Converting Your Ten Largest Expenses
In the section on corporate entities, I covered many of the tax saving benefits of having your own business. What do you say we apply some of these to your particular situation? What's underlying the work we're going to so in this section is a key concept: Much of the potential tax savings comes as result of you converting your personal expenses into deductible business expenses. Many of these expenses are common place. For example: Your phone, fax, cell phone, and automobile. Yet some are not so apparent. Often, when working with a new student, (s) he'll tell me, “I'm already deducting everything I can”. Or “My accountant makes sure I get all of the possible deductions.” In my experience, there is always room for improvement. In fact, in over 25 years of business experience, I find that most business people and entrepreneurs are pulling from a list of about 25 -50 business deductions. Often, they push those deductions to the edge (or beyond) while failing to document them properly. This can leave them with too few deductions and unpaid taxes plus penalties and interest. Not an enviable approach. Advisor Diane Kennedy, C.P.A. advises us that there are 300 deductions available to businesses. Part of what we teach our students is how to use more of those legitimate deductions (i.e. get more bang for the buck from the 250 deductions you are not using by going “wider, not deeper” into the list) and how to audit proof your records (a subject we'll go into detail about in the next section. So, let's take some that the typical deductions that the average entrepreneur and business person is using to his best advantage.
The Home Office Deduction
Those that do take it usually take a percentage of their home. In other words if your office is 150 sq. ft and your home is $1,500 sq. ft., your using 10% of your total square footage as office. Assuming you're mortgage is $1,000 per month, you take a $100 per moth deduction. There's nothing inherently wrong with that, but there may be a better way. Visit a local realtor and ask for a printout of the available office space in the area and the cost per sq. ft. They may tell you its going for $18-$22 sq. ft. If you multiply your 150 sq. ft office by say, $20 /sq. ft – your new deduction is $_________ per month. That's a little better. Remember you must use the space exclusively for your office. We'll talk about proper documentation in the next section.
Your Corporate Gym
Your corporation can pay for the cost of gym equipment. It could be a bow flex marching, the “gazelle” running machine, a treadmill, or free weights, etc. If you've already purchased them, reimburse yourself. Here's an added bonus: If you set up your corporate gym near your corporate home office (say in the basement or garage, the additional space can also be deducted. That could be an additional 300-500 sq. ft. or more of office space.
How About Some Nourishment
Your business can have snacks and refreshments on hand for employees and guests. Say, for example, you visit the grocery store and spend $100. You could also pick up $10-$15 worth of refreshments and snacks for your home office. The cost of cleaning supplies, paper towels and toilet paper, etc. for your home office is also a business deduction. There is no need to purchase a separate refrigerator. And make sure you pay for the office portion separately from your groceries and get a separate receipt.
Suppose its near quitin' time and the boss comes to your office and says “I need you to stay late and finish this project. But I tell you what, I'll buy you dinner”. The cost of that meal is a business deduction. And you can use it for your own business, as well. A good rule of thumb is to keep the cost of the meal between $25 and $30 each time, perhaps 3-4 times a month. This is what I do for my weekly tele-classes.
Meals and Entertainment
Your business can pay for the reasonable cost of meals and entertainment incurred in connection with your business. Meals by yourself and meals with your spouse are not included, but if you take out a colleague (prospect, source of business, investor, potential investor, etc. and discuss business, the meal is a business expense. If you and your spouse discuss business with another couple over a meal, that, too, is deductible. The current limit is 50% of the cost of the meal. Documentation (which we will cover in the next section, is key).
Business Entertainment at Home
If you entertain others at your home while discussing business, that's also deductible. You could do a sales or marketing presentation or make it educational in nature. There's no reason you can't have fun while you work. Meetings followed by entertainment and vice versa Suppose you and your spouse have a business meeting with a colleague or prospect. Directly thereafter, you all decide to play a round of golf, go skiing, see a movie, show, concert or sporting event, or engage in any other entertainment. The cost of that entertainment is deductible.
Office Parties or Promotional Events
Suppose you open a new office and invite everyone you can think of to come by end enjoy some refreshments. Or, if you decide to through a holiday party and invite your staff andor best customers or clients. The entire cost is deductible.
Pay for Your Kid's Wedding and Education (With a Subsidy from Uncle Sam)
Just hire them. Beginning age seven, the U.S. Supreme Court says they are old enough to provide simple clerical services. (Give theme time card and a list of responsibilities). Or, you can hire them as models for your marketing materials. Put their picture in your flyer or website. For the advanced course, put their salary in a Roth, IRA or Educational IRA. It's a great way to give your kids a financial head start in life and its tax deductible!
