10 most expensive tax mistakes that cost business owners thousands

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10 Most Expensive 10 Most Expensive Tax Mistakes That Tax Mistakes That Cost Business Cost Business Owners Thousands Owners Thousands VJN Associates VJN Associates CPAs CPAs 112 West 34 112 West 34 th th Street Street New York, NY 10120 New York, NY 10120

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10 Most Expensive Tax Mistakes That Cost Business Owners Thousands. VJN Associates CPAs 112 West 34 th Street New York, NY 10120. #1: Failing to Plan. “There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that.” - PowerPoint PPT Presentation

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Page 1: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

10 Most Expensive Tax 10 Most Expensive Tax Mistakes That Cost Mistakes That Cost Business Owners Business Owners

ThousandsThousands

VJN Associates CPAsVJN Associates CPAs

112 West 34112 West 34thth Street Street

New York, NY 10120New York, NY 10120

Page 2: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#1: Failing to Plan#1: Failing to Plan

““There is nothing wrong with a There is nothing wrong with a strategy to avoid the payment of strategy to avoid the payment of taxes. The Internal Revenue Code taxes. The Internal Revenue Code doesn’t prevent that.”doesn’t prevent that.”

William H. RehnquistWilliam H. Rehnquist

Page 3: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Why Tax Planning?Why Tax Planning?

1.1. Key to financial Key to financial defensedefense

2.2. Guarantee resultsGuarantee results

Page 4: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Taxable IncomeTaxable Income

Add Taxable IncomeAdd Taxable Income

minus Adjustments to Income

minus Deductions

times Tax Bracket

minus Tax Credits

Earned incomeEarned income Interest/dividendsInterest/dividends Capital gainsCapital gains Pension/IRA/AnnuityPension/IRA/Annuity Rent/royaltyRent/royalty AlimonyAlimony Gambling winningsGambling winnings Illegal incomeIllegal income

Page 5: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Add Taxable Income

Adjustments to IncomeAdjustments to Income

minus Deductions

times Tax Bracket

minus Tax Credits

IRA contributionsIRA contributions Moving expensesMoving expenses ½ SE tax½ SE tax SE health insuranceSE health insurance RetirementRetirement AlimonyAlimony Student loan interestStudent loan interest

minusminus Adjustments to Income Adjustments to Income

Page 6: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Deductions/ExemptionsDeductions/Exemptions

Add Taxable Income

minus Adjustments to Income

minusminus Deductions/ExemptionsDeductions/Exemptions

times Tax Bracket

minus Tax Credits

Medical/dentalMedical/dental State/local taxesState/local taxes Foreign taxesForeign taxes InterestInterest Casualty/theft lossesCasualty/theft losses Charitable giftsCharitable gifts Miscellaneous Miscellaneous

itemized deductionsitemized deductions

Page 7: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Tax Brackets

Add Taxable Income

minus Adjustments to Income

minus Deductions

timestimes Tax BracketTax Bracket

minus Tax Credits

Rate Single Joint

10% 0 0

15% 8,951 17,901

25% 36,251 72,501

28% 87,851 146,401

33% 183,251 223,051

35% 398,351 398,351

39.6% 400,000 450,000

Page 8: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Tax CreditsTax Credits

Add Taxable Income

minus Adjustments to Income

minus Deductions

times Tax Bracket

minus minus Tax CreditsTax Credits

Family creditsFamily credits Education creditsEducation credits Foreign taxForeign tax General business General business Low-income housingLow-income housing RenovationRenovation

Page 9: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Two Kinds of DollarsTwo Kinds of Dollars

Add Taxable Income

minus Adjustments to Income

minus Deductions

times Tax Bracket

minus Tax Credits

Pre-Tax Dollars

After-Tax Dollars

Page 10: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Keys to Cutting TaxKeys to Cutting Tax

1.1. Earn nontaxable incomeEarn nontaxable income2.2. Maximize deductions and creditsMaximize deductions and credits3.3. Shift income: later years, lower bracketsShift income: later years, lower brackets

“You lose every time you spend after-tax dollars that could have been pre-tax dollars.”

