Business Tax Deductions
Posted Thursday, July 9, 2020
WCG are business consultants first and accountants second. Far too often business CPAs are simply compliance-oriented and are not a client advocate by helping owners understand general principles and subsequent business tax deductions. We have a few objectives when engaging with small business owners-
- Assist business owners in appreciating the financial landscapes of their business, and add expertise and comfort to operational decision-making.
- Have our business owners understand how the numbers of a tax return come together and what they mean so together we can improve tax planning.
- Put business owners in better IRS-compliant positions to minimize tax consequences and keep more money in their pockets.
- Help owners leverage more from their business and apply those benefits to everyone, including family.
To accomplish these objectives and ensure that no rock goes unturned, we have created a Periodic Business Review (PBR) agenda. It is a framework designed to get the creative juices flowing and jog your memory about some of the issues keeping you up at night. Having said that, a PBR is your meeting, so if there are specific questions and concerns we focus on those first. More importantly a PBR is a living engagement- we can never solve all your problems in one meeting and today’s objectives evolve over time. Click on the button below to review our PBR agenda-
Ownership and Entity Considerations
Everyone wants to jump into business deductions, but like anything else we need to make sure your business foundation is set up correctly. We explore putting your spouse on payroll, and why it might make sense (such as maxing out solo 401k plan contributions). How about your children? This is usually a good idea when your marginal tax rate is 24% or greater. Why? The additional cost of payroll taxes (15.3%) must exceed the delta between Junior’s marginal tax rate and your tax rate. So, is putting your kids on payroll a good idea? Sure, in some circumstances.
Mom and Dad as owners? Perhaps. As you get older magically your parents get older too, and Mom and Dad might not have enough money. Instead of squirreling away a few bucks here and there at your tax rate, have your parents be minority, inactive shareholders. They take distributions at their tax rate and because they are not participating in your business they do not need a wage.
Do you have several business units (such as you are a consultant and your spouse is real estate agent)? Do you need a holding company? Other issues explored are business exit strategies and ownership expansion with key personnel.
Owning real estate and leasing it back to your business is commonplace but occasionally we still see operating entities owning real estate. Usually not the best idea. But have you explored leasing equipment back to your business? Buy a car and lease it back?
How about Operating Agreements with non-spousal partners? Provisions for death and divorce are easy. Most junior associate attorneys can draft these provisions one handed with the lights off. How about incapacitation? How is that defined? If you do have a death, divorce or incapacitation situation how is the entity valued? How about distribution formulas and cash reserves? What monetary amount can each shareholder spend on behalf of the company without approval? What is the dispute resolution when conflict among owners arise?
Oftentimes with non-spousal owners, we set up a multi-member LLC with each member being an S corporation owned by each person individually. Why does this help? Lower self-employment taxes, but provide autonomy in terms of revenue sharing and corporate expenditures. For example, each owner can buy a company car without concern for amount spent and subsequent office politics since the car is isolated in the individual’s S Corp.
Here are some blog posts and KB articles to get your mind spinning-
Small Business Tax Deductions
Finally! Sorry to make you wade through all the foundational considerations. Let’s start off with some softballs. Home offices, cell phones, internet charges and personal vehicles should all be paid for personally and then reimbursed by your company for the business portion. The reimbursement is done through an Accountable Plan. This bolsters the arms-length perspective that must be maintained between the business owner and the business. Imagine you worked for Microsoft, and you incurred expenses on behalf of your employer such as using your personal vehicle to pick up Bill Gates from the airport. You would turn an expense report into payroll for reimbursement. Same thing with your business. Click on the button below for more information about Accountable Plans-
While we are on the topic of vehicles, there are several scenarios to consider. Do you use the car for nearly 100% business use? Do you have another car at your disposal? Do you drive a lot of miles where the mileage rate might be better in favor of actual expenses (about half the mileage rate is depreciation)? We can explore these questions and find the best match for your business and tax objectives. By the way, Yes, the car has to be in the business name. Yes, your insurance increases. Yes, your car loan will be more expensive. Yes, you will lose an audit if you don’t satisfy these three things (title, insurance and loan in business name). Here’s a tidbit- some insurance companies allow you to joint title your automobile between you the person and your business, and this allows a personal insurance policy versus a commercial one.
