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Cons

Your legal and accounting costs will be higher than other types of
structures. This is for your own protection. There may be places to
cut your costs or scale back in order to save money, but when it
comes to your taxes, believe me, you will get what you pay for, and
going cheap in this arena can often leave you paying MORE in the
long run. I have heard too many nightmares where business owners
have come to me to try and straighten out the tangle that has been
created when they either tried to do things themselves (based on
some questionable information they read on the Internet), or they
went to someone that was extremely ‘affordable’. If they are cheap,
there is a reason.

S-Corps, while being able to offer stocks, can only offer common
stocks. Without being able to offer different types of stocks this may
make investing less attractive to some. Only individuals can own S-
Corp stocks, not other companies or organizations.

Limited Liability Companies

Pros

The Limited Liability Company (LLC) is VERY different from a
Limited Liability Partnership. The LLC is a combination of the
benefits of both the Partnership structure and the Corporation
structure. The LLC provides businesses with the ability to have
liability protection and no double taxes. Pass through benefits are the
same as a corporation and each individual is taxed on their earnings.

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It is much the same as an S-Corp but with a few decided differences.
First the LLC has no limit on the number of shareholders, and all
members can fully participate in the day to day operations of the
business if they want to.

Your only risk in this business is the money that you put into the
business directly. Business debts and other liabilities aren’t directly
linked to you or your personal assets. This safety net goes away if you
personally act as a guarantor for a loan for your business.

Cons

The company isn’t forever. Unlike a true corporation, which can live
on indefinitely, LLCs dissolve when the managing member passes
away, quits, retires, or sells to someone else. Some states have LLCS
automatically being dissolved after forty or fifty years.

LLCS have trouble having multiple offices in different states. This is
because each state varies so widely on what they require of their
LLCs. What would be acceptable practices in New Jersey might not
be in Arizona. This is where an accountant with familiarity with the
various rules would be worth his or her weight in gold.

LLCs don’t issue stock or raise money. You can give a percentage of
ownership in the business, but then you are required to decide what
sort of power or rights that entitles them to. There is also massive
paperwork for this type, and each state is different. Many of the
deductions that you could have enjoyed with other entities are not

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available with this type.

You will pay self-employment tax, which is generally calculated on
15.3% of the profits. This is very different from an S-Corporation
whose Social Security tax is on the salary, not profits. Ultimately, you
don’t want to opt for this type of structure without conferring with
someone very knowledgeable in tax liability as this could break the
back of a fledgling business.

Summing It All Up

At a glance, here are the questions you should ask when choosing the
structure for your business:

*What is Your Vision?

What is the purpose of your business? In a perfect world with perfect
circumstances, what would your business look like? This will
determine why you choose one structure over another. Maybe your
goal is to remain small, as many artisans are. On the other hand,
maybe your goal is to grow larger, expand by adding more employees,
and open several offices in different places. Knowing what it is that
you want will help you decide the type of entity that your business
should be.

*How Much Risk is Too Much?

Really examine your industry and your type of business. Certain
industries have lower risk profiles than others. Where liability
exposure is lower, then a certain type of structure might work will for
you, whereas if the industry you are in is high risk of law suits, then

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you might want to opt for a structure that will insulate you better.
This is where talking it out with someone that has knowledge in
doing this type of work would be invaluable.

*What is Your Paperwork Tolerance?

For many the idea of taking care of accounting paperwork each
month, or even each week, gives them hives. If the thought of
creating and maintaining all of the additional paperwork necessary for
various types of structures intimidates you, there are a couple of
solutions. First, hire someone to do it for you. Or, opt for a structure
that reduces the amount of paperwork necessary to continue moving
in a positive direction.

When starting a business, one of the biggest mistakes the new
entrepreneur can make is to jump into it without thinking about the
type of business they want to create, not only in the here and now,
but in the thereafter, too. Knowing the answers to these crucial
questions (and more if you were to go through one of my coaching
sessions) will help you to determine what structure is most likely to
bring you to that millionaire dream, and which structures will give
you nothing but headaches. Taking the time to speak to those who
know more than you do only makes sound fiscal sense, and it is one
of the chief reasons that people, who become millionaires, remain
millionaires.

