|TAX Planning – Common Mistakes / Errors costs thousands of your hard earned money.
Tax filing is here once again. Well once quoted, “Death and Tax are the two things that are inevitable. Your hard earned money is not yours to keep. IRS is waiting for a big chunk of it as its share and if your tax return is prepared like usually done ignoring the tax saving opportunities, you will end up forking a big share of your money to IRS. The most common mistakes tax filer do are:#1: Failing to Plan
Right tax planning approach is about giving you a plan for minimizing your taxes.
- What should you do?
- When should you do it?
- How should you do it?
Our tax planning has two more powerful advantages.
First, it’s the key to your financial defenses. As a business owner, you have two ways to put cash in your pocket.
Financial offense is making more.
Financial defense is spending less. For most of us, taxes are our biggest expense. So it makes sense to focus our financial defense where we spend the most.
#2: Misunderstanding Audit Odds
The second big mistake is nearly as important as the first, and that’s fearing, rather than respecting the IRS.
What does the kind of tax planning we’re talking about do to your odds of being audited? The truth is, most experts say it pays to be aggressive. That’s because overall audit odds are so low, that most legitimate deductions aren’t likely to wave “red flags.”
Audit rates are actually at historic lows. The IRS primarily targets small businesses, especially sole proprietorships, and cash industries like pizza parlors and coin-operated laundromats with opportunities to hide income and skim profits. In fact, they publish a series of audit guides that you can download from their web site that tell you exactly what they’re looking for when they audit you!
#3: Too Much SE Tax
If you’re like most business owners, you pay as much in self-employment tax as you do in income tax. If that’s the case, you might consider setting up an “S” corporation or limited liability company to reduce that tax.
If you run your business as a sole proprietor, you’ll report your net income on Schedule C. You’ll pay tax at whatever your personal rate is. But you’ll also pay self-employment tax, of 15.3% on your first $94,200 of “net self-employment income” and 2.9% of anything above that.
Let’s say your profit at the end of the year is $60,000. You’ll pay regular tax at your regular rate, whatever that is. You’ll also pay about $9,000 in self-employment tax.
The self-employment tax replaces the Social Security and Medicare tax that your employer would pay and withhold if you weren’t self-employed. How many of you plan to retire on Social Security?
#4: Wrong Retirement Plan
Now let’s talk about the fourth mistake: choosing the wrong retirement plan.
If you’re looking to save more than the $5,000 limit for IRAs, you have three main choices: Simplified Employee Pensions, or “SEPs,” SIMPLE IRAs, or 401ks.
#5: Missing Family Employment
Now let’s talk about the fifth mistake: missing family employment. Hiring your children and grandchildren can be a great way to cut taxes on your income by shifting it to someone who pays less.
Yes, there’s a minimum age. They have to be at least seven years old.
Their first $5,450 of earned income is taxed at zero. That’s because it’s the standard deduction for a single taxpayer – even if you claim them as your dependent. Their next $8,026 is taxed at just 10%. So you can shift a lot of income downstream.
You have to pay them a “reasonable” wage for the service they perform. The Tax Court says a “reasonable wage” is what you’d pay a commercial vendor for the same service, with an adjustment made for the child’s age and experience. So, if your 12-year-old son cuts grass for your rental properties, pay him what a landscaping service might charge. If your 15-year-old helps keep your books, pay him a bit less than a bookkeeping service might charge. Does anyone have a teenager who helps with your web site? What would you pay a commercial designer for that service?
#6: Missing Medical Benefits
Now let’s talk about health-care costs. Surveys used to show that taxes used to be small business owners’ biggest concern. Now it’s rising health care costs.
If you pay for your own health insurance, you can deduct it as an adjustment to income on Page 1 of Form 1040. If you itemize deductions, you can deduct unreimbursed medical and dental expenses on Schedule A, if they total more than 7.5% of your adjusted gross income. But most of us don’t spend that much.