What about meals with your spouse? Normally not deductible but what if your spouse is an employee? As a business owner, your business is all you think about and magically is talked about a lot- brushing your teeth, dozing off in bed, driving to the opera, and eating meals. Sure, you can’t drop $300 every other night on drinks and steaks, and call it business related, but here and there works… even under the Tax Cuts and Jobs Act of 2017.
How about golf outings? Sporting events? The hot buttons of the IRS can get you in trouble. Two business owners could deduct the exact same expense, but one would win an audit and one would lose an audit. The answer is simply knowing the rules, and positioning you and the business accordingly.
We’ve dedicated a whole web page to small business tax deductions including our automobile questionnaire. Please click the buttons below-
Gimmick Business Tax Deductions
There is all kinds of material out there giving you a laundry list of business deductions. Be careful! Some of these are gimmicky. For example, you can rent out your primary residence for 14 days or fewer, and the income is not taxable. Yeah, pretty cool. Some argue that originated from Augusta where the Master’s golf tournament is held. At any rate, some business consultants advocate leasing your house to your business for a 14-day board meeting. Really?!
You are a company of one (or perhaps two), and you need a 14-day board meeting. There is an underlying rule in business deductions- they must be ordinary and necessary. You would fail on both fronts. Perhaps one day, but not fourteen. Having said that, we have a client who sells Pampered Chef, and she hosts parties once a month. Yes, her business leases her house- deductible for the business and she does not have to pick up the income. Win win!
Again be careful of the one size fits all business tax deduction that you hear about in the locker room at the club or over a drink at a cocktail party. Yes, these can work for you but you must know the rules and, as mentioned before, position yourself carefully.
Business Tax Planning
One of the cornerstones of our Periodic Business Reviews (PBR) is small business tax planning. We don’t mind telling you bad news, we just don’t want you to be surprised by it. If we tell you in September that you are tracking to owe $10,000 next April, you gulp and then we figure out a way to minimize the pain. If we tell you on April 15th that you owe $10,000, you should fire us.
There are very few things worse than having $50,000 in the bank and not knowing how much you can spend. Through tax planning we can add comfort to your family budget- “Hey, we need you to send off $20,000… the rest you can spend as you wish.”
We also explore solo 401k plans and defined benefits pensions. Remember, these are tax deferral tools not tax reduction tools. WCG (formerly Watson CPA Group) also has Certified Financial Planners, and far too often we see people defer taxes at 24% just to pay it back at 32%. As people get older, they earn more and have fewer deductions… it is not uncommon for your marginal tax rate to increase during your retirement years.
Also, tax deferrals hold your money captive until 59.5 years old, and also create a tax bomb at 70.5 years old when required minimum distributions kick in. With $2M in tax-deferred money, your RMD is about $73,000. $3M is $110,000. You start piling this onto all your other income sources, and boom, higher tax bracket! Having said that, your 401k plan doesn’t count towards RMDs provided you still are employed- well, if you work for yourself, this is easy.
Risk Mitigation and Estate Planning
During our PBRs we also talk about disability insurance and umbrella policies. How about long-term care insurance? We also explore how to get you out of your business- can you sell your future cash flow stream like an insurance agent or financial advisor would? If so, when is the optimal time to sell? Do you have an employee or two that might want to buy-in? How does that work? We can help!
How about your Will and Trust? Should your business be a part of your trust? Again, we can help. For our full PBR agenda, please click the button below-
Business Advisory Service Plans
WCG specializes in small businesses who generally have fewer than 100 employees. Why? We want to help people, and more importantly we want to help the business owner directly. Frankly speaking, once a business gets to a certain size management layers get in the way of owner access. Access allows us to ensure the owner(s) are leveraging the most out of their business for themselves and their families.
