It’s Not What Your Business Makes That Counts — It’s What You Get To Keep!
By Patrick Astre
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.
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 this article covers is legal, audit-tested, and rooted well within the IRC (Internal Revenue Code.) So let’s get started so you can keep more of that hard-earned money from your business.
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. Here are a few legitimate strategies you can implement now:
• Rent part of your home to your business. Many business owners use part of their homes for business, second office, storage, etc., and 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, maintenance, and depreciation, etc. that you cannot use otherwise.
• 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 ‘80s resulted in that deduction being outlawed and denied to many businesses. Legislation two years later overturned this ruling and restored the deduction. Home office deductions are legitimate and allowed by the IRC. As in all deductions, be sure to keep documentation to back it up.
• Don’t neglect business use of your automobile. Simply because you don’t use your car often in your business, it doesn’t mean you shouldn’t deduct the amount that you do use. Keep a log of your business mileage, reimburse yourself by using the IRS mileage rate, and deduct it on your business tax return. Do not include commute to and from your business, and make sure to document the business reason for auto usage.
• Make your spouse part owner (shareholder) of your Sub S Corporation. A recent tax court ruling held that any money paid sole shareholders of “S” corporations from the business must be taken as payroll. That’s because “S” distributions are not subject to payroll taxes, and the IRS wants those taxes paid. The tax court backed it up by stating that a single shareholder-owner is rendering service to the corporation. 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.
• 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, and 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.
• 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 for 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.
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. HBM
Patrick Astre — CFP, EA, RFC — is an author, speaker, and recognized tax and financial expert specializing on the economic issues of longevity and business. As the founder of Astre Planning, Inc, Patrick has been advising individuals, small businesses, and corporations for nearly 40 years. Clients include ING Direct, Princess Cruises, and Emerald Passport International. He is the author of “This is Not Your Parents’ Retirement” (Entrepreneur Media Publishing) and “Educated Investing and the Four Seasons of Money.” For more information, contact Patrick at 1-631-744-9100 or visit www.ProsperousBoomer.com.