10 most expensive tax mistakes

10 Most Expensive Tax Mistakes That Cost Business Owners

Thousands

Q: Are you satisfied with the taxes

you pay?

Q: Are you confident you’re taking

advantage of every available break?

Q: Is your tax advisor giving you

proactive advice to save on taxes?

I’ve got bad news and I’ve got good news.

A: The bad news is, you’re right. You do pay too

much tax. You’re probably not taking advantage of

every tax break you can. And most advisors do a poor

job of actually saving their clients money.

A: The good news is, you don’t have to feel that

way. You just need a better plan. Today, we’re

going to talk about some of the biggest mistakes that

business owners make. Then we’ll talk about how to

solve them.

#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.”

William H. Rehnquist

#1: Failing to Plan

The first mistake is the biggest mistake of all.

It’s failing to plan.

I don’t care how good you and your tax

preparer are with a stack of receipts on April

15. If you didn’t know you could write off

your kid’s braces as a business expense,

there’s nothing we can do.

Why Tax Planning?

1. Key to financial defense

2. Guarantee results

Why Tax Planning?

Tax coaching is about giving you a plan for minimizing your taxes.

What should you do? When should you do it? How should you do it?

And tax planning gives you 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 in this room, taxes are

our biggest expense. So it makes sense to focus our financial defense

where we spend the most. Sure, you can save 15% on car insurance by

switching to GEICO. (Everybody knows that!) But how much will that

really save in the long run?

And second, tax planning guarantees results. You can spend all sorts of

time, effort, and money promoting your business. But that can’t

guarantee results. Or you can set up a medical expense reimbursement

plan, deduct your daughter’s braces, and guarantee savings.

Taxable Income

Taxable Income

Let’s start by taking a quick look at how the tax system

works. This will “lay a foundation” for understanding

the specific strategies we’ll be talking about soon.

The process starts with income. And this includes most

of what you’d think the IRS is interested in:

• Earned income from wages, salaries, bonuses, and

commissions.

• Profits and losses from your own business.

• Interest and dividends from bank accounts, stocks,

bonds, and mutual funds.

Taxable Income

• Capital gains from property sales.

• Pensions, IRAs, and annuity income.

• Alimony and gambling winning.

• Even illegal income is taxable. The IRS doesn’t care

how you make it; they just want their share! (The good

news is, if you’re operating an illegal business, you

can deduct the same expenses as if you were running a

legitimate business. If you’re a bookie, you can deduct

the cost of a cell phone you use to take bets.

Adjustments to Income

Adjustments to Income

Once you’ve added up total income, it’s time to start subtracting

“adjustments to income.” These are a group of special deductions,

listed on the first page of Form 1040, that you can take whether you

itemize deductions or not. Total income minus adjustments to income

equals “adjusted gross income” or “AGI.” Adjustments to income are

also called “above the line” deductions, because you take them

“above” AGI.

Adjustments include IRA contributions, moving expenses, half of your

self-employment tax, self-employed health insurance, self-employed

retirement plan contributions, alimony you pay, and student loan

interest.

Deductions/Exemptions

Add Taxable Income

minus Adjustments to Income

minus Deductions/Exemptions

times Tax Bracket

minus Tax Credits

Medical/dental

State/local taxes

Foreign taxes

Interest

Casualty/theft losses

Charitable gifts

Miscellaneous itemized

deductions

Standard or Itemized Deductions?

Once you’ve determined adjusted gross income, you can take a

standard deduction or itemized deductions, whichever is greater. The

standard deduction for 2015 is $6,300 for single taxpayers, $9,250 for

heads of households, $12,600 for joint filers, and $6,300 each for

married couples filing separately.

Tax deductions reduce your taxable income. If you’re in the 15%

bracket, an extra dollar of deductions cuts your tax by 15 cents. If

you’re in the 35% bracket, that same extra dollar of deductions cuts

your tax by 35 cents.

You can also deduct a personal exemption of $3,950 for yourself, your

spouse, and any dependents.

