C corporations and since they planned to be rich, they figured they needed a C corporation as well. However, simply buying what the rich have won’t make you rich. The Process We first went through the details of James and Cheryl’s three-year-old business. They had just begun to make good money with their marketing consulting business. James and Cheryl provided services from the office space that they rented. The income was still a little uncertain. But we did discover a number of hidden business deductions that reduced their taxable income by $20,000. At their 28 percent tax rate, this provided a tax savings of $5,600. James and Cheryl had operated as a sole propri- etorship and so paid self-employment tax on their $150,000 taxable in- come. As joint owners, both had self-employment tax. This added an additional $22,950 in taxes. Our first plan was to form an LLC, which elected to be taxed as an S corporation. The LLC gave James and Cheryl protection of the assets of the business by providing “charging order” protection. This meant that any judgment that came as a result of their personal assets or actions could not go against their business. The Benefit James and Cheryl paid $17,000 less in tax with this new system. They were happy, even though they still wanted to know how they could eventually have a C corporation. Future Plans The next step for James and Cheryl was to buy a building for their busi- ness. Their plan was to take a distribution to make the down payment. James and Cheryl would hold the building in a separate LLC that would elect partnership taxation. The S corporation would pay rent (which was deductible for the S corporation) to their LLC. Their LLC would then have income (in the form of rent) that could be offset by depreciation. If we created a passive loss from the LLC for James and Cheryl, they would likely not be able to deduct it against other income. So our plan would be to make the rent as high as is reasonable for the S corporation. The higher rent meant a bigger deduction for the S corporation. 246 TAX LOOPHOLES STRATEGY SUCCESS STORIES ccc-kennedy_appa_237-247.qxd 10/22/04 1:03 PM Page 246 The higher income in the new LLC, even if it resulted in a flow- through taxable income after depreciation, was part of our plan. In this way, James and Cheryl began to see how real estate could be bought with money that was effectively before tax. The rent was a deduction. If we added a C corporation to their tax strategy later, we could either use the same strategy of paying rent or actually make the C corporation a member in an LLC that holds real estate. The C corporation would re- ceive the flow-through benefit of depreciation because it was a member. Figure A.4 demonstrates how the rental expense reduces the taxable income that distributes through the S corporation. This means lower tax. The rent is income through the LLC, but that income is offset by the depreciation on the building. TAX LOOPHOLES STRATEGY SUCCESS STORIES 247 Business Buys Real Estate DKA Plan Consulting S-Corp Income <High Rent> <Salary> Lower Taxable Income Via K-1 Via K-1 LLC Individual Income Tax Rental Income <Expenses> <Depreciation> Lower Income FIGURE A.4 Business Buys Real Estate Diagram ccc-kennedy_appa_237-247.qxd 10/22/04 1:03 PM Page 247 Appendix B 300+ BUSINESS DEDUCTIONS Business Tax Deductions Instructions: Check each tax deduction that applies to your business. A Abandonment of property used for business purposes Accounting and auditing expenses, such as: Auditing of your books and accounts Costs of bookkeeping Costs of tax strategy preparation Costs of preparing and filing any tax returns Costs of investigation of any tax returns Costs of defense against any IRS or state agency audits or challenges Accounts receivable, worthless Achievement awards—requires plan: Longevity award Safety award Sales award Advances made to employees or salespeople where repayment is not expected Advances to employees canceled as bonus Advertising expenses, such as: Premiums given away 248 ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 248 Advertising in: Newspaper Magazine Radio Other media Prizes and other expenses in holding contests or exhibitions Contributions to various organizations for advertising purposes Cost of displays, posters, and so on to attract customers Publicity—generally speaking, all costs including entertainment, music, and so on Christmas presents to customers or prospects—de minimis rule Alterations to business property, if minor Amortization Attorney’s fees and other legal expenses involving: Tax strategy Drafting of agreements, resolutions, minutes, and so on Defense of claims against you Collection actions taken against others Any other business-related legal activity Auto expenses for business purposes, such as: Damage to auto not covered by insurance Gasoline Oil