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10 Most Expensive Tax Mistakes That Cost Business Owners Thousands Dirk Dixon, LPA 8033 University Blvd Suite C Clive, IA 50325 Baker & Associates, LLP.

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Presentation on theme: "10 Most Expensive Tax Mistakes That Cost Business Owners Thousands Dirk Dixon, LPA 8033 University Blvd Suite C Clive, IA 50325 Baker & Associates, LLP."— Presentation transcript:

1 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands Dirk Dixon, LPA 8033 University Blvd Suite C Clive, IA Baker & Associates, LLP Certified Public Accountants and Business Consultants

2 #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.” “There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that.” William H. Rehnquist William H. Rehnquist 1. Tax planning is financial defense 2. Tax planning guarantees results

3 Taxable Income  Add Taxable Income  minus Adjustments to Income  minus Deductions  times Tax Bracket  minus Tax Credits Earned income Earned income Interest/dividends Interest/dividends Capital gains Capital gains Pension/IRA/Annuity Pension/IRA/Annuity Rent/royalty Rent/royalty Alimony Alimony Gambling winnings Gambling winnings Illegal income Illegal income

4 Add Taxable Income  Add Taxable Income Adjustments to Income  minus Deductions  times Tax Bracket  minus Tax Credits IRA contributions IRA contributions Moving expenses Moving expenses ½ SE tax ½ SE tax SE health insurance SE health insurance Keogh/SEP Keogh/SEP Alimony Alimony Student loan interest Student loan interest  minus Adjustments to Income

5 Deductions/Exemptions  Add Taxable Income  minus Adjustments to Income  minus Deductions/Exemptions  times Tax Bracket  minus Tax Credits Medical/dental Medical/dental State/local taxes State/local taxes Foreign taxes Foreign taxes Interest Interest Casualty/theft losses Casualty/theft losses Charitable gifts Charitable gifts Miscellaneous itemized deductions Miscellaneous itemized deductions

6 Tax Brackets  Add Taxable Income  minus Adjustments to Income  minus Deductions  times Tax Bracket  minus Tax Credits RateSingleHoHJoint 10% % 8,02616,051 25% 32, ,101 28% 78,851112,651131,451 33% 164,551182,401200,301 35% 357,701

7 Tax Credits  Add Taxable Income  minus Adjustments to Income  minus Deductions  times Tax Bracket  minus Tax Credits Family credits Family credits Education credits Education credits Foreign tax Foreign tax General business General business Low-income housing Low-income housing Renovation Renovation

8 Two Kinds of Dollars  Add Taxable Income  minus Adjustments to Income  minus Deductions  times Tax Bracket  minus Tax Credits Pre-Tax Dollars After-Tax Dollars

9 Keys to Cutting Tax 1. Earn as much nontaxable income as possible 2. Make the most of adjustments/deductions/credits 3. Shift income to later years and lower-brackets “You lose every time you spend after-tax dollars that could have been pre-tax dollars.”

10 #2: Misunderstanding Audit Odds FilerFY 2004FY 2005FY 2006 Form 1040 (by Income) $ 0 – 24, %1.46%1.49% $ 25,000 – 49, %0.60%0.62% $ 50,000 – 99, %0.57%0.62% $100, %1.41%1.29% $1,000,000+N/A5.2%N/A Schedule C (by Gross Receipts) $ 0 – 24, %3.88%3.78% $ 25,000 – 99, %3.31%2.09% $100, %3.85%3.90% S Corp (Form 1120S)0.19%0.30%0.38% LLC/Partnership (Form 1065)0.26%0.33%0.35%

11 #3: Too Much SE Tax 1. Report net income on Schedule C Pay SE tax up to 15.3% on net profits

12 Proprietorship vs. S Corp 1. Report net income on Schedule C Pay SE tax up to 15.3% on net profits 1. Split income into wages and pass-thru WagePass-Thru

13 Proprietorship vs. S Corp 1. Report net income on Schedule C Pay SE tax up to 15.3% on net profits 1. Split income into wages and pass-thru 2. Pay FICA tax up to 15.3% of wages WagePass-Thru

14 Proprietorship vs. S Corp 1. Report net income on Schedule C Pay SE tax up to 15.3% on net profits 1. Split income into wages and pass-thru 2. Pay FICA tax up to 15.3% of wages 3. Avoid SE tax on pass-thru WagePass-Thru

15 Proprietorship vs. S Corp 1. Report net income on Schedule C Pay SE tax up to 15.3% on net profits Wage Shift income to lower-bracket family Pass-Thru Pass-Thru

16 Entity Comparison Proprietor S Corp State Filing NoneArticles IRS Filing None EIN/S Election MeetingsNoneAnnual Owner Payroll None FICA, UC,WC SE Tax Net income Salary Only File Schedule C 1120S + K1 Income Split? NoYes

17 #4: Wrong Retirement Plan

18 Simplified Employee Pension “Turbocharged” IRA “Turbocharged” IRA Self-employeds contribute up to 25% of “net SE income” Self-employeds contribute up to 25% of “net SE income” Corporations contribute up to 25% of “covered comp” Corporations contribute up to 25% of “covered comp” Max. contribution: $46,000 Max. contribution: $46,000 Must contribute for all eligible employees Must contribute for all eligible employees Contributions directed to employee IRAs Contributions directed to employee IRAs No annual administration No annual administration