Tax Brackets

Add Taxable Income

minus Adjustments to Income

minus Deductions

times Tax Bracket

minus Tax Credits

Rate Single Joint

10% 0 0

15% 9,076 18,151

25% 36,901 73,8011

28% 89,351 148,851

33% 186,351 226,851

35% 405,101 405,101

39.6% 406,751 457,601

Tax Brackets (2015)

Rate Single Joint

10% 0 0

15% 9,226 18,451

25% 37,451 74,901

28% 90,751 151,201

33% 189,301 230,451

35% 411,501 411,501

39.6% 413,201 464,851

Tax Brackets (2015)

Once you’ve subtracted deductions and personal exemptions, you’ll have

taxable income. At that point, the table of tax brackets tells you how much to

pay.

You may also owe self-employment tax, which replaces Social Security and

Medicare for sole proprietors, partnerships, and LLCs. You’ll also owe state and

local income and earnings taxes.

Some types of income aren’t taxed at the regular rate. For example, tax on

“qualified corporate dividends” and long-term capital gains is capped at 20%.

There’s also a 3.8% “unearned income Medicare contribution” on investment

income for single taxpayers earning more than $200,000 and joint filers earning

more than $250,000. For purposes of this new rule, “investment income”

includes interest, dividends, capital gains, rental income, royalties, and annuity

distributions.

Tax Brackets (2015)

Oh, and don’t forget that your itemized deductions and personal

exemptions start phasing out once your income hits certain levels.

For 2014, those are $254,200 for singles and $305,050 for joint

filers.

The bottom line here is that “tax brackets” aren’t as simple as they

might appear. Your actual tax rate can be quite a bit higher than

your supposed “tax bracket.”

Tax Credits

Tax Credits

Finally, you’ll subtract any tax credits. These are dollar-

for-dollar tax reductions, regardless of your tax bracket.

So if you’re in the 15% bracket, a dollar’s worth of tax

credit cuts your tax by a full dollar. If you’re in the 35%

bracket, an extra dollar’s worth of tax credit cuts your

tax by the same dollar.

There’s no secret to tax credits, other than knowing

what’s out there.

Two Kinds of Dollars

Pre-Tax Dollars

After-Tax Dollars

Two Kinds of Dollars

Ultimately, there are two kinds of dollars

in this world: pre-tax dollars, and after-tax

dollars. Pre-tax dollars are great. And

after-tax dollars aren’t bad. But they’re

not as good as pre-tax dollars.

Keys to Cutting Tax

1. Earn nontaxable income

2. Maximize deductions and credits

3. Shift income: later years, lower brackets

“You lose every time you spend after-tax

dollars that could have been pre-tax dollars.”

Keys to Cutting Tax

So here’s the bottom line:

You lose . . . every time you spend after-tax dollars .

. . That could have been pre-tax dollars.

Let me repeat that.

You lose . . . every time you spend after-tax dollars .

. . That could have been pre-tax dollars.

Keys to Cutting Tax

We’re going to spend the rest of this presentation

talking about how to turn after-tax dollars into pre-

tax dollars. We’re going to use three primary

strategies.

First, earn as much nontaxable income as possible.

Second, make the most of adjustments to income,

deductions, and credits. There’s really no magic to

it, other than knowing what’s available.

Keys to Cutting Tax

Finally, shift income to later tax years and

lower-bracket taxpayers. This includes

making the most of tax-deferred retirement

plans and shifting income to lower-bracket

children, grandchildren and other family

members.

#2: “Audit Paranoia”


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. For 2014,

the overall audit rate was just one in every 100

returns. 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!


Take a look at the bottom of the chart. You’ll see

that the IRS audits just one-half of one percent of S

corporations and partnerships. If you’re really

worried about being audited, you might consider

reorganizing your business to help fly “under the

radar.”

#3: Wrong Business Entity

C-Corp?

S-Corp?

Partnership?

Sole Prop?

#3: Wrong Business Entity

The next mistake is choosing the wrong business entity.

Most business owners start as sole proprietors, then, as

they grow, establish a limited liability company or

corporation to help protect them from business liability.

But choosing the right business entity involves all sorts

of tax considerations as well. And many business

owners are operating with entities that may have been

appropriate when they were established – but just don’t

work as effectively now.

