and they say, oh, you know, if you’re not making more than 14, 000, that’s standard deduction that you don’t file, but it’s different. So many things are just different when you’re self employed.
So 400, you said, is the standard deduction.
[00:09:29] Charles Harris: 400 is the threshold for self employed individuals. But I will say even if you’re only at the standard deduction, you should still file because there are a lot of credits that you can get that will help. So the earned income tax credit is you might be eligible for if you earn less than the standard deduction, child tax credit as well.
So I still recommend filing even if you’re below the threshold, you’ll never go wrong with filing. You can have issues if you don’t file.
[00:09:54] Andrea: Okay. Okay. A lot of people fall into teaching without really intending to, like someone just says, Hey, can you teach my kid? And you say, sure. So they, they may have earned money to meet the filing threshold, but because they weren’t planning on it, they haven’t been paying quarterly taxes or anything like that.
So what should they do if they find themselves here in January or the spring, realizing they needed to pay taxes or pay quarterly taxes? What should they do now?
[00:10:21] Charles Harris: File as soon as you can. You’re probably going to have penalties if you’re over that standard deduction, but you didn’t pay your quarterly estimates.
But honestly, it’s pretty minimal. As long as we get ahead of it and start paying correctly. You’re going to be better off, right? If we push it off and trying to ignore it, let our anxiety take control and just not file, that’s when we have issues. So it’s just best to pay as soon as you can.
[00:10:44] Andrea: What if it’s a, maybe a new teacher, they started their studio and they had a lot of startup expenses.
So they actually didn’t make a profit this year. Would that teacher still have to file?
[00:10:54] Charles Harris: Yes. And you really should, because in this situation, you’re going to create a net operating loss, which we don’t have to go into and be super nerdy, but basically you get to roll that forward and then pay less taxes next year.
So when I started my own business, I actually was at a loss that first year due to softwares and hardware that I bought, but then the next year I could take that loss and offset my revenue. So it’s always good to file, even if you have a loss.
[00:11:21] Andrea: Yeah, and to put some numbers to that. So if you earned 5, 000 this year and spent 10, 000, let’s just say, so you had a 5, 000 loss, but next year you earn 50, 000 and you had still the same 10, 000 of expenses or 15, 000.
And because you can roll that loss forward, you now get to add your loss from last year. So you’ve got 15, 000 or 20, 000 of expenses to write off and reduce your taxable income in future years.
[00:11:51] Charles Harris: Yeah, I will put a caveat if you have a loss for multiple years in a row, the IRS might consider that a hobby. And that also raises red flags and can be an issue as well. So just be aware of that, right? Businesses are, according to the IRS, wanting to earn money. So if you’re not earning money, it causes. Red flags to be issued. But generally speaking, I imagine most of us want to earn money. So it’s not really a worry.
You can be at a loss for a year or two without causing any issues.
[00:12:20] Andrea: Great. I’m glad you mentioned that hobby thing. Can you elaborate on that? Is the IRS guidelines on hobby income? Is it mostly about intent? Like if you intend to earn a profit
[00:12:31] Charles Harris: Generally speaking. Yes, and that’s generally how they talk about it.
So one of the rules of thumb It’s not written down in the irs code. So we have to take with a grain of salt and there’s a bunch of conditions. You can go on my website. I have a blog post about hobby versus an actual business, but for the sake of this general rule of thumb, as if three years, you’re in a loss position out of five, then they’re going to raise red flags and they’re going to call it a hobby, not a business. That’s the general rule.
[00:13:00] Andrea: Okay, so looking back on the 2024 tax year, so the year that has just wrapped up, what changed during that year?
[00:13:08] Charles Harris: So there aren’t any big changes luckily, that’ll happen next year, but for 2024, it’s mostly inflation adjustments. So every year the standard deduction increases, it went from 13, 850 to 14, 600 along with that tax brackets adjust. So each year, the tax brackets. The minimum will increase for each bracket and then also changes to your retirement accounts and FSA and FSA contribution limits. And so those change each year as well. Just type in to Google. It’s pretty easy. HSA limit contribution and you’ll get the right number.
[00:13:45] Andrea: And then it’s December 17th when we’re recording this and it’ll release sometime in January.
So there’s a lot is actually going to change just in the world by that point. We’re going to have in the U. S. a new administration change. And often with administration changes also come tax changes. So what are you seeing going forward 2025 and forward that we should be aware of?
[00:14:09] Charles Harris: It’s a great question. And the answer is we don’t really know. And maybe by the time this comes out, we’ll know a lot more. I’m not really sure if that’s true or not. It might, we might be unsure until legislation is written. So like a good example is QBI. We don’t know if that’s going well, it’s going away technically in 2025, but it might be renewed and then taxes on tips is a big one that people keep talking about.
