#1 To Monitor the Numbers

Many tax strategies are based on income and expenses being at certain levels. It is not uncommon for these numbers to change during the year. Certain changes can impact the effectiveness of the tax strategy so it is critical to know if the numbers change so changes can be made to the tax strategy.

#2 To Monitor the Documentation

Part of the tax coaching I do with clients includes coaching them on how to document the transactions, the activity, the income and expenses that impact their tax strategy. Proper documentation increases the accuracy of the information my clients provide to me to do tax planning and prepare their tax returns. It also provides the support the IRS would want to see if my client is audited. Part of my mid-year planning process includes checking in with my clients on how their documentation is coming along.

What is your system to make sure you monitor your taxes throughout the year?

If you don’t have a system to monitor your taxes throughout the year, you need one and here is why:

Have you ever met with a CPA or tax preparer and been told you could have done something about a tax problem if only you had acted before the end of the year?

And while year end tax planning has its place in a tax strategy, often times there is simply not enough time at the end of the year to get the best tax results. That’s why mid-year tax planning is so important.

I have a system in place to make sure this monitoring happens for my clients. Part of that system includes a custom checklist designed for each specific client. Here are the top 5 questions from that checklist.

** Question #1 **

Do you need to change how your entity or entities are taxed?

Sometimes an entity is formed with the strategy that once that entity hits a certain target income, then how that entity is taxed needs to change. This can be a very costly tax mistake if it is missed!

** Question #2 **

Do you need to add an entity or restructure how your entities are owned?

Knowing the right time and the right entity for your tax strategy can often save as much as $10,000 per year in taxes.

** Question #3 **

Are your salary and distribution amounts from your S Corporation optimal?

S Corporations are the most popular entity for businesses. The mistake I see most often is S Corporation owners not balancing the amount the S Corporation pays them as salary versus distributions in order to reduce their taxes and their audit risk.

** Question #4 **

Is your accounting up to date?

If your accounting is not up to date through at least the first quarter of 2008 (March 2008), then it is not up to date and you need to take action now! Accounting is the heart of every tax strategy. Without current accounting, it is impossible to determine the tax strategies that will generate the most tax savings or if anything needs to be adjusted during the year to protect the tax savings.

** Question #5 **

Are your travel, meals and entertainment expenses properly documented?

Travel, meals and entertainment are among the most heavily scrutinized expenses. This makes proper documentation of these expenses a key part of every tax strategy.

In order to answer this, we need to look into the history of government and society. In the beginning of human history, people lived in nomadic tribes where one person and/or his family would preside over the tribe. Everyone basically worked for the good of the tribe. At some point these tribes began to settle down and villages began to form.

It was during this time that something akin to “government” probably took hold. Throughout history there have been, and continue to be, different forms of government from dictators to monarchies to republics to democracies. Each form of government would tax its citizens for a variety of reasons.

Some governments may have taxed their citizens for the benefit of a few (the wealthy) or even for the common good. For example, the Roman Empire did not tax you if you were a Roman citizen AND lived within the city limits of Rome. Instead the Roman Empire taxed all of its conquered peoples in exchange for peace (Pax Romana) and other services (roads).

This concept of paying taxes for services has evolved quite a bit since the Roman Empire. We now have a smorgasbord of different taxes and pay for different services in our modern life. Different types of taxes include:

• Real estate taxes - are imposed by local government in order to pay for schools, police/fire services, hospitals, garbage disposal, sewage/sanitation, road maintenance, parks, and libraries.
• Sales taxes - can be imposed at any level of government, but the largest percentage is at the state level. The funds from sales taxes go towards the State’s budget and will vary from state to state. Income tax - is imposed at the federal level as well as the state level (with some exceptions).
• Income tax is a progressive tax in the United States. This means that the tax rate increases as the amount subject to taxation increases. The proceeds from income tax are used for the Federal budget.

There are of course other types of taxes such as the Payroll (FICA), Capital Gains, Corporate, Estate, Gift, and Excise taxes. These taxes are used for the government’s budget, with the exception of the Payroll Tax which goes to fund Social Security and Medicare.

Ideally the proceeds from taxes would benefit all equally. However, this is not always the case as people pay taxes, which pay for government services that they may not use or agree with. For example a bachelor pays property tax for the local public’s school budget even though he has no children. Another example is people who disagree with the Federal government’s policy, but are required to pay taxes to fund the Administration’s policy nonetheless.

Some people refuse to pay their taxes, either for one of these reasons or other reasons.

