"Taxes
" . . . what a boring topic, right? Teach me something that makes me
money! Think about this . . . every dollar you save in taxes is a
dollar in your pocket. It is making MORE money just like doing more
business. The bottom line IS the bottom line - don't forget that!
The following are some last minute ideas for maximizing tax
deductions on your 2002 return.
Mileage
Let's not overlook this basic expense. Did you drive to your
rentals? Did you drive to the courthouse to research foreclosures?
Did you drive around neighborhoods looking for vacant houses? Did
you drive to the bank or title company to close transactions? Go
back through your Day Timer for the year and figure out the mileage
- it may astound you how many miles you actually drove!
The standard mileage deduction for 2002 is 36.5 cents per mile, or
you can use the actual expense method (a bit of a pain to keep track
of). As of tax year 1998, leased cars can now use the mileage method
(in prior years you could not use the standard mileage allowance if
you leased your car). Remember that miles driven from your home to
work are not deductible, only miles driven from workplace to
workplace (a good reason to have a "home" office).
Meals
Expenses for meals while entertaining clients or prospective clients
are subject to the 50% limitation. However, meals "for the
convenience the employer" (such as working late or through lunch)
are fully deductible. Occasional meals off the business premises are
also permissible under the same rules.
Do you have a home office? Did you order in a pizza while working
late? Let your employer (your business corporation) pay for it! This
is an important distinction - if your company provides meals for its
eimployees while working late in the office, it is a 100% deduction,
not 50%. Do you work at home? Can you bear eating at your desk (who
doesn't when they are busy)? Be creative, keep good records and
maximizer your bottom line!
Section 179
Few people take advantage of IRC Section 179. This provision of the
Code allows you to expense rather than depreciation certain capital
assets, such as computers, cell phones and other equipment. Thus you
can fully deduct the cost of these items you purchased in 2002
rather than depreciate them over several years. The maximum in 2002
is $24,000. You cannot deduct these items to create a loss, but you
can carry the unused expense forward to next year.
Education
Education is deductible if:
- To maintain or improve skills in
your current job or business, or
- Required by your employer, or
- Required for your profession (such
as continuing education requirements).
Attending a seminar to learn a new profession is not deductible, but
if your company sent you to learn skills for use in your position
with them, it is deductible. If you do not have a corporation,
consider forming one (see below).
Planning for
the Next Tax Year
You can't ask for a parachute after your jump out of an airplane.
You can't buy life insurance after you die. Likewise, you can't plan
for taxes after the tax year is over. An idea you should think about
this year is setting up a
"C" Corporation. A C corporation is a tax shelter that provides
many benefits for the small business entrepreneur.
A C corporation can provide tax-free financial planning and income
tax preparation help to employees. It can also set up a medical
insurance and medical reimbursement plan for its
shareholder/employees. The cost of medical and dental insurance
premiums and deductibles can be paid by the corporation and fully
deducted. The benefit is not taxable to the employee. To be
tax-free, such benefits must be part of a written employee benefit
plan and available to all employees, not just the owners. If you and
your spouse are the only employees, is this a problem? Of course
not!
C
corporations can provide employees with group life insurance
coverage and deduct the premium costs. Only group term life
insurance qualifies. Death proceeds for beneficiaries are limited to
$50,000 for each employee. If greater coverage is provided, the cost
is still deductible to the corporation, but the cost of the
additional coverage is taxable to the employee as income.
A C corporation shareholder can borrow up to $10,000 from the
corporation, interest-free. The loan still must be documented, but
the IRS will not impute interest. This is an ideal way to take out
money without the "double-tax" issue (C corporation income is taxed
at the corporate level, then again at the shareholder level, but
only when dividends are distributed).
Finally, a C corporation can set up a profit sharing plan for its
employees. The shareholder/employee of such a plan can actually
borrow out of the plan. Properly utilized, this strategy can provide
excellent opportunities for the real estate entrepreneur.
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