1. 10 Most Expensive Tax
Mistakes That Cost
Business Owners
Thousands
Jaswant S Gill CPA
281-880-8500
info@jsgcpas.com
www.jsgcpas.com
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.”
William H. Rehnquist
4. Taxable Income
Earned income
Interest/dividends
Add Taxable Income Capital gains
minus Adjustments to Income Pension/IRA/Annuity
Rent/royalty
minus Deductions
Alimony
times Tax Bracket
Gambling winnings
minus Tax Credits Illegal income
5. Adjustments to Income
IRA contributions
Moving expenses
Add Taxable Income ½ SE tax
minus Adjustments to Income SE health insurance
Retirement
minus Deductions
Alimony
times Tax Bracket
Student loan interest
minus Tax Credits
6. Deductions/Exemptions
Medical/dental
State/local taxes
Add Taxable Income Foreign taxes
minus Adjustments to Income Interest
Casualty/theft losses
minus Deductions/Exemptions
Charitable gifts
times Tax Bracket
Miscellaneous itemized
minus Tax Credits deductions
7. Tax Brackets
Rate Single HoH Joint
10% 0 0 0
Add Taxable Income
15% 8,501 12,151 17,001
minus Adjustments to Income
25% 34,501 46,251 69,001
minus Deductions
28% 83,601 119,401 139,351
times Tax Bracket
33% 174,401 193,351 212,301
minus Tax Credits
35% 379,151 379,151 379,151
8. Tax Credits
Family credits
Education credits
Add Taxable Income Foreign tax
minus Adjustments to Income General business
Low-income housing
minus Deductions
Renovation
times Tax Bracket
minus Tax Credits
9. Two Kinds of Dollars
Add Taxable Income
minus Adjustments to Income Pre-Tax Dollars
minus Deductions
times Tax Bracket
minus Tax Credits
After-Tax Dollars
10. Keys to Cutting Tax
“You lose every time you spend after-tax
dollars that could have been pre-tax dollars.”
1. Earn nontaxable income
2. Maximize deductions and credits
3. Shift income: later years, lower brackets
13. Sole Proprietorship
Report net Pay income
income on tax on net
Schedule C income
Pay SE tax up
to 15.3% on
income
14. S-Corporation
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to Avoid FICA/SE
15.3% on salary tax on income
15. Employment Tax Comparison
S-Corp FICA Proprietorship SE
Salary $40,000 Income $80,000
FICA $6,120 SE Tax $11,304
Net $73,880 Net $68,696
S-Corp Saves
$5,184
16. #4: Wrong Retirement Plan
50,000
40,000
Contribution
30,000
20,000
10,000
0
30,000 60,000 90,000 120,000
Income
SEP SIMPLE 401(k)
17. Simplified Employee Pension
“Turbocharged” IRA
30000
Contribute up to 25% of
income 25000
Max. contribution: $49,000 20000
Must contribute for all 15000
eligible employees
10000
Contributions directed to
5000
employee IRAs
No annual administration 0
30,000 60,000 90,000 120,000
SEP Contribution
18. SIMPLE IRA
Defer 100% of income up to
$11,500 16000
Age 50+ add $2,500 “catch 14000
up” 12000
10000
Business “match” or “PS”
8000
Contribute to IRAs 6000
No annual administration 4000
2000
0
30,000 60,000 90,000 120,000
SIMPLE Contribution
19. 401(k)
Defer 100% of income up to
$16,500 45000
Age 50+ add $5,500 “catch 40000
up” 35000
Employer contributes up to 30000
25000
25% of “covered comp”
20000
Max. contribution: $49,000 15000
Loans, hardship withdrawals, 10000
rollovers, etc. 5000
Simplified administration for 0
“individual” 401(k) 30,000 60,000 90,000 120,000
401(k) Contribution
20. Defined Benefit Plan
Guarantee up to $185,000
Age Regular 412(i)
Contribute according to
age and salary 45 $80,278 $164,970
Required contributions
“412(i)” insured plan 50 $133,131 $258,019
“Dual” plans
55 $211,448 $395,634
60 $236,910 $450,112
Projections based on retirement at age 62
with $165,000 annual pretax income.
21. #5: Missing Family Employment
Children age 7+
First $5,800 tax-free
Next $8,500 taxed at 10%
“Reasonable” wages
Written job description, timesheet, check
Account in child’s name
FICA/FUTA savings
22. #5: Missing Family Employment
Children age 7+
First $5,800 tax-free
Next $8,500 taxed at 10%
“Reasonable” wages
Written job description, timesheet, check
Account in child’s name
FICA/FUTA savings
23. #6: Missing Medical Benefits
Employee benefit plan
– Married: Hire spouse (no salary necessary)
– Not married: C-corp
Reimburse employee for medical expenses
incurred for self, spouse, and dependents
Works with any insurance
– Use your own insurance
– Supplement spouse’s coverage
24. MERP/105 Plan
Major medical, LTC, Medicare, “Medigap”
Co-pays, deductibles, prescriptions
Dental, vision, and chiropractic
Braces, fertility treatments, special schools
Nonprescription medications and supplies
25. MERP/105 Plan
Written plan document
No pre-funding required
– Reimburse employee
– Pay provider directly
Bypass 7.5% floor
Minimize self-employment tax
26. Health Savings Account
1. “High deductible health plan”
- $1,200+ deductible (individual coverage)
- $2,400+ deductible (family coverage)
Plus
2. Tax-deductible “Health Savings Account”
- Contribute & deduct up to $3,050/$6,150 per year
- Account grows tax-free
- Tax-free withdrawals for qualified expenses
27. #7: Missing A 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
28. #7: Missing Home Office
Determine “BUP” of home
– Divide by rooms
– Square footage 1500
– Eliminate “common areas”
100
144
29. #7: Missing Home Office
Deduct “BUP” of expenses:
– Mortgage/property taxes
(better than Schedule A)
– Utilities/security/cleaning
– Office furniture/decor
– Depreciation (39 years)
Increase business miles
30. #7: Missing Home Office
When you sell:
– Recapture depreciation
– Keep tax-free exclusion
31. #8: Missing Car/Truck Expenses
AAA Driving Costs Survey (2010)
Vehicle Cents/Mile
Small Sedan 43.3
Medium Sedan 56.2
Large Sedan 70.2
4WD SUV 73.9
Minivan 62.0
Figures assume 15,000 miles/year; $2.603/gallon gas
32. #9: Missing Meals/Entertainment
Bona fide business discussion
– Clients
– Prospects
– Referral Sources
– Business colleagues
50% of most expenses
Home entertainment
Associated entertainment
34. #10: Missing Tax Coaching Service
True Tax Planning
Written Tax Plan
– Family, Home, and Job
– Business
– Investments
Review Returns
35. Circular 230 Notification
In accordance with the provisions of US Treasury Circular 230
we advise you that this communication and any attachments to
this message is not intended or written to be used, and cannot be
used for the purpose of avoiding tax penalties, under the IRS code,
or promoting, marketing or recommending to another party any
tax related matters addressed in this e-mail message or
attachments.
www.jsgcpas.com
info@jsgcpas.com
281-880-8500