| The clock is running, but have no fear. There is still time | | | | prerequisite to having deductible business expenses. |
| to make plans, as the tax filing season nears. How | | | | Suppose you started a sideline business or quit your |
| clever, yet another poem from the host of the most | | | | previous job to begin the dream of owning a business. |
| complete business program on radio, "Better Business". | | | | The 2006-year might have generated plenty of |
| What can be done to reduce income tax exposure | | | | expenses without so much as a dollar of revenue. The |
| for 2006? Read on if dare, read on if you care. | | | | good news is that current efforts will yield a boon for |
| Outside salesmen should take note. Get reimbursed | | | | later years and current efforts will not be left |
| for your business expenses, please. The life of the | | | | unforgotten in the current year. |
| salesman is one where meals & entertainment and | | | | Expenses incurred for the current year will serve to |
| use of a personal auto create income tax deductions | | | | offset income from other sources during the year |
| that are not terribly beneficial. They are recorded on | | | | (W-2 income, interest and dividends, etc.). Providing the |
| form 2106 and lead to miscellaneous itemized | | | | business is organized as a sole proprietor, partnership, |
| deductions that are subject to a 2% adjusted gross | | | | or S corporation (caution: the S corporation requires |
| income (AGI) floor. Besides this limitation, it is entirely | | | | direct capital contributions from shareholders in order |
| possible that our client, the outside salesman, is subject | | | | to create basis for taking losses) the taxpayer stands |
| to the dreaded alternative minimum tax or AMT. | | | | to get a tax benefit. Here's where additional planning |
| Getting into the AMT causes miscellaneous itemized | | | | can take form. Suppose the new business owner |
| deductions to be lost permanently in the winds leaving | | | | determines that new equipment is needed. Is it better |
| taxpayers stunned and bewildered. How can a | | | | to place it in service during the current year, or wait |
| defense be mounted against such a noble foe as the | | | | until next year? To make this assessment, it become |
| AMT? Get reimbursed I say. Get reimbursed for | | | | necessary to determine what tax rates are currently |
| whatever your employer will allow. Here's what to do. | | | | and what they will be next year. Suppose the |
| In lieu of getting paid a final sales commission, gather all | | | | taxpayer is in a 35% federal bracket for 2006. The |
| of your expenses for the year, including auto mileage. | | | | business is projected to generate income in the next |
| Multiply your business auto mileage by 44.5 cents, add | | | | year that will put the taxpayer in the 15% bracket. The |
| your supplies and travel costs to your ledger, and | | | | answer is to put the equipment in service during the |
| present this expense report to your employer. | | | | current year and taking 179 expense if there is enough |
| Remember meals & entertainment will be limited to | | | | W-2 income from jobs of the taxpayer and spouse. |
| 50% so your employer might not be quick to offer | | | | W-2 income will give the taxpayer basis for taking the |
| reimbursement for this expenditure. Here's how it can | | | | immediate expensing election of up to $108,000 for |
| work to the benefit of both employer and employee. If | | | | assets placed in service during 2006. An example of |
| one is due a commission of $10,000, turn the | | | | how this works would include a husband and wife with |
| commission into expense reimbursement if you have | | | | W-2's totaling $80,000 start a business in 2006. They |
| $10,000 of expenses. By doing so, the salesman will | | | | have expenses totaling $10,000 from the business and |
| receive income that is not reported for tax purposes | | | | need to purchase equipment totaling $40,000. It is |
| and it will not matter that the 2% AGI floor and AMT | | | | determined that it is more beneficial to take the |
| are present as they will be handily defeated with this | | | | 179-expensing limit in the current year as income will be |
| strategy. The salesman's expenses will serve to keep | | | | minimal in 2007. The expensing limit of code section |
| the $10,000 commission out of income in the first place | | | | 179 limits the amount of deduction to income. Since |
| rendering the efforts of AMT and AGI thresholds | | | | income from the business is zero, the W-2 income |
| useless. The employer is also happy. No employer paid | | | | counts as income from a trade or business thus |
| payroll taxes of any kind will be due on expense | | | | allowing the full deduction of $40,000. This will drive the |
| reimbursements unlike the payment of commissions. | | | | income from the taxpayers down to $30,000 ($80,000 |
| This is truly a situation where everyone can be happy, | | | | -$50,000). |
| how rare is that? | | | | Checklist for other items to consider: |
| Other Things to Consider | | | | -Create a retirement plan and determine the best plan |
| If you started a new business during the year, | | | | -Don't forget about auto expenses (mileage rate is 44. |
| understand this important fact. Income is not a | | | | |