#1 Most Tax Planning Assumes You Want to Retire Poor
When I speak at a seminar, I ask how many people plan on retiring poor.It may not surprise you that no one raises their hand. It surprises me because the tax planning they have done works best if they retire poor.

This is because most tax planning focuses on tax deferral. Tax deferral means you are opting not to pay tax now and will pay the tax in the future.The most common example of tax deferral is the advice to maximize the contributions to your retirement plan.

Most retirement plans work like this:

– The money you contribute is deductible.
– The money you receive as a distribution when you retire is taxable.
– The tax is deferred until a later date.

What’s the problem with this? The deduction is at your current tax rate while the distribution is taxed at your future tax rate.If you plan on retiring rich, you will be in a higher tax rate when you retire. This means you are deferring your tax into a higher tax rate.

Example: If you are currently in a 25% tax bracket, and are in a 40% tax bracket when you retire, you are deferring your taxes into a higher tax bracket.This type of tax planning works best if you plan on being in a lower tax rate when you retire.

Example: If you are currently in a 25% tax bracket, and are in a 15% tax bracket when you retire, deferring your taxes works much better.If you plan on retiring rich, deferring your taxes will ultimately increase your taxes. Instead of deferring your taxes, create a tax strategy that focuses on permanent tax savings.

You may be wondering why tax deferral is such popular advice then? Because it’s easier than creating permanent tax savings. Creating permanent tax savings requires a much better understanding of the tax law.

#2 Your Taxes Keep You from Your Dreams
Taxes steal our time. In an average lifetime, no matter where you are in the world, taxes are stealing an average of 20 years of your life. That’s a prison sentence!

The average person spends 30% to 50% of their income on taxes.What if you were able to reduce your taxes (legally, of course) by 10%? Or 20%? Or even 30% or 40%?

You would keep more money in your pocket. You could then use this money to build your wealth.The result is more time – whether it’s an early retirement or not having to work as much.

#3 Following the Tax Law Can Improve Your Business and Investing
There are thousands of incentives in the tax law, in all countries, to encourage businesses and investors.Governments need businesses and investors to succeed. Governments want people to be employed. Governments want people to have housing. Businesses and investors help the government do this.

Governments are highly motivated to help businesses and investors succeed, so the tax law is written to help businesses and investors do just that. When looked at this way, the tax law is really an instruction book for businesses and investors.

The closer you follow the tax law, the more successful your business and investing becomes and the more money you’ll make in your business and investing.

Janice S. Vanderbilt, Vanderbilt CPA Group

By Janice Vanderbilt

People get into big tax trouble with their business because they don’t treat it like a “real” business.    

Annual meetings are an important example of this.A public company holds an annual meeting with its shareholders (owners). During these meetings, many things are discussed, including:

• Informing the owners of previous and future activities
• Reviewing and approving financial statements and budgets
• Declaring dividends
• Approving vendors

A public company keeps a written record of each meeting – these are the meeting minutes.

The topics of a typical annual meeting directly relate to a tax strategy which makes the meeting minutes an extraordinary tool to protect your tax savings. This is why it is so important to treat your business like a big public company when it comes to annual meetings and minutes.

How meeting minutes can protect your tax strategy
Meeting minutes are an ideal place to document the activity in your tax strategy, such as:

• Your salary
• Your bonus
• Your distributions (dividends)
• Loans to/from your company from/to you or your other companies
• Investments purchased
• Investments sold
• Travel expenses
• Vehicle expenses
• Use of your home office

Just to name a few!

Who should have meeting minutes?
When you think of meeting minutes as being a tool to protect your tax savings, then every company should have meeting minutes. It doesn’t matter if the company is an LLC, partnership, corporation or even a sole proprietorship.It’s always a good business practice to have an annual meeting. It’s a great time to review the past year and focus on the upcoming year. This falls right in line with the company approving your salary, bonus and/or distributions. Have a discussion about why the amounts are appropriate and document that in your meeting minutes.

An annual meeting is the ideal time to document activities the company has done and intends to do. For example, if one of those activities is to purchase real estate, the discussion can address if the real estate will be held long-term and rented, or fixed up and sold, or perhaps the company has something else in mind.

Two terms that commonly come up during a tax audit are “intent” and “facts and circumstances.” A tax auditor wants to know what a taxpayer’s intent was and what the facts and circumstances were for a particular transaction. Meeting minutes are one of the most effective ways to document these items.

What if your company is just you?
You may be wondering how you conduct your meetings if your company is just you. While you may be the only owner, you may have employees who should participate or you can invite members of your team of advisors to participate.

If you haven’t been holding annual meetings in your small business, now is the time to make the change.  Annual meetings will help you manage your business and will help you stay out of tax troubles.

Business owners, including real estate investors, often come across this situation:

You make a purchase of property for your business – maybe it’s a printer, tablet, appliance or furniture – and the question becomes: is this a cost that can be expensed right away or does it have to be capitalized?

If a cost is capitalized, it means the expense (depreciation) is taken over a number of years which is usually less desirable than expensing it all at once.

The general rule is that costs must be capitalized if the useful life is more than 12 months.  This can become a bit impractical in real-world application.

Fortunately, the IRS has released much needed guidance on when costs for property must be capitalized. This new guidance is effective for tax years beginning after December 31, 2013.

With this new guidance comes an important opportunity that allows businesses (which includes real estate investors) to immediately expense certain property that would otherwise have to be capitalized.

This can mean big tax savings but action must be taken now in order to take advantage of this opportunity.

How to Qualify for this Tax Opportunity
To qualify, businesses must have “non-tax accounting procedures” in place at the beginning of the year.

The purpose of these accounting procedures is to indicate that amounts paid for property that are less than a specified dollar amount or that have a useful life of 12 months or less will be expensed.

The amount that can be expensed depends on whether the business has an Applicable Financial Statement (AFS).  An AFS includes financial statements filed with the SEC or provided to a federal or state government or agency (other than the IRS) and certified audited financial statements.

Businesses with an AFS must have written accounting procedures and can expense property that costs up to $5,000 (per item) if it is in accordance with their written accounting procedures.

Most businesses do not have an AFS.  For those businesses without an AFS, they must have accounting procedures and can expense property costing up to $500 (per item) if it is in accordance with those procedures.  At this point, the procedures for these businesses do not need to be written. However, we strongly recommend that all businesses put their accounting procedures in writing.

The following is a sample procedure:

It is the policy of the business to capitalize assets that cost $500 or more individually. All capitalized assets will be depreciated based on the appropriate depreciation rules. Assets that cost less than $500 individually will be expensed in the period purchased.

Once the above is in place, the business must follow this procedure when recording costs to purchase property.  This then qualifies the business to make an election on their tax return to have these items treated the same way on its tax return.

The Bottom Line
Businesses that take advantage of this new opportunity will be able to immediately expense items that would otherwise have to be capitalized.

To take advantage of this new opportunity, businesses need to do the following:

#1 Document the accounting procedure for the business by January 1, 2014.

#2 Follow the accounting procedure when recording purchases of property in the bookkeeping for the business.

#3 Make the election on the business tax return.

If you want to learn more about how to take advantage of these tax strategies; sign up on our web site or call us for an appointment to get started today.