Post by Ron Piner, CPA
Realizing revenue tax law is not enough. In order to provide value to taxpayers, tax law information should be combined with efficient tax preparing tactics in order to yield maximum benefit. What would you do if you owned a landscaping business with the upcoming details and circumstances? I will tell what I would do.
Whilst having a quiet night out at a local restaurant, listening to music from a nearby band, I am approached by a friend that has just started a landscaping business. He is married and has one young daughter, age twelve. He will have gross receipts of ,000 and will get a 1099 for his efforts. His first question to me is how he ought to go about producing quarterly estimated tax payments to cover both revenue tax expense and social security tax (SE tax). My response to him was “hold on there young fellow. Let’s have a discussion of the details and circumstances prior to we begin”.
As the band played beautiful music and a soft summer breeze cooled the restaurant patrons, I asked our young entrepreneur if he would require to purchase a new truck for his organization venture. His response was not only yes, but he informed me that he has already picked out the really one and knows the price to be ,000. In this case, he can deduct the whole cost of this new truck in year 1 under internal revenue code section 179. This allows for the write-off of new property placed in service of up to 5,000 in year 1. Since this guy is financing the truck over four or 5 years, this becomes a excellent benefit to get such a significant write-off with out having to invest a bunch of cash. Projected income from all business activities are now decreased to ,000.
Throughout our ongoing discussion, my friend tells me of his desire to offer for his daughters college education. The 529 was mentioned but I had a much better idea. What if we put your daughter on the payroll of your enterprise for ,000 (near the standard deduction for all individual taxpayers)? This will further reduce your exposure to earnings tax and self-employment tax. His daughter will not have to pay earnings tax because her normal deduction will minimize her tax exposure to zero. In addition, there will be no exposure to social security tax on his daughter’s wages since she is a minor and functions for her dad’s unincorporated enterprise. Projected net earnings is now reduced to ,000. If our hero types a partnership with his wife, she is a passive owner as she will not participate in the day to day operations of the enterprise and his exposure to SE tax will be cut in half (assuming a 50/50 partnership interest). Roughly, the total tax exposure for 2007 will be ,400 which consists of the SE tax. This is before any other tax deductions the couple may well have. Regardless, there will be no need for estimated earnings tax payments in year 1.
For the future, year two provides hope that a retirement program be formed to shelter some revenue as the truck deduction was used in the present year. There will also be the chance to claim a residence office deduction as my friend takes more than the entire operation and moves it into his property. Think it or not, this conversation lasted about twenty minutes. My dessert had arrived and it was time to deal with the matters at hand. I was even invited to sing a couple of numbers with the band. I usually do say, never ever trust an accountant that can’t sing and dance.
Ron Piner, CPAHost of “Better Enterprise”Saturday mornings at 10ETON WBIS AM 1190www.wbis1190.comwww.mwibonline.comtaxguy9@hotmail.com