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Have your pockets grow while planning for taxes !
| How to Grow your Business and Personal Wealth and still Plan for Taxes. By Henry S Kim, CPA |
To grow your personal wealth is not an easy task. Nor is it a task to be taken
lightly. There are many factors to be taken into consideration. However, even
before going into the details, we must first think about what it is that makes
one a successful businessman or woman. There are many seminars,
books, tapes etc all discussing business growth and personal wealth
accumulation. But we need to understand what it is behind the success of
the successful businessman.
3 Principles for Success
Around 1900 Andrew Carnegie gave a grant to Napoleon Hill to research the
attributes of successful individuals. Carnegie was always sympathetic to the
working individual living day by day and wanted to help them by finding out
what makes success and thus helping out the average man and woman to
be successful. So for over 20 years Napoleon Hill studied various successful
individuals such as Thomas Edison, Wright Brothers, Henry Ford, JP Morgan,
Alexander Bell, etc. At the end of the research, Hill found out that all
successful individuals shared 3 basic principles:
1. Burning desire and self-motivation. All individuals had an inner
burning desire to achieve something. This desire could be genetic,
or due to education and business experience.
2. Specialization in one area; expertise. All successful individuals
had specialized in one area and focused on that area. They were
experts in their chosen field.
3. Association with the master group. Successful individuals continue
to communicate, surpass and adopt new technology skills.
It is a risky and challenging endeavor to run ones own business. We have to
look and to understand and learn the past. And from my on experience, the
one key ingredient of personal wealth and business success is marketing.
Successful Marketing
There are six strategies in marketing:
1. Unique selling approach. Your product should be unique in order to stand
out in the marketplace. For example, Fedex has a reputation for reliable and
next day delivery, Walmart had a reputation for cheap but good products and
Toyota has a reputation for long lasting reliable products.
2. Risk averse. The customer must entail no risk from the use of your
product or service. Your product must guarantee that the customer will not
run into any risks at all from the use of your product or service.
3. Continuing to educate your customers. You must constantly tell your
customers the benefit of your products.
4. Mass Sales. In economics the break even point is where the revenues
cover all expenses. After this break-even point, all revenues become net
profit. You must generate a mass amount of sales so that you can move past
the break-even point and also to provide good salaries for your employees. In
today’s environment, you cannot exploit employees by paying low salaries.
Also to maintain mass sales, you should have a multi-pillar approach. That is
you must have a line or several lines of business that complements your
primary line. Thus if one line fails or slows down, it doesn’t severely impact
your mass sales.
5. Mass Marketing. Your product or service must be communicated to the
target market thru many different channels such as radio, TV, print, joint
advertising etc. You must constantly expose your product.
6. Goodwill & trust. There must be goodwill and trust between your
customers and your employees. This trust will bring luck and fortune to your
company.
Once you have started your business, I can not emphasize the value of hard
work. Mother Teresa once said that “ Happiness comes from hope and hard
work”. If you have hard work and a job, you are blessed. In Matthew 25, verse
14-30, God expects that we will use his gifts wisely. One master gave 3
servants gifts of money. 2 of the 3 servants used this gift from their master to
do various business and after a while they doubled their money. The 3rd
servant dug a hole and kept his gift in the ground. This money never grew.
God expects his gifts to be used wisely. To run a small business is Gods
will. Once you have established your business and have gained a steady flow
of income, you must then wisely plan how to reduce your taxes and
save/invest to accumulate wealth. It is not how much one makes but how
much one saves. Methods to reduce taxes include setting up retirement
plans such as Simple IRA, 401KS, IRA etc. Thru these vehicles you must
invest wisely. With a larger salary, you can then purchase a bigger
residence. The mortgage on the house will be tax deductible. You should
also invest in some life insurance product or annuity product.
Formula for Success!
So how do you know if you are currently successful? Calculate the following:
Age x Net Income divided by 10 = your net worth.
If your net worth is below this figure you are not currently successful. If your
net worth is equal to this figure, you are successful. If your net worth is above
this figure, you are above successful.
