Hiring children to work in the family business: A tried and true strategy.

Although many small and large business owners are already aware of this strategy, some things are good enough to revisit once in a while.

This tax strategy can have the following ripple effects for your children:

Increasing their responsibility
Allows the business owner to show them how to run the business, while potentially providing tax benefits to ‘the family’.
Allows children the opportunity to get a head start on tax advantaged retirement plans such as contributions to IRA’s.

How it works:

Strategy 1: Income earned by children may be tax free (federally) to the extent they do not exceed $5,450.

Example: Sam who works for her mother’s company and is claimed as a dependent of her mother, earns $4,000 cleaning the office building every week. When Sam goes to file her return, although she is a dependent of her mother she still gets her standard deduction up to her W-2 earnings (limited to the first $5,450). So her federal income tax is $0. Her mother would still have to pay Social Security tax on the income, but usually this is a small price to pay to transfer small dollar amounts to your daughter who also now cleans the office (a win-win situation).

Strategy 2: Earned income contributed to the child’s IRA.

Example 2: Sam has worked in the office for a few years and now does filing duties as well as cleaning. Because of this promotion, her annual income has increased to $9,000. While Sam still receives a $5,450 standard deduction, there is another trick she can use to shelter some of that income (if not all). She can contribute (or her parents) up to $5,000 to a traditional IRA account to reduce her taxes by $355*. Or, she can contribute up to $5,000 to a Roth IRA and receive the money tax free (at a later date) for college, or a first home purchase in the future (Sam would give up the immediate tax savings of $355, and there are certain restrictions on these types of distributions).

* Tax without IRA = (9,000 – 5,450) x 10%
* Tax with traditional IRA = (9,000 – 5,450 – 5,000) x 10% (cannot be less than zero)

Happy Memorial Day

I would like to thank all those who gave their lives for our country. For their friends and family, have a blessed memorial day.

SBA offers tools for small businesses

Recently the SBA (U.S. Small Business Administration) released a collection of videos designed to help small businesses. This series has tools and suggestions that can help businesses with topics such as marketing, preparing for growth and team building (among others). These videos are designed to be short enough to be interesting, but succinct enough to entice small business owners into action. If you have some extra time, check it out here:

http://sba.gov/strategiesforgrowth/

Interesting article regarding MBT

In a strange twist of fate, two compelling things have happened:

1. A Grand Rapids Press writer has something interesting and topical that was not taken directly from the AP wire.

2. This article talks about what accountants have been stressing since the implementation of the MBT. Namely that this tax is much more complex than the SBT and although it charges a "surcharge" (essentially a penalty for either adding value to your company, or gasp, actually earning net income) the actual revenue the state collects from this tax is less than collections from the SBT. What this article does not point out is that many businesses are having to pay a much higher share to this tax than others, because there are many advantageous tax breaks and tax credits for certain business types.

http://www.mlive.com/business/index.ssf/2010/05/michigan_business_tax_isnt_wor.html

Simplest visualization of US debt

Check this out. It is a little nerdy, but hey, do what you know...

This is a visualization of the national budget vs. the proposed budget cuts the Obama administration is attempting to administer in the next 90 days. The rest speaks for itself.

http://www.wimp.com/budgetcuts/

New and Expiring Tax Credits: Part 1

At no time in the history of the United States has the tax code changed so rapidly, in such a short period of time. With many changes to business and personal income taxes as well as other tax concerns, it is important to stay on top of the ever-changing tax landscape.

In the next few weeks I will attempt to cover most of the major personal and business tax changes that have either gone into effect in 2010, or that will be implemented in 2011.

Some of the major topics I will cover for businesses will include:

The Hire Act
"Universal Health Care"
NOL carrybacks
First year bonus depreciation (168k)
179 bonus depreciation

Some of the major personal topics I will cover include:

Capital Gains rate changes
Tax bracket changes
Education benefits changes
Many expiring tax credits
AMT tax changes
IRA distribution changes

So if anyone would like information regarding a specific tax credit, or tax concern, please let me know.

Deducting Health Insurance Premiums

The other day I took a phone call from one of our business clients. His business provides insurance services to other businesses. He asked me a very simple question, "I have a business client who has a group health insurance plan for him and his employees, and he needs to know whether or not he can deduct these expenses."



It became pretty clear to both of us, that although it may have been an easy question for him to ask me, the answer to that question is a lot more involved. Thanks to the prevalent use of pass-through taxable entities (S-Corps, and Partnership returns), and changes to tax provisions, deducting health insurance as a business owner is not as easy as paying the insurance bill.



If this business owner has a traditional C-Corporation the corporation would be able to deduct the full amount of the health insurance expenses as long as they have a qualified plan in place that covers all employees (without discriminating in favor of Highly Compensated Employees, or the business owners, or their families).



If this business is instead a Schedule C business or a single member LLC (disregarded entity) the business would not be able to deduct the portion of health insurance purchased for the business owner and/or his family. The health insurance expense for his normal employees (other than himself and his family) would be deductible. However, the portion of the expenses paid for his personal health insurance coverage would be includable on the front page of the business owner's personal income tax return (1040). Therefore, the business owner would be allowed to deduct on his personal return, personal health insurance expenses (to the extent that his business has earnings in the current taxable year). If the business owner had a loss for that same year, he would not be allowed to take the deduction on the front page of his personal return, but would instead include the expense on Schedule A (to the extent that health expenses exceeded 7.5% of AGI).



If this business is instead a S-Corporation, and the business owner is a more than 2% owner, the preferred method for deducting this expense is to include the amount as a "Gross-up" of W-2 wages to the owner/shareholder. This method is a little more involved, but basically at the end of the day, the deductibility is treated similarly to Schedule C business owners.



In conclusion, thanks to many changes in the tax code in recent years, businesses and individuals should be aware of costs and opportunities associated with business tax decisions. If you have concerns regarding your business's specific tax items, it is important that you use a qualified tax representative.