The Easiest
Way for Any Small Business
(including Home-Based & Part-Time Businesses)
to Immediately and Legally Pay Less Tax NOW
(oh, this
includes Self-Employed People, too!)
By
Wayne M. Davies
Contact Information:
Wayne M. Davies Inc.
4660 W. Jefferson Blvd., Suite 220 / Fort Wayne, IN 46804
Tel: (260) 459-3858 / Fax: (260) 459-0124
Email:
Wayne@YouSaveOnTaxes.com
http://www.YouSaveOnTaxes.com
Copyright 2003 Wayne M. Davies Inc.
Copyright
2003 Wayne M. Davies Inc.
ALL RIGHTS
ARE RESERVED. No part of this book may be reproduced, stored in
a retrieval system, or transmitted in whole or in part, in any
form or by any means (mechanical, electronic, photocopying,
recording, or otherwise), without the prior written permission
of the Publisher.
While all
attempts have been made to verify information provided in this
publication, neither the Author nor the Publisher assumes any
responsibility for errors, inaccuracies or omissions. Any
slights of people or organizations are unintentional.
Neither the
Publisher nor the Author are rendering tax, legal, accounting,
or other professional advice. Tax strategies and techniques
depend on an individual's facts and circumstances; accordingly,
the information presented in this book must be correlated with
the individual's tax situation to establish applicability.
Moreover, because of the complexity of the tax laws, the
constant changes resulting from new developments, and the
necessity of determining appropriateness to a particular
taxpayer or business entity, it is important that professional
advice be sought before implementing the tax ideas presented in
this book.
PRINTED IN
THE UNITED STATES OF AMERICA
Table of Contents
Introduction
PART ONE:
Timely Tax Tidbits Guaranteed to Tickle Your Tastebuds
Tax Tidbit
#1:
How To Turn
Non-Deductible Commuting Mileage Into A
Legitimate Business Expense
Tax Tidbit
#2:
How To Get A $1,000 Refund By
Filing An Amended Tax Return
Tax Tidbit
#3:
Carpe Diem
-- Seize The Per Diem Method (and Throw Away Your Receipts)
Tax Tidbit
#4:
How to Let the IRS Pay for Your
Kids' Summer Camp
Tax Tidbit
#5:
How to Deduct Your Next Vacation
PART TWO:
New Tax Law Turns Small Biz Loophole Into A Crater!
PART THREE:
The Biggest Tax Mistake You Can Ever Make (and How To Avoid
It)
PART
FOUR:
Why the Most Important Business Decision
You Probably Never Made is the Key to Paying Thousands Less in
Taxes
Introduction
As you
probably already know, taxes is the largest expense you have.
Period.
So, what is
the easiest way for you to increase your cashflow and put more
money in your pocket? The answer is obvious: Reduce your taxes.
Period.
And that's
the purpose of this eBook. To give you, the typical Small
Business Owner or Self-Employed Person, easy-to-understand and
easy-to-implement tax reduction strategies.
By the way,
if you are not a Small Biz Owner or Self-Employed Person, you
probably won't find much to help you here. Sorry!
And by
"Small Business", I'm including the Part-Time Business Owner as
well as the Home-Based Business Owner. Maybe you've got a
regular full-time "day job" and have aspirations to some day
tell your boss to take this job and . . . .
Ooops!
Sorry there. I didn't mean to get you all worked up. Let's stay
focused on paying less tax, shall we?
As I was
saying, even if your business is very small and you only devote
a few hours a week to it, you can still take advantage of every
deduction in this eBook. Honest!
I've done
my best to keep this stuff simple. Let's get started!
PART ONE:
Timely Tax Tidbits Guaranteed to Tickle Your Tastebuds
Taxes is an incredibly complicated subject. Do you ever feel
like it's just not worth trying to understand our crazy tax
system? If so, you are not alone. That's how most small biz
owners feel.
That's why
I've written this eBook -- to explain some of the best
tax-saving strategies in true "plain English".
If you'll
take a few minutes to master the content of this eBook, you can
easily put several thousand dollars in your pocket instantly!
So let's
start with a few short but sweet "tax nuggets" for the Small Biz
Owner and/or Self-Employed Person, each morsel serving up a
specific tax reduction strategy guaranteed to tickle your
monetary tastebuds.
The U.S.
Tax Code is so big, there's only one way to digest it: one
little nibble at a time.
Just like a
piece of candy, one small bite of tax knowledge can give you one
very delicious deduction!
Tax
Tidbit #1:
How To Turn
Non-Deductible Commuting Mileage Into A
Legitimate Business Expense
For most
folks, commuting mileage is a non-deductible expense -- unless
you know the little tax trick I'm about to reveal.