For Example:
Age 50, Net Income: $200,000.00
50 x 200,000 = 10,000,000/10 = 1,000,000
Thus, in this example, any net worth below 1,000,000 would be considered
below average while any net worth above 1,000,000 would be considered
above average.
Corporation Income Taxes
There are 3 basic choices when choosing the legal structure for your
business: sole proprietorship, partnership, and corporation. I strongly
suggest that you choose corporation as the legal structure for your business.
Corporations not only have more deductions, but also offer more protection to
the owners. Any financial mishaps, bankruptcy, general liabilities would first
have to bypass the corporation entity in order to affect the individual owner.
The corporation is like a form of insurance not unlike your fire insurance on
your home. The fire may never happen however it offers peace of mind and
protection. Thus the following describes corporation taxes in general.
Corporations must file either Form 1120, 1120-S, or 1120-A (short form) by
the 15th of the 3rd month after the end of tax year of the corporation.
Automatic extension up to 6 months available. There is a failure to file penalty
in the amount of 5% per month up to 25%, and a failure to pay penalty in the
amount of ½% per month up to 25%. Interest will continue to accrue on the
balance and penalties due.
Dividends paid by corporations are subject to the special tax rate of:
Taxpayers above the 15% income tax bracket 15%
Taxpayers below the 15% income tax bracket 5%
Since dividends are taxed at a rate of 15%, some closely held C corporation
owners might be tempted to take dividends taxed at maximum 15% rather
than salaries taxed at a maximum 35%. In addition, dividends are not subject
to payroll taxes whereas salaries are. However, dividends are not deductible
by the corporation whereas salaries and taxes are deductible items. Thus it
is not a simple case of saying that since dividends are taxed at 15% and
salaries at 35% to just take out dividends instead of salaries. The answer to
whether to take dividends or salary must be computed on a case by case
basis.
Dividends received by corporations are entitled to a deduction of 70% if the
corporation is owned less than 20 percent. If the corporation owned is
between 20-80 percent then the dividends received deductions is 80%. If the
corporation owned is over 80 percent then the dividends received by the
corporation is not subject to any tax.
Corporations can only deduct compensation that is reasonable in amount
and not simply based on the earnings of the corporation. Any excess
compensation might be reclassified as dividends and thus not be deductible
as an expense of the corporation.
Capital gains tax rate for corporations are the same as the ordinary corporate
tax rates unlike reduced rates for individuals. Capital losses for corporations
are allowed to be carried back 3 years and forward 5 years.
Like kind exchanges may be used by corporations. The property exchanged
must be identified within 45 days. The property must be received within 180
days. Only like kind property can qualify for the 1031 exchange. Like kind
property includes: real estate for real estate; except USA real estate for foreign
real estate does not qualify, similar personal property; automobiles etc.
Goodwill or going concern value of a business is never like kind property.
Start up and organizational costs are costs that are incurred before a
business begins and must be capitalized. Start up costs include salary and
training expenses prior to start of business. The costs associated with
opening an additional location for the same line of business is not
considered as start up expenses, rather as an expansion of an existing
business. Thus the costs are therefore expensed immediately as any other
expenses.
Commuting expenses non-deductible. Meals and lodging away from home is
deductible. Meals and entertainment expenses are 50% deductible. Lodging
expenses at an entertainment facility (resorts, cruise ships, planes,
swimming pools, etc.) are not deductible. Standard mileage rate for 2004 is
37 ½ cents per mile. Medical rate of 14 cents per mile.
Fringe benefits are costs and expenses which are deductible by employers
and not taxable to employees.
The premiums of group term life insurance is deductible for coverage up to
$50,000.00.
Medical and accident insurance plans are deductible.
Child care assistance provided by employers are deductible and not taxed to
employees only up to $5,000.00 and only if both spouses have earned
income and child is less than 13 years old.
Educational assistance provided by employers are deductible and not taxed
to employees up to $5,250.00 for use for tuition, books, and related fees.
