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Tax Tips

How to "pay yourself" as a member of the LLC:

As a member of a Limited Liability Company (LLC) your taxable income is determined by your percentage of the LLC's net income at the end of the year.  In most circumstances each member of the LLC is self-employed and not an employee.  Checks written to LLC members only affects their investment in the LLC and are not a wages.  The LLC member can invest or draw as much money as they wish without tax consequence (until the business is sold).   You could think of these draws and investments in the LLC as savings accounts. They should be tracked for each member.

This scenario is the same for self-employed individuals operating as sole-proprietors or single-member LLCs.

Health Savings Accounts:

Would you like to Deduct the Cost of Out-of-Pocket Medical Expenses? Are you interested in affordable health insurance while providing a tax benefit as well? As health insurance plans begin to have ever increasing deductibles and exclusions, you might feel like health insurance is not worth it. Health Savings Accounts (HSA's) combined with high deductible health plans (HDHP's) keep your monthly premiums at a minimum while providing a tax deduction for most out-of-pocket expenses.

Usually medical expenses are not deductible because they must exceed 7.5% of your AGI (adjusted gross income) and you must itemize deductions. If your interested in additional information on New Hampshire's Assurant Health and how this works try our Health Savings Account Information page.

Business or Hobby?

Is you business continuing to show losses year after year? Make sure you pay attention to guidelines setup by the IRS to determine if your business is really a business or may be considered a hobby. The IRS may determine that losses and/or certain expenses be disallowed. Go to our Business or Hobby page to see how your business measures up.

Filing an Extension:

The extension beyond April 15th is automatic if requested.  No reason is necessary.  However, the extension is only for the tax return, not the amount due.  We will need estimate if you have paid adequate amounts of estimated tax payments and withholding to cover the actual tax due.  If your payments are not adequate (and you make no other payments before April 15) interest and penalties will be charged.  In some cases we can successfully request the waiver of penalties, but interest would be due in any case. 

If you need help with estimating your liability or filing an extension give us a call.

Spread out Gains on Sale of Assets:

We all probably expect to pay more taxes in a year that we have a large gain. But what most people don’t know is how much your effective tax rate increases. If your adjusted gross income (AGI) is normally $50,000 and you sell a second home, rental property or business and have a gain of $150,000 your tax return will look very different. Your tax would go from approximately $4,400 to $47,100! Your effective tax rate goes from 8.7% to 23.5%. Installment sales are a relatively simple way of reducing this affect. Before finalizing a sale, see us to reduce these taxes. (Remember that some gains on the sale of a principal residence may also be included in income.)

Business Use of Autos:

Generally, there are two methods of deducting business use of a vehicle. The “actual expenses” method involves keeping records of all expenses related to your vehicle such as gas, maintenance, and depreciation. The “standard mileage rate” method involves multiplying your business miles by a rate determined by the IRS. This is supposed to provide a deduction that, on average, is equal to the actual expenses of running an auto, including depreciation. Remember to keep a log of your business mileage. Even if you use the “actual expenses” method, you should have documentation of your business use. Mileage logs also provide a method of allocation of expenses between business and personal use . Remember to keep track of tolls, parking, town tax and interest on your auto loan. These are deductible (for the business portion) under either method. This is a troublesome issue for many small businesses. Click on our Business Use of Autos page for further information.

Estate Planning:

Estate planning continues to be an issue for anyone with significant assets. Estate tax will probably not go away. Without planning, your estate may pay hundreds of thousands of dollars more than necessary. Estate planning can be inexpensive and can provide your heirs with huge benefits. Estate planning can also serve many other purposes besides minimizing estate tax. Other purposes include succession planning for businesses, control of assets passed to beneficiaries, and providing for loved ones that may be less than capable.

Expensing Certain Assets:

Typically business assets with a life of more than 1 year must be depreciated (expensed over time). Section 179 of the Internal Revenue Code allows you to expense all or part of the cost in the year the asset was purchased. Vehicles may be expensed as well. In some situations it is possible to deduct the entire cost of a vehicle in the first year. For more information go to our Expensing Vehicles page. This deduction cannot exceed $105,000 (for 2005) and cannot exceed the income derived from the business. Any excess amount can be carried over to the next year. This deduction is also phased out for businesses with asset purchases over $420,000 per year.

Do you use the Standard Deduction?

If your itemized deductions come close to the standard deduction, consider timing  your itemized deductions so that they are lumped together every other year. Pay 2 years of property tax within 1 calendar year by paying one payment late (January and December of the same calendar year). Do the same for contributions. Every other year you will be able to itemize and reduce your tax.  On the alternate years, you will use the standard deduction.

Other itemized deductions include medical (limited), mortgage interest, and unreimbused employee expenses (limited).  These typically are harder to time the payment to your advantage.

 

     
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