I’ve been asked that several times. Don’t change your business model yet. We don’t know if it’s really going to happen or if it’s going to happen only for hospitality based businesses or service based businesses. And so again, it’s just one of those things we just have to pay attention to. We don’t know for sure yet what’s going to happen.
I do think it is likely we’re going to have a decrease in tax rates because Republicans control all three branches of the government. But what that means, I don’t know. So again, it’s best just to join Music Studio Startup and be aware of what’s happening have a accountant or someone else that you can refer to and ask for help when things are happening because changes are coming. It’s just when and how much.
[00:15:20] Andrea: Yes, and typically when we see tax changes, they impact future years only or like going forward. But we have seen the reverse in 2018, right? Isn’t that when a bunch of tax changes were rolled out that actually impacted the previous year?
[00:15:37] Charles Harris: Yeah, it’s my worst nightmare. Because it just requires a lot of learning and work all at the same time.
But theoretically, when they come into power on January 20th, they could change the tax law for 2024. We don’t know if that’s going to happen or not. There haven’t been any indications of that happening, but again, it’s just something to be aware of and keep your ear open.
[00:16:01] Andrea: And then I just want to clarify to some things you mentioned the QBI deduction that stands for the qualified business income deduction.
Can you say briefly what that is if someone’s not familiar?
[00:16:10] Charles Harris: Yeah, so it decreases the taxable amount that businesses pay by 20%, unless you’re over a threshold and then there are other qualifications as well. And I’m more than happy to talk with people about that, but the basics of it is it decreases your business income tax liability by 20%.
[00:16:31] Andrea: And then the tax on tips. The suggestion here, or that you might hear is quit charging tuition for lessons and just accept tips because you won’t have to pay tax on tips. And what you said is, hold on, that might not apply across the board and might not be a good business strategy.
[00:16:49] Charles Harris: Yeah. The Harris team talked a little bit more specifically about only hospitality. Trump has been a little bit more vague and it could be all service based industries. We don’t know, but yeah, just hold off.
[00:17:01] Andrea: So those things are out there. Okay. And it’s January now. So what tips do you have for a teacher to ensure a smooth tax prep season?
[00:17:08] Charles Harris: Organization! That’s the biggest one. If you’re organized and your books are up to date, you’re going to have a smooth tax season.
The issues really come when we’re mixing our bank accounts and we don’t know what’s going on in our business. That’s when we have the most issues. So get organized and make sure your bookkeeping is up to date. And then also for January, make sure you’re issuing your 1099s and your W 2s to employees.
1099s are for contractors specifically, so those are also due at the end of the month.
[00:17:39] Andrea: What are some often missed deductions that self employed music teachers should be paying attention to?
[00:17:44] Charles Harris: Okay, so I’m going to give you the a terrible answer. It depends. But one of my favorites that I think is often missed is the home office deduction.
People are scared of it, or they teach out of their living room and they think, well, I don’t have an office. So that doesn’t count for me. But that’s not true. We can still do it. Take the space you’re in and we can deduct that space from your tax return. And then the other nice part about that is if we do that, then we can use that same percentage of your home and we can deduct things like internet expense, sewage, water, and all your other utilities, which is great.
And just a really good opportunity to be intelligent and proactive in our tax preparation. And then don’t forget also that you can deduct conferences you attend, trainings you attend. So I’m going to plug Music Studio Startup again, right? Because you can count that as a deduction for your taxes. So make sure you’re including all these things.
Sometimes people think they don’t count because you’re doing it for yourself, but most businesses provide training and offer opportunities for their employees. And so your business is no different.
[00:18:48] Andrea: Even though 2024 has ended, there are still some things we can do to reduce our tax bills. Can you talk about some of those and their deadlines?
[00:18:55] Charles Harris: Yeah, so the biggest ones are retirements and HSA contributions. We briefly mentioned those earlier. But you can contribute those through April 15th and deduct them from the prior taxes. However, if you are contributing, do it now. Don’t wait until April 15th. Because if you contribute on April 15th there’s no guarantee your money is going to transfer in time. And then if you come to me April 15th after you transferred it, there’s no guarantee I’ll be comfortable taking it as well. So just do it now.
[00:19:24] Andrea: Listeners might have heard us talk in the past about tax preparation versus tax planning. Can you talk about the distinction between those?
[00:19:32] Charles Harris: Yeah, so tax preparation is really just filling out the forms. And while this is required, probably going through, we’re going to miss certain things or we’re not going to know, for instance, how big your office is or how big your studio is in your house. And so sometimes by just doing preparation, we kind of miss some of the big picture items. By doing tax planning we can kind of take advantage of just even making sure that we’re even counting all of our business expenses as business expenses and that we can deduct those. By tax planning, we can make sure that we’re going to be able to retire one day, which is really nice. And then, you know, we can make sure that we can take advantage of every deduction we possibly can.