The
non-deductibility of commuter miles is painfully true for the
employee who fights rush hour traffic every day, twice a day,
for 5 to 10 hours a week.
All that
hassle, and what does he have to show for it?
Just gas
money down the drain, not to mention the wear and tear on both
his vehicle and his stress-o-meter.
You can
deduct virtually all your mileage, including the miles you log
from your home to the office or other place of business, if you
meet the following two criteria:
1. You are
a small business owner or self-employed person, and
2. You have
two offices or work locations: one outside the home (Office #1)
and one inside the home (Office #2).
Having two
offices is very common for today's self-employed professional.
The store owner, the shopkeeper, the salesman, the plumber, the
consultant -- all these folks are typically self-employed and
have two offices: one where they meet with the public (Office
#1), the other at home, where they get their paperwork done
(Office #2).
Here's how
it works:
Every day
you get up and "go to work." But you don't get in the car and
drive to Office #1 right away. If you did that, even as a
self-employed person, you would be racking up non-deductible
commuting miles, just like the employee.
Instead,
you grab a cup of coffee and head to Office #2 first, which
takes all of 30 seconds.
After
working in Office #2 for awhile, then you hop in the car and
head to Office #1, where you work for the bulk of the day.
Then, when
you're done at Office #1, you get back in the car and go "home"
-- except when you get inside your house, you don't head for the
living room, you go straight to Office #2, where you finish up
your daily routine with a few final minutes of paperwork.
What have
you just done?
You daily
round-trip "commute" is now a business deduction, due to a
simple tax loophole that says: Any miles driven between two
business locations are deductible business miles.
The fact
that one of those two locations just happens to be your Home
Office is fine and dandy with the IRS.
By
following this route each day, you can save hundreds, even
thousands of dollars in taxes.
The proof
is in the pudding:
Let's say
your round-trip "commute" is 20 miles per day.
20 miles X
5 days = 100 miles per week.
100 miles per week X 50 weeks = 5,000 miles per year.
5,000 business miles X .36 cents = $1,800 deduction
So, you
just got yourself a nice $1,800 deduction -- a deduction that
you've probably been entitled to for years but didn't know it.
$1,800
deduction X 32% income tax rate = $576 in actual tax savings
(27% federal income tax + 5% state income tax)
Five-hundred and seventy-six bucks. . . every year. . .
. . . Hmm,
mmm, good! Now that's a tasty little morsel!
Tax
Tidbit #2:
How To Get A $1,000 Refund By Filing An Amended Tax Return
Aren't you
glad another Tax Season is over?
Ah, yes --
another tax return filed, another tax return "in the books."
Well, I've
got a pleasant surprise for you.
Did you
know you can actually get a refund for a return that you already
filed?
Yep, it's
true.
If you
think you forgot a deduction on a previously filed return, you
have three years to tell the IRS about it and receive a refund.
Here's how
it works: You can file an amended return up to three years after
the due date of the return in question.
So, for
Year 2002 returns due April 15, 2003 -- you have until
April 15, 2006 to file a correction.
For Year
2001 returns due April 15, 2002 -- you have until April 15, 2005
to file a correction.
And for
Year 2000 returns due April 15, 2001 -- you have until
April 15, 2004 to file a correction.
Now the
question becomes: Is it worth it? I mean, do you really want to
spend the time and energy doing tax paperwork -- and it's not
even Tax Season!
I know, I
know -- you've got better things to do with your time.
So here's
an incentive to make it worth your time: If I offered you a
little part-time job that paid about $140 per hour, would you be
interested? I think so.
Well,
that's how you should look at the task of filing an amended tax
return. Do the math:
You
discover $1,000 of unreported deductions on your return from
Year 2000, 2001 or 2002. So you do the research, prepare the
proper forms (or have your accountant do it), and send them off
to the IRS.
If you are
in the 35% tax bracket (say, 30% federal plus 5% state), you
will get a $350 refund for your efforts. And even if it took you
2.5 hours of paperwork drudgery, Uncle Same just paid you a cool
$140/hour. Not bad, eh?
To file an
amended federal income tax return, here are the links to the
necessary forms:
You should
also file an amended state return (assuming your state has an
income tax). For a link to a database of all state income tax
forms, check out:
Don't
forget: if you're able to find $1,000 worth of unreported
deductions on one previously filed return (resulting in tax
savings of $350), there's a good chance the same situation
exists for the other 2 "open" years.
End result:
$350 x 3 = $1,050 in total tax savings . . .
. . .Hmm,
mmm, good! Now that's a tasty little morsel!
