Tax planning strategies. I have tried to nail this down to the most substantial tax planning strategies the average San Diego business can take advantage of based upon what we see on a daily basis in our practice. Here are some useful Ideas.

 

 

 

 

 

 

Hire Children to Save Tax:


An employer-parent can shield self-employment income from taxation by hiring his or her child.
1) Wages are exempt from FICA for a child under age 18 if employed in a parents unincorporated business.
2) A dependents standard deduction can be up to $5,000 if all income is earned income.
3) A child may be eligible to contribute $4,000 to a deductible IRA.
4) Wages paid by a parent to a child are deductible by the parents business if (a) work is done in connection with the parents trade or business, (b) the child actually performs the work for which wages are paid and (c) payments are actually made.
Note: Wages paid to a child must be reasonable in relation to other services actually rendered. The business owner should keep detailed records.

Sole Proprietor Can Deduct Cost of Medical Expenses Paid to Employee-Spouse:


Under an accident and health plan that meets the requirements of Section 105(b), sole proprietors can deduct as business expenses the full amount of medical reimbursement costs paid to employees. Sole proprietors generally cannot deduct benefits paid for themselves [IRC 105]. However, if the proprietors spouse if an employee, the proprietor can be covered under the spouses medical plan since the proprietor is in the employees family.
1) The cost of an employers medical reimbursement plan is deductible by the employer (ref.1. 162-10). The amount if not included in the employees taxable income.
2) In Letter Ruling 9409006, the IRS allowed deductions for reimbursements of family medical expenses made to a sole proprietors employee-spouse. The proprietor benefiting from the reimbursement did not disqualify the deduction.
3) If the plan discriminates in favor of highly compensated employees, the benefits are taxable.
Note: Regulations require that a written agreement be in place before a medical reimbursement plan can be implemented.
An employee-spouse must actually perform services for the employer. The IRS is likely to reclassify amounts paid to an employee-spouse if it determines that the spouse did not function as a bona fide employee.

Organizational and Start-Up Costs Deduction vs. Capitalization:


Expenses incurred before a business begins operations are not allowed as current deductions. These expenses may be eligible for deduction or amortization once the business begins operating. Some costs are added to the basis of property, and may or may not be depreciable. When a business begins operating determines whether costs are currently deductible or capitalized as organizational and start-up costs.
Applicable Rules
1) Start-up costs. Expenses incurred before the start of business operations that would be deductible if the business had already started operating.
2) Organizational costs. Costs of setting up the business entity, such as organizational meetings, temporary directors and incorporation, legal and accounting fees.
3) Tax treatment. For organizational and start-up costs paid or incurred before October 23, 2004, a taxpayer can elect an amortization period of 60 months or more. For costs paid ro incurred after October 22, 2004, a taxpayer can elect to deduct an amount equal to the lesser of:
The start-up/ organizational costs, or
$5,000 for each type of cost reduced by the excess of each type of cost over $50,000.
Any remaining expenditures are amortized over a 180-month period beginning in the month in which the business begins. Failure by a taxpayer to make the election requires the costs to be capitalized with no deduction for amortization.

Unsuccessful Attempt to Acquire Business Section 1244 Loss:


What is the tax effect to a prospective business owner if the search for a new business is unsuccessful?
1) If the search for a new business is successful, costs of getting the business started are capital expenses. Once operations begin, the costs can be recovered by depreciation, or deduction/ amortization of organizational and start-up costs.
2) If the search for a new business is not successful, costs of trying to go into business are divided into two categories:
a) Costs incurred in a search, before making a decision to acquire a specific business. For an individual, these costs are personal and nondeductible.
b) Costs incurred after a decision has been made to acquire a specific business. If the attempt to go into business is not successful, these costs can be deducted as capital losses.
3) Investigative costs incurred by a corporation are deductible whether or not a specific business was identified.

Tax on Appreciation of Contributed Real Estate:


If a shareholder contributes property to a corporation, the corporation cannot later distribute the property back to the shareholder without recognizing gain on the propertys appreciation.
1) Corporations distribution of appreciated property:
Effect on Corporation. If a corporation makes a distribution of appreciated property to a shareholder the corporation recognizes gain as if the corporation sold the property at FMV.
Effect on Shareholder. The FMV of the distribution is generally treated by the shareholder as a taxable dividend up to the earnings and profits (E&P) of the corporation.
2) Complete liquidation:
Effect on Corporation. In complete liquidation, a corporation recognizes gain or loss on the distribution of property as of the corporation sold the property at FMV.
Effect on Shareholder. In a complete liquidation, FMV of property distributed is treated as payment for the shareholders stock. Gain or loss is reported as if the shareholder sold stock back to the corporation.
Note: It is usually advantageous to keep real estate or other property likely to appreciate out of a corporation. In a closely held business, the shareholder will typically lease property to the corporation rather than contributing it.

Katrina Emergency Tax Relief Act of 2005:


If elected, cash donations to public charities, churches, hospitals and similar charities are limited to the C corporations taxable income. The corporation must substantiate that the donation was for relief efforts related to Hurricane Katrina.

Any business that donates food inventory can claim the enhanced deduction normally allowed only to C corporations. It doesnt matter where the donating business is located provided the charity uses the food solely for the care of the ill, the needy or infants; there is no requirement that the food be used for Katrina victims.

Automatic Extensions Now Six Months:


In the past, only corporations could request an automatic six-month tax-filing extension. Newly issues regulations under Section 6081 make this option available to most noncorporate business taxpayers, which in past years had to request an initial three-month extension and, if more time was needed, request another three months.


For more detailed information, please ask us.

Sole Proprietor Can Deduct Cost of Medical Expenses Paid to Employee-Spouse:


Under an accident and health plan that meets the requirements of Section 105(b), sole proprietors can deduct as business expenses the full amount of medical reimbursement costs paid to employees. Sole proprietors generally cannot deduct benefits paid for themselves [IRC 105]. However, if the proprietors spouse if an employee, the proprietor can be covered under the spouses medical plan since the proprietor is in the employees family.
1) The cost of an employers medical reimbursement plan is deductible by the employer (ref.1. 162-10). The amount if not included in the employees taxable income.
2) In Letter Ruling 9409006, the IRS allowed deductions for reimbursements of family medical expenses made to a sole proprietors employee-spouse. The proprietor benefiting from the reimbursement did not disqualify the deduction.
3) If the plan discriminates in favor of highly compensated employees, the benefits are taxable.
Note: Regulations require that a written agreement be in place before a medical reimbursement plan can be implemented.
An employee-spouse must actually perform services for the employer. The IRS is likely to reclassify amounts paid to an employee-spouse if it determines that the spouse did not function as a bona fide employee.

 

All advise rendered herein is current as of the time it is rendered. As tax law and the IRS interpretation of such law is subject to change, we can guarantee the accuracy of this advise only for the time and situation given. 2006. Livesay Capital Solutions