19 SIMPLE IRA Employees defer up to 100% of income or $10,500 Employees defer up to 100% of income or $10,500 Employees age 50+ can add $2,000 “catch up” Employees age 50+ can add $2,000 “catch up” Business “match” or “PS” Business “match” or “PS” –Match $-for-$ up to 3% –Profit share = 2% of income Contribute to SIMPLE- IRAs Contribute to SIMPLE- IRAs No annual administration No annual administration

20 401(k) Employees defer 100% of income up to $15,500 Employees defer 100% of income up to $15,500 Employees age 50+ can add $5,000 “catch up” Employees age 50+ can add $5,000 “catch up” Employer contributes up to 25% of “covered comp” Employer contributes up to 25% of “covered comp” Max. contribution: $45,000 Max. contribution: $45,000 Loans, hardship withdrawals, rollovers, etc. Loans, hardship withdrawals, rollovers, etc. Simplified administration for “individual” 401(k) Simplified administration for “individual” 401(k)

21 Defined Benefit Plan Guarantee up to $175,000 annual retirement income Guarantee up to $175,000 annual retirement income Calculate contributions according to current age, retirement age, and salary Calculate contributions according to current age, retirement age, and salary Required annual contributions Required annual contributions “412(i)” fully-insured plan “412(i)” fully-insured plan “Dual” plans for more flexibility “Dual” plans for more flexibility AgeRegular412(i) 45$80,278$164,970 50$133,131$258,019 55$211,448$395,634 60$236,910$450,112 Projections based on retirement at age 62 with $165,000 annual pretax income.

22 #5: Missing Family Employment Children age 7+ Children age 7+ First $5,450 tax-free First $5,450 tax-free Next $8,025 taxed at 10% Next $8,025 taxed at 10% “Reasonable” wages “Reasonable” wages Written job description, timesheet, check Written job description, timesheet, check Account in child’s name Account in child’s name FICA/FUTA savings FICA/FUTA savings

23 #5: Missing Family Employment Children age 7+ Children age 7+ First $5,450 tax-free First $5,450 tax-free Next $8,025 taxed at 10% Next $8,025 taxed at 10% “Reasonable” wages “Reasonable” wages Written job description, timesheet, check Written job description, timesheet, check Account in child’s name Account in child’s name FICA/FUTA savings FICA/FUTA savings

24 #6: Missing Medical Benefits Employee benefit plan Employee benefit plan – Married: Hire spouse (no salary necessary) – Not married: C-corp Reimburse employee for medical expenses incurred for self, spouse, and dependents Reimburse employee for medical expenses incurred for self, spouse, and dependents Works with any insurance Works with any insurance – Use your own insurance – Supplement spouse’s coverage

25 MERP/105 Plan Major medical, LTC, Medicare, “Medigap” Major medical, LTC, Medicare, “Medigap” Co-pays, deductibles, prescriptions Co-pays, deductibles, prescriptions Dental, vision, and chiropractic Dental, vision, and chiropractic Braces, fertility treatments, special schools Braces, fertility treatments, special schools Nonprescription medications and supplies Nonprescription medications and supplies

26 MERP/105 Plan Written plan document Written plan document No pre-funding required No pre-funding required – Reimburse employee – Pay provider directly Bypass 7.5% floor Bypass 7.5% floor Minimize self-employment tax Minimize self-employment tax

27 Health Savings Account 1. “High deductible health plan” - $1,950+ deductible (individual coverage) - $1,950+ deductible (individual coverage) - $3,850+ deductible (family coverage) - $3,850+ deductible (family coverage) Plus Plus 2. Tax-deductible “Health Savings Account” -Contribute & deduct up to $2,900/$5,800 per year -Account grows tax-free -Tax-free withdrawals for qualified expenses

28 Example Before $900/month premium –no deductible/out-of-pocket –$15 co-pays –$10/$20/$40 drug card $10,800 minimum/year –$2,700 federal savings –$ 0 SE tax savings $ 8,100 after-tax cost After $265/month premium –$5000 out-of-pocket max –80/20 drug co-pay –100% after o-o-p max $8,180 maximum/year –$2,045 federal tax savings –$1,156 SE tax savings $4,979 after-tax cost Owner/spouse/2 children 31% federal/state tax 15.3% self-employment tax

29 #7: Missing A Home Office Determine “BUP” of home Determine “BUP” of home –Divide by rooms –Square footage –Eliminate “common areas”

30 #7: Missing A Home Office Deduct “BUP” of expenses: Deduct “BUP” of expenses: –Mortgage/property taxes (better than Schedule A) –Utilities/security/cleaning –Office furniture/decor –Depreciation (39 years) “Footie pajama” commute “Footie pajama” commute

31 #7: Missing A Home Office When you sell: When you sell: –Recapture depreciation –Keep tax-free exclusion

32 #8: Missing Car/Truck Expenses AAA Driving Costs Survey (2007) VehicleCents/Mile Small Sedan 41.4 Medium Sedan 52.5 Large Sedan WD SUV 66.6 Minivan57.6 Figures assume 15,000 miles/year; $2.256/gallon gas

33 #9: Missing Meals/Entertainment Bona fide business discussion Bona fide business discussion –Clients –Prospects –Referral Sources –Business colleagues 50% of most expenses 50% of most expenses Home entertainment Home entertainment Associated entertainment Associated entertainment How much? How much? When? When? Where? Where? Business purpose? Business purpose? Business relationship? Business relationship?

34 #10: Missing Tax Coaching Service True Tax Planning True Tax Planning Written Tax Plan Written Tax Plan –Family, Home, and Job –Business –Investments Review Returns Review Returns


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