Tax
Tidbit #3:
Carpe
Diem -- Seize The Per Diem Method
(and Throw Away Your Receipts)
The mantra
of tax record-keeping has remained relentlessly burdensome for
decades:
"No
Receipt, No Deduction".
But fear
not, you who loathe the never-ending climb up the mountain of
paperwork required by the U.S. tax code.
Many of our
most beloved tax rules have exceptions, and such is the case
with this one.
Believe it
or not, there are actually expenses you can legally deduct
without a receipt. Here's one for self-employed folks who travel
out-of-town on business.
When it
comes to deducting your meals while on an overnight business
trip, you have two options with regard to record-keeping.
OPTION #1:
You keep
your receipt from each meal and simply deduct the cost of the
meal times 50%, a la the "No Receipt, No Deduction" rule.
OPTION #2:
You use The
Per Diem Method to determine your meal deduction. For each day
of the trip, you are allowed a daily meal allowance, depending
on what part of the country you were visiting.
For
example, the per diem meal rate for Birmingham, AL is $42. For
San Francisco, it's $50.
Like Option
#1, your actual deduction is 50% of the per diem amount -- $21
in Birmingham and $25 in San Fran.
Take note:
There are two very nice advantages to The Per Diem Method.
Benefit #1:
You don't have to keep receipts for your meals. Yep, you can
pitch 'em. Scouts honor.
Benefit #2:
It doesn't matter how much you actually spend on meals, you
still get to deduct 50% of the per diem amount. This can result
in hundreds of dollars in tax savings for you.
Example:
You
regularly go to several major cities for overnight business
trips, traveling about five days each month. These cities all
have a per diem rate of $50.
You are
frugal. To save both time and money, you prefer to eat at fast
food restaurants three times a day. On average, you spend only
$20/day on meals.
But the per
diem rate is $50/day. If you used Option #1, your actual
deduction would be $20 x 50%, or $10/day.
With Option
#2, you get to deduct $50 x 50%, or $25/day.
The
difference between Option #1 and #2 is $15/day.
Over the
course of the year, this adds up to an extra $900 in deductible
meal expenses ($15/day x 60 days) -- even though you didn't
actually spend the extra $900!
End result:
you save $315 in taxes (assuming your combined federal and state
income tax rate is 35%).
And you can
throw away 60 days worth of meal receipts.
Whoa . . .
$315 in tax savings without spending a dime.
. . . Now
that's a tasty little morsel!
One final
note: The per diem method is available to Sole Proprietors,
Partners and LLC Members. If your business is a Corporation and
you own more then 10% of the company stock, you can't use the
per diem method for yourself. Sorry! That's taxes for ya.
Tax
Tidbit #4:
How to Let the IRS Pay for
Your
Kids' Summer Camp
With summer
day-camp season upon us, here's a way to let Uncle Sam pick up
the tab for your children's fun.
Many
parents take advantage of the child daycare credit. Well, this
same credit can also be used for summer day-camp expenses.
The
child-care credit applies to expenses you incur for the care of
children under age 13 while the parents are working. And
"working" applies to both an employee job as well as
self-employment.
Sending
your child to a day-camp during the summer counts as a qualified
expense for purposes of the child-care credit.
And by
"day-camp", don't limit yourself to the traditional YMCA-type
scenario. There are plenty of other programs that qualify, such
as:
1. Sports
camps: Soccer camp, baseball camp, basketball camp, football
camp, volleyball. These all count.
2. Academic
camps like computer camp or other scholarly pursuits.
3. Fine
arts camps for music, drama, and art.
Kids (and
parents!) sure have a lot of choices these days.
The key
requirement for getting the day-care credit is that the camp not
be a sleep-over camp. The child must only spend time there
during the day.
You take
the credit on Form 2441, Child and Dependent Care Expenses. The
amount of your credit depends on your income. Take a peak at
Form 2441 to calculate your credit:
First, find
your adjusted gross income from Line 36 of Form 1040. If your
income is greater than $28,000, your credit is likely to be 20%
of the day-camp expense.
(If your
income is less than $28,000, the percentage is greater than 20%
-- so be sure to check Form 2441 if you happen to be at that
income level).
Next, you
multiply the day-camp expense by 20%, and that's the potential
tax credit amount. I say "potential" because there's one more
step to complete the calculation -- if your income is greater
than $28,000, your maximum childcare credit is $480 if you have
one child and $960 if you have two or more children with daycare
expenses.
So, if you
have $1,000 of day-camp expense this summer, you get a $200 tax
credit on your personal income tax return.
Two-hundred
bucks . . . now there's a tasty little morsel!
It is
perfectly legal to deduct your next vacation. Here's how to do
it.
