Be an Ethical Entrepreneur, Marketer, and Business Builder

Owning a business MUST be part of your wealth generation strategy

The reason for this is actually extremely simple and direct: Taxes

If you could consistently make 20% MONTHLY returns in the stock market you’d still benefit from a small business. Realistically, I can’t think of a single reason not to own a small business. Even if the business only employs you, there are tax advantages though there are certain advantages, such as healthcare, that are only possible with people working with you.

Keeping in mind that less than 12% of millionaires, according to The Millionaire Mind, are professionals (i.e. doctors, lawyers, engineers, etc.) and the vast majority create their riches through building a business, that’s actually beside the point. My point in this blog is simply that owning a brick and mortar business has many advantages that even your 1-man-show-no-employees-to-deal-with internet business can’t match. Let’s look at a few:

  1. Taxes
  2. Room to cutback
  3. Health Insurance
  4. Retirement Accounts

The quantity of tax advantages possible with a small business are for more numerous than a short blog can cover so I’ll touch on a few highlights:

  1. Pre-tax Expenses – Your gross pay is meaningless. Your net pay is all that matters and when your phone, internet, car, car insurance, business meals, and travel are all paid for by your business the savings are huge. As an example, if all of those pre-tax expenses add up to only $10,000 per year and you are in the 30% Federal Income bracket, have 5% state income tax and have to pay 15.3% in FICA (7.65% from the employee and 7.65% from the empoyer) you’d have to pay yourself over $20,000 in salary to afford the same expenses. If you own a business and those expenses only amount to $10,000/year you probably need a better accountant. Keep in mind you have to be honest about the use of those items. For instance, my company doesn’t pay for my entire cell phone bill because obviously I use the cell phone personally a portion of the time. The same is true for my vehicle allowance.
  2. Distributions – When you have a pass-thru entity you have to pay yourself a “reasonable” salary and the rest of the profit you can take as a distribution without paying any FICA tax (a savings of 15.3%).
  3. Racing This is probably my favorite! In essence, if you like racing cars, motorcycles, airplanes, bicycles or have some other hobby and you don’t mind plastering your race vehicle with your business’ logo, then your vehicle and most of the expenses related to racing can be paid for pre-tax as a marketing expense for your business.
  4. Real Estate – If your business requires a building and you own the building in a separate entity (most likely an LLC), your business can rent the building from your other entity and the rent is passive income that isn’t subject to FICA (again saving you 15.3% over a salary). Obviously the rent has to be reasonable.

As you can see, just these few items can quickly add up to tens of thousands of dollars in tax savings even with a business grossing less than $500,000 per year. Obviously, the larger the business, the greater the savings.

By room to cutback, I simply mean that if you have a business that employs just you and sales drop, guess who the first one to get fired is? On the other hand, if you have a business with just a dozen employees and sales start dropping now you have a lot more room to cut payroll before you’re out of a job or taking a pay cut. As a small business owner, I know personally that cutting others before you cut your own pay is extremely difficult to do, but you can’t deny that, if necessary, you and your family have a bit of extra security.

As for health insurance, if you have a few employees (at least prior to the new Healthcare Reform Bill) there were health insurance advantages to being on a group plan such as your rate is primarily based on your age and not pre-existing conditions. I learned this first-hand as I couldn’t get insurance as an individual but had no problem getting on my business’ plan.

Since it’s your business, you get to structure your SEP-IRA or other retirement vehicles in any way that you want. Of course you have to make the accounts available to everyone on your team, however you have the ability to structure the accounts to best benefit you. This power can have a major impact on your overall tax bill today and into retirement, so don’t overlook it.

Finally, if you’re looking for what type of entity to create, I highly recommend an LLC filing as an S-corp. Also, make sure you have a GREAT accountant to take care of all of the details of these tax advantages and to make sure you’re doing everything legally and ethically.

