Category Archives: Tips

Your Business and Your IRS Bill

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You’re at a fork in the road.  This is no ordinary fork with two choices.  This one has five choices.  Sole proprietor, a C Corporation, an S corporation, an LLC (limited liability corporation), or an LLP (limited liability partnership) are the choices.

Tax issues and personal liability are the key issues in determining the best format for your business.  Choosing sole proprietorship when you are the sole employee is the simple way to go.  If you have a regular job and work on the side as a consultant, this format would let you write off expenses such as the use of computers, phones and car mileage for your consulting and maybe your home office subject to IRS rules.   The big disadvantage is the lack of protection of your assets.  In a dispute that could lead to a lawsuit, your personal assets are at risk.  The other four forms of entity offer the protection of your assets.

If it looks like your business is going to take off, any of the other four forms would be more appropriate. They shield personal assets from suits against your business.  A C corp lets you set up a medical plan.  Then you can write-off all of your out-of-pocket medical expenses.  If you run a sole proprietorship and file as an individual taxpayer, there are limitations on those deductions (excess of 7.5% of your adjusted gross income).

The tax rates for a young C corp with low income can be lower than those on the other four types of businesses.  The first $50,000 is taxed at only 15% while the subsequent $25,000 is taxed at 25%.  The third $25,000 is taxe at 34%.  However, above $100,000, the tax can be as high as 39%.  To lessen the high tax rate on the corporation plus the tax on a high salary, other options might be more beneficial.

An S corp, LLC or LLP might be more appropriate.  All thre are similar since they are pass-through entities in which case income is only taxed once.  Income flows to the individual owners.  The differences have more to do with legal issues.  Family businesses are often S corporations, while investments in real estate are often LLCs.

Are You Self-Employed and Pay Taxes?

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More and more people are becoming self-employed as workers lose full-time jobs and take longer to find new jobs.  It is more important to stay on top of one’s tax obligations than the skill you’re trying to sell.

It is extremely important to be thoroughly familiar with the world of 1099s.  One surprise for some people is that the self-employed must pay the full amount of payroll taxes, known as self-employment taxes, while a full-time employee typically pays half.

Maximizing deductions, while minimizing the chance of being audited can be simplified by using such software products as Quicken or QuickBooks.

A professional, such as a Certified Public Accountant, stays abreast of any changes, like the recent increase to 58.5 cents allowed, effective July 1, 2008 as a travel deduction.

There are always changes in the tax code you might not be aware of or might have forgotten.  You should have adequate support for all of your deductions.  Such tools as a travel log should support your deductions for travel and entertainment.

Some people may deduct a portion of their living expense but the space must be used exclusively and regularly for work.  You shouldn’t have an exercise bike or TV in that space.

How to maximize retirement savings

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  1. Children earning limited amount while students.
    • One can make a limited contribution to an individual retirement account. That amount, however, is limited to 100 percent of earned income or $4,000. Since earned income is not taxed at the “Kiddie Tax” rates, it would make more sense for such a contribution to be made to a Roth IRA instead of the traditional IRA.
  2. Students working before going to grad school.
    • The college grads could contribute to a traditional IRA while working. This would entitle them to the contribution deduction which could be converted to a Roth IRA.
  3. Employers matching 401 (k) contributions.
    • The employee should maximize, at least to the extent that an employer matches them under the plan. The incremental value of the 401 (k) account balance will be quite rewarding if their contributions, employer matching and the tax deferred earnings are compounded every year.
  4. Resist opportunity to withdraw.
    • Once money is withdrawn, it cannot be re-contributed back into the account (except in certain instances when re-contribution is within 60 days or within the same taxable year).
  5. Use regular savings.
    • Employees 55 and over may be able to make an additional contribution. The maximum contributions have also increased. The amount for the additional contribution in 2007 is $15,500, and $5,000 for the maximum.

Tax Tips for Individuals

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Letter Ruling 200521003 issued by the IRS allowed the parents of two learning disabled children to claim a medical deduction for the school tuition paid for the children. Since regular school is not designed to deal with learning disabilities, regular school education is not medical care.

This ruling dealt specifically with children who were diagnosed with learning disabilities, including dyslexia. The intention of the program was to eventually allow them to assimilate into a regular public school. The parents felt that they were allowed to deduct the full tuition as a medical expense. The fact that the school was designated as a “special school” was not the controlling faction in allowing the deduction. The deduction depends on the curriculum of the school for the children with special needs. The determining questions are, “Is the special education designed to alleviate the disorder ?” and “Why is the student attending that school?”

The dependent care credit is also available for a special needs child. The costs eligible for the credit if the dependent is physically or mentally unable to care for him/herself. Cloverdale education savings accounts (ESA) are also available to parents with children having special needs.

Internal Control Tips

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You may be the owner of a small/medium size business and ask yourself, What does SOX (Sarbanes-Oxley Act) have to do with my business? Since SOX was designed to protect investors and creditors of public companies, that does not mean that some provisions of the act cannot help your business. Section 404, specifically, requires management to report on the effectiveness of their internal financial controls.

Being aware of how such controls can impact a business can make the difference between a successful operation and a losing one. The main reasons that a small business may want to create strong internal controls are:

1). The focus of strong internal controls is on getting the financial statements right. This can address and help prevent future or potential problems.

2). An outside party such as a banker or accountant recommends it.

3). It can solve present business problems and/or help prevent fraud.

4). The potential to go public.

5). A Sox-compliant customer may require it.