| Knowing income tax law is not enough. In order to | | | | During our ongoing discussion, my friend tells me of his |
| offer value to taxpayers, tax law knowledge must be | | | | desire to provide for his daughters college education. |
| combined with effective tax planning strategies in | | | | The 529 was mentioned but I had a better idea. What |
| order to yield maximum benefit. What would you do if | | | | if we put your daughter on the payroll of your business |
| you owned a landscaping business with the upcoming | | | | for $5,000 (near the standard deduction for all individual |
| facts and circumstances? I will tell what I would do. | | | | taxpayers)? This will further reduce your exposure to |
| While having a quiet night out at a local restaurant, | | | | income tax and self-employment tax. His daughter will |
| listening to music from a local band, I am approached | | | | not have to pay income tax because her standard |
| by a friend that has just started a landscaping | | | | deduction will reduce her tax exposure to zero. In |
| business. He is married and has one young daughter, | | | | addition, there will be no exposure to social security tax |
| age twelve. He will have gross receipts of $48,000 | | | | on his daughter's wages because she is a minor and |
| and will receive a 1099 for his efforts. His first question | | | | works for her dad's unincorporated business. |
| to me is how he should go about making quarterly | | | | Projected net income is now reduced to $8,000. If our |
| estimated tax payments to cover both income tax | | | | hero forms a partnership with his wife, she is a |
| expense and social security tax (SE tax). My response | | | | passive owner as she will not participate in the day to |
| to him was; "hold on there young fellow. Let's have a | | | | day operations of the business and his exposure to |
| discussion of the facts and circumstances before we | | | | SE tax will be cut in half (assuming a 50/50 partnership |
| begin". | | | | interest). Roughly, the total tax exposure for 2007 will |
| As the band played beautiful music and a soft | | | | be $1,400 which includes the SE tax. This is before any |
| summer breeze cooled the restaurant patrons, I asked | | | | other tax deductions the couple might have. |
| our young entrepreneur if he would need to buy a | | | | Regardless, there will be no need for estimated |
| new truck for his business venture. His response was | | | | income tax payments in year one. |
| not only yes, but he informed me that he has already | | | | For the future, year two offers hope that a retirement |
| picked out the very one and knows the cost to be | | | | plan be formed to shelter some income as the truck |
| $35,000. In this case, he can deduct the entire cost of | | | | deduction was used in the current year. There will also |
| this new truck in year one under internal revenue code | | | | be the opportunity to claim a home office deduction as |
| section 179. This allows for the write-off of new | | | | my friend takes over the entire operation and moves it |
| property placed in service of up to $125,000 in year | | | | into his home. Believe it or not, this conversation lasted |
| one. Because this guy is financing the truck over four | | | | about twenty minutes. My dessert had arrived and it |
| or five years, this becomes a great benefit to get such | | | | was time to deal with the matters at hand. I was even |
| a large write-off without having to spend a bunch of | | | | invited to sing a couple of numbers with the band. I |
| cash. Projected income from all business activities are | | | | always do say, never trust an accountant that can't |
| now reduced to $13,000. | | | | sing and dance. |