11 Ways to Slash Your Tax Bite
HOW DO YOU REDUCE YOUR ANNUAL TAX BILL AND ELIMINATE ESTATE TAXES SO THAT AFTER YOU’RE GONE, EVERYTHING GOES TO YOUR FAMILY?
Operating under the basic philosophy that “It’s not what you make, it’s what you keep that counts,” tax planning specialist Joe Gandolfo, owner of Joe M. Gandolfo, Ph.D. & Associates, has helped tens of thousands of autobody shop and other business owners keep more of their revenue in their own pockets and out of Uncle Sam’s.
With almost 50 years of experience and more than 20,000 clients across the nation, the nationally known income, estate and gift tax planning expert, who’s based in Lakeland, Fla., works with businesses to reduce personal and corporate income taxes below the alternative minimum tax and eliminate estate taxes and probate fees altogether at death—without buying life insurance or annuities. Gandolfo has appeared on many nationally syndicated radio and TV programs, including CBN’s “700 Club,” CNNfn, and others on the Eternal World Television Network. He also has spoken across the country to more than 4,000 organizations and companies, and is the instructor for the Automotive Management Institute course, “How to Reduce Taxes.”
FenderBender spoke with Gandolfo in November to gain tax insights that are specifically geared toward the autobody industry, focusing on what shop owners can do to protect their business investment and keep more of their own money, both at tax time and beyond. Following are Gandolfo’s responses in his own words.
#1 IF YOU’RE WORRIED ABOUT LIABILITY…
Liability is one of the primary differences between the many IRS-recognized forms of business organization and is an area of definite consideration when deciding your business type. Most of my clients in the autobody industry are Sub Ss (S Corporations) or LLCs (Limited Liability Corporations), with a number also doing business as sole proprietors. Some of the decision as to which form of organization you choose for your business is based on the amount of liability you feel you need. If you are worried about liability and you make more than $100,000, you will want to be an LLC, taxed as a Sub S. You do not, however, want to set yourself up as a C Corporation, as taxes would then have to be paid on the business if or when it is sold. Another option is to set your business up as a sole proprietorship, but carry an umbrella liability policy.
As defined by law, the differences between these forms of organization are:
Sole Proprietorship: As the simplest and least expensive form of ownership, the business is owned and controlled by an individual, and income and expenses are reported on the individual’s tax return.
Sub S: As a corporation, it is a separate legal entity and must follow the statutory requirements of the state of incorporation. Income and expenses flow through to shareholders in proportion to their shareholdings, and profits are taxed at the individual tax rate. C Corporation: In addition to the time-of-sale taxation problem outlined above, “double taxation” occurs often under this form of organization, with the corporation taxed on its profits and shareholders also taxed on their dividends, profit-sharing payments, etc. LLC: This form of organization combines the tax treatment of a partnership with the limited liability characteristics of a corporation. It may be taxed as a corporation or as a sole proprietorship.
So, if you are a sole proprietor, your business directly impacts your personal taxes, which are, in fact, one and the same. As a Sub S, the business finances filter through your individual tax return. And, as an LLC, you can choose your method of taxation.
#2 DON’T BELIEVE IN PARTNERSHIPS
Growing up, I had two younger brothers and an older sister, and my father owned his own business in partnership with his brother. When I was in eighth grade, my mother died, followed not long after by my dad dying. My uncle, the remaining owner, chose to sell the business and retain the profit for himself. I was put into military school, and I never saw my brothers and sisters again. I don’t believe in partnerships: You may think you know another person very, very well, but you just do not know what might happen to that person, what he or she might do in the future. I do not advise any business to be in a partnership for any reason.
#3 OWN NOTHING JOINTLY–NOT EVEN WITH YOUR SPOUSE
The same logic applies to joint ownership: About 60 to 70 percent of my clients have been married more than once. I’ve dealt with more than 80 divorces a year and, believe it or not, more than 20 murders. I also recommend that all my clients have pre-nuptial and post-nuptial agreements, or live-in agreements if they are not married but are living together.
