Topic: Member Workshop: Tax Tips for the Family eBay Business
Host: dkennedycpa Date: Wednesday 05/14 Time: 10:00 a.m. to 11:00 a.m. Pacific time Location:Workshop Board
Description: One of the biggest benefits to building an eBay business is that it's something you can together as a family. Learn how to take all the tax write-offs you can with your family business from Diane Kennedy, CPA.
Hello. My name is Diane Kennedy. I’ve been a CPA and Tax Strategist for over 25 years. My specialty is working with small business owners and real estate investors. My tax education company, TaxLoopholes, LLC, teaches people through books like Tax Loopholes for eBay Sellers, tapes and seminars on how to take advantage of the legal tax loopholes available to everyone. First though, the stuff that our lawyers make us say: Laws and practices vary from state to state and if tax, accounting, legal and other specific expert advice is required, the services of a professional should be obtained. Diane Kennedy, CPA www.taxloopholes.com
For this month's workshop I want to talk about how you can start a business and help not just yourself, but your whole family. Diane Kennedy, CPA www.taxloopholes.com
We love your questions and appreciate your participation in each month's workshop. This month we've got a special treat for the first 10 people who ask a question. We'll give you a copy of my new e-product, 25 Tax Strategies for High-Income Earners. This is an audio workshop that discusses ways for W-2 wage earners to lower their taxes. Diane Kennedy, CPA www.taxloopholes.com
One of the absolute best ways to lower your tax bill is to begin a business. Part-time, full-time, Internet-based, service provider, online retailer, auction seller – it doesn’t matter. What matters is that you have one. Why? Because it’s probably the fastest and easiest way to make some real changes in how you earn your income. It’s your first step towards financial freedom. Diane Kennedy, CPA www.taxloopholes.com
It doesn’t just have to benefit you, either. Your entire family can benefit from your business—and that benefit isn’t just from “trickling down” more dollars in the house. Your family can benefit directly by becoming involved in your business. Diane Kennedy, CPA www.taxloopholes.com
How does having extra income, medical and dental plan coverage, retirement savings benefits, family vacations, college tuition, helping elders with their expenses, and offsetting your kids’ cell phone bills sound? Every one of these things is possible through a successful home-based business. Diane Kennedy, CPA www.taxloopholes.com
If you support one or more children or older relatives financially, you can get them involved in the business, so you can begin to shift the after-tax money you would be spending anyway to pre-tax dollars. You can even continue employing your children while they’re away at college. After all, when it comes to knowing what’s hot and selling, who’s a better barometer of current pop culture trends than your kids? Diane Kennedy, CPA www.taxloopholes.com
Employing Your Kids and Other Dependents There is nothing illegal or immoral about employing your kids in your business. You can teach them valuable life lessons about business, selling, finances, responsibility, and commitment by involving them in your business. You can help them plan for their own financial future, and save taxes at the same time. Diane Kennedy, CPA www.taxloopholes.com
There are three “MUST-DOs” for employing your children or other dependents in your business: written job description appropriate for the family member, time tracking, and reasonable salary. Let’s break them down. Diane Kennedy, CPA www.taxloopholes.com
Written Job Description First, you need to develop a job description for everyone working for you, including your kids or other family members. Put it in writing, in case the IRS asks to see it. Diane Kennedy, CPA www.taxloopholes.com
Appropriate Work The tasks should be linked to each family member’s abilities. Your 8-year-old is completely unqualified to be the chief financial officer, but she may be perfectly capable of taping up boxes or wrapping sheets of bubble wrap around items in preparation for shipping. Your aged parents may not be capable of moving heavy boxes, but they can clean up around the office and maintain plans. Diane Kennedy, CPA www.taxloopholes.com
Older children may be capable of much more—if your son or daughter is a business or accounting major in college, for example, you may have just found your new bookkeeper. If you’ve got kids interested in web design or website maintenance, use their skills to build and maintain your website, create your listings, take pictures of products for sale … and to research your competitors and the market in general for pricing and other information. Diane Kennedy, CPA www.taxloopholes.com
Face it, in many instances, the items you’re going to be selling belong to your kids, anyway—so who better to tell you about any flaws, problems, defects, or even some neat features of a toy or game that you were completely unaware of? Diane Kennedy, CPA www.taxloopholes.com