Lodging and transportation are not considered as educational assistance.
This benefit is not available for any owner/employee that owns more than 5%
of the company.
Contractor vs employee status. Depends on amount of control employer has
over activities of employee, does employee set own schedule, does
employee use own tools etc. Also safe harbor status, in which industry
practices are common.
Depreciation.
Section 179 immediate depreciation up to $100,000.00. This immediate
deduction is phased out if all property purchased during the year exceeds
$400,000.00. It is completely phased out if all property purchased during the
year exceeds $500,000.00. Section 179 deduction does not cover the costs of
any air conditioning or heating units or systems.
Types of depreciable property:
5 year property: automobiles, computers
7 year property: generally all personal property
27.5 year property: residential rental properties
39 year property: commercial properties
Section 197 Intangibles: goodwill 15 years amortization
Automobile depreciation is limited to: 1st year $3,060.00, 2nd year $4,900.00,
3rd year $2,950.00 and from 4th year onwards $1,775.00.
Automobiles over 6,000 lbs are not subject to the automobile limits. Thus
luxury cars weighing over 6,000 lbs will be able to take the Section 179
immediate deduction up to $100,000.00.
Only proportion of automobile actually used in business is eligible to be
depreciated.
Corporation Income Tax Rates:
0-15,000 15%
50-75,000 25%
75-100,000 34%
100-335,000 39%
335-10mil 34%
10-15mil 35%
15-18mil 38%
over 18mil 35%
Personal service corporations are subject to a flat 35% tax rate.
Choice of entity
C corporations subject to double taxation
Advantage of S corporations over C corporations:
All income or losses are passed thru to shareholders
Appreciated assets in S corporations are taxed only once at shareholder level
2004 Capital gains are passed thru and taxed at individual rates (15% for
long term gains for individual taxpayers above the 15% tax bracket, and 5% for
individual taxpayers below the 15% tax bracket), C Corporations capital gains
are taxed at the normal corporation income tax rates.
No self-employment/FICA taxes on flow thru income.
Advantage of C corporations over S corporations:
Owners can have fringe benefits like health insurance without the benefit
being taxable income to the owner. Any owner owing 2% or more of an S
corporation will have fringe benefits taxed as compensation to the owner.
Partnership in general are being used less and less. More preferential to
partnerships are Limited Liability Companies and Limited Liability
Partnerships. Whereas partnerships leave the partners vulnerable to
liabilities, LLC, and LLP offer more protection, akin to that provided by
corporations, to the LLC/LLP members. Both entities are flow thru entities
similar to S corporations with the exception that flow thru income will be
subject to SE tax if actively earned by the members. Both types of entities are
generally taxed as partnership and file From 1065-Partnership Tax Return.
Retirement plans.
Consist of 2 major types: 1. Defined benefits plan 2. Defined contributions
plan
Defined benefits plans are plans where the employees future benefits, based
on his earnings, are determined and the employer has to fund the plan based
on future projections. An example of a defined benefits plan is an annuity
plan purchased by the employer for the retirement benefit of the employee.
Defined contributions plans are plans where the employer contributions are
currently determined and the employees future retirement benefits amounts
are based on the earnings of the investments in the plan. Examples are profit
sharing plans, Simple IRA plans.
Most modern retirement plans are of the defined contributions type. In
general all retirement plans must not discriminate in favor of highly
compensated individuals.
Simple Plans.
Only for employers with less than 100 employees receiving at least $5,000.00
per year earnings. Employer can not maintain any other retirement plan if a
Simple plan is in place.
Simple IRA
Employees have the right to make up to $9,000.00 deferal of their salaries for
the year 2004. All eligible employees must be given the right to participate in
the plan. Eligible employees are all those employees who received at least
$5,000.00 in earnings from the employer during any 2 preceding calendar
years and can be expected to receive at least $5,000.00 in earnings during
the calendar year. Employers must match employees contributions in an
amount up to 3% of the employees compensation. 401K Plans-employee
contribution limited to $13,000 for 2004.
lightly. There are many factors to be taken into consideration. However, even
before going into the details, we must first think about what it is that makes
one a successful businessman or woman. There are many seminars,
books, tapes etc all discussing business growth and personal wealth
accumulation. But we need to understand what it is behind the success of
the successful businessman.