To qualify
for this deduction, you must meet the following two criteria:
1. You are
self-employed or own a small business
2. On your next trip, you combine business with pleasure.
The first
requirement is pretty cut and dried.
The second
requirement is somewhat trickier and will be the focus of this
section.
To deduct
any U.S. trip, you can combine business and pleasure, but the
primary purpose of the trip must be business.
And here's
how the IRS defines a trip taken primarily for business
purposes: the number of "business days" must be greater than the
number of "personal days". To complete the definition, travel
days are considered "business days".
Here's an
example to clarify the rules:
You take a
10-day "vacation" to Orlando. You spend one day
getting there and one day getting back. You spend 4 days
attending a seminar. The other 4 days are spent with Mickey
Mouse & Company.
Let's tally
up the days:
Business
Days = 6 (2 travel days + 4 seminar days)
Personal Days = 4 (doing theme parks)
So, are the
number of business days greater than 50% of the total days? Yes.
So here's what you get to deduct:
-- 100% of
your transportation expenses (even though 40% of your days were
personal days)
-- 100% of
your "on-the-road" expenses for the 6 business days, including
hotel bills, cab fares, rental car, seminar fees, dry cleaning,
laundry and meals. (Although the meal expenses are still subject
to the 50% rule.)
The
on-the-road expenses for the 4 personal days are not deductible.
But you're still getting a great tax break here.
Assuming
you spend $1,000 for transportation and the 6 business day
expenses, a sole proprietor in the 35% tax bracket (15% federal
tax + 15% self-employment tax + 5% state tax) saves $350.
Three
hundred and fifty bucks!
Hmmmm . . .
now that's a tasty little morsel!
PART TWO:
New Tax Law Turns Small Biz Loophole
Into A Crater!
In case you
were too busy over Memorial Day to notice, our beloved
politicians just passed another tax bill designed to put more
dollars in your pocket.
President
Bush signed the new tax law on May 28, 2003 -- and there is
truly something for everyone in this package, a veritable
smorgasbord of tax savings.
If you are
a Small Business Owner or Self-Employed Person, there's one
especially lucrative tax break.
It's
actually an expansion of a tax rule that's been on the books for
years. Known as the Section 179 deduction, the new legislation
takes this loophole and turns it into a deduction big enough to
drive a fleet of SUV's through.
The Section
179 deduction enables the Small Business Owner to deduct 100% of
the cost of most business equipment, in lieu of depreciation
over several years.
What's so
great about that?
Think about
it like this: I've got a dollar and I'd like to give it to you.
You have two choices -- I give it to you now, or I give it to
you 5 years from now.
Which do
you prefer?
Obviously,
you'd rather have it now, right?
And why is
that?
Because of
what you learned way back in Finance 101: something your banker
calls "the time value of money."
I'll spare
you a boring textbook definition. Instead, let's just assume we
agree on this simple point: Is a dollar worth more today or 5
years from today?
It's worth
more today, right?
And that's
why the Section 179 deduction is so valuable.
Huh?
Let's use
an example to bring all this financial theory into reality.
You buy
$5,000 worth of office equipment in 2003. Under normal
depreciation rules, you wouldn't get to take a deduction for
$5,000 in 2003. Instead, you'd write off the $5,000 over 6 years
-- part in 2003, part in 2004, etc.
If you're
in the 35% tax bracket, you get your $1,750 in tax savings over
6 years. Yawn. That's a long time!
You'd get
your deduction, and the resulting tax savings, but you'd have to
wait 6 years to realize all the benefits.
Section 179
says that if you meet certain requirements, you can deduct the
full $5,000 in 2003. You reduce your taxes by $1,750 in Year
2003.
So let me
repeat my rhetorical question: Uncle Sam has $1,750 he'd like
to give you. When do you want it? All at once, or spread out
over 6 years?
That's the
beauty of Section 179.
But you
have to meet certain requirements to benefit from Section 179.
One requirement concerns the total amount of equipment you can
deduct rather than depreciate. In 2002, the amount was $24,000.
And for 2003, the amount was originally set at $25,000.
Until
Congress and the President passed the new tax bill in late May
2003 that raised that amount to a whopping $100,000.
Never liked
depreciation? Well, you can pretty much kiss it good-bye now. If
your business buys more than $100,000 of equipment in a single
year, it ain't so "small" any more! So this new law should cover
all small businesses. Enjoy!
One final
note: A few other requirements must be met to claim the Section
179 deduction. Here's a brief overview:
1. Most
personal property used in a trade or business can be deducted
via Section 179. Real property cannot. Typical examples of
personal property include: office equipment such as computers,
monitors, printers and scanners; office furniture; machinery and
tools. Real property means buildings and their improvements.