Page 11: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#2: “Audit Paranoia”#2: “Audit Paranoia”

0.40%

0.40%

4.10%

2.90%

1.30%

S-Corp

Partnership

Schedule C: $100,000+

Schedule C: $25,000-99,999

Schedule C: $0-24,999

Page 12: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#3: Wrong Business Entity#3: Wrong Business Entity

Page 13: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Sole ProprietorshipSole Proprietorship

Report net income on Schedule C

Pay SE tax up to 15.3% on

income

Pay income tax on net

income

Page 14: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

S-CorporationS-Corporation

Split proceeds into “salary” and “income”

Pay FICA up to 15.3% on salary

Avoid FICA/SE tax on income

SalarySalary IncomeIncome

Pay income tax on salary and income

Page 15: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Employment Tax ComparisonEmployment Tax Comparison

S-Corp FICA

Salary $40,000

FICA $6,120

Net $73,880

Proprietorship SE

Income $80,000

SE Tax $11,304

Net $68,696

S-Corp Saves

$5,184

Page 16: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#4: Wrong Retirement Plan#4: Wrong Retirement Plan

Page 17: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Simplified Employee PensionSimplified Employee Pension

““Turbocharged” IRATurbocharged” IRA Contribute up to 25% of Contribute up to 25% of

incomeincome Max. contribution: $49,000Max. contribution: $49,000 Must contribute for all Must contribute for all

eligible employeeseligible employees Contributions directed to Contributions directed to

employee IRAsemployee IRAs No annual administrationNo annual administration

Page 18: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

SIMPLE IRASIMPLE IRA

Defer 100% of income up to Defer 100% of income up to $11,500$11,500

Age 50+ add $2,500 “catch Age 50+ add $2,500 “catch up”up”

Business “match” or “PS”Business “match” or “PS” Contribute to IRAsContribute to IRAs No annual administrationNo annual administration

Page 19: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

401(k)401(k)

Defer 100% of income up to Defer 100% of income up to $16,500$16,500

Age 50+ add $5,500 “catch Age 50+ add $5,500 “catch up”up”

Employer contributes up to Employer contributes up to 25% of “covered comp”25% of “covered comp”

Max. contribution: $49,000 Max. contribution: $49,000 Loans, hardship Loans, hardship

withdrawals, rollovers, etc.withdrawals, rollovers, etc. Simplified administration for Simplified administration for

“individual” 401(k)“individual” 401(k)

Page 20: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Defined Benefit PlanDefined Benefit Plan

Guarantee up to $185,000Guarantee up to $185,000 Contribute according to Contribute according to

age and salaryage and salary Required contributionsRequired contributions ““412(i)” insured plan412(i)” insured plan ““Dual” plansDual” plans

AgeAge RegularRegular 412(i)412(i)

4545 $80,278$80,278 $164,97$164,9700

5050 $133,13$133,1311

$258,01$258,0199

5555 $211,44$211,4488

$395,63$395,6344

6060 $236,91$236,9100

$450,11$450,1122

Projections based on retirement at age 62 Projections based on retirement at age 62 with $165,000 annual pretax income.with $165,000 annual pretax income.

Page 21: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#5: Missing Family #5: Missing Family EmploymentEmployment

Children age 7+Children age 7+ First $6,100 tax-freeFirst $6,100 tax-free Next $8,950 taxed at 10%Next $8,950 taxed at 10% ““Reasonable” wagesReasonable” wages Written job description, timesheet, checkWritten job description, timesheet, check Account in child’s nameAccount in child’s name FICA/FUTA savingsFICA/FUTA savings

Page 22: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#5: Missing Family #5: Missing Family EmploymentEmployment

Children age 7+Children age 7+ First $6,100 tax-freeFirst $6,100 tax-free Next $8,950 taxed at 10%Next $8,950 taxed at 10% ““Reasonable” wagesReasonable” wages Written job description, timesheet, checkWritten job description, timesheet, check Account in child’s nameAccount in child’s name FICA/FUTA savingsFICA/FUTA savings

Page 23: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#6: Missing Medical Benefits#6: Missing Medical Benefits

Employee benefit planEmployee benefit plan– Married: Hire spouse (no salary necessary)Married: Hire spouse (no salary necessary)– Not married: C-corpNot married: C-corp

Reimburse Reimburse employeeemployee for medical expenses for medical expenses incurred for self, spouse, and dependents incurred for self, spouse, and dependents Works with any insuranceWorks with any insurance

– Use your own insuranceUse your own insurance– Supplement spouse’s coverageSupplement spouse’s coverage

