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The 12 Biggest Tax Mistakes that Cost Business Owners Thousands of Dollars Each Year

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“Of course you have a purpose in life. You pay taxes, don’t you?”
THE 12 BIGGEST
demands.” Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934). In 1913, the year the 16th Amendment to the U.S. Constitution became law, income taxes became constitutional and the IRS was formed, the U.S Tax Code contained 400 pages. Today, the Tax Code contains a mind boggling 71,536 pages. Albert Einstein once remarked: “The hardest thing in the world to understand is the income tax… I am a mathematician, not a philosopher.” It’s easy to understand why most business owners make big income tax mistakes that cost them big dollars each year. Here are the 12 biggest tax mistakes, and how to eliminate them.
TAX MISTAKES
THAT COST BUSINESS OWNERS THOUSANDS OF DOLLARS EVERY YEAR
BY BRENT J. JORDAN, ESQ.
A Proactive Tax Plan
Income taxes are every business owner’s largest monthly expense: greater than a home mortgage, car loan and food bill combined. Beginning in 2014, the highest individual federal income tax rate became a whopping 39.6 percent. Add another 15.3 percent in self-employment taxes, along with 7.6 percent in payroll taxes, and a business owner’s income tax rate can easily exceed 60 percent. The Honorable Justice Learned Hand once wrote: “Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the U.S. treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right for nobody owes any public duty to pay more than the law
1. Failing to Plan “I spend 60 percent of my day working for the IRS, so that’s the part of my day when I goof off.”
When asked if they have a tax reduction plan, most business owners shrug their shoulders and say, “Not really. Should I? Doesn’t my accountant do that for me?” America is full of accountants who put the right numbers on the right lines on the right forms. But most business owners cannot remember the last time their accountant said, “Here is an excellent tax idea that will save you money.” There is a treasure chest of free money buried in every business. The key to discovering this money isn’t tax preparation by an accountant. The key is proactive tax planning by the business owner!
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THE 12 BIGGEST
3. Missing Home Office Deductions
TAX MISTAKES
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2. Wrong Business Entity “The U.S. government vehemently denies the existence of aliens from other planets, until April 15th tax time.”
There are basically four business entities available for most business owners: sole proprietorship, limited liability company, C corporation and S corporation. Many business owners don’t consider tax consequences when forming their businesses. By designating a limited liability company as an S corporation for tax purposes, a business owner can obtain substantial savings in selfemployment taxes. Self-employment taxes claim 15.3 percent of business income. Income is subject to self-employment taxes, but dividends are not subject to this tax. Thus, with an S corporation, by withdrawing money from the business as both income and dividends, a business owner can substantially reduce self-employment taxes every year.1
Most business owners don’t realize the IRS allows them a home office in addition to a commercial office outside their home. A business owner’s home qualifies for a home office deduction if the home office is used to conduct administrative or management activities for the business, and there is no other office that conducts these activities. Thus, a business owner can perform certain business activities at a residential home office, and others at a commercial office, and still receive tax deductions for both offices.2
4. Missing Meals Deductions “That lunch didn’t agree with me. It wasn’t tax deductible.”
Many business owners don’t take advantage of deductions for meals they eat alone outside their home: meals with clients, for which both persons pay for themselves, meals with members of their family and even meals with neighbors invited to their home.3
5. Missing Entertainment Deductions “By proposing a merger instead of a marriage, we can deduct this restaurant meal as a business expense?”
Businesses owners are pleasantly surprised to discover the IRS permits deductions for fun trips with their families to theme parks such as Disneyland. By including a client or prospective client, a business owner can deduct paid parking, entrance tickets, meals and even Mickey Mouse souvenirs.4
6. Missing Vehicle Deductions
Most business owners are happy to discover they can deduct vehicle mileage for driving from their residential home to any business location, providing they have a home office. Business owners can increase their vehicle deductions by driving their own car one day and their spouse’s car another day. Finally, all vehicle mileage from a residential home to a personal medical appointment, charitable event, or for moving or relocation, is 100 percent deductible.5
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7. Missing Travel Deductions “If I flee the country to avoid paying taxes, can I write off the miles as a travel deduction expense?”
