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MacLawnCo
04-13-2003, 02:12 PM
Just to preface this, i am going to talk to my accounting professor on tuesday about this idea and i shall let you know what he says...

I am interested in saving all my profits (after ownder withdrawls :) ) from the next few years with the intention of using that sum to invest in some property for the business. I want to do this in a way as to keep as much for the business and as little for good ol unlce sam. Where can i store my money in a short term, tax free type of account? (ill have to pay taxes on the interest, correct?) Once i get it in the tax free account, will i have to pay taxes on it when i take it out and then directly put it into my business property? What i am after is a large downpayment on some land that i have my eye on. I hate paying so much in taxes and want to keep as much in the business as possible. Any ideas?

Meier
04-13-2003, 07:02 PM
One thing's for sure:

Death & Taxes.

If you re-invest all your profit into a high dollar asset, you'll have to depreciate that high dollar asset over time with Unlce Sam.

Example:

Say you make $100K this year in profit and want to buy $50K worth of assets. Instead of taking $100K out of the company to live on, you instead take only $50K. With the remaining $50K, you buy assets. You'll have to figure out how long you expect those new assets to last. Then you depreciate the assets over time.

If you expect the assets to last 7 years, you might depreciate 1/7th, or 14%, of the assets this year. 14% of $50K is roughly $7K. So your tax bill would be based on profits of $93K, even though you only took home $50k. (If your company is taxed as a corporation, as mine is, this is how it works...your corporation would pay taxes on $43K and you would pay income taxes on your wages/salary of $50K.)

But next year, if you make $100K in profit again, you'd only be taxed on $93K. This would repeat for the next 5 years too.

One huge thing that distorts all of this is the new tax law that allows small businesses to depreciate 100% of their long term assets in the year they were purchased. I think the cap for a small business is something like $26K, but I'm not sure. You'd depreciate all the CapEx above that amount over the usefull life of the asset.

When you say property, I assume you mean real estate. My understanding is that real estate is generally depreciated over 30 years, but again, I'm no expert.

Talk to an accountant. But this is the gist of how this works.

Later,
DFW, TX

bruces
04-13-2003, 08:13 PM
I'll be very interested in suggestions your professor has for sheltering income.

It will be very difficult to avoid paying tax on the profits when they are earned, without either spending the money on business assets.

Once you have paid tax on the profits, then you might invest in some tax free investments (municipal bonds, etc.).

When you take the money out of these investments to purchase the property, there would be no tax consequences to taking the money out, since you have already paid tax on it.

Also, keep in mind that only the building portion of real estate is depreciable, not the value attributable to the cost of the land.

And, that is depreciated over 39 years for business property.

It is a great goal, but might be tough to accomplish.

An alternative might be to borrow more money to purchase the property sooner. If you are paying rent now, it could help offset the property payment if you are able to quit paying rent.

Good luck, and let us know what your professor suggests.

MacLawnCo
04-13-2003, 09:10 PM
Originally posted by bruces
Once you have paid tax on the profits, then you might invest in some tax free investments (municipal bonds, etc.).

Bruce, see my idea is to get away without paying taxes before i put the profit into wherever. Then hopefully, i can take the profit out of wherever, pay some interest tax, and buy the land. Probably not doable, but i hope my professor can steer me as close as possible. I will let you know what he says.

cos
04-13-2003, 10:23 PM
If it is a sole proprietorship, I see no way of getting away without paying taxes (legally). I would just sock away a certain percentage in an account and forget it is there until you are ready to look for your purchase.

If you find a way, let us know. :)

John Allin
04-14-2003, 11:01 AM
Sure wish I could find a way to avoid paying taxes....

MacLawnCo
04-14-2003, 01:17 PM
This is an accontant's reply that ive coppied from another site:

posted by GreenInIdaho: The first question was "Where can i store my money in a short term, tax free type of account?" There are many tax-free mutual funds and even direct investments available esp for Ohio specific funds. Those accounts are called municipal bonds and municipal bond mutual funds. To get one seek an investment advisor or do some research on your own to find one and avoid the fees. However, based on your question and revealing your level of investment sophistication I'd recommend that you seek an investment advisor. Such an advisor will probably say, "You are barking up the wrong tree." Most likely you are in a relatively low tax bracket. You're a student, right? Students usually have low income= low tax. Tax-free investments are not advantageous for low tax people. The're designed for high income high tax people.