This is such an important question for mid-year planning because knowing the right time to add an entity to your tax strategy can often save as much as $10,000 per year in taxes!

What entity should you consider adding to your tax structure?

Many of you want to know what entity you should consider adding to your tax structure. There are 2 levels of tax planning to consider in answering this question.

** Level #1 **

This level is for those business owners or investors who are either just starting their business or investment or are in the “ramp-up” phase of their business or investment. The ramp-up phase may mean you are a few months in to your new business or investment, or perhaps even a few years depending on the type of business or investment. The ramp-up phase means your business or investment has not yet produced a profit. Now, without profit, taxes are likely minimal or even non-existent, which is why the focus of this level is building a strong foundation for your tax structure so once there is profit, your tax structure is already in place to immediately minimize your taxes.

I often get asked the question “When should I form my entity for my business (or investment)?”

Many of the people I talk to are unsure if they should get their business up and going first, and then worry about the entity, or if they should have the entity in place even before starting the business or investment.

The answer to this depends somewhat on the type of business or investment, however, if I have to give an answer, I recommend setting up the entity first. This is because the right entity can grow and change with you as your business or investment grows and changes. Plus, outside of the tax benefits, many entities offer some level of asset protection which most people rank as an important planning factor.

So for those of you in Level #1, the entities to consider adding to your tax structure are:

Limited Liability Company (LLC). LLCs are the most flexible entity for tax purposes. LLCs can start off being taxed one way and then elect to be taxed differently. This means your LLC can adjust to the tax planning needs of your business or investment because your LLC can be taxed as a sole proprietorship, partnership, S corporation or C corporation. This flexibility is key in building a strong foundation for your tax structure and to minimize future taxes. S Corporation or Partnership. If your LLC will be formed in a state that assesses a separate tax on LLCs, then you should consider adding an S corporation or partnership instead of an LLC.

** Level #2 **

Level #2 is for those who already have a strong foundation in place for their tax strategy, and whose business or investment will soon be exiting the ramp-up phase or has already exited the ramp-up phase and is producing income. At Level #2, the focus is minimizing the tax liability created by your business or investment.

Consider a C Corporation if you are in the Level 2 planning group

One way to eliminate - not just reduce taxes - is to shift income to a taxpayer in a lower tax bracket. A C Corporation has initial tax brackets of 15% and 25%. If you are in an individual tax bracket of 25% or higher, then there could be an opportunity to reduce your taxes by shifting some of your income to a C Corporation.

For example, if you are in a 35% tax bracket individually and are able to shift $50,000 of income to a C Corporation, then your income tax is reduced by $10,000! And this can be an annual savings of $10,000!

BUT…

I know from experience that any time I suggest a C Corporation in a tax strategy, people panic! They think of all the bad things they’ve heard about C Corporations:

But what about the double tax?
But what about the personal service corporation tax?
But what about getting money out?
But what about the accumulated earnings tax?

What most people don’t know (including many CPAs) is how to legally avoid these tax traps…BUT I do! In fact, some of them are not even tax traps at all - I have found ways to use some of these so-called traps to save taxes!

There were some problems though. People would buy property A, sell it 5 years later, and buy property B using the money from property A. As real estate is wont to do, property A went up in price and the investor made a “profit.” The IRS would have taxed the investor for the profit, even though the money was used to buy property B and the investor NEVER realized a profit!

There were certain fixes/loopholes to this but it wasn’t until 1954 that Section 1031 was added to the Internal Revenue Code. Section 1031 outlines the tax-deferment of like-kind property being “exchanged.” When section 1031 was first implemented, the exchange was between 2 people who each owned a property. There would have either been a “swap” between two people, or one of the two would have sold (cashed-out) and been obligated to pay capital gains tax on his or her capital gains.

It was not until the famous Starker v United States case in the 1970s that you could have a 3-person exchange. Starker allowed for an investor to sell Property A and use the proceeds to buy Property B without paying tax on the capital gains from selling Property A without merely “swapping.” A “Starker exchange” is one in which Property B is identified within 45 calendar days and purchase Property B within 180 calendar days.

So, what does this all mean to you? This means that you can buy investment property and a number of years later sell it, then use the proceeds to buy a bigger/better investment property without paying capital gains tax on the sale of your first property. This DOES NOT mean that you won’t pay taxes on your gains, it just means that you are deferring your payments into the future.

There is nothing wrong with using 1031 exchanges indefinitely and deferring your tax for as long as you can. From a tax-planning standpoint, it is possible to put your investment property in a charitable trust, which could pass on to your beneficiaries tax-free.

