Last week I concluded our series on employer-employee relations. This week I will begin our three-part series on small business tax planning. Our segment today focuses upon some things which should ALWAYS be considered (incorporations, home office allowance and medical expenditures). Next week I will briefly touch upon a few more aggressive thoughts. Finally, we will conclude with a case study on how not to confront the Internal Revenue Service.
In the opinion of your humble legal practitioner, every small business should be incorporated and should file an “S” election. I have frequently had clients tell me that there are no liabilities associated with their operations, and thus, they don’t need to be incorporated. Unfortunately, I have had software companies sued for causing a fire (the customer accidentally put the program into a large printing job and the paper caught fire); apparel companies sued in connection with a murder; and even a greeting card manufacturer sued for intentional infliction of emotional distress. While I cannot predict how your company might be sued, regardless of what it does, it’s a possibility by definition if you are in business.
All small businesses that have one shareholder should also make an “S” election. In summary, this assures that your corporation will not be separately taxed, but instead, the fact that you are operating through a corporation will have no impact upon your tax treatment.
Computers, email and the Internet assure that virtually every business person conducts some business from home. There is no doubt that a home office deduction is frequently an audit flag. While many of the applicable rules are complex, suffice it to say that anyone who is self-employed and who has a room dedicated exclusively to their business should carefully examine the home office deduction.
Finally, medical expenses. Historically, many of the self-employed were not allowed to deduct medical expenses. If you run your own business – even a startup, sideline, or trading business – you can establish a self-insured medical reimbursement plan and write off 100% of your medical bills as a business expense. This includes routine “nuisances” like deductibles, co-pays, and prescriptions; occasional costs like teeth cleaning and eyeglasses; and even big-ticket items like braces, fertility treatments, and special schools for children with learning disabilities. The catch is the plan has to cover employees. But that's an easy requirement to meet. If you're married, hire your spouse. If not, incorporate.
LEGAL TIPS:
(1) Incorporate and make the “S” election;
(2) Examine the home office deduction carefully;
(3) With some basic planning, everyone can deduct a broad range of medical expenses for their family, as well as for themselves.
The above is a basic list of things that all small business owners should attempt to take advantage of. Next week, I will consider a few more aggressive strategies and then conclude the following week with a brief case study.
If you have any questions concerning the above, please feel free to contact Lawrence Horwitz, either by telephone: (949)450-4942; or email: Larry Horwitz
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