1. 10 Most Expensive Tax
Mistakes That Cost
Business Owners
Thousands
Jaswant S Gill CPA
281-880-8500
info@jsgcpas.com
www.jsgcpas.com

2. #1: Failing to Plan
“There is nothing wrong with a
strategy to avoid the payment of
taxes. The Internal Revenue Code
doesn’t prevent that.”
William H. Rehnquist

3. Why Tax Planning?
1. Key to financial defense
2. Pro-Active results

4. Taxable Income
 Earned income
 Interest/dividends
 Add Taxable Income  Capital gains
 minus Adjustments to Income  Pension/IRA/Annuity
 Rent/royalty
 minus Deductions
 Alimony
 times Tax Bracket
 Gambling winnings
 minus Tax Credits  Illegal income

5. Adjustments to Income
 IRA contributions
 Moving expenses
 Add Taxable Income  ½ SE tax
 minus Adjustments to Income  SE health insurance
 Retirement
 minus Deductions
 Alimony
 times Tax Bracket
 Student loan interest
 minus Tax Credits

6. Deductions/Exemptions
 Medical/dental
 State/local taxes
 Add Taxable Income  Foreign taxes
 minus Adjustments to Income  Interest
 Casualty/theft losses
 minus Deductions/Exemptions
 Charitable gifts
 times Tax Bracket
 Miscellaneous itemized
 minus Tax Credits deductions

7. Tax Brackets
Rate Single HoH Joint
10% 0 0 0
 Add Taxable Income
15% 8,501 12,151 17,001
 minus Adjustments to Income
25% 34,501 46,251 69,001
 minus Deductions
28% 83,601 119,401 139,351
 times Tax Bracket
33% 174,401 193,351 212,301
 minus Tax Credits
35% 379,151 379,151 379,151

8. Tax Credits
 Family credits
 Education credits
 Add Taxable Income  Foreign tax
 minus Adjustments to Income  General business
 Low-income housing
 minus Deductions
 Renovation
 times Tax Bracket
 minus Tax Credits

9. Two Kinds of Dollars
 Add Taxable Income
 minus Adjustments to Income Pre-Tax Dollars
 minus Deductions
 times Tax Bracket
 minus Tax Credits
After-Tax Dollars

10. Keys to Cutting Tax
“You lose every time you spend after-tax
dollars that could have been pre-tax dollars.”
1. Earn nontaxable income
2. Maximize deductions and credits
3. Shift income: later years, lower brackets

11. #2: “Audit Paranoia”
Schedule C: $0-24,999 1.10%
Schedule C: $25,000-99,999 1.90%
Schedule C: $100,000+ 4.20%
Partnership 0.40%
S-Corp 0.40%

12. #3: Wrong Business Entity
C-Corp?
S-Corp?
Partnership?
Sole Prop?

13. Sole Proprietorship
Report net Pay income
income on tax on net
Schedule C income
Pay SE tax up
to 15.3% on
income

14. S-Corporation
Split proceeds Pay income
into “salary” tax on salary
and “income” and income
Salary Income
Pay FICA up to Avoid FICA/SE
15.3% on salary tax on income

15. Employment Tax Comparison
S-Corp FICA Proprietorship SE
Salary $40,000 Income $80,000
FICA $6,120 SE Tax $11,304
Net $73,880 Net $68,696
S-Corp Saves
$5,184

16. #4: Wrong Retirement Plan
50,000
40,000
Contribution
30,000
20,000
10,000
0
30,000 60,000 90,000 120,000
Income
SEP SIMPLE 401(k)

17. Simplified Employee Pension
 “Turbocharged” IRA
30000
 Contribute up to 25% of
income 25000
 Max. contribution: $49,000 20000
 Must contribute for all 15000
eligible employees
10000
 Contributions directed to
5000
employee IRAs
 No annual administration 0
30,000 60,000 90,000 120,000
SEP Contribution

18. SIMPLE IRA
 Defer 100% of income up to
$11,500 16000
 Age 50+ add $2,500 “catch 14000
up” 12000
10000
 Business “match” or “PS”
8000
 Contribute to IRAs 6000
 No annual administration 4000
2000
0
30,000 60,000 90,000 120,000
SIMPLE Contribution