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When a Hobby is a Business

CHAPTER 6

“If I had the time I would….” This is generally how the conversation
begins with budding entrepreneurs. The difference being that those
who go on to move their hobbies into an actual and viable business

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go on to actually become business owners. Each year thousands of
people turn their hobbies into money making endeavors, but it isn’t
all cupcakes and dog grooming. The federal government is very
touchy when it comes to offering tax incentives to start ups. If you
think that you would like to turn your hobby into a business, there
are some considerations, both from a legal standpoint, and a business
standpoint, that you should truly consider before taking the leap.

You Could, but Should You?

Ask yourself a few key questions before filing for that business
license.

1. Can you work on a deadline?

Most who have hobbies do so in their leisure time without any
pressure to get things completed. How will you enjoy doing this day
in and day out? Can you work at a faster pace? Will you still enjoy
doing this when you have to get up early, stay late, and work on
multiple projects at once?

2. Can you deal with the financial fallout?

Making money from your hobby as a supplement to your larger
income is great, but what does that mean for you if it is your ONLY
source of income? That’s not to say that you can’t maintain the
business as just a part time business entity for tax purposes, but most
who want to go into business do so full time eventually. Given this,
then, can you deal with the worry of needing to produce enough
widgets to pay your bills and overhead for the business? Those who

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turn their hobbies into a business often have the rude awakening that
it isn’t as much fun as it once was.

3. Do you use this hobby as a way to relax?

If you answered yes to that question, then rest assured you’re going
to have to find another way to wind down, because as a business, it
will be anything but relaxing.

4. Are your eyes wide open?

Being your own boss is fantastic, and I won’t tell you otherwise. But
being your own boss carries with it a heavy burden, too. If you’re
thinking of going into your own business because you are ticked off
at your current boss, or you want something easier to do for a
living…think again. Staring a new business from the ground up is
going to be work, and lots of it, before you see a really good return.

5. Can you sell and/or promote yourself?

Most people don’t begin to consider that just because they hang their
shingle out, no one will know about them until they start screaming it
to the larger world. This means you have to embrace your inner
salesperson, somewhere, somehow. If you don’t have a background
in sales or marketing, then understand that unless you learn and
educate yourself on these types of activities, you are going to have a
more difficult time staying afloat. Look, most small business people
are very passionate about what it is that they do. Talking about it
should be easy for you. If it isn’t, then figure out how to do so, or
reconsider moving this from the hobby category.

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Take a moment to jot down your answers to the above questions.
List any obstacles that you see to taking your hobby to a new level.

Take this list with you to discuss with your certified tax planner who
can help you think through your responses and offer solutions.

The Hobby to Business Advantage
There are very significant benefits to setting up a business, from a tax
standpoint. I’ve personally worked with many small businesses over
the years, and each year, those who are new to the game, are often
shocked (sometimes in a good way, and sometimes in a bad way)
over the advantages, tax wise, they are receiving.
Honestly, being in business for yourself is still one of the best ways to
reduce your overall taxes. Even if your business takes a loss, it’s not

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directly a bad thing. Those losses can help to offset your personal
taxes, therefore giving you an additional advantage.

Making a Profit is Always Possible

If your new business didn’t take a lot of startup capital, then making a
small profit, even in your first year, can be done. There are many low
cost or no cost ways to advertise, thanks to modern technology. And,
better still, any money you spend on these marketing activities are tax
deductible. The IRS views these expenses as acceptable as long as
they are common expenses for your trade or industry. This is true
even if your new business is still only a part time work in progress.

For the most part, taxpayers can deduct what the IRS deems
‘necessary expenses’. If those expenses can be directly tied back to
the business, you’re golden. But you need to make sure that all of
your paperwork is in order and prepare to keep excellent records.
Depending on what your business is, you’ll be required to obtain a
state license to do business, file a fictitious name document, register
for sales (and sales tax), and any permits or licenses that your state
deems necessary. All of those, too, are tax deductible. Your tax coach
can help navigate you through many of these obstacles as well, which
many don’t realize.

Another thing that is completely necessary is to show the IRS that
you consider your business an actual business and not just a
successful hobby. There are many steps to take to make this happen,
but one of the largest is making a business plan. The business plan
outlines who the main players are in your business, how you intend

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to run your business, your income and expense projections, and
projections for several years down the road. If you plan on getting a
small business loan then this business plan will be completely
necessary. Establish your business as a separate entity, with its own
bank account, affiliations with associations in the field/industry, and
having evidence of being a real business (such as business cards, and
a website). Beyond these things, the IRS has some very strict policies
which determine whether or not your business is really a business, or
just a hobby playing dress up.