Sole Proprietorship Sole Proprietorship

Report net

income on

Schedule C

Pay SE tax up

to 15.3% on

income

Pay income

tax on net

income


I can’t make you an expert in business entities. But I

do want walk through one popular choice to illustrate

how important this question can be.

If you operate your business as a sole proprietorship,

or a single-member LLC taxed as a sole

proprietorship, you may 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

to reduce that tax.


If you’re taxed 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 $118,500 of

“net self-employment income” and 2.9% of anything

above that. You’ll also pay a new 0.9% surtax on any

earned income over $200,000 if you’re single,

$250,000 if you’re married filing jointly, or $125,000

if you’re married filing separately.


Let’s say your profit at the end of the year is $80,000.

You’ll pay regular tax at your regular rate, whatever

that is. You’ll also pay about $11,000 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?

S-Corporation

Split proceeds

into “salary”

and “income”

Pay FICA up to

15.3% on salary

Avoid FICA/SE

tax on income

Salary Income

Pay income

tax on salary

and income

S-Corporation

An “S” corporation is a special corporation that’s taxed like

a partnership. The corporation pays you a reasonable wage

for the work you do. If there’s any profit left over, it passes

through to you, and you pay the tax on that income on your

own return. So the S corporation splits the owners income

into two parts, wages and pass-through distributions.

Here’s why the S corporation is so attractive.

You’ll pay the same 15.3% tax on your wages as you

would on your self-employment income.

BUT – there’s no Social Security or self-employment tax

due on the dividend pass-through.

Employment 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

Employment Tax Comparison

Let’s say your S corporation earns the same $80,000 as

your proprietorship. If you pay yourself $40,000 in

wages, you’ll pay about $6,120 in Social Security.

But you’ll avoid employment tax on the income

distribution. And that saves you $5,184 in employment

tax you would have paid without the S-corporation.

#4: Wrong Retirement Plan

#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 $5,500 limit for

IRAs, you have three main choices: Simplified Employee

Pensions, or “SEPs,” SIMPLE IRAs, or 401ks.

I’m not here to make you an expert on retirement plans.

But I can help you decide pretty quickly if the plan you

have is right for you – or if you should be looking for

something more suited for your specific needs. So bear

with me, even if the next few slides look intimidating.

These are some very powerful strategies.

Simplified Employee Pension

“Turbocharged” IRA

Contribute up to 25% of

income

Max. contribution: $53,000

Must contribute for all

eligible employees

Contributions directed to

employee IRAs

No annual administration


The SEP is the easiest plan to set up because it’s just a

turbocharged IRA:

• If you’re self-employed, you can contribute up to 25%

of your “net self-employment income.”

• If your business is incorporated and you’re salaried,

you can contribute 25% of your “covered

compensation,” which is roughly the same as your

salary.

• The maximum contribution for 2015 is $53,000.


• If you’ve got employees, you’ll have to contribute for them, too.

You generally have to contribute the same percentage for your

employees as you do for yourself. However, you can use what’s

called an “integrated” formula to make extra contributions for

higher incomes.

• The money goes straight into employee IRA accounts. There’s no

annual administration or paperwork required. The SEP is easy to

adopt, easy to maintain, and flexible. If there’s no money to

contribute, you just don’t contribute. But the contribution is

limited to a percentage of your income. If you set up an S

corporation to limit self-employment tax, you’ll also limit your

SEP contribution.

SIMPLE IRA

Defer 100% of income up to

$11,500

Age 50+ add $2,500 “catch

up”

Business “match” or “PS”

Contribute to IRAs

No annual administration

SIMPLE IRA

The next step up the retirement plan ladder is the SIMPLE

IRA. This is another “turbocharged IRA that lets you

contribute more than the usual $5,500 limit:

You and your employees can contribute up to $12,500. If

you’re 50 or older you can make an extra $3,000 “catch

up” contribution. If your income is under $50,000, that

may be more than you could sock away with a SEP.

(That’s because $12,500 is more than 25% of whatever you

could contribute to a SEP.)

