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I've looked at numerous schemes...offshore accounts, self directed IRA's, fake companies owned by yourself acting as IRA's under a limited partnership to invest your profits tax free.....I'm not buying any of these loopholes, they all have longterm disadvantages.
If you are running a company that has a limited life then maybe some schemes would be advantageous. But, as Suze says, what are you going to do in your old age to keep the grey cells ticking if not what you do now?.....so my advice, having spent 12 months looking at this, is the same as her's.....pay up and be happy :)
I'll be writing a check for several hundred thousand dollars to Uncle Sam in just a few weeks.....hard to smile about that....but, I'm going to try :)
I should add make/take the max and very legal SEP IRA deduction of $40K/$80K......that is definately worth having!
In addition if you are an "S" corporation then it may be worth looking at taking more distributions than salary. Website designers are really only worth $20K a year, so the rest should be justified ;)
Do you know any good accounting programs to use? I recently bought MS Money for Small Business but have not had time to use it yet.
For general accounting for very small businesses, Quicken can do the job but as you get bigger, QuickBooks is a good next step.
TaxAct has a free version which can meet the tax preparation needs of many people but if not, their top of the line package is only about $20, including a State return and electronic filing.
Where I am in the northeast, a web designer can make high 70's, and that is NOT someone capable of managing the whole package. If it is prudent to take a larger salary as opposed to corporate profits (as your acountant), it is certainly not a "scheme" to pay yourself more than $20,000. Your accountant can tell you how high is reasonable. Here in Northeast a business owner/operator of the gross dollar volumes cited by "percentages" can easily pay himself $150k or more without concern.
The poster asked about deductions, which are not a scam or tax scheme. They are an important and valid aspect of doing business. For each of you who does NOT deduct your allowable expenses, the rest of us are penalized because we are all compared to "reasonable and customary" which is determine by - you guessed it, the average of reports.
Good deuctions of course include all direct expenses (hosting fees, etc) but never forget your very generous equipment deductions allowed by GW (I believe it is up to $75,000 written off in one year against profits). Your accountant would have informed you of this back in September, with suggestions of ways to benefit.
I cannot agree more with Brett who commented on his "concern" that people are making large amounts of money and don't have personal accountants. In my view, if you make over $50k net in a year having a personal accountant is not only cost efective but legally prudent (it should be a CPA or a firm run by a CPA).
If you read the tax laws you will see that Uncle Sam has built in these deuctions and allowable tax breaks in order to PAY YOU BACK FOR TAKING RISK as an entrepreneur. Successful new businesses lead to JOBS and jobs lead to salaries for staff and those are taxed TWICE... so Uncle Sam has a solid interest in you succeeding, even if you personally get wealthy off legal/allowable tax breaks.
An analogy just came to mind.... you want a quick optimized website for a new project. You could go with a CMS like MamboServer or PostNuke... all the features you'd ever want (Quickbooks). Or you could hand carft a bunch o' HTML pages and get em online, makingmoney for you the organic way (use some lists in Excel).
I don't have an accountant yet (and in terms of self employed income am below the numbers thrown out here for one.)
You can take a one year depreciation of up to $100k of equipment as a 179 for depreciable equipment put into service this year, including boxed software. I would guess that means most people in this business have the choice of whether to depreciate equipment (to increase pre-tax [paper] net profit) or write off all at once (to increase post-tax net profit.)
What's people's take on home office deduction? Who's had to sell a house where they had one? What were the issues?
(I am not an accountant...this is not official advice...etc. I am in the US.)
However, once you work with a good accountant, for many people Quickbooks is unnecessary and overkill, and introduces considerable gotchas.
Of course many accountants recommend, demand, and of course support clients using Quickbooks these days, so it may not be important for other reasons.
Also there are *numerous* system issues with Quickbooks as a choice, which may not come into play for years (but which are very likely to come into play as tax records are kept for 7 years from date of filing). Windows dependency, binary file formats, security and privacy concerns, Intuit's history of injecting DRM code into various versions without warning or disclosure, Intuit's history of misleading customers about compatibility of web service options, etc... far too many to go into here.
