Entrepreneur business owners tax savings for 2015!

Entrepreneurs  business owners can reduce significantly 2015 income taxes!!

 

By Jeffrey Brooks, CPA, CFP, MBA for JBrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

 

I receive  a large number of calls from repeat clients every year in October, November, and December who are worried about paying too much in income taxes. They know that nearly every year, I am able to pull out a “tax saving rabbit “out of my hat.

 

But we always get referrals from existing clients who want to know how to legally save thousands of dollars in taxes.

 

Our mission is to find little known ways to reduce taxes legally.  Most business owners are very smart about taxes once someone teaches them a system to save taxes.

 

The only way to find the time to keep up with tax changes and finding new tax saving ideas is by being a specialist.  A specialist does not perform financial statements audits or reviews. A specialist does not dabble in non-profit organization or home owner associations or IRS offers in compromise.

 

 Let us name this client Joe. “Joes” contacts me after they find out from their soon to be prior CPA that they are going to pay too much money for the previous tax year.

 

 In 20% of the situations, we can still help “Joe”.  But since the “paint has dried on the prior year” in 80% of the situations it is just too late!

 

 

Joe said, “I’ll worry about saving taxes again this upcoming fall!  I need to take a draw now from my S corporation to pay the previous year’s taxes and travel costs for my personal trip to Maui.

 

 I do not want to pay the high FICA Medicare taxes of over 15% in addition to the regular income tax rates. I need the cash draw to pay off my Maui trip of December”.   (Joe could have gotten a tax deduction for Maui if he understand how to legally work with the tax system)

 

I said  “Joe, every time we pay out cash that came from taxable revenue to draw or another nondeductible expense, we are creating a negative Gap between cash and taxable income. The result is that we will pay the price later. ?

 

“I don’t understand”, said Joe.

 

I said, “Joe, a good analogy would be how we gain weight. Maybe you see an obese person and you wonder how that person became so obese. The reason is that they ate a lot of bad calories like sugar, flour and other foods higher in carbohydrates while expending very little energy. Maybe they rarely ever move around.

 

Let us now look at this situation in terms of taxes. Let’s look at the month of January of the prior year. Your revenue was $200,000 and your business cash went up by $200,000. However if you paid only $90,000 deductible expenses while drawing out $50,000 cash (which is not tax-deductible), your S corporation taxable income would be $110,000 but your cast decreased or dropped way down to $60,000! You have just creating a negative tax Gap of $50,000. The Gap is the difference between your S corporation taxable income and cash position!!

 

Why? Because draws are not tax-deductible.

Also you have a tax deductible profit of $110,000 BUT Joe you have had zero federal and state withholding. On an annual basis the tax would be as much as $50,000 which means you’re already $50,000 in the proverbial negative tax hole.

 

In February, you may start taking withholding out on payroll but you might also create a bigger next text a negative tax hole by paying nondeductible expenses such as life and disability insurance out of cash that came from taxable revenues!

 

The negative cumulative tax hole grows and grows until it reaches its zenith on December 31, 2015.  Each time taxable revenues exceed taxable deductions, the tax hole grows! Eventually Joe cannot even see the land above!

 

Joe, it can get even bigger and bigger like a growing snowball as each month ends. Of course if November and December are disastrous months and you put more cash into the business, then it is possible that the negative cumulative tax Gap gets smaller.

 

Joe, I recommend that after each quart that we prepare a year to date calculation of tax owed and how much of a tax gap we have. This will help you project how much cash you will have to keep in reserve to pay taxes or how much you can take out of the corporation without additional taxes.

 

The good news is that once the initial tax plan is established we simply update the year to date tax status so Joe, you will  know how much tax you would owe through today.

Joe asked, What are some specific ideas that will help me reduce my tax?

 

Joe, I see from your previous year that you will owe $30,000 because you did not have a CPA prepare a tax savings plan! You will need to pay this tax by April 15. If you do not have this cash personally,  you will need to take the cash out of your business. I recommend that you take it out through payroll so you will avoid increasing negative tax gap” I said.

 

Jeff, “I don’t have the cash to do this”, said Joe emphatically.

 

I said, “Joe, you have excellent strong profits and current ratio! I know you said Uncle Jack was complaining about getting only about 2% from a certificate of deposit at the bank.

 

 You could ask Jack for $100,000 at an acceptable interest rate with a reserve in a separate bank account for six months of interest as collateral for Uncle Jack.

 

Then you could use this money to loan the money directly from you to the corporation. The biggest mistake you can make this by having Uncle Jack loan the money to your corporation. The reason is something called shareholder “at risk” basis which your CPA needs to teach you about and your CPA needs to watch this capital basis carefully!! Joe, I teach clients to clearly understand this dangerous trap.

 

 

So Joe,  Uncle Jack must loan you the funds and then you loan the funds to your S corporation.

 

Joe, you will need to use these funds to pay for your 2014 income taxes, pay off some 2014 and 2015 payables and  pre-pay 2016 taxes. We will show you in a tax plan example, the dollar savings you will get by paying off these expenses. The first column will be without tax planning and the second column will be with tax savings.

 

Your previous CPA should’ve had you set up a solo 401(k) or a profit-sharing plan for 2014. The good news is if you have a really bad year you can take out these retirement plan funds with minimal amount of income taxes.

 

Joe, I also noticed you have meals and your team of over $20,000. Did you know that you need to protect these deductions? Also there is a smarter way to get 100% deductibility for many of these expenses!

 

Also your girlfriend, Lana helps you with your business. She doesn’t have enough income to file a return. You could have reduced your income taxes by paying her as an independent contractor or employee. However she needs to submit time sheets for each week or pay period to support the deduction and needs to have a job description and employment agreement. Joe, you will see in the tax plan that we were able to save an overall $6,000 in income taxes by following the legal way to deduct Lana’s expenses and minimize Lana’s taxes.

 

We will put together for you a cash outflow amount for the next six months for taxes using the tax planning strategies, we have recommended.

 

 We have many other ideas that will result in tax savings but we need to take one idea at a time.

Once you learn our legal system to save taxes you will need us less and less. You may just need us for a review and of course preparing and audit proofing your personal returns!

 

We are looking forward to making financial and peace of mind wealth much, much better while reducing your IRS risk!” said Jeff

 

 

 

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com