THE WHALEN GROUP
Proven Tax Reduction Strategies for Sole Proprietors
If you operate your business as a sole proprietorship, there are many strategies to reduce your taxes.
Let’s start with the following 10:
- Use the Section 105 plan to make your health insurance a tax-favored business deduction on your Schedule C.
- Employ your under-age-18 child to make taxable income disappear.
- Employ your spouse without paying him or her a W-2 wage.
- Rent your office, even your home office, from your spouse to save self-employment taxes.
- Establish that an office in your home is your principal office to increase (yes, increase!) your vehicle deductions and also turn personal home expenses into business expenses.
- Give yourself flowers, fruit, and books as tax-deductible fringe benefits.
- Combine the home office and a heavy SUV, crossover vehicle, or pickup truck to grab big deductions this year.
- Design a business trip that includes some personal days—days you treat as 100 percent business even though you don’t work on those days.
- Use the seven-day tax deduction travel rule to create a business trip that is 87 percent personal vacation.
- Deduct your smartphone and provide smartphones to your employees as tax-free fringe benefits.
If one or more of these look good to you, let’s talk about how to make them work.
Incorporation Is Not for Everyone
If you’re not good at paperwork, the corporate form of business is probably not for you.
Let me tell you about a tax court case involving William H. Bruecher III. He learned a lesson by paying more than $27,000 in taxes on monies his corporation supposedly loaned to him. Mr. Bruecher’s corporation did not pay him a salary; rather, the corporation paid his personal expenses, classifying the payments as advances.
Advance Account on Corporate Books
Advances handled properly do not create a tax problem. The IRS in an audit, or the court in a decision, first looks to see whether the advances are loans or dividends. If repayment by the owner and collection by the corporation seem assured, or actually take place in a later year, the advance is a loan.
Intent to Repay
To decide whether there is intent to repay, the court looks at factors such as the following:
- Promissory notes or other written promises to repay the advance
- Interest charges on the advance
- Collateral to ensure repayment
- Past history of repayment
Neither Mr. Bruecher nor his corporation could produce any of these. Further, the very personal nature of some of the advances (such as divorce settlement payments, child support payments, and payments to the grocery store) got the court’s attention.
In court, Mr. Bruecher delivered his self-serving testimony and presented as evidence the corporate tax return, on which the advances were classified as loans. Not good enough, ruled the court, as it made the advances taxable dividends to Mr. Bruecher.
When you operate as a corporation, the corporation is a separate legal entity, and you should have a corporate paper trail that clearly reflects intent and action.
- C corporation. Clear out the advance account and make the advances interest-bearing loans, with specific repayment dates.
- S corporation. Either offset the advances with the distribution account or evidence the advances as interest-bearing loans.
“It is a good thing that we do get as much government as we pay for” – Will Rogers
How to Deduct Cruise Ship Conventions, Seminars, and Meetings
If you want to attend a convention, seminar, or similar meeting onboard a cruise ship and deduct all your costs, you face some very special rules. But it can be done.
When you know the tax code rules, you will find an enlightened workaround that removes almost all the hassle and gives you what you want. The IRS considers all ships that sail cruise ships.
In 1982, your lawmakers were attempting to give the U.S. cruise ship industry a leg up by outlawing all cruise ship conventions, seminars, and similar meetings other than those
- that take place on a vessel registered in the United States, and
- for which all ports of call of such vessel are located in the United States or in possessions of the United States.
The 1982 law remains on the books. Lawmakers have not updated the limits for inflation. Here’s the cruise ship convention tax code rule as it existed in 1982 and as it exists today:
With respect to cruises beginning in any calendar year, not more than $2,000 of the expenses attributable to an individual attending one or more meetings may be taken into account under Section 162 . . .”
Had the $2,000 been indexed for inflation, the 2019 amount would be a reasonable $5,431, and that would likely encourage more 2019 U.S. cruise ship convention-type travel.
