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Skin care professionals can run into a variety of financial and legal problems in the course of owning and running a business, and overpayment of taxes and the lack of a viable estate plan are the most common. Part II of this two-part column will address tactics skin care professionals can use to address the issues of tax overpayment and estate planning.
Billions of dollars are overpaid each year in taxes as a result of people not using all the available deductions and tax laws.
To avoid this problem, structure your assets and income to reduce your taxes to the legal minimum. Proper use of legal entities can potentially save you thousands of dollars in taxes each year by enabling you to maximize deductions, create nontaxable income, spread income across multiple entities and defer income to a new tax year. For some, charitable entities—such as charitable remainder trusts, nonprofit corporations and family foundations—can also be used to reduce taxes. Following are several strategies many skin care professionals are not using.
Create nontaxable income. The IRS allows you to rent out your home for up to 14 days a year without having to declare the rent as income. This is one strategy you can use to create nontaxable income. When a business partner or client comes into town and stays at your home, you can charge your corporation rent for the room. Also, if you have a company party or training at your home, you can rent your home to your corporation for the day. The corporation deducts the rental expense, and you enjoy the rental income tax-free.
Spread income to a C corporation. If you are in a federal tax bracket higher than 15%, you could reduce your taxes by setting up a Nevada C corporation and having up to $50,000 of your income flow to this corporation, which has no state income tax and has a federal tax rate of 15% on the first $50,000 of taxable income. Your corporation can retain these earnings so you are not double taxed. This is one strategy you can use to spread income.