SIMPLE IRA

But - you have to match everyone’s deferral or make

profit-sharing contributions. You can match

everyone’s contribution dollar-for-dollar up to 3% of

their pay, or contribute 2% of everyone’s pay

whether they defer or not. If you choose the match,

you can reduce it as low as 1% for two years out of

five.

The money goes straight into employee IRAs. You

can designate a single financial institution to hold the

money, or let your employees choose.

SIMPLE IRA

Like the SEP, there’s no set-up charge or annual

administration fee.

The SIMPLE IRA may be best for part-time or

sideline businesses earning less than $50,000. You

can also hire your spouse or children, and they can

make SIMPLE contributions. We’ll be talking more

about those strategies in a few minutes.

401(k)

Defer 100% of income up to $17,500

Age 50+ add $5,500 “catch up”

Employer contributes up to 25% of “covered comp”

Max. contribution: $52,000

Loans, hardship withdrawals, rollovers, etc.

Simplified administration for “individual” 401(k)

401(k)

The final step up the ladder is the 401k. Most people think of

401ks as retirement plans for bigger businesses. But you can set

up what’s called a “solo” or “individual” 401k just for yourself.

The 401k is a true “qualified” plan. This means you’ll set up a

trust, adopt a written plan agreement, and choose a trustee. But

the 401k lets you contribute far more money, far more flexibly,

than either the SEP or the SIMPLE.

You and your employees can “defer” 100% of your income up

to $18,000. If you’re 50 or older, you can make an extra $6,000

“catch up” contribution.

401(k)

You can choose to match your employees

contributions, or make profit-sharing contributions

up to 25% of their pay. That’s the same percentage

you can save in your SEP – on top of the $18,000

deferral.

The maximum contribution for 2015 is $53,000 per

person, plus any “catch up” contributions.

401(k)

You can offer yourself and your employees loans,

hardship withdrawals, and all the bells and whistles “the

big boys” offer their employees.

401ks are generally more difficult to administer. There

are antidiscrimination rules to keep you from stuffing

your own account while you stiff your employees. If

you operate your business by yourself, you can establish

an “individual” 401k with less red tape. And again, you

can hire your spouse and contribute to their account.

Defined Benefit Plan

Guarantee up to $185,000

Contribute according to

age and salary

Required contributions

“412(i)” insured plan

“Dual” plans

Age Regular 412(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.


If you’re older, and you want to contribute more than the

$53,000 limit for SEPs or 401ks, consider a traditional

defined benefit pension plan:

Defined benefit plans let you guarantee up to $210,000 in

annual income.

You can contribute – and deduct – as much as you need to

finance that benefit. You’ll calculate those contributions

according to your age, your desired retirement age, your

current income, and various actuarial factors.


A 412(i) plan, which is funded entirely with life

insurance or annuities, lets you contribute even more.

Defined benefit plans have required annual

contributions. But you can combine a defined benefit

plan with a 401k or SEP to give yourself a little more

flexibility.

#5: Missing Family Employment

Children age 7+

First $6,300 tax-free

Next $9,225 taxed at 10%

“Reasonable” wages

Written job description, timesheet, check

Account in child’s name

FICA/FUTA savings


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 $6,300 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 $9,225 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?


To audit-proof your return, write out a job description and keep a

timesheet.

Pay by check, so you can document the payment.

You have to deposit the check into an account in the child’s name.

But it doesn’t have to be his pizza-and-Nintendo fund. It can be a

Roth IRA for decades of tax-free growth. It can be a Section 529

college savings plan. Or it can be a custodial account that you

control until they turn 21. Now, you can’t use money in a

custodial account for your obligations of parental support. But

private and parochial school aren’t obligations of parental support.

Sleepaway summer camp isn’t an obligation of parental support.


Let’s say your teenage daughter wants to spend two weeks at horse

camp. You can earn the fee yourself, pay tax on it, and pay for

camp with after-tax dollars. Or you can pay her to work in your

business, deposit the check in her custodial account, and then, as

custodian stroke the check to the camp. Hiring your daughter

effectively lets you deduct her camp as a business expense.