IRS Criteria for Being a Business

The IRS is actually quite generous in regards to offering tax breaks to
business owners. But, there are certain guidelines that have to be
followed in order to enjoy those benefits. In more recent years the
IRS reflected back on past returns and realized that nearly $30 billion
dollars every year had been incorrectly taxed. In other words, they
realized that they had lost that much in potential revenue because
people had claimed tax breaks for activities that weren’t really directly
related to the business. And then the big crack-down began.

The IRS operates what it calls a ‘presumption based on profit’
attitude. That means that activities that are considered necessary for a
business are allowed, and those that are not, are disallowed. But it
goes deeper than that. You need to show a profit after so many years,
or your business will be downgraded to a hobby. And then say good
bye to your tax advantages. However, if they decide to call you onto
the carpet before 5-7 years, you are allowed to opt for a deferment.

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This is called the ‘election to postpone determination’. This is
basically you stating that your business needs ample time to get up
and running. I don’t usually recommend this action (though each case
is different) as it draws unwanted attention to you and it will extend
the amount of time the IRS has to compile its own evidence against
you.
Some of that evidence that they compile against you includes answers
to the following questions:

• Are you earning a profit?

• Have you been successful in a similar industry?

• Do you have the knowledge to make the business successful?

• Is this your sole source of income?

• Are you experiencing losses that you have little to no control
over?

Steps to Take to Hobby-proof Your Business
There are distinct and important steps that you must take in order to
indicate to the government that your business is, indeed, the real
thing. Just like Pinocchio wanting to be a real boy, simply wanting to
be a real business isn’t enough to make it happen. Show yourself
worthy of the distinction, and just like the puppet boy, you’ll be
considered a living, breathing entity with the IRS.

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Use the provided space to jot down the list of ‘take action’ items that
you are going to do, making sure to list a projected timeline for
completion. Staying on track is crucial to making certain that the IRS
views your business in the correct light. This guide can be your
‘Jiminy Cricket’ if you will, offering you good advice and support as
you navigate through these waters.
The IRS requires many elements to be in place in order for you to
consider yourself a business, at least in a legal sense. Take a look at
the following and determine whether or not you need to take further
action.
Profit Motive.
Do you intend to make a profit with this endeavor? The IRS will
want to see that you had a notion to make some money when you
started this business; otherwise, it is definitely a hobby. One of the
ways to indicate this is to have a business plan, written out, and kept
on file in your office (even if you never present it anywhere). If you
don’t know how to make a business plan (and the Internet is a good
source for samples), then there are numerous business writers who
can assist you with this, and is well worth the money. More on that
later.

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Action Items: To Do
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Marketing and Sales
One of the quickest ways to indicate your desire to both make a
profit and view yourself as a business is to start getting the word out.
This can take the form of fliers, a website, business cards, and
attending local organizations to offer your services. The IRS will want
to know that you are out there making statements about your intent
to view this as a business and not just a nice hobby that makes some
money on the side.

Action Items: To Do
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Do You Act Like a Business and Business Owner?

The IRS judges your business on the owner’s intentions being very
clear. Conduct your business and run it similarly to others who own
businesses in the same industry. Consulting with experts, such as a
tax coach, is a legitimate and solid way to provide evidence of acting
like a business owner. Do you have a separate bank account for the
business? Are you keeping track of your mileage and travel expenses?
Are you making reports for quarterly assessment? What activities are
you engaging in that are similar to what others in your industry are
doing? Remember the old saying: If it looks like a duck, walks like a
duck, and quacks like a duck, then it must be a duck. This definitely
applies to the IRS.

Action Items: To Do

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How Much Time are You Spending on this Business?

The IRS wants to see measurable evidence, and there’s no better
evidence than the amount of time spent working at the office.
Logging into and out of a business computer, for starters, shows that
you’ve been there and at least engaged on the computer. Receipts
that show activity throughout the day, meetings with clients, sales
receipts, all show and indicate engagement with the business in a
‘more than a hobby’ way. Some studies indicate that if you are putting
in as much as a few hours a day on the business, then the IRS will
take this as sufficient motivation to make a profit.

Action Items: To Do

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Do you Have a Strong Paper Trail?

