This week we conclude our series on Small Business Tax Planning with a brief case study of specific issues I have come across recently. Next week we will begin a three-part series on the basic concepts and recent developments associated with trademarks.
Amp Electronics is a new formed wholesale distributor of automobile parts. It is a corporation wholly owned by Steve Johnson. In order to capitalize his newly formed corporation, Steve placed $100,000 in cash and $50,000 in inventory from his previous business into Amp. Steve has five employees who are either clerical staff or warehousemen. His business generates about $1,000,000 in gross revenues a year.
Steve should instead, loan his corporation the money by executing a Promissory Note and then slowly taking money out of the corporation as repayment for the loan. We frequently find that our clients invest money in a corporation and then take the money back out as TAXABLE INCOME. Please don’t do this ~ you need to save your money for legal fees.
Steve could also have take money out of his corporation and characterized it as a loan to himself, again, so long as there is a Promissory Note and regular payments. We advise that such a loan be “zeroed out” at the end of each calendar year and that no more than 25% of the total compensation would involve such a loan.
This week we conclude our series on Small Business Tax Planning with a brief case study of specific issues I have come across recently. Next week we will begin a three-part series on the basic concepts and recent developments associated with trademarks.
Amp Electronics is a new formed wholesale distributor of automobile parts. It is a corporation wholly owned by Steve Johnson. In order to capitalize his newly formed corporation, Steve placed $100,000 in cash and $50,000 in inventory from his previous business into Amp. Steve has five employees who are either clerical staff or warehousemen. His business generates about $1,000,000 in gross revenues a year.
Steve should instead, loan his corporation the money by executing a Promissory Note and then slowly taking money out of the corporation as repayment for the loan. We frequently find that our clients invest money in a corporation and then take the money back out as TAXABLE INCOME. Please don’t do this ~ you need to save your money for legal fees.
Steve could also have take money out of his corporation and characterized it as a loan to himself, again, so long as there is a Promissory Note and regular payments. We advise that such a loan be “zeroed out” at the end of each calendar year and that no more than 25% of the total compensation would involve such a loan.
Finally, Steve should carefully consider to what extent all or a portion his meals, entertainment, travel and home office can be attributed to his corporation as well. While the IRS typically focuses upon all of these areas in any audit, it is our experience that well documented expenditures will typically be accepted.
LEGAL TIPS:
(1) Most of any initial contribution to a new business should be characterized as a loan to avoid paying taxes on the money you place into the corporation.
(2) Using a loan account during the year to improve cash flow is frequently used in small businesses.
(3) Consider the applicability of meals, entertainment, travel and home office expenditures to your business.
This completes our discussion on Small Business Tax Planning. Next week we will begin our three part-series on trademarks.
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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