1010 Most Expensive Most Expensive Tax Mistakes That Cost Tax Mistakes That Cost
Business Owners Business Owners ThousandsThousands
Conrad OertwigConrad Oertwig
#1:#1: Failing to Plan Failing to Plan
““There is nothing wrong with a There is nothing wrong with a strategy to avoid the payment of strategy to avoid the payment of taxes. The Internal Revenue Code taxes. The Internal Revenue Code doesn’t prevent that.doesn’t prevent that.””
- William H. Rehnquist- William H. Rehnquist
Why Tax Planning?Why Tax Planning?
1.1. Key to financial Key to financial defensedefense2.2. Guarantee resultsGuarantee results
Taxable IncomeTaxable Income
Add Taxable IncomeAdd Taxable Income
minus Adjustments to Income
minus Deductions
times Tax Bracket
minus Tax Credits
Earned incomeEarned income Interest/dividendsInterest/dividends Capital gainsCapital gains Pension/IRA/AnnuityPension/IRA/Annuity Rent/royaltyRent/royalty AlimonyAlimony Gambling winningsGambling winnings Illegal incomeIllegal income
Add Taxable Income
Adjustments to IncomeAdjustments to Income
minus Deductions
times Tax Bracket
minus Tax Credits
IRA contributionsIRA contributions Moving expensesMoving expenses ½ SE tax½ SE tax SE health insuranceSE health insurance RetirementRetirement AlimonyAlimony Student loan interestStudent loan interest
minusminus Adjustments to Income Adjustments to Income
Deductions/ExemptionsDeductions/Exemptions
Add Taxable Income
minus Adjustments to Income
minusminus Deductions/ExemptionsDeductions/Exemptions
times Tax Bracket
minus Tax Credits
Medical/dentalMedical/dental State/local taxesState/local taxes Foreign taxesForeign taxes InterestInterest Casualty/theft lossesCasualty/theft losses Charitable giftsCharitable gifts Miscellaneous Miscellaneous
itemized deductionsitemized deductions
Tax Brackets
Add Taxable Income
minus Adjustments to Income
minus Deductions
timestimes Tax BracketTax Bracket
minus Tax Credits
Rate Single HoH Joint
10% 0 0 0
15% 8,701 12,401 17,401
25% 35,351 47,351 70,701
28% 85,651 122,301
142,701
33% 178,651
198,051
217,451
35% 388,351
388,351
388,351
Tax CreditsTax Credits
Add Taxable Income
minus Adjustments to Income
minus Deductions
times Tax Bracket
minus minus Tax CreditsTax Credits
Family creditsFamily credits Education creditsEducation credits Foreign taxForeign tax General business General business Low-income housingLow-income housing RenovationRenovation
Two Kinds of DollarsTwo Kinds of Dollars
Add Taxable Income
minus Adjustments to Income
minus Deductions
times Tax Bracket
minus Tax Credits
Pre-Tax Dollars
After-Tax Dollars
Keys to Cutting TaxKeys to Cutting Tax
1.1. Earn nontaxable incomeEarn nontaxable income2.2. Maximize deductions and creditsMaximize deductions and credits3.3. Shift income: later years, lower bracketsShift income: later years, lower brackets
“You lose every time you spend after-tax dollars that could have been pre-tax dollars.”
#2:#2: ““Audit ParanoiaAudit Paranoia””
#3:#3: Wrong Business Entity Wrong Business Entity
Sole ProprietorshipSole ProprietorshipReport net income on Schedule C
Pay SE tax up to 15.3% on
income
Pay income tax on net
income
S-CorporationS-CorporationSplit proceeds into “salary” and “income”
Pay FICA up to 15.3% on salary
Avoid FICA/SE tax on income
Pay income tax on salary and income
Employment Tax ComparisonEmployment Tax ComparisonS-Corp FICA
Salary $40,000FICA $6,120Net $73,880
Proprietorship SEIncome $80,000SE Tax $11,304
Net $68,696
S-Corp Saves $5,184
#4:#4: Wrong Retirement Plan Wrong Retirement Plan
Simplified Employee PensionSimplified Employee Pension ““TurbochargedTurbocharged”” IRA IRA Contribute up to 25% of Contribute up to 25% of
incomeincome Max. contribution: $49,000Max. contribution: $49,000 Must contribute for all Must contribute for all
eligible employeeseligible employees Contributions directed to Contributions directed to
employee IRAsemployee IRAs No annual administrationNo annual administration
SIMPLE IRASIMPLE IRA Defer 100% of income up to Defer 100% of income up to
$11,500$11,500 Age 50+ add $2,500 Age 50+ add $2,500 ““catch catch
upup”” Business Business ““matchmatch”” or or ““PSPS”” Contribute to IRAsContribute to IRAs No annual administrationNo annual administration
401(k)401(k) Defer 100% of income up to Defer 100% of income up to
$16,500$16,500 Age 50+ add $5,500 Age 50+ add $5,500 ““catch catch
upup”” Employer contributes up to Employer contributes up to
25% of 25% of ““covered compcovered comp”” Max. contribution: $49,000 Max. contribution: $49,000 Loans, hardship Loans, hardship
withdrawals, rollovers, etc.withdrawals, rollovers, etc. Simplified administration for Simplified administration for
““individualindividual”” 401(k) 401(k)
Defined Benefit PlanDefined Benefit Plan Guarantee up to $185,000Guarantee up to $185,000 Contribute according to Contribute according to
age and salaryage and salary Required contributionsRequired contributions ““412(i)412(i)”” insured plan insured plan ““DualDual”” plans plans