To your tax-saving success, Bryan

A few more ways to get tax-free money from your business…

As I’ve pointed out before, when dealing with customers, team members, suppliers and even the tax man I’m not at all a fan of doing anything “under-the-table” or unethical. So keeping that in mind, here are a few ways to get tax free money from your business.

  1. Credit Card Rebates – This would be the ever popular cashback, rewards, points, and travel credit cards. The IRS currently has no provisions for rebates of any kind so this can easily add hundreds (if not thousands) of dollars in cash, gifts, or travel expenses into your pocket tax-free. I personally have 3 rebate cards. One from American Express, one CapitalOne visa, and a Discover card. The rebates range from 1-5% and in about 8 months of random purchases (both personal and corporate) I accumulated over $500 in rebates. My personal preference is to receive cash rebates so I can spend the money wherever I want however I’m looking into travel rebates since I tend to travel a lot.
  2. Purchase Rebates – These are the rebates you find at large retailers where you buy a fax machine and can receive a $50 mail-in-rebate. Guess what? The total expense is deductible and when the rebate comes in the money is yours. Check with your accountant (cause I’m definitely not one).
  3. Marketing – This is one of my favorites. A few weeks ago I sat down with my accountant and asked about my business sponsoring a race car at the local track. Turns out it’s 100% deductible. The racecar (or motorcycle), repairs, gas to get there, parts, etc. etc. can all be written-off as marketing expenses. If you are always racing something like me, then you really shouldn’t let this tax-free racing budget pass you by. Of course your race vehicle needs to advertise your business.
  4. Personal Development/Training – My accountant just educated me on this one recently. Currently I have 2 businesses that are about 4 hours apart with a total territory that would take me about 12 hours to circle by driving. Add to that the possibility of another business about 4 hours away in a different direction and the benefits of flying become quite obvious. So I’m working on getting my personal pilot’s license so I can fly myself around for business and also a bit just for fun. Just like with a company car, you need to figure out how much of your time is truly business and how much is personal and allocate the proper amount of your flight instruction and flying lessons through your business. Of course that would be a direct, pre-tax, business expense.
  5. Gifts – Not sure if this varies by state or is just for federal however my accountant informed me that a performance based incentive of up to $400 can be awarded to all employees without claiming it as taxable income each year. This can be in the form of a gift or simply cash. Hopefully you’ve performed well enough in your business to earn such an award. 🙂

It seems like I’m learning new, creative, legitimate ways to benefit from owning a business on a weekly basis so as I learn more I’ll post them. If you have any great ways to lessen your tax burden legally please let me know!

To your success, Bryan

P.S. I’m not an accountant and everyone’s situation is different, so make sure you check with your accountant before starting any of this. 🙂

The ULTIMATE tax shelter?

It never quite made sense to me why when you’re applying for a mortgage they ask about your gross income. You know, your income before taxes. Who cares what your gross income is???  If you make $100,000 per year are single and rent an apartment you’ll probably pay your full federal tax of $22,110.75. Factor in your state income tax (let’s say it’s a conservative 3%) and your FICA (7.65%) and your take home is around $67,200. That’s a total of about 32% or about 1/3rd of your total income going to Uncle Sam. Kinda depressing isn’t it? (Did I forget to mention the sales tax on everything you purchase, too?)

Now let’s say you’ve done some homework and decided to buy (~$14,000 in interest and $2000 in property taxes) instead of rent. You even felt that it was a good idea to make a few charitable contributions (another $5000) and invested the maximum allowable amount ($4000) in an IRA and assume your state doesn’t allow any of those deductions.  Now your federal tax bill will be $14,423.75.  A savings of almost $8k in federal taxes alone.  Your take home after taxes jumps to ~$74,900. Keep in mind, that after your charitable contributions, property taxes, interest, and IRA your take-home that you can spend on sports cars and flat-screen TV’s will only be ~$50,000.  However, you now have a house that hopefully is appreciating and a retirement account so you’re ahead of the game. But let’s face it – you still don’t have tons of cash as compared to the total cash that you earned.