The $2,000 is pretty skimpy when you consider that the expenses include
- the cost of air or other travel to get to and from the cruise ship port;
- the cost of the cruise; and
- the cost of the convention, seminar, or similar meeting.
Bigger, Better Deductions with Less Hassle
This is a way you can avoid the $2,000 limit, take the cruise you want, and likely deduct all your costs. And this does not have to involve a U.S. ship. Any ship from any country works.
Here’s the strategy. You take the cruise ship to a convention, seminar, or meeting that’s held
- on land, say at a hotel, and
- in the tax-law-defined North American area.
When you meet the two easy requirements above, you deduct (a) the full cost of getting to and from the location; (b) the full cost of the convention, seminar, or similar meeting; and (c) likely the full cost of the cruise if your onboard ship expenses are less than the 2019 daily luxury water limits.
Using the 2019 luxury water limits, if your average daily cost of the cruise is $692 or less, you can use this strategy to deduct all cruise ship costs to travel to and from the seminar.
Impact of Death, Retirement, and Disability on the 179 Deduction
What tax effect would death, retirement, or disability have on you or your business? Here’s an easy example to illustrate.
Let’s say that in 2017, you purchased for business use a pickup truck with a gross vehicle weight rating greater than 6,000 pounds. Asserting that you use the pickup 100 percent for business, you expensed the entire $55,000 cost.
What happens to that $55,000 expensed amount if you die, retire, or become disabled before the end of the vehicle’s five-year depreciation period?
If your heirs are not going to pay estate taxes, your death is about as good as it gets. Here’s why: You get to keep your Section 179 deduction. (It goes to the grave with you.)
Your pickup truck gets marked up to fair market value. (Remember, you expensed it to zero, but now at your death, the fair market value is the new basis to your heir or heirs.)
Example. Using Section 179, you expensed the entire cost of your $55,000 pickup truck. You die. Your daughter inherits the pickup at its fair market value, which is now $31,000, and sells it immediately for $31,000. Here are the results:
- You get to keep your Section 179 deduction—no recapture applies.
- Your daughter pays zero tax on her sale of the pickup truck.
- Your estate includes the $31,000 fair market value of the pickup, and if your estate is less than $11.4 million, your estate pays no estate taxes.
This is ugly. If you become disabled and you allow your business use of the pickup to fall to 50 percent or below during its five-year depreciable life, you must recapture and pay taxes on the excess deductions generated by the Section 179 deduction.
To make matters worse, you must use straight-line depreciation in making the excess-deduction calculation.
With retirement, you have exactly the same problem as you would have if you were to become disabled. In fact, with retirement, you disable your business involvement, and that makes your pickup truck fail the more-than-50-percent-business-use test, resulting in recapture of the excess benefit over straight-line depreciation.
“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half the money” – Arthur Godfrey
IRS Scan Notices:
Two new IRS impersonation telephone scams are on the agency’s radar. In one, thieves posing as IRS employees tell victims they owe back taxes and must pay up fast or their Social Security numbers will be suspended or cancelled. The second involves the mailing of letters threatening liens or levies for unpaid taxes. The letters reference the “Bureau of Tax Enforcement,” which does not exist.
What To Do If You Receive a CP2000 Notice From The IRS
These letters let you know the agency computers found a discrepancy between income and deductions you reported on your tax return, remember know human eye has seen this until you open the letter. The IRS computer receives data for employer form W-2, Form 1099, Form 1098 and others, the data is electronically compare to what you reported on your tax return, when there is a difference not in your favor out pops the CP2000 letter. What you should do: First, check your records. If you agree with the proposed changes, return the form with your payment, if you do not have the money now explain when it can be paid or arrange for an installment payment plan. Second is you do not agree then send the document back to the IRS with a explanation of why you disagree. Third, always respond time, within 30 days of the date on the form, you can call the IRS if you need more time, but do not ignore the CP2000. Remember you can call our office a get help NO Charge weather a client or not.
Estate Tax Issues.