In addition, there is tax advantage to owning property separately if it is worth more than $2 million because each of you can leave up to $2 million to heirs tax-free, whereas anything over that would be subject to taxation.
#4 PUT THE FAMILY ON THE PAYROLL
Children who are ages 7 to 18 can be company employees, earning up to $5,350 per year, which is fully deductible and non-taxable for the children. I’ve helped to educate thousands of children and grandchildren through these deductions. If you are incorporated, you can also put mom on the board of directors and incur a further deduction.
#5 OWN REAL ESTATE SEPARATELY, THEN LEASE IT BACK
Most automotive businesses own their own real estate, but if your business is incorporated, significant benefit can be derived by separating ownership of the property from the business. If you own the property separately, you can gain passive income by leasing it back, and then you can keep it from being subject to Social Security or Medicare. In addition, if the property is owned by the business, you will have to pay taxes twice on it if you sell. Keeping property and business separate enables you to sell the business while keeping the real estate and charging rent—which can be a nice source of post-business income.
#6 INVEST IN YOURSELF WITH BENEFITS
Set up plans for major medical, medical reimbursement and dental, as well as a pension plan, such as an IRA, 401K or SEP IRA. Not only do you get the benefits, all are tax deductions, and the pensions also allow you to stash money which would be completely protected if your business were to be sued. I also recommend that my clients invest in an independent working interest in natural gas. To encourage investment in U.S. natural gas, the IRS allows a 100 percent deduction of the investment. Not only does it provide a tax deduction, but, within six months, you will start earning income on your investment.
#7 YOU CANNOT OUTGIFT GOD
Gifting to do God’s work is deductible. You can deduct up to 50 percent in cash for charitable contributions and up to 30 percent in property of your adjusted gross income each year.
#8 DON’T GIVE PART OF THE BUSINESS TO YOUR KIDS
One of the biggest mistakes that business owners make is bringing sons or daughters on as part owners. No partnerships—remember? People change when people die. Your son may want to take an active part in the business at first, then decide later that he is tired of it. If he is part owner, he can continue to “earn” his percentage even if he does no work at all. And if he dies, his wife gets his part of the business. What if she then remarries and her new husband decides to take an active role, questioning your actions, your decisions—your salary! If you do want to pass the business on to a family member, sell him or her the entire thing.
#9 DOING YOUR OWN TAXES IS STUPID
If you needed open-heart surgery, would you get a book, put a mirror on the ceiling and operate on yourself? Doing your own taxes has the same effect. Work with a tax accountant who understands and is up-to-date on tax laws. If you don’t already have one, ask friends for recommendations. My recommendation would be an ex-IRS female who has been in business for at least 10 years.
Some business owners choose to do their own taxes because they are hiding money. The biggest mistake you can make is to not report income. You may think you are saving money by taking in cash, then not reporting it as income to the IRS. And you may, but it is a criminal act.
#10 HAVE A WILL, A LIVING TRUST AND A DURABLE POWER OF ATTORNEY
It is your family—your loved ones—who will have to deal with your estate when you die or if you are incapacitated. If you don’t have a current will, living trust and durable power of attorney, you are telling them that you don’t care about them—and you will be needlessly wasting a lot of money, which will end up going to lawyers and the IRS instead of to your family. Your living trust provides instruction for dispersal of property upon your death. A living trust enables property and assets to go directly to the named person without having to go through the time or expense of probate. A durable power of attorney gives the named person the right to make decisions on your behalf should you become incapacitated.
While your spouse should know how to access each of these—as well as your Social Security number, birth certificate, marriage license and military discharge statement—you should also have a back-up in case both you and your spouse are zapped at the same time.
#11 REASSESS YOUR STRATEGIES
If you are thinking about getting divorced, selling the business or any asset worth more than $2 million, or sending your kids to college, call a tax consultant—call me. Any major event can affect your financial situation and outlook, and you should prepare for the event prior to its happening. Even if you have no major changes, you should look at your strategies at least twice a year, assessing them against any increase or decrease in finances and against the ever-changing tax laws.