Rearrange Your Affairs For Maximum Tax Savings

One way to maximize your business profits is by reducing your taxes. Frequently, income and other taxes could be lowered significantly if only the taxpayer were willing to plan ahead. By taking some simple steps to rearrange your affairs, you could save a fortune!

1. Are You Splitting Your Business Income?

You may pay reasonable salaries to spouse or children through your incorporated or unincorporated business. If you are not doing so, you may be missing out on some real tax savings.

In the Canadian Federal Budget of February 16, 1999, measures were introduced to discourage income splitting with minor children through family trusts. However, these measures do not apply to paying reasonable wages to family members. Thus, this may be one of the last ways of legally splitting income left for the small business person with minor children.

Obviously, the amounts paid must bear some relationship to the work performed. Of course, all required payroll taxes should be remitted and proper records need to be maintained.

Why not rearrange your affairs so that family members with little or no income can perform duties for and be paid by your business? Then, they can contribute out of their own income towards the operation of the household. In this way, little or no tax will be paid by your dependants and you will have successfully shifted taxable income out of your hands.

2. Should You Register For The Goods And Services Tax?

Even if your business grosses less than $30,000.00 per year in taxable sales, you may still benefit by registering your business to collect the Goods and Services Tax (G.S.T.). If you are not doing so, you may be missing out on some real tax savings.

For example, you will be paying G.S.T. on many of your business expenses. If not registered for G.S.T., you must absorb this cost. If registered, you may deduct the G.S.T. paid on such business expenses (input tax credits) from the tax collected. Many business persons expect to pay G.S.T. and it doesn`t really cost them anything since they deduct such amounts as input tax credits from the G.S.T. they collect from their customers.

In some cases, the quick method of calculating G.S.T. may actually allow you to retain more of the G.S.T. collected than you would have just claiming the G.S.T. actually paid by you.

A factor to consider also: If you are not registered for G.S.T. in Canada, you are telling your clients that you do under $30,000.00 per year in taxable sales or that you cheat. Is this the image you want your clients to have?

3. Could You Benefit From Incorporating Your Business?

Although incorporating your business may result in increased accounting and legal fees (for setup, extra tax returns, and annual minutes), the advantages of incorporation may justify this added expense. Not only will you enjoy limited liability by incorporating, but you may reap significant tax savings as well.

Corporations are often subject to lower tax rates on small business income. In Canada, sales of shares of qualifying small business corporations can obtain a lifetime $500,000.00 capital gains exemption. Certain tax incentives and government programs are only available to incorporated entities. Additionally, corporations can be used for income-splitting and estate, retirement, and succession planning objectives.

4. Do You Engage in Tax Planning Year-Round?

Some people only worry about their taxes during tax season. However, you will save a fortune in taxes, legally, if you make tax planning your year-round concern.

Can you make some changes to turn your hobby into a moneymaking business? Can you use that extra room in your house as a home office for your business? Can you arrange to use your car more for business purposes and have you documented your business use mileage? Can you arrange for more of your entertainment expenses to be business related and have you listed the business purpose on the back of each receipt?

Do you make business and personal purchases, investments, and other expenditures with tax savings in mind. Do you document your expenses well so that you they would survive a tax audit? Whenever you are faced with a business or personal financial decision, do you consider the tax consequences?

Make year-round tax planning part of your business management mindset and, thus, enjoy maximum tax savings. Yes, by rearranging your affairs to account for tax implications, you will save a fortune in taxes.

RESOURCE BOX

J. Stephen Pope, President of Pope Consulting Inc., <a target="_new" href="http://www.popeconsultinginc.com/">http://www.popeconsultinginc.com/</a> has been helping clients to earn maximum business profits for over twenty-five years.

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What Is Tax Law?

The federal tax code is complex. This complexity generally arises from two factors: the use of the tax code for purposes other than raising revenue, and the feedback process of amending the code.

While its main intent is to provide revenue for the federal government, the tax code is frequently used to direct the behavior of businesses and individuals in an attempt to achieve social, economic, and political goals.