The Cost of Health (and Wellness) Care
Your company can pay for the cost of health care premiums (for you and the family), plus your deductibles, co-pays and even things that are not covered by your medical insurance.
Things like chiropractic, therapeutic massage, dental, eyeglasses and eye surgery, working with a nutritionist. And, if you get a note from your doctor, you can even pay for the cost of your swimming pool, sauna or hot tub. The proper documentation includes a written medical reimbursement plan, which of course we will cover in the next section.
Your Own Retirement
Part of any good business plan is an exit strategy and for most entrepreneurs, that means planning for your retirement. Even if you never retire, you want to keep working because you love it, not because you have to. There are lots of different retirement plans to choose from: IRA's Roth IRA's Self Directed plans, defined benefit plans, qualified and non-qualified. And the new individual K plan. You need to seek the assistance of a qualified retirement planner to set one up (you can contact my office for a referral). Bit for our purposes, use the tax deductible benefits of this subsidy from Uncle Sam to build your asset column.
Phone and Cell Phone
These days everyone has a phone and most everyone has a cell phone. Both of these are legitimate deductions as is your fax line and your modem/DSL line. Office equipment: Desks, computers phone system, fax, copy machine, etc. All of these can be deducted by your business and, in a later session, we teach you how to rent this equipment back to your corporation for a further tax deduction.
You can deduct not only your car payment or lease payment but also the cost of gas, oil, repairs, tires and maintenance to the degree that you use the car for business. So, a simple way to do this is to put all of your expenses on a separate business credit card. In other words, every time you get gas in your car, put the cost on your corporate credit card and pay off the entire balance at the end of the month. Then, you can take the percentage of time you use the car for business (say its 80% for our example) and 80% is deductible, the other 20% your accountant will attribute to you as salary. There are other, more advanced ways of taking auto deductions and Drew will cover them during an upcoming teleclass.
There are two ways that your company can give away gifts. The first way is to individuals, the second way is to a corporation.
a.) If you give the gift to an individual, say, for example around the holidays, the value of the gift is limited to $25.00. Get a receipt and document the expense in your tax diary. By the way using a Tax diary is a great way to keep track all of your business expense and audit proof your records.
b.) If you give a gift to another company (without designating a recipient – for example, a gift basket of fruit.) there is no limit to the value of the gift.
Education and Seminars
Your corporation can deduct the cost of any education or seminars that you attend, even if the subject matter is unrelated to your business. This includes the cost of the seminar itself, and your travel expenses. (Airline ticket, limo to and from the airport, etc. Remember to properly document the expenses, by keeping the airline tickets, seminar workbook, etc. NOTE: You may not deduct the cost of investment seminars, so if you attend a real estate foreclosure seminar, make sure you attend for education, not investment purposes).
Books and Tapes
Your corporation can deduct the cost of any books or tape reasonably designed to improve your business ability, product knowledge, marketing experience or anything else that would be useful to you in business.
Every year, you must conduct your annual meeting and you get to pick where in the continental U.S. you want it to be. So why not pick a beautiful place like sunny California or the ski slopes of Aspen.
Today, dependants come in two forms: Kids and Adults (i.e. our parents). Your corporation can pay approximately $5,200 per year per dependant for their care. This includes children and our elderly parents that need assistance.
Special provisions. Here's a little fun. You can pay the cost of having your hair and nails done at a salon while you travel. Also, your dry cleaning bill resulting from a trip is deductible. Just make sure to have the clothes cleaned within a few days of the trip. Big ticket items: i.e. skis golf clubs, Big Screen TV, cookware, etc. Each year your corporation can give away two (2) gifts one for safety and one for longevity (after the company has been in existence for at least five years) The value can be up to $1,600 per year and must be in writing and given “in kind”. This means that you can't give an award of cash. The award must be something tangible (for example, a set of ski's cook ware, a watch, etc.) It's a great way to pay for that special item you've been wanting and get subsidy from Uncle Sam in the process.
Automobiles (More Advanced)
The IRS allows you to write off equipment purchases over 6,500 lbs in the year of the purchase. Some large automobiles (i.e. Ford Expedition, Durango's Hummers, etc) fall into this weight category. Recently, the limit was raised from $20,000 to $100,000. So, if you purchase a new Hummer, you can write off $100,000 off in the current year. And the list continues. Keep in mind you can also combine items for added impact. For example you can combine business travel with a seminar and/or a business meeting followed by a show. So be creative and let Uncle Sam underwrite the cost. Also, don't forget the importance of documentation. The difference between a properly documented expenses and an improperly documented one may be the lose of the deduction plus penalties and interest.