LOOPHOLES OFTHE RICH How the Rich Legally Make More Money & Pay Less Tax phần 9 pps

Advertising in:Newspaper Magazine Radio Other media Prizes and other expenses in holding contests or exhibitions Contributions to various organizations for advertising purposes Cost of d

C corporations and since they planned to be rich, they figured theyneeded a C corporation as well However, simply buying what the richhave won’t make you rich.

The Process

We first went through the details of James and Cheryl’s three-year-oldbusiness They had just begun to make good money with their marketingconsulting business James and Cheryl provided services from the officespace that they rented The income was still a little uncertain But wedid discover a number of hidden business deductions that reduced theirtaxable income by $20,000 At their 28 percent tax rate, this provided atax savings of $5,600 James and Cheryl had operated as a sole propri-etorship and so paid self-employment tax on their $150,000 taxable in-come As joint owners, both had self-employment tax This added anadditional $22,950 in taxes

Our first plan was to form an LLC, which elected to be taxed as an Scorporation The LLC gave James and Cheryl protection of the assets ofthe business by providing “charging order” protection This meant thatany judgment that came as a result of their personal assets or actionscould not go against their business

The Benefit

James and Cheryl paid $17,000 less in tax with this new system Theywere happy, even though they still wanted to know how they couldeventually have a C corporation

Future Plans

The next step for James and Cheryl was to buy a building for their ness Their plan was to take a distribution to make the down payment.James and Cheryl would hold the building in a separate LLC that wouldelect partnership taxation The S corporation would pay rent (which wasdeductible for the S corporation) to their LLC Their LLC would thenhave income (in the form of rent) that could be offset by depreciation If

busi-we created a passive loss from the LLC for James and Cheryl, they wouldlikely not be able to deduct it against other income So our plan would

be to make the rent as high as is reasonable for the S corporation Thehigher rent meant a bigger deduction for the S corporation

The higher income in the new LLC, even if it resulted in a through taxable income after depreciation, was part of our plan In thisway, James and Cheryl began to see how real estate could be bought withmoney that was effectively before tax The rent was a deduction.

flow-If we added a C corporation to their tax strategy later, we could eitheruse the same strategy of paying rent or actually make the C corporation amember in an LLC that holds real estate The C corporation would re-ceive the flow-through benefit of depreciation because it was a member.Figure A.4 demonstrates how the rental expense reduces the taxableincome that distributes through the S corporation This means lowertax The rent is income through the LLC, but that income is offset bythe depreciation on the building

Business Buys Real Estate

DKA Plan

Consulting S-CorpIncome

Individual Income Tax

Rental Income

<Expenses>

<Depreciation>

Lower Income FIGURE A.4 Business Buys Real Estate Diagram

Appendix B

300+ BUSINESS

DEDUCTIONS

Business Tax Deductions

Instructions: Check each tax deduction that applies to your business

or challenges Accounts receivable, worthless Achievement awards—requires plan:

Longevity award Safety award Sales award Advances made to employees or salespeople where repayment is not expected

Advances to employees canceled as bonus Advertising expenses, such as:

Premiums given away

248

Advertising in:

Newspaper Magazine Radio Other media Prizes and other expenses in holding contests or exhibitions Contributions to various organizations for advertising purposes Cost of displays, posters, and so on to attract customers Publicity—generally speaking, all costs including entertainment, music, and so on

Christmas presents to customers or prospects—de minimis rule Alterations to business property, if minor

Amortization Attorney’s fees and other legal expenses involving:

Tax strategy Drafting of agreements, resolutions, minutes, and so on Defense of claims against you

Collection actions taken against others Any other business-related legal activity Auto expenses for business purposes, such as:

Damage to auto not covered by insurance Gasoline

Oil Repairs and maintenance Washing and waxing Garage rent

Interest portion of payments Insurance premiums such as fire, theft, collision, liability, and

so on Lease payment License plate Driver’s license fee Depreciation

Wages of chauffeur Section 179 deduction, for qualified vehicle

B

Bad debts—if previously taken into income Baseball/softball/soccer team equipment for business publicity Board and room to employee:

All meals and lodging if for employer’s benefit Temporary housing assignment

Board meetings Bonuses as additional compensation to employees Bookkeeping services

Building expenses, used for business, such as:

Repairs to building Janitorial service Painting

Interest on mortgage Taxes on property Water

Rubbish removal Depreciation of building Heating

Lighting Landscaping Burglary losses not covered by insurance Business, cost of operating office

Business taxes—except federal income taxes

C

Cafeteria plan—requires written plan Capital asset sale—losses

Car and taxi fares Casualty damages, such as:

Bombardment Fire

Storm Hurricane Wind Rain Ice Heat Drought Forest fire Freezing of property Impairment or collapse of property Charitable contributions