Because small business is a core competency for us, we have created business advisory service plans which include these really cool things-
|A la Carte*||Vail||Telluride||Aspen|
2023 Tax Planning and Preparation
|Streamlined Tax Planning, Tax Projection Worksheets||$350 to $500|
|Annual Tax Reduction, Shifting and Deferral Analysis||$350 to $500|
|Small Business Tax Deductions Optimization||Included|
|Section 199A QBI Deduction Tax and Salary Optimization||$300|
|Estimated Income Taxes (via increased payroll withholdings)||Included|
|Business Entity Tax Return (Form 1065, 1120, 1120S)||$1,500 starting|
|Individual Tax Return (Form 1040, joint filing), One Owner||$800 starting|
|Expat / Foreign Income Calcs (Form 2555, FBAR, Form 8938)||$300 to $500||Add-On||Add-On||Add-On|
|Tax Resolution, Audit Defense||Varies||As Req'd||As Req'd||As Req'd|
|Financial Planning, Calculations, Discussions||$900 to $2,500||Add-On||Add-On|
|Situational Tax Law Research (up to 3 hours annually)||$750 to $1,000|
Payroll and Accounting Services
|Reasonable Shareholder Salary Calculation (RCReports)||$500|
|Monthly Shareholder Payroll Processing (up to 3 shareholders)||$1,200|
|Employee Payroll Processing (bi-weekly, direct deposit)||Varies||Add-On||Add-On||Add-On|
|Annual Payroll Processing (W-2s, other filings, up to ten 1099s)||Included|
|Accounting Services (bookkeeping + analysis... see below)||Varies||Add-On||Add-On||Add-On|
|Quarterly QuickBooks Consulting (QuickStart Launch)||$250, $750||Add-On|
Business Advisory Services
|Business Consultation, Periodic Business Reviews (PBR)||$250 to $1,000||Annually||Routine||Routine|
|Complimentary Quick Chats (CQC)||$250 to $500||Routine||Routine||Routine|
|CPA Concierge Services||Varies||Add-On||Add-On|
|Interfacing with Lenders, Attorneys, Financial Planners||$750||Routine||Routine|
|Fractional Controller (monitoring 3rd party bookkeeping)||Varies||Add-On||Add-On||Routine|
|Quarterly Financial Statements Analysis, Comparisons||$1,200|
|Annual Cash Flow Management and Analysis||$1,500 to $2,500|
|Annual Budgeting, Forecasting, Goal Setting||$750 to $1,000|
|Annual First Research Reports, Industry-Focused Consulting||$350 to $600|
|Annual National and Metro Economic Reports||$150|
|KPI Analysis, Benchmarking, Hot Sheets, Trend Analysis||$500 to $1,500|
|Strategy and Maintenance|
|C-Level Financial Advice, Strategic Planning (Fractional CFO)||Varies|
|Succession Planning, Ownership Changes Consultation||$750 to $1,000||Routine|
|Annual Business Valuation||$2,500 to $3,000|
|Annual Corporate Governance, Resolutions, Meetings||$150 + filing fee|
|(prorated based on onboarding date)|
Custom! Unlike the modern day new car packages where you have to spend $8,000 for the moonroof, our Business Advisory Service plans can be customized specifically for you. The array above is simply a starting point. If you need more or less from us, let’s chat about it!
Tax Patrol Services
We also have Tax Patrol! This is a wonderful tax service for those who don’t need all the business advisory bells and whistles above, but from time to time want some love from an experienced tax consultant and business advisor. Have a quick tax question? Need to know the depreciation rules as you buy that new car? Wondering what your April tax bill is going to be in August? Tax Patrol is like ski patrol… you might not use it, but you sleep better knowing you have it.
