Posted in: Blog, Posted On: 27-01-2014, Posted By: Steven Schroeder

1. TAX SAVINGS TIPS FOR THE SELF EMPLOYED

•    Employ spouse and deduct medical expenses for entire family including sole proprietor.

•    Employ spouse and deduct fringe benefits.

•    Contribute to SEP, Simple or Keogh instead of IRA and increase deductible contribution amount.

•    Employ a child and save Social Security taxes.

•    Employ a child and shift income to a lower tax bracket.

•    Maintain a qualified home office and deduct all mileage.

•    Maintain a qualified home and deduct otherwise nondeductible home expenses.

•    Follow Section 530 rules to keep payroll costs down by treating workers as independent contractors.

•    Reduce self-employment tax by converting the business into an S corporation.

•    Deduct fringe benefits by converting business into a C corporation.

•    Turn charitable donations into business deductions by giving money to charities in exchange for advertisement.

•    Turn nondeductible vacation expenses into deductible business travel expenses by conducting business while on vacation.


2. RECORD KEEPING FOR SELF EMPLOYED

•    Permanent books, including inventory records, should show gross income, deductions and credits.  The principal support for entries in the business’ books is normally the business checkbook.  Complete records are also supported with sales slips, invoices, receipts, deposit slips, canceled checks, financial statements, etc.

•    Identify Source of Each Receipt of Income:  When the IRS audits a business tax return, all unaccounted-for deposits to a bank account may be considered income to a self-employed taxpayer.

•    Keep a separate bank account for the business.

•    Record retention should be for a minimum of 3 years.

3. FILING REQUIREMENTS & TAX WITHHOLDING

•    Self-Employed individuals are required to file Schedule C to report their business income and expenses.

•    Self-Employed individuals must file quarterly estimated tax payments due on April 15th, June 15th, September 15th, and January 15th.

•    If you have self-employment income, you are subject to the self-employment tax.  For 2014, the self-employment tax is 15.3% on the first $117,000 in self-employed income.

4. BUSINESS USE OF HOME

•    Definition:  The office is used exclusively and regularly for administrative or management activities of a trade or business, and there is no other fixed location where the taxpayer conducts these activities.

•    The business percentage of expenses below are generally deductible:
1.    Mortgage Interest;
2.    Real Estate Taxes;
3.    Rent;
4.    Home repairs/maintenance;
5.    Utilities;
6.    Depreciation;
7.    House Insurance;
8.    Security System;
9.    Casualty losses; and
10.    Other expenses such as water, sewer, and garbage.

•    Direct Expenses (Benefit only the Business part of the home).
1.    Painting and repairs made to the specific area or room are 100% deductible.

5. DEPRECIATION

•    Low-Cost Assets
1.    Generally, assets with a useful life of more than one year must be depreciated, regardless of cost.  The IRS does not have a provision to treat items under a de minimis amount (such as $100) as a deductible expense.

•    Section 179
1.    Rather than depreciating the cost of business property over several years, §179 allows a sole proprietor in 2014 up to $125,000 of tangible depreciable property used in the active conduct of a trade or business.
2.    Automobiles (SUVs) with loaded gross vehicle weight greater than 6000 pounds are not considered “passenger automobiles” under the Internal Revenue Code, therefore:
a.    Yearly depreciation limits for autos do not apply;
b.    Lease inclusion amounts do not apply; and
c.    No luxury tax is imposed on the purchase.
d.    The 2014 SUV’s that have approximate gross vehicle weights exceeding 6000 pounds, allowing them to be depreciated over 5 years and electing the §179 expensing rules can be found at www.intellichoice.com.

6. FAMILY INCOME SHIFTING

•    For a business owner, one of the best income-shifting strategies is to pay wages to his/her children as employees.
1.    Example 1:  For $5,350 business income of a parent in the 44.3% bracket (Federal 35%, State 9.3%), the tax is $2,370.05.  If the parent pays wages of $5,350 to a child, income tax is $0 if the child has no other income.
2.    Example 2:  For $9,350 business income of a parent in the 44.3% bracket (Federal 35%, State 9.3%), the tax is $4,142.05.  If the parent pays wages of $9,350 to a child, income tax is reduced to $0 if the child puts $4,000 into a deductible IRA.
3.    Example 3:  For $15,850 of business income of a parent in the 48.9% bracket (Federal 39.6%, State 9.3%), the tax is $7,750.65.  If the parent pays wages of $15,850 to a child, income tax is reduced to $0 if the child puts $10,500 into a deductible SIMPLE-IRA plan.

• Factors to consider:
1.    Child’s wages are deductible by a parent-employer if:
a.    Work is done in connection with the parent’s trade or business,
b.    Child actually renders the service for which wages are paid, and 
c.    Payments are actually made.
2.    Child is under age 18 who works for a parent’s unincorporated business is not subject to Social Security or Medicare, and exempt from FUTA if under age 21.
3.    A dependent’s standard deduction can be up to $6,100 if all the income is earned income.
4.    Regardless of age, earned income is not subject to kiddie tax.
5.    Parents can generally deduct wages as a business expense.
6.    If the child earns enough from the family business during college years, the child may be able to claim the Hope or Lifetime Learning credits that the parents lose due to their AGI limitation.
7.    Note:  Payments to child must be reasonable in relation to the services rendered.


7. BUSINESS AUTOMOBILE

•    Taxpayers using an automobile it a trade or business can account for business expenses of the auto by using either:
1.    Standard Mileage Method; or
2.    Actual Expense Method.

•    Standard Mileage Method:
1.    Allowance:  $.565
2.    Expenses included in allowance are: Depreciation, Gasoline, Insurance, Lease Payments, Maintenance, Oil, Registration, Repairs, and Tires.
3.    Expenses not included are: Business parking fees and tolls, State and local personal property taxes, and interest on auto loan.
4.    Actual Expenses are:  Depreciation, Gasoline, Insurance, Lease Payments, Maintenance, Oil, Registration, Repairs, Tires, Parking, Tolls, and Interest on Auto Loan.

 

For more information about how to save money this Tax Season

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The Law Office of Steven F. Schroeder, PC is a firm focused on estate planning and taxation.  For the past three years Mr. Schroeder has been named as one of the top estate planning attorneys and tax attorneys in CA by Orange Coast Magazine. 

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