If you hire your child to work in an unincorporated business, you

don’t have to withhold for Social Security until they turn 18. So

this really is tax-free money. You’ll have to issue them a W-2 at

the end of the year. But this is painless compared to the tax you’ll

waste if you don’t take advantage of this strategy.

#6: Missing Medical Benefits

#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 10% of your

adjusted gross income. But most of us don’t spend that much.

What if there were 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.

“Employee” Benefit Plan

Business Entity How to Qualify

Proprietorship Hire Spouse

Partnership Hire Spouse (if <5% owner)

S-Corporation >2% Shareholders ineligible

C-Corporation Hire Self


The Section 105 plan is an “employee” benefit plan. That

means somebody needs to qualify as an employee. The

problem is, if you run your business as a sole

proprietorship (which includes a single-member LLC), a

partnership, or an S-corporation, you’re considered “self-

employed,’ and you can’t get benefits from the plan. So

you have to figure out another way to qualify:

If you’re a sole proprietor (or a single-member LLC

taxed as a proprietorship) and you’re married, you can

hire your spouse.


If you’re a partner in a partnership (or LLC taxed as a

partnership), you can hire your spouse so long as they don’t own

more than 5% of the business.

If you’re a shareholder or member in an entity taxed as an S-

corporation, you don’t qualify and your spouse doesn’t qualify.

Your best bet in that situation is to segregate part of your income

into a separate entity, such as a proprietorship or a C-

corporation, and run the plan through that entity.

Finally, if you run your business – or even just a part of your

overall business – as an entity taxed as a C-corporation, you do

qualify as an employee all by yourself.


By the way, you can also use the 105 plan for family

members other than your spouse. Let’s say you’re a

single mom working as a real estate agent. You can hire

your teenage child and use the plan to pay for their

eyeglasses, braces, or other medical costs. You can even

hire a retired parent to help cover their medical costs.

The “Fine Print”

Nondiscrimination:

Must cover all eligible employees

However, you can exclude:

– Under age 25

– less than 35 hours/week

– less than 9 months/year

– less than 3 years service

Controlled group rules

Affiliated service groups

The “Fine Print”

The plan has to cover all eligible employees. You can’t just cover

yourself or your family and exclude everyone else. However, there are

several “safe harbors” you can use to limit coverage. Specifically, you

can exclude:

Employees under age 25

Employees working less than 35 hours per week

Employees working less than nine months per year, and

Employees who have worked for you for less than three years.

There are a couple of other exclusions for larger employees – and the

IRS doesn’t pay a whole lot of attention in this area. But the fact remains

that you do have to cover all employees – so if you have nonfamily

employees and can’t exclude them under one of these rules, the 105 plan

may not be appropriate for you.

The Benefit

Reimburse medical expenses incurred for: – self

– spouse

– dependents

Not subject to 10% floor

Avoid self-employment tax

Supplement spouse’s coverage

The Benefit

Now for the benefit! Once you qualify, the plan lets

you reimburse your employee for all medical

expenses they incur for themselves, their spouse, and

their dependents.

Let’s say you’re a married sole proprietor and you

hire your spouse. You can reimburse them for all

medical expenses they incur for themselves, their

spouse (which means you), and your dependents.

The Benefit

Now you’ve taken what would probably have been a

nondeductible personal expense – and converted it into a

business expense.

You’ve avoided that 10% floor on itemized deductions.

And if you pay self-employment tax on your net income,

you’ll even avoid paying self-employment tax on the

money you deduct through the 105 plan. That’s another

15.3% or 2.9% or 3.8%, depending on your self-

employment income.

Eligible Expenses

Major medical, LTC, Medicare, “Medigap”

Co-pays, deductibles, prescriptions

Dental, vision, and chiropractic

Braces, LASIK, fertility, special schools

OTC medications (by prescription)

Eligible Expenses

What exactly can you deduct? Well, pretty much

everything you can think of!

This includes all the expenses you see listed here:

Major medical insurance, long-term care coverage,

Medicare Part B and D coverage, and Medigap

insurance.

Co-pays, deductibles, and prescriptions.

Eligible Expenses

Dental, vision, and chiropractic care.