Documentation is crucial and can be considered the King of
everything when it comes to the IRS. The government loves paper
trails, and giving one to them will seal the deal for you, as long as it is
done in the correct manner. Keeping a ledger, either using an

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electronic accounting software, or keeping it old school with a
handwritten ledger, is paramount to providing a paper trail to the
IRS. Showing income and expenses over a period of time will pave
the way for a smoother ride should you ever be audited, or if the IRS
requests to see evidence that you are more than just a hobby.
It’s a good idea to not only keep a very good accounting ledger, but
to also keep a monthly accounting of activities, such as meetings,
appointments, consultations with experts or others in your field, and
any additional written down proof of business operations.

Action Items: To Do
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Top Secrets to Small Business Success
A recent study polled thousands of small business owners in various
industries to find out what they had all done to be considered small
businesses, and to what they attributed their success. Their answers
might surprise you. If you can incorporate even a few of these secrets
into your new business, you are well on your way to being viewed as
a viable business owner.
Stay small…at least at first
All of the business owners, who had been in business anywhere from
2-15 years, all said the same thing in regards to staring out: Start
small. They stated that growing too big too fast, and before you are
ready for it can spell doom. Invest a small portion of the money that
you make from each sale back into the business.
Resist the urge to diversify
Focus on one thing, and do that one thing incredibly well. Then, and
only then, you can branch out.
Create value and meet a need
Offer something that very few people are offering, and do it well. If
there are a number of people in your field, offer a better value,
something that is incredibly helpful to a great number of people.
What does your customer base really want?

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retirement planning, is critical. Time is your friend in this instance, so
don’t waste any of it. Regularly contribute to a profit sharing plan,
like a SEP, or SIMPLE retirement plan. These are all deductible for
you as the business owner.

So, you could literally set up a SEP for yourself (you ARE after all an
employee of your company) and regularly contribute a set amount
into it on an annual basis. Now, not only are you gaining the
retirement benefits when you do retire, but you are also getting a tax
deduction on the amount each year (even prior to your retirement).
What if you were to set one up for your daughter? Compound
interest is her friend, and by the time it was time for her to retire, she
could be set up quite nicely.

Hidden Deduction No#7

If your business offers credit card service to your clients, then those
pesky transaction fees are deductible. This can add up to hundreds of
dollars just in and of themselves. Any service that you use for your
business that charges a fee to use it, save that receipt, or print out the
report quarterly, and file it away for tax time. The more commonly
accrued transaction fees are from:

• MasterCard

• Visa

• American Express

• Paypal

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• Any online transaction fees

Hidden Deduction No#7

State sales tax is often a point of contention for those who operate a
business in a state that does not have a state income tax. Here’s why.
Congress states that those who are going to itemize have a choice
between deducting state sales taxes that they’ve already paid, or state
income taxes that they will be paying. Well, if you are living in a state
that doesn’t have state income tax, guess what? You have no choice.
Luckily, the IRS does have a handy tool on their website that lets you
see just how much state sales tax you can deduct based on your
income, and local/state income tax rates.

Hidden Deduction No#8

Just because you work out of your home doesn’t always imply that
you also keep an eye on your very young children. Most business
owners, who are operating their business as a true business, make
child care arrangements during business hours. The child care credit
deduction can really be your friend, here. Tax credits for child care
run from 20%-35% of the annual cost you pay for their care. The
child has to be younger than 13 in order to qualify.

So, for example, say that you have a three year old, and each day you
take her down the road to her grandmother’s home, where she stays
for four or five hours. As long as you are paying grandma for her
time and effort, then you will get the tax break, and grandma has
made some pocket money. It’s yet another way to give money to

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people and be paid, yourself, to do it.

Hidden Deduction No#9

Hire the disabled. Each year many disabled citizens have trouble
finding work simply because they are confined to a wheelchair.
Hiring someone that is disabled, though, can earn you not only a very
dedicated worker, but also tax breaks at the end of the year. The
government is very well aware of the employment statistics and with
the Americans with Disabilities Act, government made it even more
attractive to give a disabled worker a shot at making a good living for
themselves. The amount of the deduction is based on the size of your
business, and the number of disabled persons you’ve hired. Only
small businesses are able to take advantage of this tax credit, too,
which is rare.

There are several types of tax credits you can receive in regard to the
disabled. Up to $10,500 can be awarded and it is based on
expenditures that add up over $250 dollars. This can include such
improvements as hiring a sign language interpreter, or readers for
those who have trouble seeing, or the purchase of adaptive
equipment.