For example, the tax law provides a deduction for mortgage interest in order to encourage home ownership. A theoretically pure income tax would not allow this deduction, which is not an expense incurred for the production of income. The allowance of the mortgage interest deduction is seen by some as discrimination against taxpayers who rent, rather than own, their home: the payment of rent for one's home is not deductible. Of course in theory, landlords generate tax savings on their mortgage interest payments, and pass these savings on to renters.

Because the government uses the tax code as an instrument of social policy, the code as a whole appears to lack a coherent organizing principle. This lack of a coherent organizing principle has become magnified over time, due to the interplay between successive legislative amendments and regulatory changes to the law and the private sector responses to those amendments and changes. For instance, suppose that Congress enacts a tax credit to encourage a particular type of activity. In response, a group of taxpayers who are not the intended beneficiaries of the credit re-order their affairs, or the superficial aspects of their affairs, to qualify for the credit.

Congress responds by amending the code to add restrictions and target the credit more effectively. Certain taxpayers manage to use this change to claim additional benefits, so Congress acts again, and so on. The result is a feedback loop of enactment and response, which, over an extended period of time, produces significant complexity.

In general, the U.S. income tax is highly progressive, at least with respect to individuals that earn wage income. As of 2001, the top 1 percent of individual taxpayers paid approximately 23 percent of all federal taxes. The top 5 percent paid approximately 39 percent, and the top 10 percent paid 50 percent of all federal taxes. The bottom 20 percent of taxpayers paid a little over 1 percent of all federal taxes.

Moreover, the progressivity of the U.S. tax system has gradually increased over recent decades. The top 20 percent of taxpayers paid approximately 56 percent of all taxes in 1980, and this figure gradually has risen to 65 percent, as of 2001. In recent years, however, a reduction in the tax rates applicable to capital gains has significantly reduced the income tax burden on non-wage income. In this regard, the general structure of the U.S. tax system has begun to resemble a partial consumption-tax regime.

For more free legal information on <a target="_new" href="http://www.bankdynamic.com/laws/tax-law.html">Tax Law</a>, please visit <a target="_new" href="http://www.bankdynamic.com/">Free Legal Information</a>.

Save Money on Taxes - Let Uncle Sam Pay for Your Fun!

"Deducting Meals and Entertainment"

O.K. You've been working really hard on these lessons. Now its time for some fun. Are you with me? Imagine if you could spend time with friends, eating, drinking and seeing shows and your company could foot the bill? Wouldn't that be GREAT! Fasten your seat belt, we're going on a (tax-deductible) journey?

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Our first stop is meals. There are several great ways to deduct your meals. The first is to turn your social outings into business meetings. No Fun, you say. Watch this, I say. Many of my lunches are already spent with colleagues and associates. That's the way it is when you're in business for yourself. You start spending more and more time with business partners and associates. <a target="_new" href="http://m123.infusionsoft.com/go/dm/MikeDrew/sampay">Asset Protection Techniques</a>

Well, if I have lunch or dinner with a friend, that's NOT tax deductible. But, if I discuss business with that same person, suddenly it becomes a deductible expense. And what does it take to officially discuss business? The IRS says that that the following conversation will suffice:

Your Associate: &quot;How's Business?&quot;

Your Reply: &quot;Great, but I could always use more business&quot; (with the inherent request for referrals) That's it. You've just turned a social gathering into a legitimate business meeting and the meal becomes 50% deductible. Don't forget to document it properly.

What about having a meal with your spouse or &quot;significant other.&quot; We'll the IRS is pretty darn smart, so they aren't about to let use write off all our romantic dates. Yet they realize that when two couples go out for a meal, that's a great time to discuss business in a relaxed setting. So the rule is that if you and your spouse enjoy a meal with another couple and you have that same business discussion outlined above, the meal is (50%) deductible. You want more? No problem. <a target="_new" href="http://m123.infusionsoft.com/go/pfbsaff/MikeDrew/sampay">Tax Strategies</a>

How about dinner and a show. Or what about a full day on the golf course? The rule is that if you have a business meeting that is followed by entertainment, or entertainment that is followed by a business meeting, that's a deductible expense. The IRS wants to see that you have a table or some other flat surface available to you during the meeting, so that you can sign documents, etc. Same thing goes for skiing, the movies or even a day at the beach. How about a ball game or even the Super Bowl? Just precede or follow it with a business meeting and document what you discussed.