Here's some Finance 101:
Taxable investment of $10,000 yields 5%= $500 income and at 15% tax rate you pay $75 in taxes for an after tax return of $425.

Alternatively the tax-free yield (always lower than taxable yields for the same risk) of 4% will yield $400. And since it's not taxed that is also your after-tax yield. So it's $425 vs $400 - the taxable is actually better even after paying tax on it.

BUT if you had a higher tax rate like 31% the the taxable would cause a tax of $155 (550 x .31) and the after-tax yield would be $345 (500- 155). Then it's $345 vs $400 and the tax-free is better.

Here again, what works for one doesn't work for everyone, and misinformation can detrimental- add a couple zeros to see that evidence.

If you have relatively low taxable income, tax-free investments are not the right thing for you.

Further if you are looking for a large down payment, that is not necassarily a good stategy either. With ocean-bottom low interest rates, financing as much of your land purchase as possible is the best way to go. Even if you had $20,000 sitting around and the bank said you could get the land w/$5,000 down, you would be wise to only put the $5k down and use the other part as reserves or a pool to make the payments.

*****
Best bet if you are saving for business investments--- stash the money in a regular money market account with your bank until you get enough to purchase their CD's to mature when you need the money.

Yes, the earnings from money markets accounts and CDs are taxable. But with the current tax benefits of paying for your tuition, your tax bill ought to be about $0 anyway.

No, you are not going to get a lot of interest there or anywhere else. It's pretty much the same as putting the cash in a cookie jar at this point.

Until you start making truck loads of money your concern ought to be "protecting" the money by not spending it = Keeping it simple. Unless of course you are holding back and are actually talking about a $500,000 income from your part-time mowing business.... hee hee.

hoyboy
04-15-2003, 12:43 AM
Your not going to get away from the tax man altogether, and the question should not be "how do I pay the least taxes" but rather "how am I going to maximize my after tax income"

For most entrepreneurs, sticking money in a 2.5 % bond just because it is not subject to federal tax just doesn't make sense.

Why not incorporate as a "C" Corp and take advantage of the low 15% tax rate on the first 50,000 net? That way 85% of your profit is still available to work for you and not stuck in some bank.
You can then make a loan to yourself personally, use that money to make a down payment, then rent the property back to the corporation as needed. That rental income is free from payroll taxes as well. You can even raise that rent in the future to keep from going into some of the higher tax brackets that inflict the typical "C" Corp.

Hope that helps....


Dan Norton, CPA
Hoy Landscaping, Inc.

MacLawnCo
04-15-2003, 01:14 AM
Dan that makes alot of sense, and i appreciate your ideas. I may have to look down that route, should my accountant suggest it also. This phrase caught my attention though:
Originally posted by hoyboy
For most entrepreneurs, sticking money in a 2.5 % bond just because it is not subject to federal tax just doesn't make sense.


So that may be the loop im looking for? I honestly dont need to use the money for at least 3 years. I just want to have a fair amount "hidden" somewhere for when i get out of school and want to really go full bore into this business. Could you ellaborate any more on this option. Thanks a bunch.

Jason

KZ Lawn Care
04-15-2003, 05:47 PM
I hope to pay $100,000 to uncle sam next year!!!!!!!!!??????????!!!!!!!

Figure this one out?

Tharrell
04-16-2003, 07:50 AM
That's a tough one. I used to be a mainframe computer operator for a large international company. We would run certain programs for accounting that itemized our tax liabilities and such. Every time we did it, it was guaranteed to be an all day thing because we had to do it over and over so they could massage the numbers. You need someone to massage the numbers.

Rob T
04-16-2003, 10:24 AM
Look into putting the money into a tax deferred IRA. Being a biz owner you can open a ?Simple IRA and invest most of your profits into it. Then when your ready to buy the property there is a way to withdraw the funds without penalty for FIRST TIME HOMEOWNERS. Assuming your purchase will be a home and a shop on the same property you may be able to do this.
Good Luck

Shuter
04-16-2003, 12:54 PM
You could buy the property today with a low downpayment as a commerical expense and make payments through the company.

lsylvain
04-16-2003, 07:02 PM
there is basicaly no way to get out of paying taxes. You can deffer taxes and pay them later through different things. Like the Simple IRA you don't pay tax on that money now but you will when you start pulling that money out when you retire.