2. Your
total Section 179 deduction is limited to the business' annual
profit. In other words, you cannot use the Section 179 to create
or increase a loss.
This is
known as the "taxable income limitation." For "C" Corporations,
this limitation is very cut and dried. But if your business is
an "S" Corporation, Partnership, LLC, or Sole Proprietorship, it
may not be as limiting as it seems. For these non-"C" Corp
businesses, the Section 179 deduction can be used to offset both
business and non-business income.
And if
you're married filing jointly, the Section 179 deduction can
offset your spouse's income, including W-2 income.
Example:
You start a new business in 2003 that ends up with a loss for
the year of $5,000 (before taking the Section 179 deduction).
Your spouse has W-2 income of $60,000. Even though your business
is unprofitable, you can still take the full Section 179
deduction of $5,000 (again, assuming your business is an entity
other than a "C" Corporation).
(Be sure to
consult with your tax professional to get the scoop on all the
Section 179 rules.)
Now that
you're done celebrating Memorial Day, be sure to take advantage
of this new loophole. A very nice deduction just got expanded to
monstrous proportions!
Take
advantage of it.
PART
THREE:
The Biggest Tax Mistake You
Can Ever Make
(and How To
Avoid It)
EDITOR’S
NOTE: The following section (Part Three) was written in May
2003.
Ah, April
15 has come and gone. And American taxpayers everywhere breathe
a collective sigh of relief.
Whew,
aren't you glad another Tax Season is over? What a relief --
unless you filed an extension, you've got your tax return done
and now you can forget about taxes for another year.
Yep, that
has a nice ring to it, doesn't it?
It sounds
so good, I think I'll say it again:
"Now you
can forget about taxes for another year."
If you
found yourself agreeing with me there, guess what?
I gotcha!
I just
caught you making the biggest tax mistake you can possibly make
-- the incredibly short-sighted attitude that taxes is a
"once-a-year" thing, something you do only because you are
forced to deal with it every spring, and then you are so fed up
with the whole mess that you gladly forget about it until next
spring, and then, only because you are forced to deal with it
again!
If this is
the way you approach taxes, you are doomed to overpay your taxes
forever!
(Oh, pardon
me for just a second while I climb up on my soapbox, turn up the
volume, and let it rip. I'm goin' to preach this message till
the cows come home!)
And what
message is that, you ask?
My message
today is a simple one, but unfortunately, one that often falls
on deaf ears. So please, I really do hope you are listening (I
mean, reading) with your ears (and eyes) wide open.
Here it is,
my Post-Tax Season Message:
If you only
pay attention to your tax bill during Tax Season, then I
guarantee you are paying too much tax.
Our tax
system is unbelievably confusing, incredibly convoluted, and
increasingly chaotic. In a word, it's crazy. And it's only going
to get worse
Even as I
write this, Congress and the President are going round and round
about the next round of tax law changes. So what else is new?
But even
with all its mind-numbing complexity, our tax code has many
legal loopholes you can drive a truck through.
Here's a
startling statistic to drive home the point: It is
conservatively estimated that small business owners and
self-employed people are overpaying their taxes by 160 billion
dollars every year.
And the
biggest cause of this situation is the simple fact that small
biz owners and the self-employed are not using all the tax
loopholes they are entitled to.
But you'll
never figure out what those loopholes are by only spending a few
hours, once a year, to the task of filling out the forms.
It's gotta
be a year-round task. And you need to realize that some of the
best tax-reduction strategies require some research on your
part. You've got to do your homework, check things out, maybe
even consult with a professional to make sure you're not missing
something and that all your ducks are in a row.
Like any
worthwhile goal, it takes time and energy.
In my
experience, there is one small biz tax-reduction strategy that
stands head and shoulders above all the rest: Choice of Entity.
Bear with
me here, as I explain what I mean.
By "Choice
of Entity", I'm referring to what type of business you own, from
a legal standpoint.
Here are
your choices:
Sole
Proprietorship
Partnership
Corporation
Limited Liability Company
(Note: If
you are self-employed and don't view yourself as owning a
business, guess what: from a tax standpoint, as a self-employed
person, you do own a business. It's called a Sole
Proprietorship.)
The purpose
of this article is not to tell you which entity is best for you
and exactly how much money you can save in taxes by picking one
of these entity choices.
I can't do
that in a thousand words.
But what I
can tell you right now is this:
Your Choice
of Entity is the single-most important factor in determining
your annual tax bill.
I can also
tell you this: every year, thousands of small biz owners and
self-employed people save literally thousands of dollars in
taxes because they made a simple one-time change in their Choice
of Entity.