You can choose more than 1 replacement property provided you meet one of the following three requirements:

1. Any THREE properties regardless of value
2. Any number of prospective replacement properties provided the Fair Market Value (FMV) of the replacement properties is at least 95% of the FMV of property A.
3. Any number of prospective replacement properties provided the total value of all the prospective properties does not exceed 200% of the (FMV) of property A.

There are some additional rules regarding the 1031 exchange, which should also be discussed.

• If Property B is less than the price of Property A, you will receive some cash. This cash is known as “boot” and you WILL be liable for this boot as capital gains income.
• Property A & B must be “like-kind.” This means that you cannot use a 1031 exchange between a primary residence and a commercial property.
• Proceeds from the sale of Property A to pay for non-qualified expenses (such as service costs) are NOT tax-deferred. It is always advisable for the buyer to bring cash to the closing to pay for non-qualified expenses.
• Any money borrowed to pay for Property B will be applied to the price first. This means that any gains from Property A will be recognized as income for tax purposes.

1031 exchanges are one of the best vehicles used by investors to defer their capital gains. However, if property B is LESS THAN property A, it is NOT advisable to do a 1031 exchange. This will defer your capital loss forward and you will be unable to deduct the loss on your tax return!

In many states, if the property owner does not pay the property taxes the county or municipality will accrue the taxes and penalties for many years. Ultimately, if the property owner does not pay the taxes, the county or municipality will sell or auction the property at a tax sale or auction.

Counties issue a tax lien which in many states are sold at an auction, These certificates allow the counties and municipalities to collect the tax revenue they need to run the government for each year - rather than wait for the property to be auctioned to collect the taxes due.

In other words, the county or municipality sells a tax lien certificate that is nothing more than a certificate that shows the taxes due on “X” property.

The objective in selling the certificates is to allow an investor (rather than the property owner) to pay the property tax on “X” property. This benefits the county with immediate revenue and benefits the investor with a low-risk certificate that has a high-yield interest rate - which could be from 10% all the way to 50%.

Tax Lien Foreclosure is the formal term for the process in which counties or municipalities collect their money. The sales for delinquent property taxes occur at every level of government, from the county to hospital districts, to water districts and to transportation districts. All these government agencies have taxing authority and the taxperson’s ultimate remedy is a foreclosure.

Tax Lien Foreclosure is the formal term for the process in which counties or municipalities collect their money.

The sales for delinquent property taxes occur at every level of govern­ment, from the county to hospital districts, to water districts, to transportation districts.

All these government agencies have taxing authority and the taxperson’s ultimate remedy is a foreclosure.

The basis of our tax system dates back to the foundation of our country. The system was brought over from England. From the English, we learned that the basis of a person’s wealth was land holdings. Consequently the land provided the tax assessor a method of attach­ing the property owner’s wealth. Real property cannot be hidden and it’s easy to assess.

Taxation is a complex science, as the property is not the only thing being assessed. The prop­erty is the security for the tax collector because the owner cannot conceal or move it. Because of this lack of mobility, many agencies attach their payment lien (assessment) to this rigid structure (the property).

Many different authorities assess property owners. Non-payment to these entities could lead to a loss of the asset by the owner to the county or municipality district at a tax lien auction/sale.

Fortunately, most property taxes are assessed at the county level. The various districts aren’t necessarily uniform in their procedures. Your county might issue you one property tax bill that covers all tax authorities in your area. But, there are more than 3,000 counties in the United States, and they don’t act uniformly. The fact that you now know they act independently will be a real competitive advantage for you.

It’s not unusual for different districts to serve their own assessment bills to the property owner. Generally, the county will serve a bill and after collection of that bill, the county administrator will distribute the money to the various districts or agencies of the local government.

Discover Booming Tax Lien Markets Near You
Running a government even a small government like a county demands a lot in funds. When citizens fail to pay their taxes, counties turn to tax lien auctions to bridge the financial gap. This is where the savvy investor stands to reap quite a profit. If you can find a steady market of tax liens in a well established county you can seriously plump up your wallet. Most homeowners will eventually redeem their taxes, particularly on properties that are in relatively good condition, and then you get your money back plus interest. And in some cases, should the homeowner fail to pay the accrued back taxes, you could end up with the deed to the property for as low as a few thousand dollars.