The bonds you are talking about are non-taxable however usually the rates on such bonds are lower than you can get on the open market. And you still have to pay the taxes on the income you earn and put into those bonds anyway.

Incorporating is a good idea to lower your taxes when you are in the lower tax brackets. Becarefull with the loans to the owner stuff. If you are the primary shareholder and the IRS feels like it they can forse you to pay taxes on that money by declaring it a constructive dividend. which means you pay the 15% C-tax plus your personal tax on that same amount of money.

Buy at least 35k in equipment each year and section 179 it that will save you quite a bit.

If I'm understanding right, you want to not pay taxes on money you are going to spend on personal stuff, you just can't do it. sorry.

MacLawnCo
04-16-2003, 08:17 PM
Originally posted by lsylvain
If I'm understanding right, you want to not pay taxes on money you are going to spend on personal stuff, you just can't do it. sorry.

It is definately NOT personal stuff. I completely realize that is illegal.

I talked to my acct professor and he told me that it can not be done legally. His only advice was to max out a Roth IRA each year.

I dont want to purchase the property now since i dont have a need for it currently. The idea was to save up a nice chunk so when i graduate, i can use some of that money as a downpayment on a place to run the business from.

I wish i could convince the parent that its a good idea to purchase up to $35k worth of stuff, but i honestly dont NEED anything else.

Thank you all for your ideas and advice.

Turf Medic
04-16-2003, 08:46 PM
If I understand you correctly, you do not want to pay tax on the money your business earns not just the interest you earn on the money you earned and then saved:dizzy: You might consider setting up a corporation, it would have to be a C corporation as an S corp is taxed like a sole proprietor, another option is to set up a LLC and then have the IRS tax it like a C corporation. With either set up you would pay a lesser tax on the money you left in the corporation, you would not have to pay the soc sec tax on this money. You would then be considered an employee of your corporation, could pay your medical insurance, educational expenses, pay "office" rent, your truck expenses as part of the business expenses. All of this would be allowed without first having to pay soc sec and Medicaid taxes on this money, you would only pay this on the the wages you took out, you would also be entitled to collect un-employment during the off season. Some of my information is dated due to the fact that it has been several years since we had corp status, so you will want to run it by your lawyer or CPA.

Darryl G
04-23-2003, 01:04 AM
The key is to not make a profit, re-invest the $ in the buisness. I operate an LLC and did not pay a dime in taxes last year (other than sales tax collected).

bruces
04-23-2003, 09:46 AM
Originally posted by darryl gesner
The key is to not make a profit, re-invest the $ in the buisness. I operate an LLC and did not pay a dime in taxes last year (other than sales tax collected).

This kind of defeats the purpose of being in business and working hard.

If you are going to continually keep investing all profits back into the business, why bother?

I would rather make money and pay taxes than have nothing left at the end of the year because whatever I made had to go back in to the business.

Darryl G
04-23-2003, 06:34 PM
The long term plan IS to make money...just setting myself up for it. I would also make money if I sold the business.

My situation was kind of uniquie...I took advantage of Bush's bonus 30% depreciation for 2002 by buying lots of stuff and taking the write off, which helped to offset some one-time income from other sources.

When it comes down to it, the only way to avoid paying taxes is to not make any...either that or cheat!

strickdad
04-26-2003, 09:27 AM
Originally posted by John Allin
Sure wish I could find a way to avoid paying taxes.... laughing,,, i bet you do.. uncle sam knows you well huh john...

Green in Idaho
04-27-2003, 04:07 AM
[QUOTE]Originally posted by MacLawnCo
[B]This is an accontant's reply that ive coppied from another site:
posted by GreenInIdaho: The first question was....


Hi Mac,
Hey nice to see you are taking my posts and placing them in other forums. Usually it is courteous to ask for permission of such actions though. Ask your law professor about the new whacky Internet copyright laws - could be a good term paper for YOU.

Take it easy and good luck on your finals.

Mark