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