Repairs and maintenance Washing and waxing Garage rent Interest portion of payments Insurance premiums such as fire, theft, collision, liability, and so on Lease payment License plate Driver’s license fee Depreciation 300+ BUSINESS DEDUCTIONS 249 ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 249 Wages of chauffeur Section 179 deduction, for qualified vehicle B Bad debts—if previously taken into income Baseball/softball/soccer team equipment for business publicity Board and room to employee: All meals and lodging if for employer’s benefit Temporary housing assignment Board meetings Bonuses as additional compensation to employees Bookkeeping services Building expenses, used for business, such as: Repairs to building Janitorial service Painting Interest on mortgage Taxes on property Water Rubbish removal Depreciation of building Heating Lighting Landscaping Burglary losses not covered by insurance Business, cost of operating office Business taxes—except federal income taxes C Cafeteria plan—requires written plan Capital asset sale—losses 250 300+ BUSINESS DEDUCTIONS ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 250 Car and taxi fares Casualty damages, such as: Bombardment Fire Storm Hurricane Wind Rain Ice Heat Drought Forest fire Freezing of property Impairment or collapse of property Charitable contributions Checking account bank charges Child care—requires written plan Children’s salaries Christmas presents to employees, customers, and prospects for advertising or publicity purposes, or goodwill, or if customary in the trade Collection expenses, including attorney’s charges Commissions on sales of securities by dealers in securities Commissions paid to agents Commissions paid to employees for business purposes Commissions paid to salespeople Condemnation expenses Contributions (deductible if made to organization founded for the following purposes, subject to some limitations): Religious Charitable Scientific 300+ BUSINESS DEDUCTIONS 251 ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 251 Literary Educational Prevention of cruelty to children and animals Convention expenses, cost of attending conventions Cost of goods Credit report costs D Day care facility Depletion Depreciation Discounts allowed to customers Dues paid to: Better Business Bureau Chamber of Commerce Trade associations Professional societies Technical societies Protective services association E Education assistance—requires written plan Embezzlement loss not covered by insurance Employee welfare expenses, such as: Dances Entertainment Outings Christmas parties Shows or plays Endorser’s loss Entertainment expenses 252 300+ BUSINESS DEDUCTIONS ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 252 Equipment, minor replacements Equipment purchases—may require capitalization and depreciation Equipment repairs Exhibits and displays to publicize products Expenses of any kind directly chargeable to business income, such as: Renting of storage space Safe-deposit boxes Upkeep of property Books to record income and expenses or investment income Experimental and research expenses F Factoring Fan mail expenses Fees for passports necessary while traveling on business Fees paid to: Accountants Agents Brokers Investment counsel Professionals for services rendered Technicians Fire loss Forfeited stock Freight charges G Gifts to customers—limit $75 Gifts to organized institutions, such as: Charitable Literary 300+ BUSINESS DEDUCTIONS 253 ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 253 Educational Religious Scientific Group term insurance on employees’ lives Guarantor’s loss H Health insurance Heating expense Hospitals, contributions to I Improvements, provided they are minor Insurance premiums paid Interest on loans for business purposes, such as: Notes (bank discount on note is deductible as interest) Mortgages Bonds Tax deficiencies Installment payments on auto, furniture, and so on Margin account with broker Inventory loss due to damages Investment counsel fees L Lawsuit expenses Legal costs In defense of your business In settlement of cases Payment of damages 254 300+ BUSINESS DEDUCTIONS ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 254 License fees Lighting Living quarters furnished to employees for business’s benefit Lobbying costs Losses, deductible if connected with your business or profession, such as: Abandoned property Accounts receivable Auto damage caused by fire, theft, heat, storm, and so on Bad debts Bank closed Bonds Buildings damaged Burglary Business ventures Capital assets Casualties: fire, theft, heat, storm, and so on Damages to property or assets Deposit forfeiture, on purchase of property Drought Embezzlements Equipment abandoned Forced sale or exchange Foreclosures Forfeitures Freezing Goodwill Loans not collectible Theft Transactions entered into for profits 300+ BUSINESS DEDUCTIONS 255 ccc-kennedy_appb_248-260.qxd 10/22/04 1:04 PM Page 255 [...]