Another tax credit can come from the removal of barriers in the
office environment. For example, if you need to install ramps so that
someone in a wheelchair can access the workplace, then the
government will pay up to $15,000 dollars per year for the removal of
architectural or transportation structure barriers.

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The Work Opportunity Tax Credit is extended to small businesses
who hire someone that is disabled. A portion of the employee’s salary
is deductible. This applies to the first $6000.00 dollars of the
employee’s wages.

Hidden Deduction No#10

Most also aren’t aware that if you qualify for Medicare, you can
deduct the premiums that you’ve paid for Medicare Part B and D, as
well as the cost of any supplemental Medicare plans (like Medigap).
This is available even if you don’t itemize, and doesn’t get hit up with
that 10% of AGI like other types of medical expenses are. The only
hitch is that you can’t be covered under a spouse’s healthcare plan or
your own employer (if you’re running your small business as a side
business). Otherwise, this deduction is totally kosher.

There are scores of additional deductions and benefits that will fall to
you as a small business owner. Make sure that you are spending
regular time making sure you are keeping track of all of those items
that will pay you back, hugely, come tax season. Here is a fairly
comprehensive (though not exhaustive list) of deductions you can
consider. However, the best bet is to partner with a good certified tax
coach who is up to date on the latest and the greatest deductions
(because let’s face it, the government changes their minds on a
regular basis, especially around election time).

• Auto expenses (mileage, oil, repairs, purchase price, tags,
licenses, etc.)

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• Startup Costs
• Professional Fees (accountants, lawyers, consultants)
• Bad debt (someone refuses to pay for your goods or services)
• Entertaining
• Travel
• Interest (credit cards, bank accounts, anything related to the

business that is charged interest)
• Equipment
• Moving Expenses
• Software
• Club Fees (professional business affiliations, clubs,

organizations)
• Charitable donations
• Taxes (sales tax, fuel taxes, employment taxes, income tax,

property tax, etc...)
• Education expenses
• Advertising and Marketing expenses
• Business trips
• Business gifts

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• Coffee and beverage service
• Office supplies
• Office equipment
• Bank service charges
• Postage
• Petty cash
• Seminars, conventions, tradeshows
• Cell phone bills
• Repairs on the structure
• Commissions
• Entertainment (business related)
• Equipment rental
• Cleaning services
• Customer discounts
• Franchise fees
• Shipping costs
• Internet service
• Losses due to theft

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• Outside services
• Prizes for promotional efforts
• Rebates
• Storage rental
• Website creation/maintenance
• Workers’ compensation
• Unemployment

Action Items: To Do
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Making Deductions Work for You
This list is just a start, and not every one of the items listed will apply
to you. Many of the deductions only apply up to a certain amount of
the overall money you paid out, while others are based on strict
guidelines by the IRS. Keeping track of all business expenses is a key
component to making the deductions legitimate, which also
minimizes your risk of a bad audit experience, should one ever take

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place. There are many really good, and free, apps on the market right
now that will allow you to keep track of your expenses (and many will
even generate reports for you).

In general, when it comes to taxes for the small business owner, there
are some very tried and true rules to follow. First, make sure that you
have absolutely, without any shadow of a doubt, selected the correct
legal entity for your business. As discussed in early chapters, this will
determine how many of these hidden tax benefits you can enjoy.
Staying current, staying vigilant in your book keeping is going to pay
you back handsomely in the long run. I often hear from clients who
come to see me a few months before taxes are due, wanting to know
what they should do to reduce their tax burden. Unfortunately, while
there are a few things I can tell them, most of the time I end up
suggesting that they start looking at tax credit savings and tax
strategies much earlier in the year.

The primary way that most tax strategies work is by reducing the
amount of income your company is taxed on. For example, if your
business made $100,000, and you had a total of over $60,000 in tax
deductions or tax credits, then you are only going to be taxed on
$40,000 of that profit! That’s, in essence, free money. The SBA
estimates that more than 80% of business owners don’t take full
advantage of the tax saving power of a small business, costing most
business owners thousands of dollars each year. It simply pays to
spend the time taking care of these things.