Big-ticket expenses like braces for your kids’ teeth, LASIK

surgery for your eyes, fertility treatments, and special schools for

learning-disabled children.

You can even reimburse for over-the-counter medications,

vitamins and herbal supplements, and medical supplies, so long as

they’re actually prescribed by a physician.

The best part is, this is money you’d spend anyway, whether you get

to deduct it or not. You’re just moving it from a nondeductible

place on your return, to a deductible place.

The “Paperwork”

Written plan document

Benefits are “reasonable compensation”

Verify bona fide employment

Document payments

Certification

PCORI fee

The “Paperwork”

You’ll need a written plan document, which we can provide you.

You’ll need to make sure the benefits you pay are “reasonable

compensation” for the work your employee does. If your

teenager stuffs a few envelopes for you, the IRS will have a hard

time believing a full set of braces is “reasonable compensation”

for that little work.

You’ll need to verify the work your employee does in order to

establish that the benefits you pay are reasonable compensation.

This is a big hot button with the IRS and Tax Court.

The “Paperwork”

Finally, you’ll need to establish a “paper trail” to verify

payment. This means tracking expenses, of course. It also means

reimbursing your employee out of the business or paying their

expenses directly out of the business. It’s not enough just to pay

your family’s expenses out of personal funds, total them up, and

deduct them at the end of the year. A couple of recent Tax Court

cases have established that you really do need to establish a

business link to those expenses.

There’s no need for an outside third-party administrator.

However, IRS rules state that employees can’t “self-certify”

their own expenses.

The “Paperwork”

There’s no special reporting required. You’ll report

reimbursements as “employee benefits” on Schedule C,

Form 1065, or Form 1120. You’ll save income tax and self-

employment tax.

There’s no pre-funding required. You don’t have to open a

special account, like with Health Savings Accounts or flex-

spending plans. You don’t have to decide ahead of time

how much to contribute. And there’s no “use it or lose it”

rule. The plan is really just an accounting device that lets

you characterize your family medical bills as business

expenses.

The “Paperwork”

All Section 105 plan sponsors must file Form 720 to

report and pay a “patient-centered outcomes research

institute” fee of $2/per participant by 7/31 of the year

following the plan year. Ordinarily, this form is filed

quarterly; however, if an employer owes no other

excise taxes, they may file annually.

Health Savings Account

1. “High deductible health plan”

- $1,300+ deductible (individual coverage)

- $2,600+ deductible (family coverage)

Plus

2. Tax-deductible “Health Savings Account”

- Contribute & deduct up to $3,350/$6,650 per year

- Account grows tax-free

- Tax-free withdrawals for qualified expenses


If a medical expense reimbursement plan isn’t

appropriate, consider the new Health Savings Accounts.

These arrangements combine a high-deductible health

plan with a tax-free savings account to cover

unreimbursed costs.

To qualify, you’ll need a “high deductible health plan”

with a deductible of at least $1,300 for single coverage

or $2,600 for family coverage. Neither you nor your

spouse can be covered by a “non-high deductible health

plan” or Medicare.


The plan can’t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. You’re not eligible if you’re covered by a separate plan or rider offering prescription drug benefits before the minimum annual deductible is satisfied.

Once you’ve established your eligibility, you can open a deductible savings account. You can contribute up to $3,350 for singles or $6,650 for families. You can use it for most kinds of health insurance, including COBRA continuation and long-term care premiums.


You can also use it for the same sort of expenses as a

Section 105 plan.

The Health Savings Account isn’t as powerful as the

Section 105 Plan. You’ve got specific dollar contribution

limits, and there’s no self-employment tax advantage.

But Health Savings Accounts can still cut your overall

health-care costs.

#7: Missing A Home Office


The home office deduction is probably the most misunderstood deduction in the entire tax code. For years, taxpayers feared it raised an automatic audit flag. But Congress has relaxed the rules, so now it’s far less likely to attract attention. Your home office qualifies as your principal place of business if: 1) you use it “exclusively and regularly for administrative or management activities of your trade or business”; and 2) “you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.” This is true even if you have another office, so long as you don’t use it more than occasionally for administrative or management activities.