Obviously,
there are many factors that determine how much tax you pay: the
accuracy of your record-keeping, how organized you are, your
knowledge of all the many available tax deductions, etc.
But the
most important factor of all is this: What entity type are you?
So, now
that Tax Season is a not-so-distant memory and your mind turns
to other, supposedly more important matters, my question to you
is this:
How do you
know that your current Choice of Entity is the best one for you?
Have you
done an analysis of the pros and cons of each entity? Do you
know what the tax consequences would be if your changed your
Choice of Entity? Do you know what it takes to make a change
from one entity type to another?
Let's say
you are a Sole Proprietor: do you know how much tax you would
have paid last year if your business had been a Corporation, a
Partnership, or a Limited Liability Company?
These are
not the kinds of questions you have time to address while
frantically looking for lost receipts and filling out the tax
forms on April 14th.
Sooner or
later, you MUST turn your attention to the most important tax
issue of all: Choice of Entity. And believe me, sooner is
better than later. If you’ve made the wrong Choice of Entity,
you are probably overpaying your taxes by thousands every year.
How do you
get started researching the best Choice of Entity for your
particular situation? Read on to find out.
PART
FOUR:
Why the Most Important Business
Decision You Probably Never Made is the Key to
Paying Thousands
Less in Taxes
Let's summarize what we've
covered so far.
First, you can reduce your
taxes immediately by putting those Tax Tidbits to use. Each one
of these strategies is easy to implement and doesn't require any
additional out-of-pocket expenses. You just have to do a little
planning and a little record-keeping and presto, you've got
several hundred or even several thousand dollars in your pocket:
Whoa -- two thousand, four
hundred and ninety-one dollars in tax savings! That's a lot of
pizza in my house. (Obviously, your particular tax situation may
result in a different amount of tax savings then the numbers
cited in each Tax Tidbit; I'm just using these as conservative
examples of the type of tax savings possible when these
strategies are implemented. You could get more or less than
this.)
Then, if we add to that
the immediately tax savings of $1,750 from Section 179, now were
up to $4,241. (I realize that the $1,750 would be saved even if
you depreciate your equipment over 6 years, but then you have to
wait 6 years to get the tax savings. How inconvenient is that?)
So, you've
just saved over $2,000 or even $4,000 in taxes. How does that
make you feel? Not bad, eh?
Well, I'm
here to tell you that this is just the tip of the iceberg.
Saving
$2,000 or $3,000 or even $4,000 per year in taxes is awesome --
but it's just the beginning. The five Tax Tidbits and the
Section 179 Deduction are great -- they are perfectly legal ways
for the average small business owner or self-employed person to
put some "easy money" in your pocket.
But of all
the tax reduction strategies available to you, they really are
"small potatoes" when compared to the tax savings available to
you when you make a change in your Choice of Entity, as
explained in Part Three.
This is so
important, let me say it again: Your biggest potential tax
savings will result from doing a serious analysis of your Choice
of Entity.
Let's
review the possibilities:
Scenario
#1: You are a Sole Proprietor.
This is
probably the most common scenario for the new small business
owner or self-employed person. And my experience is this -- most
likely, you are a Sole Proprietor "by default", i.e. because you
really didn't know any other way to run a small business.
And that's
OK. You have to start somewhere, and if that's where you are,
that's where you are.
But you've
got to take a serious look at this: how much less tax would you
pay if you formed a corporation, partnership or limited
liability company? Do you have any idea? Probably not.
Scenarios
#2, #3, and #4 are really just variations of Scenario #1.
Scenario
#2: You are a Partner in a Partnership. How do you know that
this is the best Choice of Entity for you? Would you pay less
tax if you were a corporation, LLC, or Sole Proprietor?
Scenario
#3: You are a C Corporation. What would happen if you converted
to one of the other entities?
Scenario
#4: You are an S Corporation. What would happen if you switched
to a C Corporation, LLC or Partnership?
Scenario
#5: You are a LLC? How do you know that this is the best
scenario for you?
I think you
get the picture. You've got to do an analysis of the pros and
cons of each entity.
And when I
say that these other tax strategies, like the Tax Tidbits, are
just the tip of the iceberg, here's an example to illustrate
what I mean.
I have a
client, let's call him Donald, who started a business about 4
years ago as a Sole Proprietorship. Like many new business
owners, he didn't really know any other way to do it. His
brother-in-law told Donald, "Just keep it simple. Don't even
think about anything complicated like a corporation. You have to
pay a high-priced lawyer, fill out mountains of confusing
paperwork, and you'll just end up spending money unnecessarily."