3 Principles for Success
Around 1900 Andrew Carnegie gave a grant to Napoleon Hill to research the
attributes of successful individuals. Carnegie was always sympathetic to the
working individual living day by day and wanted to help them by finding out
what makes success and thus helping out the average man and woman to
be successful. So for over 20 years Napoleon Hill studied various successful
individuals such as Thomas Edison, Wright Brothers, Henry Ford, JP Morgan,
Alexander Bell, etc. At the end of the research, Hill found out that all
successful individuals shared 3 basic principles:
1. Burning desire and self-motivation. All individuals had an inner
burning desire to achieve something. This desire could be genetic,
or due to education and business experience.
2. Specialization in one area; expertise. All successful individuals
had specialized in one area and focused on that area. They were
experts in their chosen field.
3. Association with the master group. Successful individuals continue
to communicate, surpass and adopt new technology skills.
It is a risky and challenging endeavor to run ones own business. We have to
look and to understand and learn the past. And from my on experience, the
one key ingredient of personal wealth and business success is marketing.
Successful Marketing
There are six strategies in marketing:
1. Unique selling approach. Your product should be unique in order to stand
out in the marketplace. For example, Fedex has a reputation for reliable and
next day delivery, Walmart had a reputation for cheap but good products and
Toyota has a reputation for long lasting reliable products.
2. Risk averse. The customer must entail no risk from the use of your
product or service. Your product must guarantee that the customer will not
run into any risks at all from the use of your product or service.
3. Continuing to educate your customers. You must constantly tell your
customers the benefit of your products.
4. Mass Sales. In economics the break even point is where the revenues
cover all expenses. After this break-even point, all revenues become net
profit. You must generate a mass amount of sales so that you can move past
the break-even point and also to provide good salaries for your employees. In
today’s environment, you cannot exploit employees by paying low salaries.
Also to maintain mass sales, you should have a multi-pillar approach. That is
you must have a line or several lines of business that complements your
primary line. Thus if one line fails or slows down, it doesn’t severely impact
your mass sales.
5. Mass Marketing. Your product or service must be communicated to the
target market thru many different channels such as radio, TV, print, joint
advertising etc. You must constantly expose your product.
6. Goodwill & trust. There must be goodwill and trust between your
customers and your employees. This trust will bring luck and fortune to your
company.
Once you have started your business, I can not emphasize the value of hard
work. Mother Teresa once said that “ Happiness comes from hope and hard
work”. If you have hard work and a job, you are blessed. In Matthew 25, verse
14-30, God expects that we will use his gifts wisely. One master gave 3
servants gifts of money. 2 of the 3 servants used this gift from their master to
do various business and after a while they doubled their money. The 3rd
servant dug a hole and kept his gift in the ground. This money never grew.
God expects his gifts to be used wisely. To run a small business is Gods
will. Once you have established your business and have gained a steady flow
of income, you must then wisely plan how to reduce your taxes and
save/invest to accumulate wealth. It is not how much one makes but how
much one saves. Methods to reduce taxes include setting up retirement
plans such as Simple IRA, 401KS, IRA etc. Thru these vehicles you must
invest wisely. With a larger salary, you can then purchase a bigger
residence. The mortgage on the house will be tax deductible. You should
also invest in some life insurance product or annuity product.
Formula for Success!
So how do you know if you are currently successful? Calculate the following:
Age x Net Income divided by 10 = your net worth.
If your net worth is below this figure you are not currently successful. If your
net worth is equal to this figure, you are successful. If your net worth is above
this figure, you are above successful.