Now here’s the real exciting part. If you have a business that pays for your car, for your cell phone, and your internet access (pre-tax), since you work from home at times, you’re starting to get WAY ahead of the tax man. Add in some passive income from a rental property (since you won’t have to pay FICA on residual income) and your NET (after-tax) income just keeps climbing. If your business is filing as an S-corp, you take a “reasonable” salary, and take the rest out in distributions you again avoid the FICA taxes. Tax minimization is one of the greatest advantages of being an entrepreneur. In the scenario above, if you take out $50,000 in salary and pay the remaining $50,000 in distributions, your tax bill drops another $3825 (which is direct cash to your pocket).

Before I get into The Ultimate Tax Shelter, Jeff Schnepper in How to Pay Zero Taxes 2009 points out a few fun facts for us:

  • The average middle-American salary in 2005 would take about 107 days of 100% of income going to Uncle Sam to pay off his taxes! In 1930 it took only 57 seconds of work to pay your taxes.
  • On Average Americans spend more time working to pay their taxes than they spend working to pay for food and shelter combined (as an employee I KNOW that was the case for me).
  • In 2004, 42.5 million tax returns – one third of all filed – had no income tax liability because of the available deductions and credits
  • For the tax year of 1998 2,085,211 individual tax returns showed income of $200k or more. Of those, .07 percent or about 1,467 returns, showed no U.S. tax liability! By 2001 that number jumped to 2,959 returns! (This statistic is my personal favorite)

My point is you pay too much tax. However, as I always stress, you don’t need to cheat the tax man by doing anything unethical. You play by the book and educate yourself properly and you won’t have to. With that in mind, my accountant confirmed what How to Pay Zero Taxes 2009 recently taught me – an amazing tax shelter – resort rental properties.

Obviously as a rental property it has all of the advantages of passive income:

  1. No FICA (7.65% of wages)
  2. Potential for paper loss along with a positive or break-even cashflow for great tax deductions
  3. Appreciating real estate
  4. Minimal management (most resorts offer management companies)
  5. A vacation home to use when you want!

Without any of the draw-backs:

  1. NO Necessity of being an “Active Participant”
  2. NO Limitation of $25,000 of passive losses against active income
  3. NO Phase-out of all deductible losses starting at $100k and completely erasing all deductible losses by $150k

This scenario is because in any property where the average rental term is less than 7 days it’s considered a hotel/motel and the income (and loss) becomes active with no limitation on the loss. In other words, it becomes its own business with all the normal business perks. (Have your accountant reference Treasury Reg. 1.469-5T(f)(2)(ii) for more details.)

Let’s take it even a step farther. Once you start your vacation rental business, you decide it’s a pretty good business to be in and so would like to invest in more resort rental properties. Your spouse and you are both shareholders so you decide to take a trip to evaluate more properties. That tax-deductible trip can be to the local ski-resort, to Hawaii, or around the world. After all, you need to evaluate 50 businesses to find the right one, how many resort rental properties will you have to evaluate before you find a great one?

Unfortunately, in my experience, your accountant is rarely going to come up with great tax-savings ideas for you… The average accountant seems to be too busy with the “basics” and effort taking care of those monotonous details, to get real creative. I’m not real sure exactly why that is… At any rate, it’s your responsibility, not your accountant’s, to make sure you’re not paying too much tax!

Don’t ever forget that NO investment should be made solely for a tax deduction. That’s not only poor business planning, it’s actually illegal. You make your real estate investments based on the potential for appreciation and ultimately that the money you put in will be less than the cash you take out.

As an entrepreneur it’s important to build your team, educate yourself on technology, train yourself on marketing and a host of other things – but why do all that work while donating 107 of your hard-working days to the tax-man? It’s poor business and probably poor for your health considering the possible depression that it can induce.

To your NET success, Bryan