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Action Items: To Do
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CHAPTER 8

This chapter encompasses some of the best advice on holding onto
your money as any of the chapters so far. That’s because the act of
shifting and splitting your money, moving it into lower tax brackets,
is what the wealthy know to do (and now you!) so that they can
better leverage their earnings in the future.
So, obviously, if someone told you that you could potentially hold on
to thousands of dollars more each year, you’d listen to the advice,
right? Oddly enough, many small business owners don’t take this
advice, when it can really be only a matter of keeping a little more
organized with your paperwork.

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Income Shifting

Income shifting is the process of taking some of your income and
‘shifting’ it from your tax bracket to a lower tax bracket. This can be
accomplished in many ways, but one of the most tried and true
methods is to shift money to your children, or to a spouse. They are
generally speaking, in a lower tax bracket. Here’s a great example:

Your elderly mother needs financial help each year. You dutifully give
her about $10,000 dollars a year to help defray her costs. Now, the
government will consider that $10k your income, even if you are
gifting it to your mother, UNLESS, you declare that income as wages
paid to an employee (your mother). In this instance, instead of paying
the nearly $3k you’d been paying on income taxes, your mother will
only end up paying $1k in income taxes. That’s quite the savings. And
that is income shifting. We will explore many such strategies for
shifting income to other places where they will not be taxed as
harshly. But, be aware that the government watches this type of
activity very closely, so doing it correctly is critical.

Who Benefits from Income Shifting?

Honestly, when it is done correctly it is a win/win situation. This
works very well for those who are self-employed, have a professional
practice, and have children, or lower income parents or family
members. Earned income, such as declaring someone an employee
isn’t subject to the Kiddie Tax (something we will discuss later on in
this chapter), and as long as it is done correctly and legally (you can’t
really give your kids 10k for doing nothing…they do have to earn it),

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then this is a fabulous way to keep more money in your pocket.

There are limits to gifting, however. The IRS became wise to the
ways of the wealthy, and those attempting to be, by stating that an
adult could no longer give more than $14,000 in assets without
paying taxes on the gift. So, the savvy just found a way to spread the
joy among many recipients.

The Terrible Kiddie Tax

The government also decided that money being shifted to children
was keeping them from getting at your money, so the rule now is that
children under the age of 18 who are given income from investments
that go over $2100.00 for the tax year. If the parent just outright
gives their child money, the gift is not taxed as long as it stays under
$850.00. If it is up to $1000 then it is taxed at the 15% rate, and if it is
above that, it is taxed at whatever the parents’ tax bracket is. And that
just plain sucks. But as you will see shortly, there are many ways to
deal with this ruling as well.

What the Wealthy Know That You Don’t

One of the things that the wealthy all know is that the money that
you bring in isn’t the entire story. At some point the money must
work harder for you, instead of the other way around. Generating
income that is protected at a lower tax bracket is what all wealthy
people do on a continual, almost religious, basis.

Likewise, the wealthy understand value as compared to cost. Using
the law and tax codes to their advantage is the way that the wealthy,

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once they make money, hold on to it. The value of having someone
to work with them, for the long haul, is considered a valuable asset,
and one that they are willing to spend some money on. In other
words, they find trusted advisors in several areas, and they treat them
like family.

The following are some of the top strategies used by those who are
building wealth. In the end, it’s more about holding on to what you
make than how much you actually make. Granted, if you only earn
minimum wage, your return will be smaller than those who have a
career and a salary, but in the end, the goal is to hang on to more of
what you make, and to make the money that you do have, work for
you, not against you.

Strategy Number One: Hire Your Spouse and/or Children

Hiring your spouse is one of the best ways to shelter your pre-tax
dollars. Doing this will offer many tax free benefits, including giving
you the ability to deduct medical expenses. There are several reasons
why this is a very good idea. First, if your spouse is already working
in your business, but isn’t receiving payment, then they aren’t paying
in to social security, which means when retirement hits, there will be
no monthly check from the government, and no money going in
toward Medicare.

Secondly, if you hire your spouse, then the money that you put into
your ‘employees’ retirement plan is tax deductible (up to 25%).

Another tax savings that is realized by hiring your spouse is that

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health insurance can be extended to them and is often cheaper than
covering them as a dependent on your own plan. These company
paid premiums are deductible, too. Any traveling that your spouse
does with you, as long as there is a legitimate reason for them to be
with you (no, holding your luggage doesn’t count), then you can
deduct the cost of the trip and their expenses as well. A good rule of
thumb is to have the higher earning partner assume the household
expenses so that the lower income person can invest as much
disposable income as possible.