Checking account bank charges Child care—requires written plan Children’s salaries

Christmas presents to employees, customers, and prospects for advertising or publicity purposes, or goodwill, or if customary in the trade

Collection expenses, including attorney’s charges Commissions on sales of securities by dealers in securities Commissions paid to agents

Commissions paid to employees for business purposes Commissions paid to salespeople

Condemnation expenses Contributions (deductible if made to organization founded for the following purposes, subject to some limitations):

Religious Charitable Scientific

Literary Educational Prevention of cruelty to children and animals Convention expenses, cost of attending conventions Cost of goods

Credit report costs

D

Day care facility Depletion Depreciation Discounts allowed to customers Dues paid to:

Better Business Bureau Chamber of Commerce Trade associations Professional societies Technical societies Protective services association

E

Education assistance—requires written plan Embezzlement loss not covered by insurance Employee welfare expenses, such as:

Dances Entertainment Outings Christmas parties Shows or plays Endorser’s loss Entertainment expenses

Equipment, minor replacements Equipment purchases—may require capitalization and depreciation Equipment repairs

Exhibits and displays to publicize products Expenses of any kind directly chargeable to business income, such as: Renting of storage space

Safe-deposit boxes Upkeep of property Books to record income and expenses or investment income Experimental and research expenses

F

Factoring Fan mail expenses Fees for passports necessary while traveling on business Fees paid to:

Accountants Agents Brokers Investment counsel Professionals for services rendered Technicians

Fire loss Forfeited stock Freight charges

G

Gifts to customers—limit $75 Gifts to organized institutions, such as:

Charitable Literary

Educational Religious Scientific Group term insurance on employees’ lives Guarantor’s loss

H

Health insurance Heating expense Hospitals, contributions to

I

Improvements, provided they are minor Insurance premiums paid

Interest on loans for business purposes, such as:

Notes (bank discount on note is deductible as interest) Mortgages

Bonds Tax deficiencies Installment payments on auto, furniture, and so on Margin account with broker

Inventory loss due to damages Investment counsel fees

L

Lawsuit expenses Legal costs

In defense of your business

In settlement of cases Payment of damages

License fees Lighting Living quarters furnished to employees for business’s benefit

Lobbying costs Losses, deductible if connected with your business or profession, such as:

Abandoned property Accounts receivable Auto damage caused by fire, theft, heat, storm, and

so on Bad debts Bank closed Bonds Buildings damaged Burglary

Business ventures Capital assets Casualties: fire, theft, heat, storm, and so on Damages to property or assets

Deposit forfeiture, on purchase of property Drought

Embezzlements Equipment abandoned Forced sale or exchange Foreclosures

Forfeitures Freezing Goodwill Loans not collectible Theft

Transactions entered into for profits

Maintenance of business property Maintenance of office, store, warehouse, showroom, and so on Maintenance of rented premises

Management costs Materials

Meals, subject to limitation Membership dues

Merchandise Messenger service Moving cost Musician expenses

Refurnishing, minor items Decorating

Painting

Office rent Office rent—portion of home used for business Office stationery and supplies

P

Passport fees Pension plans—must be properly drawn Periodicals

Physical fitness center Plotting of land for sale Postage

Professional society dues Property depreciation Property maintenance Property repairs Publicity expenses

R

Real estate expenses of rental or investment property, including: Taxes on property

Insurance Janitorial services Repairing

Redecorating Painting Depreciation Supplies Tools Legal expenses involving leases, tenants, or property Bookkeeping

Property management Utilities

Commissions to secure tenants Maintenance—heating, lighting, and so on Advertising for tenants

Cost of manager’s unit, if on-site and at owner’s convenience

Rebates on sales Refunds on sales Rental property expense, such as:

Advertising of vacant premises Commissions to secure tenants Billboards and signs

Rent collection expense Rent settlement—cancel lease Rents paid, such as:

Business property Parking facilities Safe-deposit boxes Taxes paid by tenant for landlord Warehouse and storage charges Repairing of business property, such as:

Alterations, provided they are not capital additions Casualty damages, replaced, provided they are not capital additions

Cleaning Minor improvements Painting

Redecorating Repairing of furniture, fixtures, equipment, machinery, and buildings

Roof repairs Royalties

Safe-deposit box rental Safe or storage rental Salaries (including bonuses, commissions, pensions, management fees)

Sample room Selling expenses, such as:

Commissions and bonuses as prizes Discounts

Entertainment Prizes offered in contests Publicity and promotion costs Rebates

Services, professional or other necessary for conduct of business

Social Security taxes paid by employers Stationery and all other office supplies used Subscriptions to all trade, business, or professional periodicals Supplies, office or laboratory

T

Taxes, all taxes paid except federal income taxes, such as:

City gross receipts tax City sales tax

State gross receipts tax State sales tax

State unemployment insurance tax Federal Social Security tax

State income tax State unincorporated business tax Real estate tax

Tangible property tax

Intangible property tax Custom, import, or tariff tax License tax

Stamp taxes Any business tax, as a rule Auto registration tax Safe-deposit box tax Membership dues tax Gasoline tax

Admission tax Telephone and telegraph expenses Traveling expenses (includes: meals, taxi fare, rail fare, airfare, tips, telephone, telegrams, laundry and cleaning, entertainment for business purposes)

Appendix C

IRS PRINCIPAL BUSINESS

AND PROFESSIONAL

ACTIVITY CODES

The IRS compares businesses, their income, and their expenses

based on the type of business activity they have Following is thelist of business codes that the IRS recognizes You or your tax pre-parer will have to select from the following list when you file yourcorporate or partnership return Take the time to check the list to findthe best fit for your type of business Careful selection can be the singlemost powerful way to avoid unnecessary IRS audits

Agriculture, Forestry,

Fishing, and Hunting

Crop Production

111100 Oilseed & Grain Farming

111210 Vegetable & Melon Farming (including potatoes & yams)

111300 Fruit & Tree Nut Farming

111400 Greenhouse, Nursery, & Floriculture Production

111900 Other Crop Farming (including tobacco, cotton, sugarcane,

hay, peanut, sugar beet, & all other crop farming)

112210 Hog & Pig Farming

112300 Poultry & Egg Production

112400 Sheep & Goat Farming

112510 Animal Aquaculture (including shellfish & finfish farms &

hatcheries)

112900 Other Animal Production

Forestry and Logging

113100 Timber Tract Operation

113210 Forest Nurseries & Gathering of Forest Products

113310 Logging

Fishing, Hunting and Trapping

114110 Fishing

114210 Hunting & Trapping

Support Activities for Agriculture and Forestry

115110 Support Activities for Crop Production (including cotton

ginning, soil preparation, planting, & cultivating)

115210 Support Activities for Animal Production

115310 Support Activities for Forestry

Mining

212100 Oil & Gas Extraction

212110 Coal Mining

212200 Metal Ore Mining

212310 Stone Mining & Quarrying

212320 Sand, Gravel, Clay & Ceramic, & Refractory Minerals

Mining & Quarrying

212390 Other Nonmetallic Mineral Mining & Quarrying

213110 Support Activities for Mining

Utilities

221100 Electric Power Generation, Transmission, & Distribution

221200 Natural Gas Distribution

221300 Water, Sewage, & Other Systems

Building, Developing, and General Contracting

233110 Land Subdivision & Land Development

233200 Residential Building Construction

233300 Nonresidential Building Construction

Heavy Construction

234100 Highway, Street, Bridge, & Tunnel Construction

234900 Other Heavy Construction

Special Trade Contractors

235110 Plumbing, Heating, & Air-Conditioning Contractors

235210 Painting & Wall Covering Contractors

235310 Electrical Contractors

235400 Masonry, Drywall, Insulation, & Tile Contractors

235500 Carpentry & Floor Contractors

235610 Roofing, Siding, & Sheet Metal Contractors

235710 Concrete Contractors

235810 Water Well Drilling Contractors

235900 Other Special Trade Contractors

Manufacturing

Food Manufacturing

311110 Animal Food Manufacturing

311200 Grain & Oilseed Milling

311300 Sugar & Confectionery Product Manufacturing

311400 Fruit & Vegetable Preserving & Specialty Food

Manufacturing

311500 Dairy Product Manufacturing

311610 Animal Slaughtering & Processing

311710 Seafood Product Preparation & Packaging

311800 Bakeries & Tortilla Manufacturing

311900 Other Food Manufacturing (including coffee, tea, flavorings,

& seasonings)

Beverage and Tobacco Product Manufacturing

312110 Soft Drink & Ice Manufacturing

315100 Apparel Knitting Mills

315210 Cut & Sew Apparel Contractors

315220 Men’s & Boys’ Cut & Sew Apparel Manufacturing

315230 Women’s & Girls’ Cut & Sew Apparel Manufacturing

315290 Other Cut & Sew Apparel Manufacturing

315990 Apparel Accessories & Other Apparel

Manufacturing

Leather and Allied Product Manufacturing

316110 Leather & Hide Tanning & Finishing

316210 Footwear Manufacturing (including rubber & plastics)

316990 Other Leather & Allied Product Manufacturing

Wood Product Manufacturing

321110 Sawmills & Wood Preservation

321210 Veneer, Plywood, & Engineered Wood Product

Manufacturing

321900 Other Wood Product Manufacturing

Paper Manufacturing

322100 Pulp, Paper, & Paperboard Mills

322200 Converted Paper Product Manufacturing

Printing and Related Support Activities

323100 Printing & Related Support Activities