Not all states employ the tax lien system. The following states offer tax lien investing opportunities:

Alabama
Nebraska
Alaska
New Jersey
Colorado
New York
Florida
Ohio
Illinois
Oklahoma
Indiana
South Dakota
Iowa
Vermont
Kentucky
West Virginia
Maryland
Wyoming
Mississippi
Missouri
Maryland
Wyoming
Mississippi
Missouri

What to do if your home state does not appear in the above list? Many states allow nonresidents to participate in tax lien auctions. Just make sure to check out the state’s specific rules before you pack your bags. If you do cross state lines in pursuit of tax lien certificates, look into deducting travel expenses from your taxes. Investing in a tax lien requires you to fill out a W-9 form, which is an independent contractor tax form, and technically, you are running a business by looking to turn a profit on your investment.

Make Great Money-Without the Commute
Another option is invest in tax lien certificates through the mail or to participate in online auctions. This makes tax lien investing a great venture for stay at home parents or others unable to work outside the home. Just make sure you thoroughly research a property before you invest long distance. Although it is rare to ultimately acquire real estate through tax lien investing, it can happen, and if it does you don’t want to be stuck with a property you can’t sell for good money.

Few investments can rival tax lien certificates for excellent income at a fraction of the time constraints of a full-time job. Once you’ve mastered your craft you can dramatically change your and your family’s financial life.

The most common tax deductions for home business owners involve the computers, peripheral devices, computer software programs, hardware, and related supplies. The great thing about these types of tax deductions for home based business owners is that they can be deducted at full cost. In addition to these items, you may also deduct the cost of your telephone bill, your internet bill, and any other services that have a direct impact on the overall success of your business. All of these deductions are considered to be legitimate by the IRS, and you can reap many benefits as far as money when it comes to your tax return by claiming them.

If your business requires you to travel, you can actually claim the expenses associated with travel as a business expense on your income taxes. You will need to keep track of the miles that you travel in your car that are related to business, your fuel receipts, receipts for vehicular maintenance and similar records. There is a certain percentage that is issued on tax returns for these miles. In addition to this, if you use another means of travel like air or train, you may write this off as well. Hotel accommodations, and the food that you purchase while traveling are also considered legitimate tax deductions for home business owners.

Most individuals who have a home based business actually use a specific room in their room in order to conduct their work. If this applies to you, this opens up the door for many different tax deductions. You may receive credit for a certain percentage of your rent or house payments, the utilities of your home, and more! It is absolutely imperative to ensure that you are fully prepared to provide proof of all of the deductions that you select to use. However, most of the time, the IRS will understand that there has to be sufficient work space in the home to conduct business and there are no issues.

As you can see, there are a number of tax deductions for the home based business owner. If you run your business in your home, you may be very surprised at just how much you can receive when it comes to tax deductions. It is best to get an accountant that is familiar with tax deductions and what can be allowed for businesses that are owned and operated from the home. This will prove to be extremely beneficial in saving you money during tax season. It may even give you a little bit of money in return!

eBayers Beware

The new law, The Housing Assistance Tax Act of 2008, has provisions that come online at once, and others that are activated over the next few years. The section of interest today is set to be activated in 2011. If you are an eBay merchant, or you accept credit cards, debit cards, or third-party payments, your merchant bank will have to report to IRS your total annual gross payment card receipts if you have more than 200 transactions per year that generate sales of $20,000 or less.

For your convenience, your merchant bank will also send you a copy of the report that goes to the IRS. However, like many such reports that add up total deposits, the odds are good that the report will be wrong. Over a year, you are likely to have issued credits and refunds that probably won’t make it into the report since things like that aren’t usually reflected in the total gross receipts. On top of that, costs and fees aren’t reflected on such reports either, so you will need to make sure that the figures are as accurate as possible by including all these things that aren’t normally there.

Merchants will have to provide their TIN numbers to their merchant bank and if they fail to do so, their electronic payments will be subject to a standard 28% backup withholding. The issue here is that backup withholding is usually imposed on income with no offsetting deductions, such as interest or dividends. Under the new law, this backup withholding would be applied before the merchant is able to deduct any offsetting expenses. In other words, they are going to apply a tax designed for a certain kind of income to a type of income that the tax was never meant for. That, however, is not the really troubling part.

New Auditing Power for the IRS

For most of us, it was just a matter of time before Congress began to impose taxes on the Internet. Lawmakers have been itching to do so for years, seeing all that untaxed growth just passing them by. Now they have taken their first real step in that direction. Watch out for the next one. No, the troubling thing about all this is the new power that the IRS has to get information. You see, in the good old days, if the IRS wanted information from banks and merchant accounts, the agency had to go before a judge, show cause and get a subpoena. Only after this judicial review could they then proceed. This new law, however, changes that. Now, the IRS no longer needs to go through the judicial formalities before it can rifle through your records. The agency can now simply come in and audit them at any time and with a little or no notice.

