This document outlines 10 expensive tax mistakes that business owners commonly make, including failing to do tax planning, having "audit paranoia", choosing the wrong business entity, selecting the wrong retirement plan, missing opportunities for family employment deductions, failing to take advantage of medical benefits, neglecting a home office deduction, missing car and truck expense deductions, failing to deduct meals and entertainment expenses, and not using a tax coaching service.

1. 10 Most Expensive Tax
Mistakes That Cost
Business Owners
Thousands! Copyright©2009
Vicki D Bealman
Your Logo Here 2476 Nimmo Parkway
Suite 115, #271
Copyright©2009 Virginia Beach, VA 23456
(757)581-6668

2. #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
Copyright 2009

3. Why Tax Planning?
1. Key to financial defense
2. Guarantee results
Copyright 2009

4. Taxable Income
 Earned income
 Interest/dividends
 Add Taxable Income  Capital gains
 minus Adjustments to Income  Pension/IRA/Annuity
 Rent/royalty
 minus Deductions
 Alimony
 times Tax Bracket
 Gambling winnings
 minus Tax Credits  Illegal income
Copyright 2009

5. Adjustments to Income
 IRA contributions
 Moving expenses
 Add Taxable Income  ½ SE tax
 minus Adjustments to Income  SE health insurance
 Keogh/SEP
 minus Deductions
 Alimony
 times Tax Bracket
 Student loan interest
 minus Tax Credits
Copyright 2009

6. Deductions/Exemptions
 Medical/dental
 State/local taxes
 Add Taxable Income  Foreign taxes
 minus Adjustments to Income  Interest
 Casualty/theft losses
 minus Deductions/Exemptions
 Charitable gifts
 times Tax Bracket
 Miscellaneous itemized
 minus Tax Credits deductions
Copyright 2009

7. Tax Brackets
Rate Single HoH Joint
10% 0 0 0
 Add Taxable Income
15% 8,351 11,951 16,701
 minus Adjustments to Income
25% 33,951 45,501 67,901
 minus Deductions
28% 82,251 117,451 137,051
 times Tax Bracket
33% 171,551 190,201 208,851
 minus Tax Credits
35% 372,951 372,951 372,951
Copyright 2009

8. Tax Credits
 Family credits
 Education credits
 Add Taxable Income  Foreign tax
 minus Adjustments to Income  General business
 Low-income housing
 minus Deductions
 Renovation
 times Tax Bracket
 minus Tax Credits
Copyright 2009

9. Two Kinds of Dollars
 Add Taxable Income
 minus Adjustments to Income Pre-Tax Dollars
 minus Deductions
 times Tax Bracket
 minus Tax Credits
After-Tax Dollars
Copyright 2009

10. Keys to Cutting Tax
“You lose every time you spend after-tax
dollars that could have been pre-tax dollars.”
1. Earn nontaxable income
2. Maximize deductions and credits
3. Shift income: later years, lower brackets
Copyright 2009

11. #2: “Audit Paranoia”
Copyright 2009

12. #3: Wrong Business Entity
C-Corp?
S-Corp?
LLC?
Sole Prop?
Copyright 2009

13. Sole Proprietorship
Report net Pay income
income on tax on net
Schedule C income
Pay SE tax up
to 15.3% on
income
Copyright 2009

14. S-Corporation
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to Avoid FICA/SE
15.3% on salary tax on income
Copyright 2009

15. Employment Tax Comparison
S-Corp FICA Proprietorship SE
Salary $40,000 Income $80,000
FICA $6,120 SE Tax $11,304
Net $73,880 Net $68,696
S-Corp Saves
$5,184
Copyright 2009

16. #4: Wrong Retirement Plan
50,000
40,000
Contribution
30,000
20,000
10,000
0
30,000 60,000 90,000 120,000
Income
SEP SIMPLE
Copyright 2009 401(k)

17. Simplified Employee Pension
 “Turbocharged” IRA
 Contribute up to 25% of 30000
income 25000
 Max. contribution: $49,000 20000
 Must contribute for all 15000
eligible employees
10000
 Contributions directed to
5000
employee IRAs
0
 No annual administration 30,000 60,000 90,000 120,000
SEP Contribution
Copyright 2009

18. SIMPLE IRA
 Defer 100% of income up to
$11,500 16000
 Age 50+ add $2,500 “catch 14000
up” 12000
10000
 Business “match” or “PS”
8000
 Contribute to IRAs 6000
 No annual administration 4000
2000
0
30,000 60,000 90,000 120,000
SIMPLE Contribution
Copyright 2009

19. 401(k)
 Defer 100% of income up to
$16,500 45000
 Age 50+ add $5,500 “catch 40000
up” 35000
 Employer contributes up to 30000
25000
25% of “covered comp”
20000
 Max. contribution: $49,000 15000
 Loans, hardship withdrawals, 10000
rollovers, etc. 5000
 Simplified administration for 0
30,000 60,000 90,000 120,000
“individual” 401(k)
401(k) Contribution
Copyright 2009

20. Defined Benefit Plan
 Guarantee up to $185,000
Age Regular 412(i)
 Contribute according to
age and salary 45 $80,278 $164,970
 Required contributions
 “412(i)” insured plan 50 $133,131 $258,019
 “Dual” plans
55 $211,448 $395,634
60 $236,910 $450,112
Projections based on retirement at age 62
with $165,000 annual pretax income.
Copyright 2009

21. #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
Copyright 2009

22. #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
Copyright 2009

23. #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
Copyright 2009

24. 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
Copyright 2009

25. MERP/105 Plan
 Written plan document
 No pre-funding required
– Reimburse employee
– Pay provider directly
 Bypass 7.5% floor
 Minimize self-employment tax
Copyright 2009

26. Health Savings Account
1. “High deductible health plan”
- $2,000+ deductible (individual coverage)
- $4,000+ deductible (family coverage)
Plus
2. 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
Copyright 2009

27. #7: Missing Home Office
 Determine “BUP” of home
– Divide by rooms
– Square footage 1500
– Eliminate “common areas”
100
144
Copyright 2009

28. #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
Copyright 2009

29. #7: Missing Home Office
 When you sell:
– Recapture depreciation
– Keep tax-free exclusion
Copyright 2009

30. #8: Missing Car/Truck Expenses
AAA Driving Costs Survey (2008)
Vehicle Cents/Mile
Small Sedan 42.1
Medium Sedan 55.2
Large Sedan 65.1
4WD SUV 69.7
Minivan 57.6
Figures assume 15,000 miles/year; $2,941/gallon gas
Copyright 2009

31. #9: Missing Meals/Entertainment
 Bona fide business discussion
– Clients
– Prospects
– Referral Sources
– Business colleagues
 50% of most expenses
 Home entertainment
 Associated entertainment
Copyright 2009

32. #9: Missing Meals/Entertainment
 How much?
 When?
 Where?
 Business purpose?
 Business relationship?
Copyright 2009

33. #10: Missing Tax Coaching Service
 True Tax Planning
 Written Tax Plan
– Family, Home, and Job
– Business
– Investments
 Review Returns
Copyright 2009