10 Tax Mistakes 2009

10 Most Expensive Tax Mistakes That Cost Business Owners Thousands : 

10 Most Expensive Tax Mistakes That Cost Business Owners Thousands Eric L. Levenhagen, CPA ProWise Tax & Accounting, LLC Eric@ProWiseLLC.com (888) 892-5132

#1: Failing to Plan : 

#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

Why Tax Planning? : 

Why Tax Planning? Key to financial defense Guarantee results

Taxable Income : 

Taxable Income ? Add Taxable Income ? minus Adjustments to Income ? minus Deductions ? times Tax Bracket ? minus Tax Credits Earned income Interest/dividends Capital gains Pension/IRA/Annuity Rent/royalty Alimony Gambling winnings Illegal income

Adjustments to Income : 

? Add Taxable Income Adjustments to Income ? minus Deductions ? times Tax Bracket ? minus Tax Credits IRA contributions Moving expenses ½ SE tax SE health insurance Keogh/SEP Alimony Student loan interest ? minus Adjustments to Income

Deductions/Exemptions : 

Deductions/Exemptions ? Add Taxable Income ? minus Adjustments to Income ? minus Deductions/Exemptions ? times Tax Bracket ? minus Tax Credits Medical/dental State/local taxes Foreign taxes Interest Casualty/theft losses Charitable gifts Miscellaneous itemized deductions

Tax Brackets : 

Tax Brackets ? Add Taxable Income ? minus Adjustments to Income ? minus Deductions ? times Tax Bracket ? minus Tax Credits

Tax Credits : 

Tax Credits ? Add Taxable Income ? minus Adjustments to Income ? minus Deductions ? times Tax Bracket ? minus Tax Credits Family credits Education credits Foreign tax General business Low-income housing Renovation

Two Kinds of Dollars : 

Two 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 Tax : 

Keys to Cutting Tax Earn nontaxable income Maximize deductions and credits Shift income: later years, lower brackets “You lose every time you spend after-tax dollars that could have been pre-tax dollars.”

#2: “Audit Paranoia” : 

#2: “Audit Paranoia”

#3: Wrong Business Entity : 

#3: Wrong Business Entity

Sole Proprietorship : 

Sole Proprietorship Report net income on Schedule C Pay SE tax up to 15.3% on income Pay income tax on net income

S-Corporation : 

S-Corporation Split proceeds into “salary” and “income” Pay FICA up to 15.3% on salary Avoid FICA/SE tax on income Salary Income Pay income tax on salary and income

Employment Tax Comparison : 

Employment Tax Comparison S-Corp Saves $5,184

#4: Wrong Retirement Plan : 

#4: Wrong Retirement Plan

Simplified Employee Pension : 

Simplified Employee Pension “Turbocharged” IRA Contribute up to 25% of income Max. contribution: $49,000 Must contribute for all eligible employees Contributions directed to employee IRAs No annual administration

SIMPLE IRA : 

SIMPLE IRA Defer 100% of income up to $11,500 Age 50+ add $2,500 “catch up” Business “match” or “PS” Contribute to IRAs No annual administration

401(k) : 

401(k) Defer 100% of income up to $16,500 Age 50+ add $5,500 “catch up” Employer contributes up to 25% of “covered comp” Max. contribution: $49,000 Loans, hardship withdrawals, rollovers, etc. Simplified administration for “individual” 401(k)

Defined Benefit Plan : 

Defined Benefit Plan Guarantee up to $185,000 Contribute according to age and salary Required contributions “412(i)” insured plan “Dual” plans

#5: Missing Family Employment : 

#5: Missing Family Employment Children age 7+ First $5,700 tax-free Next $8,350 taxed at 10% “Reasonable” wages Written job description, timesheet, check Account in child’s name FICA/FUTA savings

#6: Missing Medical Benefits : 

#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

MERP/105 Plan : 

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

MERP/105 Plan : 

MERP/105 Plan Written plan document No pre-funding required Reimburse employee Pay provider directly Bypass 7.5% floor Minimize self-employment tax

Health Savings Account : 

Health Savings Account “High deductible health plan” - $2,000+ deductible (individual coverage) - $4,000+ deductible (family coverage) Plus Tax-deductible “Health Savings Account” Contribute & deduct up to $3,000/$5,950 per year Account grows tax-free Tax-free withdrawals for qualified expenses

#7: Missing Home Office : 

#7: Missing Home Office Determine “BUP” of home Divide by rooms Square footage Eliminate “common areas” 144 1500 100

#7: Missing Home Office : 

#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

#7: Missing Home Office : 

#7: Missing Home Office When you sell: Recapture depreciation Keep tax-free exclusion

#8: Missing Car/Truck Expenses : 

#8: Missing Car/Truck Expenses

#9: Missing Meals/Entertainment : 

#9: Missing Meals/Entertainment Bona fide business discussion Clients Prospects Referral Sources Business colleagues 50% of most expenses Home entertainment Associated entertainment

#9: Missing Meals/Entertainment : 

#9: Missing Meals/Entertainment How much? When? Where? Business purpose? Business relationship?

#10: Missing Tax Planning Service : 

#10: Missing Tax Planning Service True Tax Planning Free Tax Analysis Written Tax Plan Family, Home, and Job Business Investments (888) 892-5132 Eric L. Levenhagen, CPA