If you are planning to take a home-office deduction on your tax return this year, consider carefully the advantages and disadvantages. This deduction has an interesting and often conflicting history.
With the changes made by tax reform, it is time to rethink the most profitable ways of taking money out of the family business.
- Keep personal ownership of business assets (such as real estate and business equipment) and lease them to the company.
Benefits: You get to claim depreciation deductions for the assets on your personal return, giving tax-shelter benefits. Should a time come when the business no longer needs the assets, you may dispose of them for your personal account.
- Hire family members who are in a low tax bracket (such as children or even parents).
Benefits: The business gets to deduct the payments at a relatively high tax rate, while the hired family members report income at a lower rate, thus cutting the family’s overall tax bill.
Family members may also become covered by tax favored benefit programs established by the business, such as medical plans and retirement programs.
Moreover, if you run the business as a proprietorship, you do not have to pay Social Security taxes on the wages paid to children under age 18. While tax reform limits the shifting of investment income to children under age 14, it does not restrict the shifting of earned income. In addition, the Tax Court has upheld salary deductions for children as young as seven years old.
- Set up an irrevocable trust for a child over age 13 (or other low tax bracket family member), and give it ownership of assets used in the business (such as equipment or real estate). Then have the trust lease the assets to the company.
Lease payments made by the company will be deductible at its high tax rate while they will be taxed to the trust at a lower rate, again cutting the family’s overall tax bill. Important: The trust must have an independent trustee who will manage it in the child’s best interest.
Brock and Associates, LLC specializes in retirement, estate, tax, and business planning. If you would like more information on family business planning strategies, please schedule a time to meet with our qualified professionals.
One topic of perennial interest to small business managers is why some small businesses go under. Knowledge of the reasons why many small businesses have failed can be helpful in seeing that it will not happen to your investment.
Dun and Bradstreet periodically publish the reasons for business failures including all of the largest failures. The reasons for large business failures are not different from those of small concerns, except for the scope. According to Associated Business Brokers of Atlanta, these are the top 9 reasons small businesses fail:
- Not preparing and following a formal Business Plan. Many business owners think that dedication and hard work will pull them through. A global look at the business, frequently updated, is essential to assure success. If the skills were not present to prepare one, no other allocation would be as effective as obtaining professional assistance.
- Inadequate attention to the business. Thinking a manager can concentrate on just one facet of the business, such as finance or production; failing to realize that all areas of operation are important to success.
- Lack of planning. Opening a company in helter-skelter fashion, for example, opening in a depressed area because the rent is low, or as the first retail tenant in an unoccupied mall.
- Failure to deal carefully with suppliers. Accepting inferior merchandise or poor service and giving little thought to develop secondary sources. It is essential to be constantly seeking the best quality and service at the lowest price - from reliable suppliers.
- Not knowing the financial condition of the business. Maintaining poor books and records - which result in having no conception of profits, costs, margins, sales or customer ratios. The business owner is then unable to make intelligent decisions because of the lack of this information.
- Insufficient understanding of the competition. Not knowing one’s strengths and weaknesses in relation to those of business rivals, thus forfeiting the opportunity to gain a stronger position.
- Poor people skills. Failing to develop an orientation system for new employees or to follow through on personnel development to foster a team spirit. Conversely, many owners are unable to swiftly discharge poor performers without fear or favor.
- Lack of perspective. Becoming too immersed in details and losing sight of how the overall operation is progressing.
- Lack of attention to sales. Ignoring what should be the main thrust of any business if it is to be successful. If sales are not there, then revenue must be lagging, and financial crisis is looming.
Brock and Associates, LLC specializes in retirement, estate, tax, and business planning. If you have concerns with any of these issues, please schedule a time to meet with our qualified professionals.