There are many strategies you can use as a business owner to keep more of your wealth and less away from Uncle Sam. I see too many people lose thousands of dollars of their hard-earned money just because they did not plan a strategy or have no knowledge of the tax laws in this country. Here’s a review of some tips from Diane Kennedy at www.usataxaid.com
Avoid audits as an employer: the IRS is looking at employers who hire independent contractors, so make sure you:
• Write a job description for the position which indicates limited control and an independent working environment
• Make sure your company’s operating agreement and employment policies treat the position as an independent contractor
• Get a signed independent contractor’s agreement between the company and the worker
• Have a completed form W-9 from each independent contractor you hire.
Executive Compensation: Audits look out for reasonable salary and non salary compensation such as loans or stock options. Ensure you protect yourself by having market comparables to substantiate the “reasonableness” of your compensation. Examples include market salaries, interest rates, and stock prices. Document your backup information and save it in your tax file.
Fringe Benefits: Everyone loves these perks for executives and employees, but the IRS is watching to make sure that tax-free and taxable fringe benefits such as cell phones, cars, and insurance are appropriately reflected. This is the best time to review your company policy and update it to be compliant.
Payroll Taxes: The IRS will be looking closely at Forms 941 and Form 1099/W-2 for issues including withholding and next-day deposit requirements. Make sure you are working with a competent payroll service company to ensure all your filings and payments are made on time to avoid huge penalties.
WARNING: The IRS has warned that businesses that are audited should be prepared to open all their records for examination. Don’t wait to get that dreaded audit letter, save yourself money and headaches by getting organized now.
Prepare by doing an internal audit to ensure all the documentation is where it’s supposed to be and fix any problems you find immediately.
Retirement Planning: Every business owner should be planning for retirement. Retirement accounts are powerful tools that you can use to minimize your current taxes with contributions and money in retirement funds allows you to increase your investing power with tax-deferred or tax-free investments. You should be asking yourself the following:
1 ) How many employees do you have?
2) What are your goals for the business?
3) What kind of vesting requirements do you want to have?
3) Would you like to be able to borrow from the plan?
4) How much would you like to contribute towards the plan?
A great retirement savings vehicle is the Solo 401(K) plan. The Solo 401(k), commonly referred to as Solo K, is a retirement plan designed for small business owners. Sole proprietors, independent contractors, C corporations, S corporations, partnerships, and LLCs can qualify for this plan if certain requirements are met.
RecordKeeping: The importance of having a good record-keeping system for your taxes cannot be underestimated. The key to superior recordkeeping is to make a habit of it. Recordkeeping should be done every day or every week and at least every month. Record keeping allows you to obtain every possible tax deduction, which is another way of cutting expenses. It is also one of the best ways to tell what does and does not work for your business as a real estate investor.
As a real estate investor, you will have a lot of transactions and documentation related to your deals. You must organize this information because you will need it when it comes to filing your tax return. If you don’t have a system in place, it will cost you time and money, and in some instances – a lot of money.
Here are some tips for keeping a good record for tax time:
• Check your records every month, week, and quarter.
• Double check, and make sure all the facts and figures are accurate.
• Make sure you have your cash flow mapped out so you know exactly what you have available.
• Use an easy to understand system like QuickBooks
• Alternatively, you can use a simple Excel spreadsheet.
The important thing is to set up the right system and manage it properly. If you need help, hire a bookkeeper, or find someone qualified to teach you how to manage your own system.
The Burden of Proof
At the IRS examination level, the burden of proof remains with the taxpayer. The burden of proof concerning an audit only shifts to the IRS in tax court. To qualify for this shift in the burden of proof, these conditions must exist:
1. You must maintain all records required by the Internal Revenue Code.
2. You must produce these records at the audit.
The IRS’s best defense is to reshift the burden of proof to you and assert that you did not have adequate records.
Some recent questions from my blog:
QUESTION: Can a person take 1031 exchange monies and partner with another investor on a similar property? If so, how would this look and be set up? Say I have $100k to 1031 and want to buy a property with a partner that also brings in $100k to invest.
ANSWER: Yes you may. Partial interests qualify for exchanging within the scope of Section 1031 of the Internal Revenue Code. However, if your interest is not in the property but an interest in the partnership that owns the property, your exchange would not qualify. This is because partnership interests are excluded from Section 1031. But don’t be confused! If the entire partnership desired to stay together and exchange their property for a replacement, that would qualify. Another caveat, those individuals or groups owning partnership interests who desire to complete an exchange, and have for tax purposes, made an election under IRC Section 761(a) can qualify for deferred gain treatment under Section 1031. This can be a tricky issue!
QUESTION: Over the years, it’s been told to me over and over that taking the mileage deduction is better than the alternative of expensing a vehicle (forgive me if I got the term wrong. Recently, some highly successful investors have told me they do better by expensing their vehicles. Does anyone use the non-mileage approach? Can you share under which variables it is superior to taking the mileage deduction?
ANSWER: I look at both scenarios for my clients and decide which is the better option. Just remember that with the actual expenses, you will need to allocate only a portion of those expenses that relate to the business.
I address many of these issues in my Wealth Building Plan. Make sure you are getting the best tax advice. Let me evaluate your financial and tax situation, then develop a customized tax strategy just for you. Together, we will come up with a strategic plan designed to answer your questions as you build your own customized wealth-building plan. You can get more information at WEALTH BUILDING PLAN
