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.
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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.
Maximize medical deductions. Within a sole proprietorship or an S corporation, there is a limit on the medical expenses you can deduct. With the right provisions in a C corporation, you can deduct all medical insurance premiums and all out-of-pocket medical expenses.
Minimize Social Security and Medicare taxes. For sole proprietors, all profit—up to the taxable maximum—is subject to Social Security and Medicare taxes. In an S corporation, profits are distributed through a K-1 and are not subject to Social Security and Medicare taxes. Having your profits flow to you as K-1 income, instead of as profit from a sole proprietorship, could save you thousands each year.
Up to 50% of your estate could be lost to probate costs and taxes if you do not have an effective estate plan. Some attorneys recommend their clients create a will instead of a living trust so the estate will go through probate. Why? Because the attorney wants to collect the legal fees associated with probate and, in some states, the attorney receives a percentage of all the assets that go through probate.
The solution to this is to organize an effective estate plan. By utilizing a few legal documents, you can set up your succession plan, avoid probate and eliminate or dramatically reduce your estate taxes. The revocable living trust is the centerpiece of an effective estate plan. Setting up and funding a living trust enables you to effectively pass your assets to your heirs and is one of the most loving things you can do for your family.
Larry Oxenham, an American Society for Asset Protection senior legal advisor, works with the nation’s top asset protection experts, and has helped thousands of clients in all 50 states achieve financial peace of mind by properly structuring their assets for tax reduction, lawsuit protection and estate planning.
Editor’s note: This column is based on the author’s presentation of the same title at Face & Body® Midwest 2012, which took place at McCormick Place West in Chicago in March. It is also Part II of a two-part series covering common financial issues skin care professionals face and how to overcome them. Part I appeared in the July 2012 issue of Skin Inc. magazine.