One more, you say. Fine here it is. Imagine that you work for a large insurance company or law firm. You're involved in a big case and you're up against a touch deadline. Your boss comes in toward the end of the day and says, &quot;I need you to work though dinner tonight- we've got to come in under that deadline. Don't go home for dinner, just order in, on the firm&quot;. Its called &quot;supper money&quot; In essence, your boss has allowed the company you work for to buy your dinner.

Your own company can do the same for you. Just don't forget to document your expenses properly.

Sincerely,
Drew Miles, The Tax Saving Attorney

Drew has combined what he learned during formal education, informal education and twenty five years of business experience in the development of programs designed to teach people how to build and preserve lasting wealth. He is an author, teacher and international speaker in the areas of asset protection, and tax saving and wealth building strategies.

Alas! In E-Commerce Taxland

In trying to comply with tax laws for your e-business, you may find yourself falling down the rabbit-hole, going through the looking glass, and attending a Mad Tea-Party.

Common sense, logic, and fairness never did apply fully to the field of taxation but this is especially true of e-commerce transactions.

1. Canada Customs Welcomes You to Canada!

Since I`m located in Canada, let`s start here.

Canada has what you might call a national sales tax or a value added tax (VAT). This Goods and Services Tax (G.S.T.) of seven percent is applicable to many Canadian transactions.

Not only is it critical to determine whether a taxable sale was made in Canada or not, but also where in Canada. If it was made (or deemed to be made) in any of the Harmonized Sales Tax (H.S.T.) provinces (Nova Scotia, New Brunswick, and Newfoundland and Labrador), a higher, fifteen percent H.S.T. rate applies. This is because those provinces have allowed Canada to collect their provincial sales taxes for them.

As well, each province and territory has its own rules. Ontario charges eight percent retail sales tax on many typical Internet transactions whereas Alberta has no provincial sales tax.

Of course, this is only scatching the surface. This entire article is an over-simplification of a very complex subject. You will definitely need professional advice to help you through E-Commerce Taxland.

2. When Exports Aren`t Exports

In Canada, exports are "zero-rated" sales for G.S.T. purposes. This means that when you ship a product to someone outside Canada, you don`t charge G.S.T. Yet, you get to claim (or deduct from the G.S.T. collected by you) all the "input tax credits" (G.S.T. that you paid for business purposes) to make that export. The idea, I suppose, is to encourage exporting.

However, if you export products other than tangible, physical goods, beware! There are many pitfalls to watch out for.

As one example, consider digitized products that you might sell from your Canadian website, such as e-books, downloadable software, or subscriptions to content. You would be considered to be selling "intangible personal property". Unless your product is also considered "intellectual property" (such as software or e-books that you produced or have obtained the rights for), you will have to charge G.S.T. The reason why, according to the Canada Customs and Revenue Agency, is that it COULD be used inside Canada, even if it isn`t.

Say you sold a membership for accessing digitized content (from various sources) on your Canadian website to a customer in the United States. Since there are no restrictions as to where the intangible personal property may be used, and the property is not considered intellectual property (nor the provision of a service), the American customer is subject to G.S.T., even if he never comes to Canada.

Strangely, the same logic doesn`t apply when an American buys a regular book (or a car) which he COULD bring into Canada with him and use here. It is true that it is easier for Canada to assess such items at the border than in cyberspace, but I know of no cases of Americans being taxed on the books or cars they bring with them when they come to live in Canada for about half the year.

As a Canadian registrant, one way you might legally avoid this silly March Hare is to explicitly state on your website and invoice that use of such intangible personal property in Canada is prohibited (or requires an additional fee and the payment of G.S.T.).