#5:#5: Missing Family Missing Family EmploymentEmployment
Children age 7+Children age 7+ First $5,800 tax-freeFirst $5,800 tax-free Next $8,500 taxed at 10%Next $8,500 taxed at 10% ““ReasonableReasonable”” wages wages Written job description, timesheet, checkWritten job description, timesheet, check Account in childAccount in child’’s names name FICA/FUTA savingsFICA/FUTA savings
#6:#6: Missing Medical Benefits Missing Medical Benefits Employee benefit planEmployee benefit plan
– Married: Hire spouse (no salary necessary)Married: Hire spouse (no salary necessary)– Not married: C-corpNot married: C-corp
Reimburse Reimburse employeeemployee for medical expenses for medical expenses incurred for self, spouse, and dependents incurred for self, spouse, and dependents Works with any insuranceWorks with any insurance
– Use your own insuranceUse your own insurance– Supplement spouseSupplement spouse’’s coverages coverage
MERP/105 PlanMERP/105 Plan Major medical, LTC, Medicare, Major medical, LTC, Medicare, ““MedigapMedigap”” Co-pays, deductibles, prescriptionsCo-pays, deductibles, prescriptions Dental, vision, and chiropracticDental, vision, and chiropractic Braces, fertility treatments, special schoolsBraces, fertility treatments, special schools Nonprescription medications and suppliesNonprescription medications and supplies
MERP/105 PlanMERP/105 Plan Written plan documentWritten plan document No pre-funding requiredNo pre-funding required
– Reimburse employeeReimburse employee– Pay provider directlyPay provider directly
Bypass 7.5% floorBypass 7.5% floor Minimize self-employment taxMinimize self-employment tax
Health Savings AccountHealth Savings Account1.1. ““High deductible health planHigh deductible health plan””
- $1,200+ deductible (individual coverage)- $1,200+ deductible (individual coverage) - $2,400+ deductible (family coverage)- $2,400+ deductible (family coverage)
PlusPlus
2.2. Tax-deductible Tax-deductible ““Health Savings AccountHealth Savings Account””- Contribute & deduct up to $3,100/$6,250 per yearContribute & deduct up to $3,100/$6,250 per year- Account grows tax-freeAccount grows tax-free- Tax-free withdrawals for qualified expensesTax-free withdrawals for qualified expenses
#7:#7: Missing A Home Office Missing A Home Office““Principal place of businessPrincipal place of business””: : 1.1. ““exclusively and regularly for administrative exclusively and regularly for administrative
or management activities of your trade or or management activities of your trade or businessbusiness””
2.2. ““you have no other fixed location where you you have no other fixed location where you conduct substantial administrative or conduct substantial administrative or management activities of your trade or management activities of your trade or business.business.””
Source: IRS Publication 587Source: IRS Publication 587
#7:#7: Missing Home Office Missing Home Office Determine Determine ““BUPBUP”” of home of home
– Divide by roomsDivide by rooms– Square footageSquare footage– Eliminate Eliminate ““common areascommon areas””
144
1500
100
#7:#7: Missing Home Office Missing Home Office Deduct Deduct ““BUPBUP”” of expenses: of expenses:
– Mortgage/property taxes Mortgage/property taxes (better than Schedule A)(better than Schedule A)
– Utilities/security/cleaningUtilities/security/cleaning– Office furniture/decorOffice furniture/decor– Depreciation (39 years)Depreciation (39 years)
Increase business milesIncrease business miles
#7:#7: Missing Home Office Missing Home Office When you sell:When you sell:
– Recapture depreciationRecapture depreciation– KeepKeep tax-free exclusion tax-free exclusion
#8:#8: Missing Car/Truck Missing Car/Truck ExpensesExpenses
#9:#9: Missing Missing Meals/EntertainmentMeals/Entertainment
Bona fideBona fide business discussion business discussion– ClientsClients– ProspectsProspects– Referral SourcesReferral Sources– Business colleaguesBusiness colleagues
50% of most expenses 50% of most expenses Home entertainmentHome entertainment Associated entertainmentAssociated entertainment
#9:#9: Missing Missing Meals/EntertainmentMeals/Entertainment
How much?How much? When?When? Where?Where? Business purpose?Business purpose? Business relationship?Business relationship?
#10: Missing Tax Coaching #10: Missing Tax Coaching ServiceService
TrueTrue Tax Planning Tax Planning Written Tax PlanWritten Tax Plan
– Family, Home, and JobFamily, Home, and Job– BusinessBusiness– InvestmentsInvestments
Review ReturnsReview Returns
Report of Foreign Bank and Financial Accounts (FBAR)
Form TD F 90-22
Are subject to a penalty of up to $10,000 per violation
June 15TH
If you are a U.S. citizen or resident alienDepartment of TreasureInternal Revenue Service CenterAustin, TX 73301-0215USA
Estimated tax payments Internal Revenue ServiceP.O. Box 1300Charlotte, NC 28202-1300USA
Translating Foreign currency into U.S. Dollars• Yearly Average Current Exchange Rates• Year-End Exchange Rate• At Time of Transaction
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