|A la Carte*||Keystone||Copper||Breck|
|Individual Tax Return Prep (Form 1040, joint filing)||$800 starting|
|Business Entity Tax Return Prep (Form 1065, 1120, 1120S)||$1,500 starting|
|Streamlined Tax Planning, Tax Projection Worksheets||$350 to $500|
|Estimated Tax Payments Calcs||Included|
|Tax Resolution, Audit Defense||NA||Add-On||Add-On||Add-On|
|Complimentary Quick Chats (CQC)||$250 to $500||Routine||Routine||Routine|
|(prorated based on onboarding date)|
Additional Business Services
The following are additional business services to get your venture launched and on the way. Some of these are teased out separately as one and done fees like formation and onboarding stuff.
|Monthly Accounting (bookkeeping + analysis)||starting at $400 / month|
|Bi-Monthly Accounting (bookkeeping + analysis every 2 months)||starting at $250 / month|
|QuadMonth Accounting (bookkeeping + analysis every 4 months)||starting at $175 / month|
|Sales Tax, Personal Property Tax||typically $75 / month, $150 / quarter|
|Employee Payroll (direct deposit, bi-weekly)||1 employee, $100 / month
2-5 employees, $175 / month
|Fine Print: Accounting fees are based on 2 bank account with less than 250 monthly transactions but does not include the QBO fee from Intuit. Custom quote is available if you have a lot going on such as third-party integrations (POS, time billing system), accrual accounting method, extensive benefits packages and / or industry specific issues (e.g, job costing in construction).
Even Finer Print: Employee payroll can be added only if already using our Business Advisory Service plans above (e.g, Vail). Custom quote for more than 5 employees and a referral to therapy.
|Articles of Organization or Incorporation, Domestic Owners||$425 + state filing fee|
|Articles of Organization or Incorporation, Foreign Owners||$725 + state filing fee|
|Initial Report (if required)||$125 + state filing fee|
|Employer Identification Number (EIN)||Included|
|Single Member Operating Agreement (SMLLC)||Included|
|MS Word Templated Bylaws Agreement (Corporations)||Included|
|S Corp Election, Timely Election (made with formation)||Included|
|Payroll Accounts Setup or Transfer||$425 to $550 depending on state|
|Employee Data Transfer||$25 per EE, >5|
|Accounting Setup or Transfer (Fractional Controller)||Varies|
|QuickStart QuickBooks Setup and Support (90 days)||$750|
|S Corp Election, Timely Election (within 75 days)||$450|
|Late S Corp Election Back to January 2022||$600, $1,200 after Jan 1 2023|
|Examine Prior Tax Returns||Included|
|Moving Entity to New State||$750 + state filing fees|
|Closing Payroll Accounts||$350|
|Address Changes w/o Payroll||$350 + state filing fees|
|Address Changes with Payroll||$450 to $600 + state filing fees|
|Address changes are tough. Basic address changes require IRS, State Department of Revenue and Secretary of State notifications. Address changes that include payroll add another level of complexity since departments of revenue are not the same as departments of labor, and there might be local or municipal agencies as well.|
Advisory Services Fine Print
A la CarteA la Carte fee ranges are approximates. 85% of our clients fit into these fee ranges, but there are outliers. We have a handful of clients with over 30 rentals; their individual tax return is north of $4,000. We also are assuming one state; if your business spans the galaxy then additional fees will be discussed with you prior to payroll setup or tax preparation. Typically each state or tax jurisdiction is around $250 to $350 for tax preparation since it affects both your business and individual tax returns (frankly, state apportionment is a pain in the butt, but it is our pain… and states, especially California and New York, are crazy about it).
Some more things to consider- when a partial year remains, our usual annual fee is pro-rated to not charge you for services you didn’t use (like payroll and consultation). However, a large chunk of our annual fee is tax preparation which is typically a built-in fixed amount of $2,300 (both business entity and individual tax returns) plus annual tax planning. Whether we onboard you in January, July or December, we have to prepare a full year tax return. This increases the monthly fee for the remaining months of 2023 but the monthly fee will later decrease in January of 2024 to reflect the amounts above. Yeah, we make it sound like 2024 is just around the corner.