3. When Imports Aren`t Imports

Goods shipped to Canada are subject to G.S.T. on importation. Such tax is often assessed at the border. But what if you are a Canadian registered for G.S.T., selling to a Canadian customer but your supplier is in a foreign country?

Pretend that your Canadian customer has bought a book from you from your Canadian website. Your drop ship supplier is located in the United States and is registered for G.S.T. You fax your order to the American company, and they, in turn, ship the book for you (complete with Customs Declaration and their G.S.T. Business Number).

Since they paid the G.S.T., you wouldn`t think you would have to charge it again, would you? "Wrong!", smiles the Cheshire cat. Since you are a registrant located in Canada, you are required to charge and remit the G.S.T.

But you are entitled to input tax credits, aren`t you? In many cases, the answer is "No".

It may be very difficult for you to satisfy the documentary and other technical requirements. As an example, it is not uncommon for American suppliers to absolutely refuse to give an invoice breaking down the G.S.T. or to allow you to be the Importer of Record. This complicates their life unnecessarily and they just don`t need the aggravation.

There are relieving tax provisions covering drop shipping, sales agencies, and other situations. In many cases, unfortunately, the most practical solution is to allow the tax to be paid twice.

4. When You`re Subject to Tax Where You`re Not Subject to Tax

It makes sense that countries impose a tax on sales and income made in their own jurisdiction. But does it make sense for Germany to tax sales made in the United States?

In effect, starting July 1, 2003, the European Union has done just that by imposing an online sales tax.

This means that if someone from England buys an e-book from someone in the United States, the American should submit this tax. Of course, If the sale was to someone in Germany, the tax rate would be different.

The rationale behind this follows: Since countries can`t collect sales tax on Internet transactions at their borders, the only way they can collect it (other than a self-assessment system) is with an online sales tax. Further, it is claimed that businesses in the European Union suffer a major competitive disadvantage because they have to collect Value Added Tax (VAT) but others don`t.

I know what they mean. Welcome to the club!

J. Stephen Pope, President of Pope Consulting Inc., <a target="_new" href="http://www.popeconsultinginc.com/">http://www.popeconsultinginc.com/</a> has been helping clients to earn maximum business profits for over twenty years.

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Tax Tips for Home-Based Business Owners

As tax time approaches, many home-based business owners begin completing their forms or paying their accountants with trepidation. This nervousness comes from two sources: a fear of being audited and a fear of having to pay a lot. For the most part, both of these fears are unfounded.

For one, audits are rare. In fact, only 0.5% of taxpayers are subjected to audits every year. And if you do beat the odds, keeping good records and maintaining receipts will help you weather the IRS storm.

Obviously you have not control over whether or not your return is chosen for an audit, but you can control how much you are going to owe the government this year. Most people who own small or home-based businesses end up paying more than they should in taxes simply because they are not taking advantage of all their deduction possibilities, even those that are right around them every day.

Your Automobile

You may not realize it, but one of your biggest potential tax savers is sitting in your garage right now. Most people realize that their car can be a tax write-off if it is used for advertising purposes, but the majority of home-based business owners don't realize that it they may also be eligible for deductions as well.

For example, if you drive your car to the post office to buy stamps for your business or if you drive to the office supply store to stock up on paper clips, you can claim that mileage on your taxes. You can even claim the mileage if your business-related stop was made on the way to picking your daughter up from ballet class or dropping your dog off at the vet.

In addition, you can write-off other automobile related expenses such as gas, insurance, and parking costs if they pertain to any business related activity.

Be sure to keep records, however. You will want to have a small notebook in your car at all times so you can jot down your start and stop mileage as well as a note about the business activity in which you are engaged. Keep all gas, parking, and insurance receipts as well if you plan to claim those as business expenses.

Your Family

If you pay your children an allowance, you can also count these as deductions if you hire them as part of your staff. Any business owner knows that the money he or she pays to employees does not count as part of their profit. The same is true for home-based businesses.

Most business owners also know they can find employees among their own family without raising any eyebrows. The same is true for home-based businesses. You can hire your fourteen year old to help you answer phones, file, or type up correspondence. You can offer your eight year old a job emptying wastebaskets, straightening your office, etc. Then you pay them a certain amount of money every week for their labor.