19. 401(k)
 Defer 100% of income up to
$16,500 45000
 Age 50+ add $5,500 “catch 40000
up” 35000
 Employer contributes up to 30000
25000
25% of “covered comp”
20000
 Max. contribution: $49,000 15000
 Loans, hardship withdrawals, 10000
rollovers, etc. 5000
 Simplified administration for 0
“individual” 401(k) 30,000 60,000 90,000 120,000
401(k) Contribution

20. Defined Benefit Plan
 Guarantee up to $185,000
Age Regular 412(i)
 Contribute according to
age and salary 45 $80,278 $164,970
 Required contributions
 “412(i)” insured plan 50 $133,131 $258,019
 “Dual” plans
55 $211,448 $395,634
60 $236,910 $450,112
Projections based on retirement at age 62
with $165,000 annual pretax income.

21. #5: Missing Family Employment
 Children age 7+
 First $5,800 tax-free
 Next $8,500 taxed at 10%
 “Reasonable” wages
 Written job description, timesheet, check
 Account in child’s name
 FICA/FUTA savings

22. #5: Missing Family Employment
 Children age 7+
 First $5,800 tax-free
 Next $8,500 taxed at 10%
 “Reasonable” wages
 Written job description, timesheet, check
 Account in child’s name
 FICA/FUTA savings

23. #6: Missing Medical Benefits
 Employee benefit plan
– Married: Hire spouse (no salary necessary)
– Not married: C-corp
 Reimburse employee for medical expenses
incurred for self, spouse, and dependents
 Works with any insurance
– Use your own insurance
– Supplement spouse’s coverage

24. MERP/105 Plan
 Major medical, LTC, Medicare, “Medigap”
 Co-pays, deductibles, prescriptions
 Dental, vision, and chiropractic
 Braces, fertility treatments, special schools
 Nonprescription medications and supplies

25. MERP/105 Plan
 Written plan document
 No pre-funding required
– Reimburse employee
– Pay provider directly
 Bypass 7.5% floor
 Minimize self-employment tax

26. Health Savings Account
1. “High deductible health plan”
- $1,200+ deductible (individual coverage)
- $2,400+ deductible (family coverage)
Plus
2. Tax-deductible “Health Savings Account”
- Contribute & deduct up to $3,050/$6,150 per year
- Account grows tax-free
- Tax-free withdrawals for qualified expenses

27. #7: Missing A Home Office
“Principal place of business”:
1. “exclusively and regularly for administrative
or management activities of your trade or
business”
2. “you have no other fixed location where you
conduct substantial administrative or
management activities of your trade or
business.”
Source: IRS Publication 587

28. #7: Missing Home Office
 Determine “BUP” of home
– Divide by rooms
– Square footage 1500
– Eliminate “common areas”
100
144

29. #7: Missing Home Office
 Deduct “BUP” of expenses:
– Mortgage/property taxes
(better than Schedule A)
– Utilities/security/cleaning
– Office furniture/decor
– Depreciation (39 years)
 Increase business miles

30. #7: Missing Home Office
 When you sell:
– Recapture depreciation
– Keep tax-free exclusion

31. #8: Missing Car/Truck Expenses
AAA Driving Costs Survey (2010)
Vehicle Cents/Mile
Small Sedan 43.3
Medium Sedan 56.2
Large Sedan 70.2
4WD SUV 73.9
Minivan 62.0
Figures assume 15,000 miles/year; $2.603/gallon gas

32. #9: Missing Meals/Entertainment
 Bona fide business discussion
– Clients
– Prospects
– Referral Sources
– Business colleagues
 50% of most expenses
 Home entertainment
 Associated entertainment

33. #9: Missing Meals/Entertainment
 How much?
 When?
 Where?
 Business purpose?
 Business relationship?

34. #10: Missing Tax Coaching Service
 True Tax Planning
 Written Tax Plan
– Family, Home, and Job
– Business
– Investments
 Review Returns

35. Circular 230 Notification
In accordance with the provisions of US Treasury Circular 230
we advise you that this communication and any attachments to
this message is not intended or written to be used, and cannot be
used for the purpose of avoiding tax penalties, under the IRS code,
or promoting, marketing or recommending to another party any
tax related matters addressed in this e-mail message or
attachments.
www.jsgcpas.com
info@jsgcpas.com
281-880-8500