It is not enough to know the legislation on personal income tax. To deliver value to taxpayers, knowledge of tax law must be combined with effective tax planning strategies to generate maximum benefit. What would you do if you had a landscaping business with the facts and circumstances ahead? I will say what I would do.
While spending a quiet evening at a local restaurant, listening to music by a local band, I was approached by a friend who had just started a landscaping business. He is married and has a little daughter, twelve years old. He will have gross receipts of $48,000 and will receive a 1099 for his efforts. His first question to me is how he should make the quarterly estimated tax payments to cover both the income tax expense and the social security tax (SE tax). My response to him was; “Wait, young man. Let’s discuss the facts and circumstances before we begin.”
As the band played beautiful music and a soft summer breeze cooled the restaurant patrons, I asked our young entrepreneur if he needed to buy a new truck for his business venture. His answer was not only yes, but he informed me that he had already chosen the same one and he knows that the cost is $35,000. In this case, you can deduct the full cost of this new truck in year one under section 179 of the Internal Revenue Code. This allows write-off for new property placed in service of up to $125,000 in year one. Since this guy is financing the truck for four or five years, this becomes a huge benefit to getting such a large payoff without breaking the bank. Projected revenue from all business activities is now reduced to $13,000.
During our ongoing conversation, my friend tells me of his desire to provide his daughters with a college education. 529 was mentioned but he had a better idea. What if we put his daughter on her business payroll for $5,000 (close to the standard deduction for all individual taxpayers)? This will further reduce her exposure to income tax and self-employment tax. Her daughter will not have to pay income taxes because her standard deduction will reduce her tax exposure to zero. In addition, there will be no exposure to social security tax on her daughter’s wages because she is a minor and works for her father’s unincorporated business. The projected net income is now reduced to $8,000. If our hero forms a partnership with his wife, she is a passive owner since she will not be involved in the day-to-day operations of the business and her SE tax exposure will be halved (assuming a 50/5 partnership interest). fifty). Approximately, the total tax exposure for 2007 will be $1,400, which includes SE tax. This is before any other tax deductions the couple may have. There will be no need for estimated income tax payments in the first year anyway.
For the future, year two offers hope that a retirement plan will be formed to house some income, since the trucking deduction was used in the current year. There will also be an opportunity to claim a home office deduction as my friend takes over the entire operation and moves into his house. Believe it or not, this conversation lasted about twenty minutes. My dessert had arrived and it was time to take care of business at hand. They even invited me to sing a couple of songs with the band. I always say, never trust an accountant who can’t sing and dance.