| 1. S Corporation: Set up an S Corporation to avoid | | | | homeowner's insurance, etc. as well as all costs for |
| self-employment tax on profits. If you conduct | | | | the room such as carpeting. Although you can also |
| business as a sole proprietor, a partnership, or a limited | | | | claim the depreciation on your home used for home |
| liability company the first $94.200 of 2006 profits are | | | | office, you should consult a qualified tax advisor prior |
| subject to a self-employment tax rate of 15.3%. The | | | | to doing so to understand the impact it will have on the |
| profits in excess of $94,200 are subject to a Medicare | | | | exclusion of gain when you sell your residence. |
| tax rate of 2.9%. These self-employment tax rates | | | | 6. Travel Expense: Deduct business trips by putting |
| are in addition to paying income tax on the profits. An | | | | your spouse on the payroll. When spouses are on the |
| S Corporation is not subject to self-employment tax | | | | payroll, even at low salaries, cost of business trips that |
| on the profits earned. | | | | include the spouse can be fully deducted. You should |
| 2. Bad Debt Expense: A reserve for bad debts is not | | | | also be aware that putting your spouse on the payroll |
| deductible, but you can write off accounts receivable in | | | | in 2006 will also double the amount of Social Security |
| the year in which they become uncollectible. Be sure to | | | | tax owed up to the first $94,200 of income. |
| take advantage of writing off all those uncollected | | | | 7. Hiring Children in the Family Business: Put your |
| accounts at year end. If you used a collection agency, | | | | children on the company payroll. When you employ |
| you can deduct a portion of the debt that will go to the | | | | your children in the business, for 2006 you can pay |
| collection agency as a fee (around 25%). You can | | | | them up to $5,150 in salary free from Federal tax. The |
| write off that amount at the time you turn over the | | | | "kiddie" tax doesn't apply to wages, so children under |
| receivable to the agency. | | | | age 14 get this tax break, too. Have your children put |
| 3. Medical Expense: For 2006, eligible self-employed | | | | $4,000 into a Roth IRA, where it will compound |
| individuals can deduct from gross income 100% of the | | | | tax-free over time. When the money is left in the |
| amounts paid for health insurance coverage. The | | | | account until they turn 59 ½, they will never have |
| deduction is limited to net earned income from the | | | | to pay out any tax or penalties on that money or its |
| business, less the deduction for 50% of the | | | | earnings. |
| self-employment tax. Also, you cannot take the | | | | If your business is not incorporated, and the children |
| deduction for any month you were qualified to | | | | are under age 18, neither you, as employer, nor your |
| participate in an employer sponsored health plan. | | | | children will owe Social Security or Medicare tax on |
| If you conduct business as a corporation, set up a | | | | their wages. |
| corporate medical reimbursement plan. Medical costs | | | | 8. Retirement Planning: Put more money away in your |
| are generally personal expenses deductible only to the | | | | company retirement plan for yourself than for your |
| extent that they exceed 7.5% of your Adjusted Gross | | | | employees. Business owners who are more than 20 |
| Income (AGI). However, medical reimbursement plans | | | | years older that other company employees can set up |
| set up by C Corporations let you deduct all the medical | | | | a defined-benefit pension plan instead of a |
| costs you incur for yourself, your spouse, and | | | | defined-contribution plan. Because they are funding a |
| dependents. These plans must cover all eligible | | | | specific benefit (not putting away a percentage of |
| employees. | | | | salary) and have fewer years to do so, owners can |
| 4. Equipment Expense: For 2006, Section 179 of the | | | | contribute more to the plan for themselves than their |
| Tax Code lets companies deduct up to $108,000 of | | | | employees. |
| new equipment, subject to certain limits. Passenger | | | | 9. Claiming Business Losses: Make the most of |
| vehicles are excluded from the expensing election. A | | | | business losses. If your company has a net operating |
| passenger vehicle is defined as having a loaded gross | | | | loss in 2006, it can be carried back two years or |
| vehicle weight of less than 6,000 pounds. | | | | carried forward up to 20 years to offset future profits. |
| The tax code also allows an accelerated method to | | | | To get a refund, file an application on Form 1139. Most |
| depreciate the remaining value of that equipment - it's | | | | refunds are sent out by the IRS within two months. |
| faster than the straight-line method of depreciation. | | | | 10. Education: Set up a company tuition-reimbursement |
| 5. Home Office Expense: Write off home-office | | | | plan to pay a child's school cost. Businesses can set |
| expenses. You can take this deduction even if you | | | | up plans that pay up to $5,250 in tuition per employee |
| use the space for administrative purposes, as long as | | | | annually. Business owners' children must work for the |
| there is no where else you can work. When you use | | | | company, be older than age 21, own no company |
| one room in your six room home as an office, you can | | | | stock and cannot be claimed as a dependent on the |
| deduct one-sixth of your costs for utilities, security, | | | | owners' tax returns. |