Page 24: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

MERP/105 PlanMERP/105 Plan

Major medical, LTC, Medicare, “Medigap”Major medical, LTC, Medicare, “Medigap” Co-pays, deductibles, prescriptionsCo-pays, deductibles, prescriptions Dental, vision, and chiropracticDental, vision, and chiropractic Braces, fertility treatments, special schoolsBraces, fertility treatments, special schools Nonprescription medications and suppliesNonprescription medications and supplies

Page 25: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

MERP/105 PlanMERP/105 Plan

Written plan documentWritten plan document No pre-funding requiredNo pre-funding required

– Reimburse employeeReimburse employee– Pay provider directlyPay provider directly

Bypass 7.5% floorBypass 7.5% floor Minimize self-employment taxMinimize self-employment tax

Page 26: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

Health Savings AccountHealth Savings Account

1.1. ““High deductible health plan”High deductible health plan” - $1,250+ deductible (individual coverage)- $1,250+ deductible (individual coverage) - $2,500+ deductible (family coverage)- $2,500+ deductible (family coverage)

PlusPlus

2.2. Tax-deductible “Health Savings Account”Tax-deductible “Health Savings Account”- Contribute & deduct up to $3,250/$6,450 per yearContribute & deduct up to $3,250/$6,450 per year- Account grows tax-freeAccount grows tax-free- Tax-free withdrawals for qualified expensesTax-free withdrawals for qualified expenses

Page 27: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#7: Missing A Home Office#7: Missing A Home Office

““Principal place of business”: Principal place of business”: 1.1. ““exclusively and regularly for administrative exclusively and regularly for administrative

or management activities of your trade or or management activities of your trade or business”business”

2.2. ““you have no other fixed location where you you have no other fixed location where you conduct substantial administrative or conduct substantial administrative or management activities of your trade or management activities of your trade or business.” business.”

Source: IRS Publication 587Source: IRS Publication 587

Page 28: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#7: Missing Home Office#7: Missing Home Office

Determine “BUP” of homeDetermine “BUP” of home– Divide by roomsDivide by rooms

– Square footageSquare footage

– Eliminate “common areas”Eliminate “common areas”

144

1500

100

Page 29: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#7: Missing Home Office#7: Missing Home Office

Deduct “BUP” of expenses:Deduct “BUP” of expenses:– Mortgage/property taxes Mortgage/property taxes

(better than Schedule A)(better than Schedule A)– Utilities/security/cleaningUtilities/security/cleaning– Office furniture/decorOffice furniture/decor– Depreciation (39 years)Depreciation (39 years)

Increase business milesIncrease business miles

Page 30: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#7: Missing Home Office#7: Missing Home Office

When you sell:When you sell:– Recapture depreciationRecapture depreciation– KeepKeep tax-free exclusion tax-free exclusion

Page 31: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#8: Missing Car/Truck Expenses#8: Missing Car/Truck Expenses

AAA Driving Costs Survey AAA Driving Costs Survey (2012)(2012)

VehicleVehicle Cents/MileCents/Mile

Small SedanSmall Sedan 44.944.9

Medium SedanMedium Sedan 58.558.5

Large SedanLarge Sedan 75.575.5

4WD SUV4WD SUV 75.775.7

MinivanMinivan 63.463.4Figures assume 15,000 miles/year; $3.36/gallon gasFigures assume 15,000 miles/year; $3.36/gallon gas

Page 32: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#9: Missing #9: Missing Meals/EntertainmentMeals/Entertainment

Bona fideBona fide business discussion business discussion– ClientsClients– ProspectsProspects– Referral SourcesReferral Sources– Business colleaguesBusiness colleagues

50% of most expenses 50% of most expenses Home entertainmentHome entertainment Associated entertainmentAssociated entertainment

Page 33: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#9: Missing #9: Missing Meals/EntertainmentMeals/Entertainment

How much?How much? When?When? Where?Where? Business purpose?Business purpose? Business relationship?Business relationship?

Page 34: 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands

#10: Missing Tax Coaching #10: Missing Tax Coaching ServiceService

TrueTrue Tax Planning Tax Planning Written Tax PlanWritten Tax Plan

– Family, Home, and JobFamily, Home, and Job– BusinessBusiness– InvestmentsInvestments

Review ReturnsReview Returns