Posted on 11/10/2008 11:19:27 AM PST by MrB
Disclaimer: I'm not a financial advisor nor a tax guy. I'll just tell you what I've learned, and where to go for more info. I also invite others to comment, criticize and add suggestions.
CHECK WITH YOUR TAX ADVISOR BEFORE IMPLEMENTING ANY TAX STRATEGY.
And whatever you choose to do, GET EDUCATED FIRST.
This education and implementation requires TIME and EFFORT, but this is a noble quest, after all. I consider it to be a moral obligation at this point. Every dollar that you let the government confiscate above that which it legally is entitled to is a dollar funding infanticide and the socialist agenda. And, for those that don't see the moral aspect of it, remember that taxation is your biggest barrier to accumulating wealth. The socialists want you dependent, not wealthy.
Strategy:
The basic strategy is to start a home business to implement the concepts - create an LLC, preferably in the Real Estate business (BIG tax advantages in RE). MLM is another possible business.
Your first year startup expenses can be deducted (up to 10k? - check with your tax advisor).
Employees pay for expenses with after tax money.
Business owners pay for expenses with BEFORE tax money, making them about 1/3 less expensive depending on your tax bracket. Also, mileage can be a huge deduction. Document every mile that is related to a business function. Document every meal where you talk with a potential business investor, or discuss business.
Pay for your expenses in pre-tax dollars. If you can run most of your expenses through your business, you pay very low taxes. (Inc and Grow Rich)
One advantage of real estate:
If it's investment property, the gov't considers it to be "worthless" in 27.5 years. This is "depreciation", or a phantom "loss". This comes OFF YOUR TAXABLE INCOME because your LLC is a "flow through" entity. This means that your business gains or losses are combined with your personal income to determine your taxable income.
A 200k property (that will appreciate, be worth more) will be reflected on your taxes as a $7,270 LOSS every year. Will that knock you down a bracket or two? How about if you owned 4 of them?
Stay Legal:
Remember, do everything within the law. Stay legal, but don't pay any more than you are legally required to.
References:
Read "Inc. and Grow Rich". A "Wow, can I do THAT??!!" book.
Read books by Sanford Botkin - anything that looks interesting, from "Reduce your Taxes, Bigtime" to "Money Mastery" for those with some debt problems.
Read Robert Kiyosaki's "Rich Dad" books - all of them, especially his "advisor" series.
Read books referenced in Kiyosaki and the advisor series.
Inc(orporate) and Grow Rich http://www.amazon.com/Incorporate-Grow-Rich-Cheri-Hill/dp/0967187109/ref=sr_1_1?ie=UTF8&s=books&qid=1226334201&sr=1-1
Rich Dad, Poor Dad http://www.amazon.com/Rich-Dad-Poor-Money-That-Middle/dp/0446677450/ref=pd_sim_b_3
Rich Dad's Real Estate Advantages: Tax and Legal Secrets http://www.amazon.com/Rich-Dads-Real-Estate-Advantages/dp/0446694118/ref=pd_sim_b_4
Everything from Sanford Botkin http://www.amazon.com/s/ref=nb_ss_b?url=search-alias%3Dstripbooks&field-keywords=sanford+botkin
Home Business Tax Deductions: Keep What You Earn http://www.amazon.com/gp/product/1413307205/ref=s9sips_c6_14_at3-rfc_g1-3237_p_si1?pf_rd_m=ATVPDKIKX0DER&pf_rd_s=center-1&pf_rd_r=1Z2TYX99KH7PYKYMKNG2&pf_rd_t=101&pf_rd_p=454435901&pf_rd_i=507846
Ping to the promised thread.
thank you much...will email this to myself...
I’m going to respond to your post not out of criticism but out of clarification.
Yes, there are tax advantages to running a business from your home.
Yes, depreciation (on real estate) can be a wonderful thing because it is a non-cash expense you can write off against current income. For this to make sense, the subject property has to cash flow or nearly cash flow. Forget not that this depreciation will be recaptured when you sell;
Suppose you buy a $300K property. The land is considered non-depreciable, hence the depr occurs on the $200K, over 27.5 years. About 14 years later, say, you’re carrying the bldg on your books at $100K. Should you sell it (it=the bldg and the land) for $500K, your profit will be $300K. Now, there are many sorts of manipulations that can be done on the monies between now and then, but my point is that depr is recaptured.
Ah, now many folks say they will 1031 into a more expensive bldg and avoid the cap gains taxes. In MOST cases, for a long held bldg, that can be shown to be a loser, because it will decrease the depr you can (start to) take on the new bldg. In effect, you’ll be transferring your basis in the old for the basis in the new bldg. (It’s too complex to detail here) RIGHT NOW, with cap gains taxed, at 15% it is probably about the most favorable tax rate on such gains we’ll ever see. I have seen people fall in love with the idea of a 1031 exchange to their detriment, because simply selling and paying the taxes is more beneficial. This is obviously subject to change as tax rates change.
There are GIANT advantages to buying and rapidly writing off equipment of ANY sort to operate a business, but again, that business needs to be profitable in a year or two, or better, the day you open it.
There are SOME advantages to setting up your company as a corporation, generally in the category of protecting your personal assets from liabilities of the company. HOWEVER, you MUST maintain the discipline of filing all the corporate papers (depending on your state) to maintain the separateness and distinctness of the company, otherwise the separation between the company and your personal assets can FAIL. To do that, most folks need to hire professional accounting help which costs more than ordinary personal accounting functions.
No free lunch.
Thanks for the post. Some good ideas and as you said, remember to stay legal.
As you stated, when you purchase investment real estate, you can depreciate the cost basis of the structure. However, when you sell it, you have to pay capital gains tax based on the difference between the selling price and the depreciated cost basis.