We make very little profits on payroll processing… we offer it as a convenience to our clients. One throat to choke with a single call can be reassuring but if you want to run your payroll, go for it! Everyone thinks payroll is a piece of cake; write a check and done. Nope… we see a lot of mistakes being made by clients especially the handling of health insurance and HSA contributions since there are special rules for greater than 2% S Corp shareholders. Then again, we don’t mind fixing what was broken.
You can prepare your own individual tax return as well… but the benefit WCG preparing both individual and business tax returns is that we slide things around depending on income limitations, phaseouts, alternative minimum tax (AMT), Section 199A deduction optimization, pass-through entity tax deductions (PTET), etc. Having our arms around both can yield some good tax savings!
Note: An individual tax return is what the IRS calls Form 1040 and refers to the entity filing the tax return (you, the individual, are the entity). However, a married couple are deemed to be one entity for the sake of an individual tax return. So, when we say we will prepare your individual tax return, it is meant to include your spouse in a jointly filed tax return.
Break-Even Analysis (does an S Corp make sense?)
Break-even analysis is based on our annual fee of $4,440. If an S corporation saves you 8% to 10% (on average) in taxes over the garden-variety LLC, then $4,440 divided by 9% equals $50,000 of net ordinary business income (profit) after expenses and deductions.
More sales pitch! Keep in mind that our fee of $4,440 includes your individual tax return which you might already be paying another tax professional to prepare. WCG has a handful of clients who are right at the break-even point of $50,000 but leverage an S Corp and our services to get tax preparation, tax planning and consultation.
We are not salespeople. We are not putting lipstick on a pig, and trying to convince you to love it, even if Tom Ford’s Wild Ginger looks amazing. Our job remains being professionally detached, giving you information and letting you decide.
We see far too many crazy schemes and half-baked ideas from attorneys and wealth managers. In some cases, they are good ideas. In most cases, all the entities, layering and mixed ownership is only the illusion of precision. Just because you can complicate the crap out of your life doesn’t mean you must. Just like Chris Rock says, just because you can drive your car with your feet doesn’t make it a good idea.
Here is a brief summary of the next steps should you want to engage WCG with Business Advisory Services or Tax Patrol-
1. We schedule an appointment to discuss your needs and ensure that we have the proper resources to help you.
2. We draft a proposal outlining the scope of services and our fixed annual fee.
3. If necessary, we schedule another appointment to review the proposal and perhaps tighten things up or make changes.
4. Once the proposal is signed, the fun begins with onboarding. We have an extensive checklist and internal task list to properly onboard you and your business. Some things are concurrent (such as gathering housekeeping docs and setting up payroll) and some things are sequential (for example, collecting financial data and then offering salary recommendations and creating a tax plan). Onboarding is like having a baby; a SWAT team shows up and does a zillion things, and poof, everyone is gone except for mom and baby.
5. After onboarding (usually 4-6 weeks), things settle down into a rhythm- Tax preparation in the spring, tax planning in the summer, with payroll and routine consultation bouncing along throughout the year.
Our Business Expertise
As mentioned elsewhere we primarily focus on small business owners and their unique consultation and tax preparation needs. With over 40 full-time consultation professionals including Certified Public Accountants, Enrolled Agents and Certified Financial Planners on your team, WCG consults on custom business structures, multiple entity arrangements, S corp elections (even late S corp elections back to January), tax strategies, business coaching, industry analysis, executive benefits, retirement planning including individual 401k plans, exit strategies, business valuations, income tax planning and modeling, and tax representation.
We also work with business law attorneys for business owners who have additional needs such as drafting Operating Agreements, fee for service contracts, buying or selling a business including employee stock ownership plans and partner buy-ins. In addition, WCG coordinates with third party plan administrators such as Polycomp and RPS to create age-based profit sharing plans and cash balance (defined benefit) plans. We can run point on whatever your business needs to ensure that communication is effective and efficient allowing you to sell widgets.
Here are some additional resources you might find useful.