For Example:
Age 50, Net Income: $200,000.00
50 x 200,000 = 10,000,000/10 = 1,000,000
Thus, in this example, any net worth below 1,000,000 would be considered
below average while any net worth above 1,000,000 would be considered
above average.
Corporation Income Taxes
There are 3 basic choices when choosing the legal structure for your
business: sole proprietorship, partnership, and corporation. I strongly
suggest that you choose corporation as the legal structure for your business.
Corporations not only have more deductions, but also offer more protection to
the owners. Any financial mishaps, bankruptcy, general liabilities would first
have to bypass the corporation entity in order to affect the individual owner.
The corporation is like a form of insurance not unlike your fire insurance on
your home. The fire may never happen however it offers peace of mind and
protection. Thus the following describes corporation taxes in general.
Corporations must file either Form 1120, 1120-S, or 1120-A (short form) by
the 15th of the 3rd month after the end of tax year of the corporation.
Automatic extension up to 6 months available. There is a failure to file penalty
in the amount of 5% per month up to 25%, and a failure to pay penalty in the
amount of ½% per month up to 25%. Interest will continue to accrue on the
balance and penalties due.
Dividends paid by corporations are subject to the special tax rate of:
Taxpayers above the 15% income tax bracket 15%
Taxpayers below the 15% income tax bracket 5%
Since dividends are taxed at a rate of 15%, some closely held C corporation
owners might be tempted to take dividends taxed at maximum 15% rather
than salaries taxed at a maximum 35%. In addition, dividends are not subject
to payroll taxes whereas salaries are. However, dividends are not deductible
by the corporation whereas salaries and taxes are deductible items. Thus it
is not a simple case of saying that since dividends are taxed at 15% and
salaries at 35% to just take out dividends instead of salaries. The answer to
whether to take dividends or salary must be computed on a case by case
basis.
Dividends received by corporations are entitled to a deduction of 70% if the
corporation is owned less than 20 percent. If the corporation owned is
between 20-80 percent then the dividends received deductions is 80%. If the
corporation owned is over 80 percent then the dividends received by the
corporation is not subject to any tax.
Corporations can only deduct compensation that is reasonable in amount
and not simply based on the earnings of the corporation. Any excess
compensation might be reclassified as dividends and thus not be deductible
as an expense of the corporation.
Capital gains tax rate for corporations are the same as the ordinary corporate
tax rates unlike reduced rates for individuals. Capital losses for corporations
are allowed to be carried back 3 years and forward 5 years.
Like kind exchanges may be used by corporations. The property exchanged
must be identified within 45 days. The property must be received within 180
days. Only like kind property can qualify for the 1031 exchange. Like kind
property includes: real estate for real estate; except USA real estate for foreign
real estate does not qualify, similar personal property; automobiles etc.
Goodwill or going concern value of a business is never like kind property.
Start up and organizational costs are costs that are incurred before a
business begins and must be capitalized. Start up costs include salary and
training expenses prior to start of business. The costs associated with
opening an additional location for the same line of business is not
considered as start up expenses, rather as an expansion of an existing
business. Thus the costs are therefore expensed immediately as any other
expenses.
Commuting expenses non-deductible. Meals and lodging away from home is
deductible. Meals and entertainment expenses are 50% deductible. Lodging
expenses at an entertainment facility (resorts, cruise ships, planes,
swimming pools, etc.) are not deductible. Standard mileage rate for 2004 is
37 ½ cents per mile. Medical rate of 14 cents per mile.
Fringe benefits are costs and expenses which are deductible by employers
and not taxable to employees.
The premiums of group term life insurance is deductible for coverage up to
$50,000.00.
Medical and accident insurance plans are deductible.
Child care assistance provided by employers are deductible and not taxed to
employees only up to $5,000.00 and only if both spouses have earned
income and child is less than 13 years old.
Educational assistance provided by employers are deductible and not taxed
to employees up to $5,250.00 for use for tuition, books, and related fees.
Lodging and transportation are not considered as educational assistance.
This benefit is not available for any owner/employee that owns more than 5%
of the company.
