It’s Not What Your Business Makes That Counts — It’s What You Get To Keep! By Patrick Astre “The hardest thing in the world to understand is the income tax.” -Albert Einstein There are two things in life you don’t want to watch closely as they’re made; the first is sausages, the second is tax laws. While death and taxes are inevitable, death doesn’t get worse every time Congress meets. The constant push-pull of special interests, partisan and “pork barrel” politics left us with an income tax system that is convoluted and overly complex. The system has one saving grace: it’s semi-voluntary. For example, everyone knows that if you own a home, you may deduct the property taxes and mortgage interest. But you are not required to. You could file form 1040A and forego deductions and “volunteer” to pay more taxes. There are a great number of tax-saving opportunities available to business owners. Sad to say, many of these opportunities are not well known and often ignored even by tax planners, CPAs and attorneys. By not using them, you will have “volunteered” to pay more taxes. Let’s get one thing out in the open at the get-go: Everything I will tell you is legal, audit-tested and rooted well within the IRC (Internal Revenue Code.) So let’s get started keeping more of that hard-earned money from your business. "The income tax has made more liars out of Americans than golf." —Will Rogers There are plenty of business tax savings in the system without resorting to illegal strategies that can come back to bite you. Stay away from tax evasion schemes such as foreign trusts, secret offshore bank accounts, claiming your house as a “church,” and other shady deals sold out of magazines or the Internet. Remember what happened to Wesley Snipes recently? Well, here are a few legitimate strategies you can implement now: · Rent part of your home to your business. Many business owners (such as me) use part of their homes for business, second office, storage, etc…yet those expenses are not deducted. Determine the portion of your home that is used for business and rent it to your corporation or LLC. Rent should be reasonable and average for your area. You must report the income on Schedule E of your personal tax return (1040) but you will apply a percentage of deductions against that income such as utilities, home insurance and maintenance, depreciation, etc.. that you cannot use otherwise. Realtors: If you operate a brokerage and have an office, you can still take this deduction. You take work home with you (I know, I’m married to a real estate broker) so you might as well get a deduction for it. · Don’t fear the home office deduction. If you operate as a sole proprietor you cannot rent part of your home to yourself. However, you can use the home office deduction. A court ruling in the late eighties resulted in that deduction being outlawed and denied to many businesses. Legislation two years later overturned this unfair ruling and restored the deduction. However, many accountants to this day fear using this. Don’t listen to them. Home office deductions are legitimate and allowed by the IRC. As in all deductions, be sure to keep documentation to back it up. · Special Note For Realtors: If you’re a broker within a brokerage, the IRS has ruled that an office is deemed to have been provided for you, hence you cannot take the home office deduction. Wrong! I’ve developed an audit-tested way to take this deduction. · Don’t neglect business use of your automobile. Simply because you don’t use your car a lot in your business doesn’t mean you shouldn’t deduct the amount that you do use. Keep a log of your business mileage, reimburse your self by using the IRS mileage rate and deduct it on your business tax return. Do not include commute to and from your business and document the business reason for auto usage. Realtors: Be sure to keep a log (okay, I know from experience that most of you don’t do this.) but at least know how many miles you put on your car so you can construct a diary that will match records if you’re audited. · Make your spouse part owner (shareholder) of your Sub S Corporation. If you are a sole owner (shareholder) the IRS position is that any income you take out of your corporation is earned income subject to payroll taxes. That’s because “S” distributions are not subject to payroll taxes and the IRS wants those taxes paid. High tax states such as New York will follow up with their own payroll taxes. It’s the case of the never-ending audit. By having a spouse part owner, you no longer have a sole shareholder and the spouse may receive distributions without payroll taxes. Caution: Be certain you have a good marital situation because your spouse will now own part of the business. This does not apply if you are repaying yourself a loan you made to the corporation. If that’s the case, be sure you have documentation and use a reasonable rate of interest. · Are you bad at record keeping? Consider LLC “Disregarded Entity Status.” If you are a single member LLC owner, the IRS allows your status to be “disregarded’ for income tax purposes. You file a Schedule C (Self employment) just like a sole proprietor, yet you are protected from liability. The advantage is simplification of record keeping. You can take money out of your business anytime, you can co-mingle money, avoid filing as a corporation and generally make business life easier. Caution: you must still document income and expenses and retain documentation to back it up. Excellent for realtors who want liability protection but don’t like all the record keeping. · Set up a SEP IRA, SIMPLE, 401K or other retirement plan. Since it comes off the top, this will save 27.5 percent and 7.5 percent (NY) in the average brackets. Sure, you can’t spend it until you retire, but so what? You’re going to get older and need money in retirement; where will it come from if you don’t accumulate it? Caution: If you have employees you must contribute equally to their retirement plan. Consult with a pro for the details. Realtors: If you’re an agent/broker with no employees a SEP is best for you. Little paperwork and IRS hassles, deduct 25% of your net profit up to $40,000. Must establish account by December 31 and fund by April 15 of the following year. · These are only a few business ideas. There are tons more in the IRC. Be proactive. Work with your accountant to develop safe, tax-saving strategies. If you want to “volunteer” money, give it to your favorite charity, not the IRS. Patrick P. Astre, CFP, EA, RFC is a financial author, advisor, and Enrolled Agents representing taxpayers rights before the IRS. His office is on Rt 25A in Shoreham and he welcomes your questions and comments. You may reach him at his office 631-744-9100 or his website www.prosperousboomer.com and subscribe to his newsletter through the website.