D.C. and 12 states currently levy their own estate taxes on some decedents. Conn., Hawaii, ILL., Maine, MD., Mass., Minn., N.Y., Ore., R.I., Vt. And Wash. The estate tax exemption amounts in the 13 locales vary widely from state to state. However, no state has raised its exemption amount to match the current federal level: $11,400,000 per person $22,800,000 for couples if portability is timely elected on form 706 for the first to die spouse. Iowa, Ky., Md., N.J. and Pa. have inheritance taxes.
Willfully Failing to Report Foreign Accounts Can Lead to a Stiff Penalty.
Under the statute, the fine is the greater of $100,000 or 50% of the highest balance in the accounts. But courts are split on whether the fine is capped. The regulations state that the penalty shall be no greater than $100,000.
Eight district courts have addressed the conflict between the regs and the statute. Two say the Service is bound by the $100,000 cap set forth in the regulations, and six agree that the statute controls. The IRS slapped a $614,000 penalty on a man for willful failure to disclose his accounts. The court reviewed the state of law and upheld the fine (Schoenfeld, D.C., Fla.). Source Kiplinger The conclusion here should be, always report foreign bank and investment accounts if at any time during the years the aggregate value exceeds $10,000. There is no penalty for having a foreign investment or bank accounts only for not reporting them.
‘Alexander Hamilton started the U.S. Treasury with nothing and that was the closest our country has ever been to being even.” – Will Rogers
Inheriting an IRA Poses Hazard for Some Heirs.
Arranging our estate to avoid or limit taxation is important with IRAs you can have named beneficiaries which avoid probate at death. A spouse beneficiary can have the account transferred to their IRA, a non-spouse beneficiary can receive it as an inherited IRA and take distributions over their lifetime or lump-sum distributions at their leisure after making it an inherited IRA. An inherited IRA title is different, meaning if John Doe died naming a son as beneficiary (William Doe) the title should read “John Doe (deceased April 1, 2019) IRA for the benefit of William Doe.”
Depending on the IRA being age 70 ½ or older makes a difference with the options you may have as beneficiary. If you are a spouse and RMDs have not started then you have 4 options:
- Treat as your own IRA by transferring to an existing IRA account or starting a new one.
- Five-Year Rule (decedent had not begun RMDs) The spouse beneficiary must withdraw the entire balance by December 31 of the fifth year after the IRA owner’s death.
- Life Expectancy Payments (available if deceased had or had not begun RMDs) The spouse beneficiary can take distributions over life expectancy using the recalculation or nonrecalculation These distributions must begin by December 31 of the year after the IRA owner’s death.
- Take the entire IRA amount in Lum-sum fully taxable.
The non-spouse beneficiary have 3 options:
- Take the beneficiary portion in limp sum, fully taxable (no premature penalty).
- Use the Five-Year Rule as in 2 above.
- Life Expectancy Payments as in 3 above.
The worst situation is to not have a beneficiary elected, then the IRA is subject to probate and must be Lump-sum distribution fully taxable. Remember reviewing the beneficiary election you have chosen is important for instance assume the beneficiary you have named as passed away then the IRA must be probated and distributed fully taxable as if you had not named a beneficiary. Remember that if the distribution is not in the final year of the Estate Return then it will be taxed at the Estate & Trust Tax Rates:
Taxable Income 2019 Tax
Not over $2,600 10% of the taxable income
Over $2.600 but not over $9,300 $260 plus 24% of excess over $2600
Over $9,300 but not over $12,750 $1,868 plus 35% of the excess over $9,300
Over $12,750 $3,075.50 plus 37% of the excess over $12,750
At the Whalen Group we do estate planning and will review your wills, trust, Durable Powers of Attorney for Healthcare and Finance, beneficiaries and other important estate documents at NO CHARGE just make an appointment.
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Al Whalen, EA, ATA, CFP®
10501 W Gowan Rd Ste 100
Las Vegas, NV 89129
Phone: (702) 878-3900
Web Site: www.whalengroup.com