Contractor vs employee status. Depends on amount of control employer has
over activities of employee, does employee set own schedule, does
employee use own tools etc. Also safe harbor status, in which industry
practices are common.
Depreciation.
Section 179 immediate depreciation up to $100,000.00. This immediate
deduction is phased out if all property purchased during the year exceeds
$400,000.00. It is completely phased out if all property purchased during the
year exceeds $500,000.00. Section 179 deduction does not cover the costs of
any air conditioning or heating units or systems.
Types of depreciable property:
5 year property: automobiles, computers
7 year property: generally all personal property
27.5 year property: residential rental properties
39 year property: commercial properties
Section 197 Intangibles: goodwill 15 years amortization
Automobile depreciation is limited to: 1st year $3,060.00, 2nd year $4,900.00,
3rd year $2,950.00 and from 4th year onwards $1,775.00.
Automobiles over 6,000 lbs are not subject to the automobile limits. Thus
luxury cars weighing over 6,000 lbs will be able to take the Section 179
immediate deduction up to $100,000.00.
Only proportion of automobile actually used in business is eligible to be
depreciated.
Corporation Income Tax Rates:
0-15,000 15%
50-75,000 25%
75-100,000 34%
100-335,000 39%
335-10mil 34%
10-15mil 35%
15-18mil 38%
over 18mil 35%
Personal service corporations are subject to a flat 35% tax rate.
Choice of entity
C corporations subject to double taxation
Advantage of S corporations over C corporations:
All income or losses are passed thru to shareholders
Appreciated assets in S corporations are taxed only once at shareholder level
2004 Capital gains are passed thru and taxed at individual rates (15% for
long term gains for individual taxpayers above the 15% tax bracket, and 5% for
individual taxpayers below the 15% tax bracket), C Corporations capital gains
are taxed at the normal corporation income tax rates.
No self-employment/FICA taxes on flow thru income.
Advantage of C corporations over S corporations:
Owners can have fringe benefits like health insurance without the benefit
being taxable income to the owner. Any owner owing 2% or more of an S
corporation will have fringe benefits taxed as compensation to the owner.
Partnership in general are being used less and less. More preferential to
partnerships are Limited Liability Companies and Limited Liability
Partnerships. Whereas partnerships leave the partners vulnerable to
liabilities, LLC, and LLP offer more protection, akin to that provided by
corporations, to the LLC/LLP members. Both entities are flow thru entities
similar to S corporations with the exception that flow thru income will be
subject to SE tax if actively earned by the members. Both types of entities are
generally taxed as partnership and file From 1065-Partnership Tax Return.
Retirement plans.
Consist of 2 major types: 1. Defined benefits plan 2. Defined contributions
plan
Defined benefits plans are plans where the employees future benefits, based
on his earnings, are determined and the employer has to fund the plan based
on future projections. An example of a defined benefits plan is an annuity
plan purchased by the employer for the retirement benefit of the employee.
Defined contributions plans are plans where the employer contributions are
currently determined and the employees future retirement benefits amounts
are based on the earnings of the investments in the plan. Examples are profit
sharing plans, Simple IRA plans.
Most modern retirement plans are of the defined contributions type. In
general all retirement plans must not discriminate in favor of highly
compensated individuals.
Simple Plans.
Only for employers with less than 100 employees receiving at least $5,000.00
per year earnings. Employer can not maintain any other retirement plan if a
Simple plan is in place.
Simple IRA
Employees have the right to make up to $9,000.00 deferal of their salaries for
the year 2004. All eligible employees must be given the right to participate in
the plan. Eligible employees are all those employees who received at least
$5,000.00 in earnings from the employer during any 2 preceding calendar
years and can be expected to receive at least $5,000.00 in earnings during
the calendar year. Employers must match employees contributions in an
amount up to 3% of the employees compensation. 401K Plans-employee
contribution limited to $13,000 for 2004.
| Contact us: 301-495-3086 410-685-3040 email: stkimcompany@gmail.com |