... 315 290 Other Cut & Sew Apparel Manufacturing 31 599 0 Apparel Accessories & Other Apparel Manufacturing Leather and Allied Product Manufacturing 316110 Leather & Hide Tanning & Finishing 316210 Footwear Manufacturing (including rubber & plastics) 31 699 0 Other Leather & Allied Product Manufacturing Wood Product Manufacturing 321110 Sawmills & Wood Preservation 321210 Veneer, Plywood, & Engineered Wood... Security tax State income tax State unincorporated business tax Real estate tax Tangible property tax 260 300+ BUSINESS DEDUCTIONS Intangible property tax Custom, import, or tariff tax License tax Stamp taxes Any business tax, as a rule Auto registration tax Safe-deposit box tax Membership dues tax Gasoline tax Admission tax Telephone and telegraph expenses Traveling expenses (includes: meals, taxi fare,... Products Wholesalers 422700 Petroleum & Petroleum Products Wholesalers 422800 Beer, Wine, & Distilled Alcoholic Beverage Wholesalers 42 291 0 Farm Supplies Wholesalers 42 292 0 Book, Periodical, & Newspaper Wholesalers 42 293 0 Flower, Nursery Stock, & Florists’ Supplies Wholesalers 42 294 0 Tobacco & Tobacco Product Wholesalers 42 295 0 Paint, Varnish, & Supplies Wholesalers 42 299 0 Other Miscellaneous Nondurable Goods... 445210 Meat Markets 445220 Fish & Seafood Markets 445230 Fruit & Vegetable Markets 445 291 Baked Goods Stores 445 292 Confectionery & Nut Stores 445 299 All Other Specialty Food Stores 445310 Beer, Wine, & Liquor Stores Health and Personal Care Stores 446110 Pharmacies & Drug Stores 446120 Cosmetics, Beauty Supplies, & Perfume Stores 446130 Optical Goods Stores 446 190 Other Health & Personal Care Stores Gasoline... (Form 1120-RIC) 52 592 0 Trusts, Estates, & Agency Accounts 52 593 0 Real Estate Investment Trusts (Form 1120-REIT) 52 599 0 Other Financial Vehicles Real Estate and Rental and Leasing Real Estate 531110 Lessors of Residential Buildings & Dwellings 531120 Lessors of Nonresidential Buildings (except miniwarehouses) 531130 Lessors of Miniwarehouses & Self-Storage Units 531 190 Lessors of Other Real Estate Property... Roofing, & Saturated Materials Manufacturing 324 190 Other Petroleum & Coal Products Manufacturing Chemical Manufacturing 325100 Basic Chemical Manufacturing 325200 Resin, Synthetic Rubber, & Artificial & Synthetic Fibers & Filaments Manufacturing 325300 Pesticide, Fertilizer, & Other Agricultural Chemical Manufacturing 325410 Pharmaceutical & Medicine Manufacturing 325500 Paint, Coating, & Adhesive... Professional & Commercial Equipment & Supplies Wholesalers 421500 Metal & Mineral (except petroleum) Wholesalers 421600 Electrical Goods Wholesalers 421700 Hardware & Plumbing & Heating Equipment Supplies Wholesalers 421800 Machinery, Equipment, & Supplies Wholesalers 42 191 0 Sporting & Recreational Goods & Supplies Wholesalers 42 192 0 Toy & Hobby Goods & Supplies Wholesalers 42 193 0 Recyclable Material Wholesalers... Towing 488 490 Other Support Activities for Road Transportation 488510 Freight Transportation Arrangement 48 899 0 Other Support Activities for Transportation 271 272 IRS PRINCIPAL BUSINESS AND PROFESSIONAL ACTIVITY CODES Couriers and Messengers 492 110 Couriers 492 210 Local Messengers & Local Delivery Warehousing and Storage 493 100 Warehousing & Storage Facilities (except lessors of miniwarehouses & self-storage... Furniture & Related Product Manufacturing Miscellaneous Manufacturing 3 391 10 Medical Equipment & Supplies Manufacturing 3 399 00 Other Miscellaneous Manufacturing Wholesale Trade Wholesale Trade, Durable Goods 421100 Motor Vehicles & Motor Vehicle Parts & Supplies Wholesalers 421200 Furniture & Home Furnishings Wholesalers 421300 Lumber & Other Construction Materials Wholesalers 421400 Professional & Commercial... Related Services Other Professional, Scientific, and Technical Services 541600 Management, Scientific, & Technical Consulting Services 541700 Scientific Research & Development Services 541800 Advertising & Related Services 276 IRS PRINCIPAL BUSINESS AND PROFESSIONAL ACTIVITY CODES 54 191 0 54 192 0 54 193 0 54 194 0 54 199 0 Marketing Research & Public Opinion Polling Photographic Services Translation & Interpretation . and since they planned to be rich, they figured they needed a C corporation as well. However, simply buying what the rich have won’t make you rich. The Process We first went through the details. property tax Custom, import, or tariff tax License tax Stamp taxes Any business tax, as a rule Auto registration tax Safe-deposit box tax Membership dues tax Gasoline tax Admission tax Telephone. demonstrates how the rental expense reduces the taxable income that distributes through the S corporation. This means lower tax. The rent is income through the LLC, but that income is offset by the depreciation