There are a few drawbacks, however, that you must consider, or
discuss with your tax consultant. First, since they are an employee
(you are one, too), then there are employment taxes that will have to
be paid quarterly. This includes FICA. There would also be costs of
enrolling and maintaining the health care plans.

If they are going to truly be an employee the IRS requires that you
also treat them like an employee. In other words, they will be given a
title, an appropriate wage for the position, have to fill out the W4
forms, and be able to document that they have actually been doing
the work you claim they are. It is also required that you maintain
unemployment taxes and workers compensation, too. Family
members, if there are any other employees beside them, must be
treated and offered all of the same benefits that other employees are
offered.

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Some Special Cases

Depending on the type of business entity that you are, the deductions
and what the IRS will allow you to deduct can vary. For example, if
you are a sole proprietorship the pay that you pay your spouse
doesn’t have to be included in the unemployment tax calculations.
But, the opposite is true if your business is either a partnership or a
corporation. If you and your spouse co-own the business together,
then that’s a whole other ball of wax altogether. Neither of you is
considered an employee in this circumstance, but most likely
considered a partnership, or a qualified joint venture. For the most
part, it is simpler, and less of a tax hiccup to designate one person as
the owner, and one as the employee, even if the other spouse is an
officer in the company.

Consider the following scenario:

You own a business that is an S-Corp. Sometimes your wife helps out
by making deliveries, running errands for the business, doing light
paperwork. If you hired her, she’d be making around $12,000 a year,
being paid for the legitimate time that she helps out with the
business, fully documented and paid a comparable wage.

The downside is that your FICA and FUTA taxes would go up, but
in exchange for this, after taxes she would basically zero out the
paycheck and be able to invest this into the investment plan, or
retirement plans (which would earn a 9% match from the company).
Deferring this gains back the company another $3-4k in federal and
state tax savings. This leaves the possibility open for the business

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owner’s wife to continue to fund retirement plans, investment plans,
and to use this money toward planning for the future. This is
especially good for this couple since his wife has been a stay at home
mother for more than a decade, and hasn’t been paying in to social
security. With this added “job” she is also paying in to the system,
and when the time comes for retirement, you will both reap the
rewards from this move today.

Put Your Kids to Work

Another good strategy is to hire your children. However, there are
many factors to consider. First, there are child labor laws that have to
be complied with. Children under 14 cannot be allowed to work too
many hours, or operate unsafe machinery. A long list of dos and
don’ts are available on the official IRS pages. In general, hire them,
don’t work them to death.

The work that you “hire” the kids for must actually be done by them.
In other words, you can’t hire your two year old as your custodian,
and your six year old isn’t going to be able to be considered your
lawyer. They must be able to perform the work assigned to them, do
it regularly, and receive a typical pay for similar work. A good rule of
thumb is to actually have them submit invoices, and to regularly pay
them for that invoice. When hiring children it is especially important
to keep accurate records of time worked, and compensation received.
FICA and FUTA (unemployment) are not required if the children are
under age 18 and working for their parents. FUTA isn’t required for
children working for parents and who are under the age of 21.

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Despite this, you should always withhold federal income taxes.

In order to keep everything above board, make sure that you have
the following set up for both your spouse and your employed
children.

• Create a separate bank account, especially for children.

• Generate an actual pay stub, or write out a check for services,
which the children deposit into their account.

• Withhold the appropriate amounts with each check

• Pay quarterly employee taxes, where applicable.

Also consider that if your company has an educational assistance
plan, then it could make contributions to the children’s tuition, and it
would be tax deductible. The class, of course, need to be in some way
tied back to the company (benefiting it in some way). So, for
example, suppose your daughter is studying Art in college. While
your company would not pay for the art classes, the general
education classes, in particular the business classes, the math classes,
and the communication classes, are all reasonable.

Consider the following scenario:

You hire your child and pay him $6200 in wages for the entire year.
Your business is a self-employed (sole proprietorship). You can
deduct that money paid in wages, and you’ll not pay the SS or
unemployment taxes. This is different if you were a corporation or a
partnership.

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Your child has to report this as income on the simple 1040 form and
takes the money as their standard deduction. Assuming that you are
in the 39.6 tax bracket, then this money will produce a refund of
nearly $2500 from the federal taxes, alone. A really good strategy is to
have your child place some or all of that money into an IRA (Roth),
which would generate interest and appreciation…which is tax free if
used for college. So, in effect, the government is supporting your
child’s education, and it’s not even a student loan that has to be paid
back.