Tax preparation is really just the last step in a whole tax process.
[00:20:15] Andrea: One of the things that really specifically excites me about our collaborating here is that Music Studio Start members will get to talk to you a lot throughout the year, not just at tax time. And I’ve heard teachers say, Oh yeah, I’ve sold a piano in December. And so I received all this revenue then from the piano sale, but I didn’t buy a new one from until January. Not thinking like what’s three days, you know, and then they realized they had to pay taxes on the income they received and they had no big expense to offset it of the new piano or things like that.
There’s just a lot that teachers should not be thinking about this all day long every day, but I’m so grateful that you are and can be reminding all the teachers in the Music Studio Startup hub of these things to be thinking about throughout the year and just you know, when you see another teacher have that experience, then you also kind of learn from their experience.
[00:21:07] Charles Harris: You mentioned a great thing about selling the piano, right? Any big expense or revenue. You should really talk to an accountant before you do it. So if you’re going to sell your studio or buy a music studio, talk to an accountant first, because they might have some insights into what’s going on. And that would just be one of my recommendations as well.
[00:21:23] Andrea: Yeah. Timing for buying or how to purchase, whether you’re financing it over time or renting it, like all those things can have an impact. I heard this really interesting question from a teacher. I’m wondering if you can help. The question was, can I write off unpaid tuition for a lesson taught? So the teacher taught a lesson and then the student left the studio, never paid the lesson, but they already delivered the service.
Can they write off the expense?
[00:21:50] Charles Harris: Sadly, no. As a taxpayer, your cash basis, so you have to have cash leave or come in in order to count as a tax write off or a tax revenue. So, in this situation, it acts as bad debt. If you’ve worked at bigger companies, bad debt just means it’s a sunk cost. You can’t recoup it. I’m sorry, I wish there was a better answer.
[00:22:11] Andrea: How about if it is a teacher, like a multi teacher studio, and you paid a teacher for a half hour that their student didn’t pay for?
[00:22:20] Charles Harris: So the payroll would still be a tax deduction, right? So make sure to record payroll still. But again, that’s a situation where the money is leaving the account. So it’s pretty clearly a tax deduction.
[00:22:33] Andrea: Is there anything I haven’t asked that I should have?
[00:22:36] Charles Harris: Boy, I don’t think so. I’m just excited to be here. I’m glad I get to talk to more music studio owners. Please send me a message. I’m glad to answer questions and chat and talk. I think one of the first opportunities I’m going to have to answer a lot of your questions is at office hours, and we’ll have more details for that coming up. Probably by the time this is released.
[00:22:56] Andrea: Yes. So any Music Studio Startup hub members always have access to these monthly office hours and Charles will be our guest host that day answering questions all your CPA and tax prep questions. So bring them to office hours. Is there a book or resource that you’d like to recommend to our audience?
[00:23:13] Charles Harris: Ooh, I just finished the E Myth, which is a great book.
Just talks about the basic premise of how to run a business. And then I just started Atomic Habits, which I also just have loved so far. They’re both great.
[00:23:26] Andrea: Okay. Two classics. Thank you. And where can listeners get in touch with you and learn about your services?
[00:23:31] Charles Harris: Yeah. So the big one, if you’re a music school, I recommend going through Music Studio Startup. You’ll get a slight discount versus just coming through my website, but you’re also welcome to go to C as in Charlie Harris, CPA. com. And you’re welcome to sign up for my newsletter there, or just reach out to me.
[00:23:50] Andrea: All right, Charles, thank you so much.
[00:23:52] Charles Harris: Glad to be here.
[00:23:58] Andrea: I am really excited to be welcoming Charles to the team. If you’ve been looking for a tax preparer, or maybe avoiding looking for a tax preparer because the thoughts seem too daunting, hopefully we can make the search easier for you. We are taking a limited number of tax prep and bookkeeping clients this year.
If you want to learn more, head over to musicstudiostartup. com to fill out the interest form and we’ll be in touch. And if you’ve already got a tax prep solution, but you just want regular access to a CPA for all those times when someone says you really should talk to an accountant about that, then check out the Hub.
Charles will be around to answer questions in the upcoming office hours. In addition, our Q1 Mastermind groups will be starting January 27th, so Hub members who participate in that program will be doing their quarterly planning next week. As you can tell, it’s a busy January here at headquarters. We are really looking forward to working with some amazing studios this year and making it a great 2025.
All the links mentioned in this episode can be found at musicstudiostartup.com/episode158. That’s all for today. Thanks for listening. I’ll be back next week.