If you generate a profit or loss from business, then here are some general planning considerations including deductions you should take time to review.

  1. Have you considered whether the legal form of your business is appropriate, or thought of a plan and strategy to maximize deductions to reduce self-employment income?
  2. Are you subject to the additional 0.9% Medicare Tax on Earned Income?
  3. Should you review retirement plan options or compare whether an automobile deduction for your business should be based on mileage rates or the actual expenses incurred.

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General Planning Considerations:

  1. Form of Business
    • Have you considered whether the legal form of business is appropriate [e.g. corporation, limited liability company (LLC)], given such issues as legal liability and double taxation.
    • Has the use of an S Corporation been considered as a means of reducing exposure to the additional 0.9% Medicare tax?
  2. Hobby Loss Rules
    • If you have consistently generated a net loss, you will need to review your business to determine if it is subject to the hobby loss rules and, if so, consider planning strategies to help avoid the application of these rules.
  3. Employing Family Members
    • You should consider the tax benefits of employing family members in the business such as:
      • shifting earned income to lower tax rate family members,
      • reducing self-employment (SE) income by employing an under-age-18 child,
      • obtaining a deduction for health costs by employing the owner’s family members and setting up a medical reimbursement plan, and
      • avoiding the kiddie tax.
  4. Additional 0.9% Medicare Tax on Earned Income
    • Have you employed strategies to minimize the impact of the additional 0.9% Medicare tax?
    • Have appropriate adjustments been made to estimated tax payments and withholding amounts to cover any additional tax liability for this new tax?
    • Can income be deferred or accelerated to avoid this tax on a multi-year basis?

Expenses:

  1. Retirement Plan Options
    • If you are self-employed, you should consider taking advantage of the deductions allowed for contributions to the following:
      • Keogh,
      • SIMPLE, or
      • SEP retirement plans.
      • A solo 401(k) plan is also an option.
  2. Health Care Costs
    • If you are self-employed, you should consider the tax advantages of establishing and contributing to a health savings account (HSA).  HSAs can be set up for individuals with certain high-deductible health insurance policies.
  3. Personal Auto Used for Business
    • If you use a personal auto for business purposes, the standard mileage rate should be compared to using actual expenses to maximize deductions.
    • It may also be more advantageous from both a tax and financial standpoint (given the annual depreciation limits on luxury auto deductions) to lease an auto.
  4. Business Property Purchased
    • Consider using the Section 179 deduction to expense qualifying property to reduce SE income and avoid the mid-quarter convention.
    • Consider your tax situation to select Depreciation methods based on needs:
      • accelerate depreciation to reduce SE tax, or
      • minimize deductions if you are subject to alternative minimum tax (AMT).
    • Consider the use of specific class lives for specific activities
    • If you purchased a building, has the purchase price been properly allocated between real and personal property and has a cost segregation study been considered to maximize depreciation deductions for non-real property components?
  5. Light Trucks and Vans
    • There are increased depreciation limits for certain light trucks and vans.
  6. Limits on Meals and Entertainment Deductions
    • Consider the various planning strategies to preserve entertainment deductions and plan around the 50% dis-allowance rule.
  7. Home Office
    • Are you eligible to claim a home office deduction for a portion of the home used exclusively and regularly as the principal place of business?
    • Is the simplified (safe harbor) option for claiming a home office deduction appropriate
  8. Business Travel
    • If you are experiencing significant travel costs, you should review your travel policies and procedures.
      • ensure travel qualifies as away from home,
      • convert commuting expenses into deductible travel,
      • preserve deductions for combined business and pleasure travel, and
      • ease the record-keeping burden.

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