With both of these hiring strategies, documentation is critical. Always
keep a very good list of the following:

• Job description and duties

• Hours worked

• Compensation

• Proof of comparable payment (salary is in line with others)

• W4 on file (hand them a W2 at tax time to file if you pay
them more than $600)

A word about the Kiddie Tax.

The IRS states that if a child’s investment income is in excess of
$2,100, then they are taxed at their parents’ tax rate. But, even this
isn’t applicable if the child is 18, or is currently a full time student up
until the age of 23. This helps avoid the unearned income tax.
Unfortunately, there’s no way around the Kiddie Tax for those who

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are under age 18. However, children can be sheltered by the standard
deductions, and earnings that exceed allowable deductions are
actually taxed at the child’s lower rates, anyway.

Action Items: To Do

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Strategy Number Two: Convert High-Taxed Income into Tax-
Free or Low-Taxed Income

There are a number of ways to avoid paying higher taxes on the
money earned. One way that the wealthy accomplish this is to shift
money from the higher tax bracket to a lower tax bracket. This can
be accomplished quite a few ways.

Income tax withholding has to happen with any employee. However,
if that employee happens to be a child, then the rules are a bit more
lenient. An employee, your child, can claim exempt status if they
didn’t have any federal income tax liability the year before, and most

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likely won’t have any during the current year. However, even if there
is withholding that is taken out, the chances are that your child will
receive that back as a refund at the end of the year, anyway.

Another way to move from high bracket to lower bracket is to take
advantage of retirement plans. If you offer your employee (whether
they are your spouse or your child) a retirement plan you could
shelter quite a bit of money from being taxed. For example, if your
business offered a SEP, then up to 25% of whatever your employee
makes could be contributed into that plan.

Strategy Number Three: Gift Property Instead of Cash

There are a number of ways to place your money in tax sheltering
entities. One of those is to place it into an investment product, real
estate, or commodities of some sort. The Kiddie Tax rules won’t
apply to children whose dividends appreciate in value over time, like
real estate or investments. Any dividends that are usually paid out are
so small as to not be taxable. When the investments or property are
sold, just make sure that the child is 24 years of age or older. Even at
their 24 year old tax bracket, it will be much lower than yours.

Here are some good ideas for giving a ‘gift’ as opposed to cash:

Bonds: Municipal or savings: Both of these products allow for
deferment on the payment of interest (which you’ll want to do until
they are 24).

Stocks/Mutual Funds: These are not subject to taxation until they are
redeemed (cashed out…or sold). Make sure it isn’t done until your

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child is at least 24, or they will be subject to your tax bracket.

Treasury bills: These bills can be bought so as to mature after your
child turns 24. But, you will have to be careful as some bonds have a
set maturation date.

Tax managed mutual funds: These are funds that specifically are
designed not to generate taxable income.

Index funds: These are tied into the stock market and generate small
amounts that are generally not taxable. They will gain or lose
depending on the stock market’s activity. These are for longer term
investing.

Action Items: To Do

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Strategy Number Four: Deduct Your Equipment TWICE

Believe it or not, you can actually double deduct your office and
business equipment twice. And it’s legal! The first thing that you do is

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give away your old equipment. It sounds crazy, but there is a method
to this madness. Give away property after it has been depreciated,
and then “lease” it back from them and pay monthly lease payments
to them for the privilege. So, in essence, the first deduction was when
the equipment was brand new. The second deduction is from the
business expense of leasing it back. This gift-leaseback strategy is also
of benefit in the event that there is a lawsuit and all of your business
assets are in jeopardy. Well, if you’re leasing your equipment, then it’s
not officially a part of your business. Thus, your equipment is safe. In
order to make this work for you, you just take into account the two
following steps:

In order for this to work you MUST own the equipment first.
Secondly, give the property only after it’s been depreciated. Fully
depreciated the property will give you the maximum deductions with
this strategy. Leasing it back from family members, benefits them,
and it benefits you. Note that if you plan to sell the equipment to
your children, and then lease it back, then they must not be minors.
Lastly, pay a reasonable amount of rent on the equipment. Do some
research in the area and see what rental on a comparable piece of
equipment might run you, then pay the same amount, or just a little
less.

Some typical sale-leaseback equipment is as follows (though this is
NOT an exhaustive list)

• Vehicles

• Computers

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