According to the Treasury Department, the reason behind this explanation in information reporting is that it will assist the IRS to increase the merchant compliance rate. The agency plans to compare the merchant’s overall volume of payment card sales to the expenses claimed and cash transactions reported by the merchant. The Treasury estimates that this new reporting scheme will raise over $9.5 billion.

The Bottom Line

New income reporting structures, new taxes, new powers to the IRS, how will small business across the country respond? The cost of taking plastic for payment is rising to the point where many businesses simply cannot afford it. Throw this into the mix and I wonder if many of these establishments will be going to a cash-only system. There is a law of diminishing returns at work here. Eventually, if this scenario plays out, businesses may stop taking these convenient forms of payment because the cost of doing so is too high. This legislation will help Freddie Mac and Fannie Mae, and it will provide funds for house construction and loans for first time homeowners, and only time will tell how all that will work out. My question is, what about the rest of the provisions in the new law? Will that help or will it hurt, and what other governmental Pandora’s Boxes will it open up? We’ll see.

According to Your Terms:

When you need to settle tax liabilities, it means the amount of tax due cannot be paid at your current earnings level. A tax liability can be the sum of more than just the income taxes you owe. It includes the tax, penalties, and interest.

Once the tax liability has been established, the IRS begins collection proceedings. This collection process can be brutal as the horror stories people tell have proven. The IRS can seize, levy, lien and harass all they want until someone points out there are remedies for unpaid taxes.

That’s where a tax negotiator can be a blessing. The IRS has the right to forcibly collect overdue taxes, but their methods of collection are merciless. It’s possible to actually get further and further behind even while making payments.

At some point, you have to admit the situation looks hopeless unless the taxes are reduced or the IRS collection process lightened. A tax negotiator can help you settle tax liabilities through one of a number of solutions.

* Releasing wage and bank levies

* Correcting assessments with errors

* Submitting an Offer In Compromise

* Establishing an installment payment plan

* Filing an Injured Spouse form

This is just a brief list of ways to settle tax liabilities. There are others including negotiating a lower debt amount and then paying off the balance due, or getting the tax amount identified as uncollectible.

Setting Early Terms:

Of course, it’s much easier and quicker to settle tax liabilities if you negotiate payment before the collection process gets to the point of levies and liens. In other words, it’s easier to prevent a lien than it is to get a lien removed. A tax negotiator can intervene in the collection process at every stage from issuing computerized notices to filing liens and levies.

The earlier you are able to come to an agreement with the IRS on payment of tax balance due, the better off you will be. Tax negotiation usually involves obtaining reductions in penalties and interest and even the tax that is due. So the sooner you negotiate, the easier it is for the IRS to negotiate from their side also.

When you need to settle tax liabilities, don’t hesitate to get professional assistance. Believing you can handle it alone can get you into more trouble. The power of the IRS is unlimited and you want to be sure you get the best agreement possible.

Best Left to the Pros: When it comes to IRS tax debt, help is always available. The trick is getting a company who’s not after your wallet. Some companies will tell you that you qualify for certain programs before they even ask about your issue. A good tax professional will analyze your financial situation so they can put you in the best possible solution. When it comes to settling IRS debt, it is done on a case by case basis. Everyone is different.

What about Forms? Once you decide which program is best for you, you’re going to need to get the forms and instructions for each program. But where do you get them? Where these forms are and what they’re called is far from common knowledge. Here’s a list of the most important ones, for each program:

• Publication 594: This could very well be the most important form of all. This is a detailed publication of the IRS collection process. This is essential if you want to know exactly what the IRS can do to you.
• Form 656: This form contains instructions for an Offer in Compromise program. The form is 44 pages and it’s a little hard to read, but at least it’s the only one you need.
• Publication 971 and Form 8857: These forms are the detailed explanation of Innocent Spouse relief. These also contain the paperwork needed to apply for the relief. If you’re debt is due to an ex spouse, you could remove your debt entirely.
• Publication 5 and Form 12203: These forms allow you to dispute an IRS tax debt. While the IRS does not particularly want you to do this, it is your right as an American Taxpayer.
• Form 9465 and 2159: These are the forms and instructions needed for an Installment Agreement. While it’s not a settlement, it’s certainly easier paying your debt off over time.

These forms and publications are available on the main IRS website, and you can reach the alphabetical index for topics at the following link: http://www.irs.gov/formspubs/article/0,,id=98171,00.html