Again keeping records is essential. Keep track of the hours your children work for you as well as the activities they do. Pay them, if possible, by check from your business account. You can set up a checking or savings account for the children in which the money can be deposited.

Your Home

Obviously if you worked in a small office building you could deduct the amount of rent you paid for that property from your taxes, as well as the costs of all the equipment and expenses. Well, just because you work out of your home that does not mean you lose out on those deductions.

Chances are you have a small area of your home that is set aside for your business purposes. Now while you cannot write-off the cost of your entire house, you can write-off the cost of that area.

What you do is determine what percentage of your home's total square feet is dedicated to your business. For example, if your office takes up 10% of your home's total area and you pay $600 per month for the property, you can claim $60 per month as a business expense which would be $720 per year.

The same formula works for your utilities, such as electricity, water, and telephone (unless you have a separate line just for business). All of your equipment - your computer, printer, scanner, cell phone, printer ink, etc - is also tax deductible.

Remember to keep track of those expenses and hold on to your receipts in order to claim them on your taxes.

When it comes to tax time, no home-based business owner needs to feel afraid. By taking advantage of all your potential deductions and keeping thorough records, you can not only significantly reduce your yearly tax bill, but you can also prepare yourself in the rare event you may be chosen for an audit.

Vishal P. Rao is the owner of: <a target="_new" href="http://www.work-at-home-forum.com/">http://www.work-at-home-forum.com/</a> An online community of people who work at home.

The Annual Gift Tax Exclusion: Getting The Edge

Whether helping the kids with a down payment on their first home, paying the premiums on a life insurance policy in an irrevocable trust, or moving appreciated assets to a younger generation, annual gifting will touch the lives of millions of Americans. But before the transfer is made, an investor should spend some time looking at the investment and the tax ramifications of the property to be passed.

Much of the gifting itself will be done under the Annual Gift Tax Exclusion, a method that alleviates both a gift tax and the need to report the transfer. This exclusion applies to gifts only between individuals. Gifts made to charities and other organizations fall under a completely different set of rules.

The transfer is not deductible by the donor nor is it taxable to the recipient. Currently (in calendar year 2005), the annual exclusion is set at $11,000. In the future, this can be adjusted for inflation, but only in $1,000 increments. Spouses can increase their gifts to others to a maximum of $22,000 and, finally, gifts between spouses, like love, knows no limits.

Most transfers are done for one of two reasons. In the past, passing along property to diminish the value of an estate and, therefore, estate taxes was a major consideration in estate planning. This is still used extensively for larger estates but, under current law, fewer estates are subject to the tax. If the estate has no tax exposure (and if nursing care is taken care of), many advisors recommend not to gift at all but, instead, toallow the assets to receive a &quot;stepped up&quot; tax basis upon death.

Gifting to allow for current use of assets has been and continues to be popular. Often a parent wants to see a child use the gift immediately in order to enjoy an extended vacation or to make a major purchase. Here, it is expected that any gift of securities will be converted into cash with the appropriate tax paid.

Both donors and recipients should be aware that various gifts for educational or medical purposes may not reduce the annual exclusion. You should check with your tax advisor to determine whether this applies to a your specific situation.

Certain kinds of property (real estate, art, collectibles, closely held business interests, etc) should be appraised before a transfer is made. Consulting an expert in the particular field is usually a good idea to calculate the fair market value of the property.

Another circumstance requiring professional help is when &quot;spending down&quot; an estate for Medicaid purposes. An elder law attorney should be consulted for help in this area.

The actual gift of marketable securities or cash is fairly straightforward. Giving a check to someone or journaling over securities is enough to complete the gift. However, before making the gift, you should understand some of the potential tax considerations.

Let's first look at stock that has appreciated in value. Remember, whatever tax basis the donor in the gifted property will become the recipient's tax basis. If the donor is in a higher tax bracket than the recipient, it is often wise to gift the stock to the recipient and let the recipient sell the stock at his or her lower tax bracket.