(Donald's
brother-in-law, by the way, is a self-employed painting
contractor, and of course, the "family authority" on the subject
of taxes and Choice of Entity!)
Well,
Donald had enough sense to come to me for help with his income
tax return that first year in business. He ran a low-overhead
service-oriented business and was immediately profitable. In
fact, he was so profitable, he had to pay several thousands in
taxes with his tax return.
I suggested
to Donald that he form a corporation. After factoring in the
additional legal and accounting fees needed to run a corporation
properly, Donald would still save over $4,000 per year
by operating as a corporation rather than as a Sole
Proprietorship.
Now, what
do you think Donald said to me when I told him about the four
grand in tax savings?
"Well,
that's a no-brainer. Let's do it." And I helped him set up his
corporation. (Sure, there is some extra paperwork. But again, he
still saved over $4,000 after paying the additional
expenses required of a corporation.)
Now, there
is no way I can sit here and tell you that you are going to save
$4,000 every year if you form a corporation. I have no way of
knowing that what is true for Donald is true for you.
But I can
tell you that I've talked to enough small business owners like
Donald to know that it would certainly be worth your while to
check into it. Even if the tax savings was $3,000 or $2,000 or
$1,000 -- wouldn't that be worth it?
Because
once you've made a change in your Choice of Entity, and that
change results in, say, $3,000 of tax savings in Year One,
chances are that you will get that same tax savings in Year Two
and Year Three and Year Four, and so on.
After five
years, we're talking $15,000 here! Whoa --- see what I mean
about "small potatoes" and "the tip of the iceberg"?
To begin
your Choice of Entity analysis, you need to take action. Here's
a simple 3-Step Plan to get started:
1.
Contact your local tax professional.
If you
already have an accountant, please go to the phone right
now and make an appointment to discuss this with
him/her.
At the
appointment, tell him exactly what you want: You want help
determining the best Choice of Entity for your situation.
You want to
know how much tax you would pay if your business existed as each
possible Choice of Entity. Example: You were a Sole
Proprietorship in 2003. You know how much tax you paid in 2003
as a Sole Proprietor. Now you want to know how much tax you
would have paid in 2003 if your business had been a C
Corporation, an S Corporation, and a Limited Liability Company.
If any of
these other entities would have paid less tax than the Sole
Proprietorship, what would it take to make a change? What are
the legal and tax requirements for making such a change? What
would it cost to hire an accountant or an attorney to help you
make the change?
2. Do
some research yourself.
If you
don't have a local tax professional, or if you feel that your
local tax professional may not be qualified to do this type of
analysis, then you may need to start the analysis yourself.
Here's a
great place to start your research -- I've written an eBook for
small business owners and self-employed people called the “Tax
Reduction Toolkit: 29 Little-Known Legal Loopholes That Will
Reduce Your Taxes By Thousands”. To get your copy, visit
http://www.YouSaveOnTaxes.com/toolkit
Several of
these "legal loopholes" deal with the tax advantages of the S
Corporation, which is sometimes the best Choice of Entity for
the small business owner/self-employed person.
Again, I
can't guarantee that the S Corporation is the best entity for
you, but it is for many, so I highly recommend that you check
into it. The Tax Reduction Toolkit will give you an excellent
explanation of why the S Corporation has the potential to reduce
your taxes by many thousands of dollars.
The Toolkit
includes $445 worth of tax consulting coupons, so you can get
some professional input on your particular situation without
spending an arm and an leg.
These
coupons entitle you to do the following:
a) Send me
up to four (4) previously filed tax returns (business or
personal) for my review. When I analyze these returns, I'll be
looking for ways to reduce your taxes, including the possible
tax benefits of a change in your Choice of Entity.
b) Talk to
me on the phone for 60 minutes about your tax situation. Pick
my brain, ask all the questions you want. We’ll go over your
tax returns and look for any overlooked or missing deductions
that could save you thousands.
Sound fair
enough? Hey, you've got to start somewhere -- so why not start
your research at
http://www.yousaveontaxes.com/toolkit and get a
professional analysis for less than the cost of dinner for two.
Oh -- I
almost forget to mention that if I am unable to offer specific
suggestions that reduce your taxes by at least $2,000 -- then I
refund your purchase price. Fair enough?
For a more
in-depth look at the tax advantages of incorporating, I’ve
written a second eBook for Small Biz Owners and the
Self-Employed called “Incorporation Tax Secrets Revealed” –
http://www.YouSaveOnTaxes.com/secrets
This eBook
explains the differences between the 3 types of corporations
(“S” Corp, “C” Corp, and Limited Liability Company) and enables
you to make a truly informed decision regarding which one is
best for you. Believe me, when it comes to this Choice of
Entity, one size does not fit all!