You can get really creative here, too, depending on what you sell. For example, perhaps you are selling used video games. If so, they have to be tested to see if they work, which means (a) something to test them on, i.e., the game console, and (b) someone to do the testing. Or maybe you sell used clothing. In that case, who better to go in search of hot fashions and cool bargains than your 16 year-old fashionista daughter? Diane Kennedy, CPA www.taxloopholes.com
Getting your kids involved in researching and valuing things can have all kinds of benefits. It can help you to discover an untapped market that is commanding a high price online, as well as giving you extra bodies to go out and get those products. This can be great if you’re also working outside the home. The division of labor will help to keep a steady supply of merchandise coming in and may help to keep your kids engaged in the business (and out of trouble). College-aged children can also continue these activities when they’re away, meaning you can still help them financially, but from a tax-advantaged position. Diane Kennedy, CPA www.taxloopholes.com
Time Tracking The second requirement is to make sure that your dependents are tracking their hours. If the IRS ever asks, you need to prove that they were keeping track of the time and were paid for work they legitimately did. Depending on the type of business structure you use to operate through, there’s a very good chance that the IRS will ask, so this is definitely something to keep good records on. Diane Kennedy, CPA www.taxloopholes.com
Reasonable Salary Finally, make sure you pay them a reasonable wage for work done. You can’t pay your 8-year-old son $100 an hour in order to move income to his tax bracket, no matter how creatively he takes out the trash. Diane Kennedy, CPA www.taxloopholes.com
But you can look at what the market rate for those services cost, and pay it. If it costs $15/hour in your area for janitorial services, then it’s not unreasonable to pay your kids that much, or even a few dollars more. You can also begin asking your kids to fund more of their own activities and personal needs through this money – effectively creating a tax-advantaged allowance. Diane Kennedy, CPA www.taxloopholes.com
This can also be a great strategy if you’re trying to help your kids begin retirement savings. Pay top dollar for their work, and hold back a portion of their salary to fund an IRA, or even better, a Roth IRA. Diane Kennedy, CPA www.taxloopholes.com
You can pay your dependents up to $5,000 a year without having any tax issues, or even the requirement to file a return. Depending on your tax rate, that means you could be moving $5,000 out of a 35% tax bracket to a 0% tax bracket. Even if you pay your kids twice that and they have to file a separate tax return, after the standard personal exemptions their tax bracket will still be at the very lowest level. Diane Kennedy, CPA www.taxloopholes.com
These same ideas can also be applied to other dependents. Again, the work they perform must be within their capabilities, and the wage paid must be a fair-market wage. With more and more research showing the benefits of elders keeping motivated and engaged with society through work and activities, it seems a slam-dunk to get some help from your elderly relatives, and you can take the tax break in return. Diane Kennedy, CPA www.taxloopholes.com
How to Pay Your Dependents It’s probably easiest to make your children or other dependents employees of the business, and pay them W-2 wages. They can be full-time or part-time, but if you’re also looking to provide healthcare coverage through the business the kids may need to be full-time to qualify, once they are too old to qualify under your coverage. Diane Kennedy, CPA www.taxloopholes.com
Will it mean a few extra costs, in the form of payroll taxes, workers compensation, etc.? Yes, there’s no real way to avoid that. But the tax breaks you’ll see from your income should more than offset these costs. Diane Kennedy, CPA www.taxloopholes.com
It’s a little trickier for elderly dependents. You’ll have to be aware of their maximum earning amount before their Social Security payment becomes affected. This amount will differ from senior to senior, depending on his or her age at retirement and when he or she first began earning income. It’s simply easier to talk to an expert or check out the relevant IRS information when trying to determine a salary in this instance. Diane Kennedy, CPA www.taxloopholes.com
How Expenses Factor In As employees of your business, your children and other dependents will be entitled to take advantage of the same tax deductions and write-offs that you do. If your kids are out looking for merchandise for the business, it’s a reasonable assumption that they’ll need a cell phone to keep in touch with other business employees. Likewise, your mother is just as entitled to take a mileage deduction for her trips to the post office or office supply store as you are when you’re out and about on your business-related activities. Diane Kennedy, CPA www.taxloopholes.com
The key to claiming all of these deductions is that they are properly documented. Busfare or cabfare can be a write-off if your child or elder has made notes of where he or she was going (in addition to keeping receipts for any merchandise he or she purchased). So consider lumping errands together—a doctor or dentist’s visit in conjunction with a scouting or merchandise buying trip, for example. Diane Kennedy, CPA www.taxloopholes.com
