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 defensedefense

2.2. 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% 85,651122,30

1142,70

1

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 Proprietorship

Report net income on Schedule C

Pay SE tax up to 15.3% on

income

Pay income tax on net

income

S-CorporationS-Corporation

Split 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 Comparison

S-Corp FICA

Salary $40,000

FICA $6,120

Net $73,880

Proprietorship SE

Income $80,000

SE 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 Account

1.1. ““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