If the fair market value of the stock is below the donor's original cost, then the donee must use the fair market value of the property as of the date of the gift in determining his or her tax basis. If you find yourself in this situation, the donor should consider selling the asset and then gifting the cash proceeds to the recipient.

Obviously, there will be times when a gift needs to be made regardless of the consequences; but, when time allows, you should do your homework to see what works to your best advantage.

Glenn (&quot;Chip&quot;) Dahlke, a senior contributor to the Living Trust Network, has 28 years in the investment business. He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him by email at <a href="mailto:dahlkefinancial@sbcglobal.net">dahlkefinancial@sbcglobal.net</a>. You may also contact him at the Living Trust Network's web site at <a target="_new" href="http://www.livingtrustnetwork.com">http://www.livingtrustnetwork.com</a>

Copyright 2005. LivingTrustNetwork, LLC. All rights reserved.

Are You Overpaying Taxes If You Use Tax Preparation Software?

For many business owners the answer to this quandary is tax preparation software. Fill out a fairly simple interview, click &quot;print&quot; and out comes a completed return that will pass muster with the IRS. The answer to all your problems?or is it?

Can One Software Program Cover All Businesses?

Take a moment to consider the wide range of businesses that exist in the United States. Now cut that number down to those that can be categorized as &quot;Internet businesses&quot;. If you were asked to write a business plan to provide web design services to each of these services, how long would it be? It would be huge and completely useless because each business would have different needs. A Internet business selling flowers would have completely different needs from an online bank which would have different needs from a hosting company and so on. The only way you could create a practical plan for all Internet businesses would be to offer a collection of general services they could all use on their sites. Tax preparation software designers have the same problem.

There are over 15,000 pages in the tax code and over 100,000 pages of regulations interpreting those pages. Changes are made to the tax code ever year, and new regulations are issued constantly. If one were to create a list of questions for every tax deduction and credit detailed in those pages, the list of questions would be the size of a phone book! Yet, tax software programmers have somehow boiled it all down to a simple 30-minute interview process? Common sense should tell you that doesn't make sense.

As practical matter, tax software programs are designed to make sure that you claim a general set of deductions that are applicable to businesses across all industries. Most programs try to mask this fact by asking you to identify your business before proceeding. For a lark, you might try selecting another industry and then running through the interview process. You will find that the interview process is modified a bit, but you are still being asked the same basic tax deduction questions.

If you are only claiming general business tax deductions, you are paying more than you should in taxes. Ask yourself if you have seen any of the following questions in a tax software program interview:

Q. Do you store business inventory in your house?

Hint: You may be able to claim hundreds or thousands of dollars in deductions.

Q. Did you start a pension plan for your employees?

Hint: You may be able to claim a tax credit for the next three years totaling $1,500.

Q. Do you have a home-based business and a second office?

Hint: You may be able to deduct your commuting expenses each day. Yes, commuting expenses.

Q. Do you have business meetings at your home?

Hint: Did you charge your business for the space?

Q. Should you claim the standard mileage rate for your auto or the actual costs?

Hint: The standard mileage rate may not the best option.

Q. Did you modify your business location to comply with the Americans with Disabilities Act?

Hint: You may be able to claim a tax credit AND tax deduction for tax savings of $20,000 or more.

Q. Did you refinance your home?

Hint: The points you paid on your original mortgage are fully deductible now, not over the length of the loan.

This represents only the tip of the iceberg of available credits and deductions available to you. Just one of these deductions could save you thousands of dollars in taxes. Yet, you are never going to see these questions raised in a tax software program interview. The tax code and regulations are simply too large to be incorporated into a usable software program.

Your business is unique. You face and overcome issues and problems that are unique to your size, financial situation and particular business needs. Don't short change yourself by limiting your deductions by using tax software programs.

Richard Chapo is CEO of <a target="_new" href="http://www.businesstaxrecovery.com">http://www.businesstaxrecovery.com</a> - Obtaining tax refunds for small businesses by finding overlooked tax deductions and credits through a free tax return review.