Ever password protect sensitive Qickbooks financial data? Well Quickbooks password crackers are widely available on the Internet for $25. Also, Intuit offers a service to crack the password for you for a small fee (they do check that it's your data, however). With their claims of high encryption, etc etc one would think it was a relevantly decent choice.
I know from personal experience that such passwords can be cracked for free in minutes - although OF COURSE I WOULD NEVER STATE THAT QUICKBOOKS PASSWORDS COULD BE CRACKED IN MINUTES... surely they must be secure, and I must be referring to other similar software packages.
Quickbooks is good and you can write that off too :)
And why would they want to do that? The only two reasons I can think of is that they need credit, or they like paying Uncle Sam more than necessary.....latter isn't likely :)
Gates and Buffet are two of the lowest "salary" paid executives in the U.S. based upon their actual job functions.......I wonder why? How about all that deferred income Chairman Grasso of the NYSE recently got hauled over the coals about? Taking the cash today is only important if you see your long term future as limited.
I wasn't saying there was anything wrong with paying yourself a large amount.......I was questioning why you might want to do that? The IRS says you MUST pay yourself a "reasonable" salary. "Reasonable" is not defined by the IRS, but my CPA says "Reasonable" is an amount closer to the minimum amount for which you could hire someone to do your job.
As for accounting software......Quickbooks is now the defacto standard, been that way for several years. Yeah, it has flaws, but so does MS Windows......sometimes you just have to follow the heard or choose to pay through the nose for being different.
A list of deductions......You should really see a CPA for this as they tend to have different opinions.
1. Any and all true business expenses (that was simple)
2. I'm advised not to include any expenses associated with my home (although it is my primary place of work). i.e. No rent for space used, no utilities used (except Internet connections and business phone lines). Basically keep your home separate from your business as much as possible is the advice I am given. It all comes down to what happens if you decide to sell your home.....it gets messy at that point (who owns what out of the profit proceeds).....see a CPA.
3. All meals for business, includes clients, prospects, networking, and fellow employee business meetings over food. Hence, we all employ our spouses.
4. All business related travel expenses. Prospecting, client meetings, "get together's" with associates and fellow workers/contractors/networking (e.g. WW pub conferences). Includes mileage, gas, airfares, hotels, meals (at 50% of course) and just about anything else you reasonably spend.
5. Equipment for business.......obviously computers, servers, hosting, printers, backup devices, and needs for a digital camera, camcorder, TiVo......etc.
6. Professional expenses......Everything from State business filing fees to membership of WW and other professional group subscriptions, magazines, newsletters, etc.
Even if you try hard, I doubt the above will come to more than $80K per year. So the biggest single deduction you can easily make is for the SEP IRA. Depending upon your income it may be challenged by changing the way you are paid.....salary Vs Distributions and deferred payments.
The above is incredibly complicated, for an average guy in the street or web designer, when you get down to the "nitty gritty". I would never advise a CPA to design or promote their own website.....likewise I would never advise anyone to try to "DIY" for an accountant's job or legal advice.
As my Papa always said........have a go at fixing your own toilet if you wish.......but never try to fix your books or legal situation......get a pro for that :)
I also see my reaction was to a sense that deductions in general weren't worthwhile. Structured properly, one may be able to "have" alot more and yet not pay for it (because the business actually supports it). Some people with no deductions (home office, little overhead) could actually have alot of nice comforts, if there is enough overlap between business need and personal tastes. Ask an accountant.
Every time you get a receipt stick it onto the nail. Perhaps you have a nail for dining, a nail for books, a nail for misc. expenses, etc. I have about 8 nails.
Every time I need to jot down a note about expenses or something accounting-related I grab a sticky, jot my note, and stick it onto the same nail.
When I meet my accountant or tabulate books I just grab each stack off the nail and process.
Works really well for me.