For many,
the “S” Corporation is the best entity. For others, it’s the
“C” Corporation or the Limited Liability Company. In certain
situations, it even makes sense to have more than one entity.
Incorporation Tax Secrets Revealed includes $340 worth of tax
consulting coupons: a personalized Choice of Entity Analysis
Certificate and a one-hour Choice of Entity Telephone
Consultation.
Should you
decide to form a corporation or LLC, here’s a great way for
Do-It-Yourself-ers to save hundreds or even thousands in lawyer
fees – take a look at my eBook, “How To Incorporate Yourself For
Free”, available at
http://www.YouSaveOnTaxes.com/howtoincorp
The purpose
of the eBook is simple -- to show the typical Do-It-Yourself
small biz owner or self-employed person how to form a
corporation, all by yourself, without a lawyer, and without
paying a dime in legal fees.
(Yes, it is
legal to incorporate without a lawyer.)
Understand,
of course, that this eBook is not for everyone. For many, hiring
a lawyer to incorporate is the best way to go.
But if you
like doing paperwork (or can at least tolerate it) and are
willing to spend an hour or two filling out government forms in
order to save several hundred dollars, then this eBook is for
you.
NOTE: These
3 eBooks are available separately, or as a 3-volume set at a
substantial discount. I’ve bundled the 3 eBooks together into
“The Ultimate Small Business Tax Reduction Guide –
http://www.YouSaveOnTaxes.com/ultimateguide
3. Make
a decision and implement it.
After
consulting with your tax professional and after consulting with
me (or both!), make a commitment and go with it.
If you see
the need to form a corporation or an LLC, do it! Don't put it
off. Do it now. There is no better time than the present to
dramatically improve your tax situation.
I have many
great clients. And I truly enjoy working with them. And I've
helped many small business owners and self-employed people go
through this Choice of Entity decision. Those that take the time
to do it never regret it. Most end up with thousands of dollars
in tax savings for many years to come.
But
occasionally I get a client like Tony, the typical small
business owner who is just "too busy" running his business to
deal with any extra paperwork. Tony came to me five years ago
and I persuaded him to let me do the Choice of Entity analysis.
He just shrugged his shoulders and said, "Sure. Whatever you
say."
So I did
the analysis and called him with the results. Tony could save
over $3,600 per year by converting from a Sole Proprietorship to
a Corporation. He liked the sound of that, and so made an
appointment to get started with the paperwork.
But making
the appointment is all Tony ever did. On the day of the
appointment, Tony cancelled. Something came up.
A month
later, he called to reschedule. And on the day of that second
appointment, Tony cancelled. Something came up.
And on
three more occasions, Tony has made an appointment to get his
corporation started, and each time, he either cancelled or just
didn't even show up.
I still do
his tax return each year, and each year I remind him of the
simple fact that he overpaid his taxes by $3,600 each year
-- for the past four years! So now Tony has paid $14,400
more than necessary, just because he's too lazy to follow
through on a simple one-time change in his Choice of Entity.
Which small
business owner do you want to be: Donald or Tony? The choice is
yours.
About the Author
Wayne
M. Davies is a Tax Professional & Business Consultant serving
small business and self-employed clients in all 50 states. Based
in Fort Wayne, Indiana, he has been helping his clients reduce
their taxes for the past 15 years. Wayne provides a complete
line of accounting, payroll, tax preparation and tax consulting
services for all business types: sole proprietorships,
partnerships, corporations and LLC's.
He is
author of 3 best-selling eBooks for Small Business Owners & The
Self-Employed:
Tax
Reduction Toolkit:
29
Little-Known Legal Loopholes That Will Reduce Your Taxes By
Thousands (For Small Business Owners and Self-Employed People
Only!) Tax Reduction Toolkit (Vol. 1):
Wayne
publishes two free monthly ezines for Small Business Owners and
Self-Employed People:
Ezine #1:
"Make My Life Less Taxing"
. . .
Dedicated to helping U.S. small biz owners & self-employed
people pay the least amount of tax allowed by law . . . . and
not a penny more.
Subscribe
to "Make My Life Less Taxing" and receive a free 37-page report,
"How Any Small Business Owner or Self-Employed Person Can Save
Thousands In Taxes." This report includes chapters on: "4
Simple Steps To Reduce Your Taxes Now!"; "5 Common Tax Myths
That Are Costing You A Bundle"; "How To Pass An IRS Audit With
Flying Colors!"; and "How To Make Sense Out Of Nonsense: The
Small Business Owner's Guide To The Wild & Wacky World Of
Taxes".