A little-known tax strategy allows business owners to work four days per week away from home at an overnight location and still deduct business travel expenses for the entire week away from home. Expenses include mileage, hotels and meals. Business owners can also deduct a weekend of fun and relaxation in any U.S. city, with or without their family, as long as their business meeting falls on a Friday, or on a Friday and Monday. Incidental deductions include dry cleaning, haircuts and shoe shines.6
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THE 12 BIGGEST
TAX MISTAKES
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Tax savings get even better outside the United States. A business owner can deduct seven days of travel expenses outside the continental U.S., even when a business-related event only lasts one day.6
12. No Audit Proofing “So far your IRS tax audit looks good, but feel free to confess anyways.”
Business owners need not fear a tax audit. First and foremost, a business owner should create a proactive tax plan. It’s easier than most people think. A TaxBot application can turn a smartphone into a bulletproof audit fortress. TaxBot allows a user to photograph an office, business events, business-related receipts and to track vehicle mileage in real time. Best of all, this application is blessed by the IRS. It’s also reassuring to know that tax audits are less common than most business owners believe. IRS tax audits of individual tax returns are less than 5 percent of all tax returns. C corporations are less than 2 percent. S corporations are only one-half of 1 percent.
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8. Missing Health Insurance Deductions “I’m sorry. The stress caused by trying to figure out your health insurance coverage is not tax deductible.”
Most business owners have never heard of a simple tax advantage known as a “Medical Expense Reimbursement Plan.” A MERP plan allows business owners and their families to deduct health expenses not covered by traditional health insurance policies. A family can deduct basic medical and dental expenses, such as aspirin, cold formulas and even their children’s braces.7
9. Missing Investment Deductions “Can I write off last year’s taxes as a bad investment?”
Many business owners don’t know they can deduct personal investments, not related to their businesses, if they are traders. Deductible expenses include a home computer, tablet, smart-phone, fax machine, camera, investment newsletters, professional investment advice and even a family safety security box.8
10. Missing Family Deductions “I have five tax dependents: My wife, two children, one dog, and Uncle Sam.”
Most business owners never realized they can shift income to their spouses, children and relatives. Business owners can shift income taxable at their 39.6 percent tax bracket to family members in lower tax brackets when they employ their family members in their business. The IRS permits a child employee as young as six years old!9
11. Wrong Retirement Plan “Well, I ran the numbers on your retirement plan. Have you considered dying young?”
Everyone is familiar with tax deferred retirement plans such as an IRA, Roth IRA and 401(k) accounts, but few business owners know about more generous retirement plans authorized by the IRS. A Simplified Employee Pension plan (SEP) and Self Employed Retirement plan (SERP) can defer $52,000 per year of taxable income.10
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THE 12 BIGGEST TAX MISTAKES
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Conclusion Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it.  If it keeps moving, regulate it. - Ronald Reagan
Doctors cure your ailments, but they normally don’t tell you how to live healthily. Similarly, accountants prepare your tax returns, but they normally don’t tell you how to run a business in a tax-efficient manner. The more a business owner knows about taxes, the more tax savings. Business owners of the U.S., rise up and claim your tax savings. Don’t fear the IRS. Make the IRS fear you. Avoid the 12 common tax mistakes, and discover a treasure chest of free money buried in your business today!
5.
Rev. Rul. 90-23, I.R.B. 1990-11; Treas. Reg. 1.162-1; Comm. V. Griner, 71-2 U.S.T.C. 9714 (N.D. Fla.) 6. IRS Reg. 1.274-4; IRS Code 1.162-2; IRS Code 274(c)(2); Rev. Rul. 63-145; Rev. Rul. 99-7, 1999-5, I.R.B.; IRS Publication 463 7. IRS Code 105; Publication 502 8. Norbert Wiesler, 6 T.C. 1148 (1946); John Moller v. U.S., 721 F.2d 269 (7th Cir. 1984) 9. IRS Code 3121; IRS Code 3306; Rev. Rule 2000-45; Giordano v. Comm. 36 T.C.M. 430 (1977); Eller v Commissioner, 77 T.C. 934; Acq. 1984-2 CB 1 10 IRS Form 5305-SEP
1. 3. 4.
IRS Code 1402(a); IRS Publication 5892. Taxpayer Relief Act (TRA) page 932 which amends IRC 280 (A)(c)(1); IRS Publication 587 Sutter v. Commissioner, 21 T.C. 170 (1953); IRS Reg. 1.274-2.; IRS Rev. Rul. 200-45, IRB 200-41R, IRS Reg. 1.162-2 IRS Reg. 1.274-2
BRENT J. JORDAN possesses an attorney’s master’s degree in federal taxation (LL.M), and is licensed to represent clients in the United States Tax Court. The Nevada Supreme Court has also appointed Jordan to serve as a Clark County District Court judge, arbitrator and mediator. You can read more about Jordan at http://www.taxexterminator.com.
24GI NVCPA Nevada Lawyer April 2014 WELCOME NV LAWYER AD.indd 1
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