You obviously know about the 1031 option, but that can be a pain. But you have 27.5 years to enjoy this phantom loss against your income, and that gives you some time to get through a socialist period of US history.
Also, even if you do take the tax hit on the recovered depreciation, you are “converting” normal income into capital gains, which for most (and for now) is at a lower tax rate.
The point of this strategy, at least for me, is “starving the beast”, even if it costs me some time and money. However, it has yet to cost me any money.
Thanks for your note. I am all for deferring taxes, as you can invest in other things and come out ahead.
If you keep your corporation around for a while you can expect visits/audits/etc. from just about every kind of government agency you can imagine -- all seeking money.
* Your local employment security office - seeking unemployment insurance payments, and making sure you have workers compensation insurance -- even though you just have one employee, yourself.
* The state departments of revenue from every state you ever got anywhere near - trying to claim your business has nexus there so they can tax you. Fighting off each one costs from $1000 to $5000 in legal fees. You see, you need to hire a lawyer in that state, not just use the lawyer you have in your own state.
* Your own state department of revenue making some hare-brained claim that you owe a couple of thousand dollars. Why? Because that amount is less than it costs to have your lawyer and accountant fight back so most companies just fork over the money.
* The IRS, claiming either that you are an employee, and you should have paid employment taxes, and since you didn't you owe huge penalties, or that your payments to yourself really aren't employee compensation and so you have to treat them as dividend income, and pay corporate taxes on them, and hence you owe taxes and penalties. Its heads you lose and tails you lose too. Once you are classified as an employee you are forever - so in effect you have to pay your taxes monthly, not quarterly. And if you are a little late on a payment the late payment penalties are stiff.
* If you are even unfortunate enough to get sued you'll have to hire an attorney for your corporation, since you can't represent it yourself, but for all practical purposes in any large dollar case you'll be on the hook for the money. Judges pierce corporate veils all the time for small corporations.
In the People’s Republic of Maine, corporate officers are exempt from paying Workers Compensation on their salaries, if they so choose.
Sounds like you don’t want to try these recommended strategies.
Like Rush says, I’ll listen to those who have succeeded with them and not to those who haven’t.
Actually, I am very familiar with small business tax strategy. I just thought it would be helpful to share some of the downsides to using a corporate structure, which should be considered by anyone seeking to choose the optimal business structure for their activities.
Reading books is fine, I've read most of the books you cited as well as many more, along with the relevant parts of the tax code. But I have also paid competent tax counsel and accountants for their advice and opinion letters. I would encourage you and everyone else considering how to structure business activities to minimize their tax consequence to do likewise.
I'm sure Rush Limbaugh relies on attorneys and accountants for his business tax strategy.
bumpity bump
bttt
I’m sorry about your experience.
Frankly, it’s the first that I’ve heard of such harassment. I am a member/manager of multiple LLC’s, have been for years, and haven’t seen that problem, nor have I heard of it from anyone in the investment club.
I’m with you 100% on getting with professionals, and keeping them as near as the phone. There are too many downsides to not knowing the rules, and it’s a lot less expensive to hire competent counsel than to fight leviathan yourself.
Remember the goal that I stated, though. Yes, it takes time and effort, and perhaps some money - but the goal is to starve leviathan; reduce the amount that they have to work their evil with. I consider it a moral obligation.
“Actually, I am very familiar with small business tax strategy.”
So if I’ve been tossing around an idea of opening up a small business (leasing a local space to offer gymnastics classes a few days a week)
It’s better to do it now during the socialist regime rather than later?
I agree - everyone should strive to pay the minimum legal amount of taxes due. And, work to reduce the burden on the productive citizens of our nation in the future.
It’s better to do it now during the socialist regime rather than later?
The most important factor isn't taxes, but the market conditions that will affect your success. Getting customers and moving to profitable operation are essential before any taxation issues become very important. (It is still important to set up the right business structure -- see the books listed early in this thread or talk to counsel. At a minimum you want some kind of corporate structure to protect you from liability claims which might result from an injury in your classes.)
Businesses are like other investments - their value grows over time - so starting sooner rather than later is usually better. Just make sure that you have a solid, realistic plan, and then that you can survive economically if your business grows at a slower rate than you planned.
Be flexible, and ready to respond to what you learn from running the business. Listen to your customers and keep them happy.
Consider strategies that let you try out your business plan without committing to any major amount of money. For example, leasing a space is easy, but then you are on the hook for a lot of money. Why not try to start up some gymnastics classes at some other facility that you can rent by the day? A local school perhaps, or another gym. If you get customers then you know your business plan will work and you can move your operations to your own facility later. It is better to test the market, and your plan, before spending money than spend the money and discover your plan didn't work, particularly if you have a kind of business that allows this strategy.
And finally, a few years from now when your classes are full and profitable, start to work on techniques to minimize your overall taxes and grow your wealth. If I were you, my goal once I had the classes generating a profit would be to buy a building for them -- personally - and then rent the building back to the gymnastics school. Renting commercial space to your own business is usually a very good way to reduce taxes and build wealth.
Don't let the government and its policies deter you from success - that's what they want, sheeple, not self reliant citizens.
Good Luck!!
Opening a business should be based first on are there paying customers? Are there enough paying customers year round.
Complexity can be added once there is a revenue stream adequate to justify the savings from complexity.
Getting bogged down in peripheral complexity is distracting from the effort required to learn how to run and succeed at the basic business.
These are very good points and are quite valid. If people reading the thread have never had a small business or are just starting out this information is good for them to know. What you have pointed out are some of the issues that many do not consider until it has happened to them. This is not to say people should not own their companies, just that they should be aware of these pitfalls they may or may not be able to control.
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