What if there was a way to write off medical bills as business expenses? There is, and it’s called a Medical Expense Reimbursement Plan, or Section 105 Plan.
This is an employee benefit plan, which means it requires an employee. If you operate your business as a sole proprietorship, partnership, LLC, or S corporation, you’re considered self-employed. So, if you’re married, hire your spouse. If you’re not married, you can do this with a C corporation. But you don’t have to be incorporated. You can do it as a sole proprietor or LLC by hiring your spouse.
The one exception is the S corporation. If you own more than 2% of the stock, you and your spouse are both considered self-employed for purposes of this rule. You’ll need to use another source of income, not taxed as an S corporation, as the basis for this plan.
#7: Missing A Home Office
You can use home office expenses to shelter profits, but not below zero. If your home office expenses exceed your net business income, you can carry forward those excess losses to future years.
When you sell your home, you’ll have to recapture any depreciation you claimed or could have claimed after May 6, 1997. You can still claim the $500,000 tax-free exclusion for home office space unless it’s a “separate dwelling unit.
#8: Missing Car/Truck Expenses
Now let’s talk about car and truck expenses. I don’t want to take too much time here, but I do want to point out the most common mistake clients make with these expenses, ie; mileage reimbursement of 50.5 cents.
Each one of us drive variety of different automobiles with wide range of cost factors associated to it. However, deduction is the same for everyone, no matter what we drive. Do you think we all spend the same to operate our cars?
It might surprise you to see how much it really costs to operate your car. And it’s probably more than 50.5 cents per mile!
Every year, AAA publishes a vehicle operating cost survey. Costs vary according to how much you drive – but if you’re taking the standard deduction for a car that costs more than 50.5 cents/mile, you’re losing money every time you turn the key.If you’re taking the standard deduction now, you can switch to the “actual expense” method if you own your car, but not if you lease. You can’t switch from actual expenses to the mileage allowance if you’ve taken accelerated depreciation.
#9: Missing Meals/Entertainment
Let’s finish up with some fun deductions for meals and entertainment. The basic rule is that you can deduct cost for meals with a bona fide business purpose. This means clients, prospects, referral sources, and business colleagues. And let me ask you – when do you ever eat with someone who’s not a client, prospect, referral source, or business colleague? If you’re in a business like real estate, insurance, or investments, where you’re marketing yourself, the answer might be “never.” Be as aggressive as you can with what you define as bona fide business discussion!
The general rule is, you can deduct 50% of your meals and entertainment, so long as it isn’t “lavish or extraordinary.” The IRS knows you have to eat, so you can’t deduct it all. But they’ll meet you halfway.
You don’t need receipts for expenses under $75. But you do need to record the five pieces of information in your business diary or records. And you should do it as close to daily as possible. The IRS wants to know how the cost of the meal, the date of the meal, the place where it takes place, the business purpose of your discussion, and your business relationship with your guest.
How many of you entertain at home? Do you ever discuss business? Are you deducting those meals, too? There’s no requirement that you eat out. Don’t forget to deduct home entertainment expenses too!
You can deduct entertainment expenses if they take place directly before or after substantial, bona fide discussion directly related to the active conduct of your business. You can deduct the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips.
#10: Missing Tax Expert Advice
Now that you see how business owners miss out on tax breaks, let’s talk about the biggest mistake of all.
What mistake is that?
The biggest mistake of all is failing to plan. Have you all heard the saying “if you fail to plan, you plan to fail”? It’s a cliché because it’s true. Fortunately, our tax planning service avoids the problem.
We offer true tax planning. We’ll tell you what to do, when to do it, and how to do it.
We start with a three-page “check the box” questionnaire that takes 5 minutes to fill out.
Then we prepare a written tax plan that addresses you family, home, and job, your business, and your investments.
We’ll even review your last three years’ tax returns to see if we can find savings you overlooked.
If you’re serious about the strategies, then why not give it a try?
For further information, please call 248-982-2036 or click here to send the message.