Taxes are inevitable and we all have to pay them; though many people are surprised to find that they are paying more taxes than they should.
While everyone has to pay “their fair share,” that “share” has become unduly burdensome to those who earn more than others.
The following strategies are by no means the only options available, but they can help you reduce your tax burden.
First, It’s Not Your CPA’s Fault
Most tax professionals’ workload occurs during a 2-3 month period culminating on April 15th – Tax Day. They “staff up” with temporary workers and work 80-90 hours a week in order to prepare hundreds of returns in that short period of time.
Additionally, CPAs and tax professionals have been deputized by the IRS – which severely penalizes them for submitting returns with questionable or undocumented deductions. This forces them to play it ultra-safe, since many of their clients do not have the proper documentation to take the deductions that are available.
Due to the heavy workload and constraints of the IRS, they often reference 15-20 of the most well-known deductions in the tax industry. However, there are more than 400 legal (though lesser known) deductions available as long as proper implementation and documentation procedures are followed. Some of these deductions are underutilized because they are misunderstood, applied incorrectly, not documented, or documented improperly.
- Protect Your Business by Confirming It Is Properly Structured
Choosing the most appropriate business entity is an important and complex decision. In some cases, tax professionals may counsel their clients to delay setting up a corporation or recommend and “S” corporation. While these routes may eliminate the added expense of filing a corporate return, these structures can provide insufficient protection in the event of a potentially devastating lawsuit.
Statistics show that one in four people will be involved in a lawsuit in the next twelve months – and the numbers are worse for business owners. Utilizing Limited Liability Companies (LLCs) and Limited Partnerships (LPs) can create an enormous asset protection advantage. Even then, however, there are additional costs to set up and maintain the LLC. Also, for a multi-member LLC, an LP, or for any LLC electing to be taxed as an “S” or “C” corporation, there are additional returns required. Since few tax/legal professionals fully understand these entities, they advise against them – leaving their clients unnecessarily exposed. However, by ensuring that the business is properly structured, owners can avoid troublesome legal complications.
- Hold and Document Annual Meetings
Business owners incorporate to protect their assets. But many unwittingly lose that protection by failing to conduct and/or document annual meetings.
The business corporation laws of each state require compliance with certain corporate formalities, such as corporate minutes, resolutions, and minutes of shareholder meetings. Most business owners do not realize this, and their tax/legal professionals fail to advise them of the consequences. In the case of a lawsuit, a judge may disregard corporate protections because the business owner didn’t follow these necessary corporate formalities.
Keeping these records could also yield benefits from a tax perspective. An annual meeting is a legitimate business reason for domestic travel. If leaving the home state, an additional business purpose is required. Also, family expenses can only be written off if family members are on the business payroll. So as long as corporate records are updated, marketing ideas are discussed, and/or a new business pan is created, almost any trip (even one that includes fun activities and family members) could be deducted through a corporation.
However, there are specific rules that must be followed. While simple for the most part, they must be followed to ensure that the deductions are taken properly.
- Audit-Proof Your Business by Keeping Careful Documentation
Documentation is key to audit-proofing tax records. Luckily, proper documentation is easy – start keeping a tax diary.
Without a tax diary, deductions that have been taken can be lost – resulting in penalties and interest in addition to the unpaid tax. Yet less than 5% of taxpayers have a tax diary.
A tax diary records all business expenses so there is a comprehensive list (with details of each deduction) once tax season rolls around. This can be as simple as keeping a pocket calendar and jotting down notes, saving receipts, of filling out a spreadsheet on a weekly basis. It may take only moments, but this record provides the basic facts needed to back up an expense claim. Things that should be included in a tax diary:
- WHO was the meeting with?
- WHAT was discussed?
- WHEN was the date of the meeting?
- WHERE did the meeting take place?
- HOW MUCH was the cost of the meeting, meal, etc.?
A tax diary, kept by the business itself, should properly document all deductions. It should not be kept by a third-party (like a tax professional), otherwise the business may be left dangerously exposed. ExTaxDiary.com provides a free online tax diary that can be used.
- Hire Your Kids to Help Around the Office
In 2015, the U.S. Department of Agriculture reported the cost of an average couple raising a child from birth to age 18 was about $233,610. This is a significant figure at almost a quarter of a million dollars for one child, not including college. By hiring children into the family business, a large amount of the expenses they incur may be eligible for write-off if approached correctly. The IRS encourages hiring family members as a benefit to the business owner. However, the tax requirements vary from a regular employee, so it is important that they are carefully reviewed.
Business owners can hire their kids as long as they remember that there is a different approach to taxation depending the type of company owned.
- If the parent is the sole owner of the business, he or she would be taxed as a sole proprietorship or a partnership. In this case, money paid toward children could be taxed as low as 0%.
- If the parent owns a corporation, employed children would be subject to the Federal Insurance Contributions Act (FICA). However, they would still be in a lower tax bracket, lowering the parent’s federal income taxes by as much as 10% to 40%.
How It Works: Hiring Your Kids
First, identify a role. Make sure there is a job or service in the company that the children are qualified to perform. Once identified, create a job description of job duties. There are many jobs children can help with around the office – including light office work, office cleaning, social networking for the business, grounds maintenance, or hiring the children as models for promotional photography or videos. The most important part of this process is making sure the job the child is hired for is age appropriate.
Next, a suitable wage must be determined. To determine this, identify the minimum wage or look at standard pay for a comparable entry-level position. Remember, the age needs to be reasonable in comparison to the work completed to avoid any complications with the IRS. Additionally, the work must be completed in order for the child to receive payment. Business owners have been flagged in the past for claiming that their children completed work that they did not.
- Don’t Forget to Deduct Your Home Office
Business owners are often told not to deduct their home office for one of two reasons:
- It is either considered “risky” for fear of raising “red flags,” or
- It is labeled “not worthwhile,” as the savings are too small.
However, neither of these statements are true. According to the Internal Revenue Code (IRC) Section 280, a business owner is entitled to have a home office. Additionally, the law allows both a standard office and a home office.
The only risk associated with the deduction arises if the owner has not kept proper documentation. The home office is no different than most other deductions taken. The key is to learn to take the deduction properly as to safely reap the financial benefits.
Even those who currently take this deduction often grossly underutilize it because, in addition to their physical “office space” (usually about 150 square feet), there are “bonus deductions” that can also be added for hallways, closets, a foyer, stairways, etc. If a shed, garage, or basement is also used for the business, those can be deducted as well. Supplies also fall into this category – the computer, phone, fax, desk, bookcase, books, instruction programs, snacks, and certain meals are also deductible.
Tax Saving Professionals offers advanced tax saving strategies for business and medical professionals seeking to keep more of what they earn by highlighting powerful solutions to build and preserve their wealth. We work with business owners and high-net worth individuals that meet the accredited investor status to save them up to 50% on their taxes – year after year. If you’d like to learn more about how Tax Saving Professionals can help reduce your tax burden, we’d love to hear from you. Contact Randy McGaha, Tax Saving Professionals for questions answered at firstname.lastname@example.org.