You have to use your office regularly and exclusively for business. “Regularly” generally means 10-12 hours per week. To prove your deduction, keep a log and take photos to record your business use. You can claim a workshop, studio, or “separately identifiable” space you use to store products or samples. The space doesn’t have to be an entire room. If you use it for more than one business, both have to qualify to take the deduction.

Qualifying Home Office

“Principal place of business”:

1. “exclusively and regularly for administrative or management activities of your trade or business”

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

Source: IRS Publication 587


First let’s talk about how you qualify for the home office deduction in the first place.

Your home office qualifies as your principal place of business if:

1)you use it “exclusively and regularly for administrative or management activities of your trade or business”

2) “you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.” This is true even if you have another office, so long as you don’t use it more than occasionally for administrative or management activities.


You have to use your office regularly and exclusively for business. “Regularly” generally means 10-12 hours per week.

To prove your deduction, keep a log and take photos to record your business use. You can claim a workshop, studio, or “separately identifiable” space you use to store products or samples.

The space doesn’t have to be an entire room. If you use it for more than one business, both have to qualify to take the deduction.

#7: Missing Home Office

Determine “BUP” of home

– Divide by rooms

– Square footage

– Eliminate “common areas”

144

1500

100


Once you’ve qualified, you can start deducting expenses. If you’re taxed as a proprietor, you’ll use Form 8829. If you’re taxed as a partnership or corporation, there’s no separate form, which helps you “fly under the radar.”

1. First, you’ll need to determine business use percentage of your home. You can divide by the number of rooms if they’re roughly equal, or calculate the exact percentage of square footage. You can exclude common areas like halls and stairs to boost that business use percentage


Deduct “BUP” of expenses:

– Mortgage/property taxes

(better than Schedule A)

– Utilities/security/cleaning

– Office furniture/decor

– Depreciation (39 years)

Increase business miles


1. Next, you’ll deduct your business use percentage of rent, mortgage

interest, and property taxes.

1. You’ll depreciate the business use percentage of your home’s basis

(excluding land) over 39 years as nonresidential property.

2. Finally, you’ll deduct your business use percentage of utilities, repairs,

insurance, garbage pickup, and security. If business use percentage for

specific expenses differs from business use percentage for the overall

home – such as high electric bills for home office equipment – you can

claim the difference as “direct” expenses.”

Claiming a home office can also boost your car and truck deductions. That’s

because it eliminates nondeductible commuting miles for that business.


When you sell:

– Recapture depreciation

– Keep tax-free exclusion


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.”


If this all seems like too much work, there’s a new

“safe harbor” method that lets you claim $5 per

square foot for up to 300 square feet of qualifying

home office. However, using the safe harbor method

might not let you claim nearly as much as the

traditional method. We can help walk you through the

calculations to see which method is best for you.

#8: Missing Car/Truck Expenses

AAA Driving Costs Survey (2014)

Vehicle Cents/Mile

Small Sedan 46.4

Medium Sedan 58.9

Large Sedan 72.2

4WD SUV 73.6

Minivan 65.0

Figures assume 15,000 miles/year; $3.28/gallon gas


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.

(At this point, I ask audience members to raise their hands if

they take the standard deduction. I remind them that it’s 57.5

cents/mile, then ask them to tell me what they drive and how

much they deduct. The goal here is to show the wide variety

of vehicles clients drive . . . and emphasize that the

deduction is the same for them all.)


Are you detecting a pattern here? That 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 not exactly 57.5 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

57.5 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

Bona fide business discussion

– Clients

– Prospects

– Referral Sources

– Business colleagues

50% of most expenses

Home entertainment

Associated 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.

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.


How much?

When?

Where?

Business purpose?

Business relationship?


You don’t need receipts for expenses under $75. But

you do need to record the five pieces of information

listed on the right side of the slide 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.

#10: Missing Tax Coaching Service

True Tax Planning

Written Tax Plan

– Family, Home, and Job

– Business

– Investments

Review Returns


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 coaching 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 we’ve discussed

today, then why not give it a try?