A little discretion will be called for on your part with some of these items. When it comes to cell phones it’s not reasonable to claim 100% of your child’s costs every month … especially if he or she spends 90% of their time texting friends. Diane Kennedy, CPA www.taxloopholes.com
Medical Coverage and Your Business This is where the C corporation stands above all other business structures. A C Corporation (or an LLC taxed as a C Corporation) can provide full healthcare coverage for all employees and dependents. The cost of the plan is completely deductible to the business and not a taxable benefit to the employees. S Corporations, or LLCs taxed as S Corporations can also provide healthcare coverage, but if you own more than 2% of the S Corporation you will need to declare the value of the benefit you have received. Fortunately, brand new IRS rules on the subject mean you can deduct those those costs, too (it used to be that you could only deduct a portion of them). Diane Kennedy, CPA www.taxloopholes.com
But one thing a C Corporation can do that an S Corporation can’t is provide a secondary Medical Expense Reimbursement Plan. This is a discretionary plan that the C Corp can offer to all of its employees and allows you to expense additional things, like co-pays, deductibles, over-the-counter medication, gym memberships, massage … anything that the C Corporation decides to offer. This is not the same thing as a Section 105 plan you may have heard about. It is a little broader and allows for more medical expenses than a Section 105 plan. Diane Kennedy, CPA www.taxloopholes.com
One thing we really love about this tax loophole is that it can come in especially handy when your children are older and going off to college. By keeping them on your business’s payroll as employees, they will remain covered, even after your kids are older than 25 and no longer eligible for dependent coverage. And although most colleges do offer some medical coverage to their students, with your own coverage in place you can be assured that your kids’ health-care needs are protected. Diane Kennedy, CPA www.taxloopholes.com
It is much easier for a corporation to obtain healthcare coverage than it is for private individuals. Even though your business may be your sole source of income and you the only employee, operating through a corporation may be your best way to get around a healthcare insurance provider’s reluctance to insure individuals. Establishing a group benefit plan for your business may also be your way of getting a family member covered who would otherwise be considered uninsurable by healthcare insurance providers—a growing problem in this country. Diane Kennedy, CPA www.taxloopholes.com
Vacations and the Family Business In addition to the obvious personal benefits of vacations, they are a great way to hold an annual meeting for your business. If you have a C or S corporation, you are required by law to hold an annual meeting and produce annual minutes. You’re also entitled to take a deduction for the expenses incurred to hold that annual meeting. So while on your vacation, reserve space on one day to hold your company’s annual meeting and make that portion of your vacation deductible as a business expense. Diane Kennedy, CPA www.taxloopholes.com
If you are vacationing within the United States, you can deduct your airfare as well, as long as you do business on the first and last days of your vacation. If you’re out of the country, you can take a percentage of your airfare, the same way you are already doing with your hotels and meals for the days that you are working. So a five-day vacation with annual meeting still nets your business 20 percent of your vacation costs as a deduction. Diane Kennedy, CPA www.taxloopholes.com
This is a wonderful way to combine business with pleasure and for everyone to share in the benefits of your family business! Diane Kennedy, CPA www.taxloopholes.com
Retirement Planning and Your Business We talked for a bit above about holding back a portion of your kids’ income to fund an IRA or a Roth IRA. Consider this: A $2500/year contribution to a child’s Roth IRA each year, while he or she is between the ages of 12 and 18, assuming regular growth, will result in a nest egg of almost $2 million when that child is 65. Not bad for taking out the trash and cleaning up the office. Diane Kennedy, CPA www.taxloopholes.com
Contrast that to an adult starting to save for retirement at age 45. Even though the 45-year-old will have 20 years to save for retirement at age 65, he will still need to put $29,703.08 away each and every year to catch up to your daughter’s little Roth IRA. Diane Kennedy, CPA www.taxloopholes.com
But you don’t have to limit your retirement planning to young children. All of us are going to need to be increasingly responsible for looking after our own financial futures. If your own business can help you to look after yours, then why not get started tonight? Here are the numbers for a 40-year-old person who clears $5000 from a business and invests $4000 per year into a Roth IRA for the next 10 years:
Earning 5% on your money: $200,454 Earning 10% on your money: $432,727 Earning 20% on your money: $2,265,509
Do you see how owning a business and operating it in a tax-advantaged manner might benefit you and your family? Diane Kennedy, CPA www.taxloopholes.com
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