If you’re fortunate enough to still have a pension, chances are you’re wondering how to rebuild it. Will real estate come back? Is the stock market your best bet today? How about self-directed investing? What’s involved in charting your own pension destiny?

There are all kinds of ways to self-direct a pension, and the levels of self-directedness vary. For example, if you’re contributing to a company-sponsored 401(k) plan, your self-direction is likely limited to whatever stocks your plan administrator and custodian have on their list of approved investments.

If you go it alone, and contribute money to an IRA or a Roth IRA, you have more choice in how you invest the funds. There are plenty of custodians out there who will allow you to have a truly self-directed fund, where you call the shots.

But the contribution limits for an IRA are low, and you can only have a Roth IRA if you make under a certain amount. That’s where small business owners, who have no full-time employees really have an advantage. The Solo 401(k) plans allow business owners to sock away up to $49,000 per year. If you and your spouse own the business together, you can double that amount, and each contribute $49,000. Of course, this assumes you’ve got the income to cover it – you can’t simply pay yourself $49,000 and have the whole amount contributed to your pension plan. But every dollar contributed to a Solo 401(k) plan is deducted from your pre-tax income, making for a hefty tax deduction.

There’s also a Solo Roth 401(k) plan you can set up. This is a little different – it’s funded with after-tax dollars, that must come from W2 or 1099 earnings, and you max out at $16,500. But that money also grows tax-free and comes out tax-free, plus there’s no income limitation. Doesn’t matter how much money you make – if your business qualifies, you can have a Solo Roth 401(k).

You can fully self-direct Solo 401(k) plans, too, depending on your custodian. But here’s where things get tricky. The more freedom you have to invest, the less you can rely on your custodian to keep things square. And that can lead to some awful results, particularly if you get caught up in a prohibited transaction or do something with a disqualified person.

Pension investments are governed by strict IRS rules. Make a mistake and you risk having your entire pension plan disqualified, and taxed at your current ordinary income tax rate. It’s easy to make mistakes. For example, you can invest personal funds alongside pension funds, but only if the investment happens at the same time. If you put a down payment on a property using personal funds, you’ve just blocked your pension from joining in. Or, people want to buy a home for a relative. Some relatives are okay – you can buy a house for a sister, brother, aunt, uncle, cousin, etc. – but you can’t by one for a lineal relative (parent, grandparent, child, grandchild, etc.) Or people want to invest pension funds into a business they are currently operating. There’s a way to do it, but you’ve got to be very careful how – the more you participate in the business, the greater the chance that you’ll accidentally create a prohibited transaction.

All of these examples can be avoided if you use a good, reputable custodian to administer your pension. A custodian can be used as a sounding board, to make sure an investment is done properly. They can also take care of the tax filings that need to be done each year, plus make sure that your plan itself is approved by the IRS. But of course there’s a price for these services … and that leads to another issue we’re seeing. There’s been an increase in self-settled pension plans, where pension owners are also acting as personal custodians and administrators of the plan. You do save fees but at the expense of the safety net a professional custodian provides. Now all decisions are truly on you personally, along with all paperwork, all compliance filings, and so on.

That’s not to say you should never use a self-settled plan. But do proceed with caution. Start slow and work with a professional custodian while you learn the ins and outs of self-directed investing. It won’t slow down your ability to invest in opportunities as they come up. Pension custodians move pretty fast when it comes to getting a check out for an investment. And it will allow you to make sure you’re getting the best advice possible before you make any investment decisions.

Related posts:

1. Once in a Lifetime 2009 & 2010 Tax Breaks
2. S Corp Tax Bill Passes House
3. Passive Income and the IRS

“Come to Tax-Free Nevada and incorporate your business! Never pay income tax!” Nice try, but it’s a fantasy so factually incorrect it’s hard to know where to begin.

It’s a permanent point of contention for me, being in the formation and structuring world, to see Nevada STILL being touted as a tax-free state. Here are the facts:

FICTION: Forming a Nevada entity means you don’t owe taxes.

FACT: Every business formed in the United States and deriving revenue from United States sources is liable for federal income tax. A Nevada company won’t save you from that. What you may save is state income tax, but with new nexus laws coming into place on what feels like a daily basis, don’t count on that either. If you form your company in Nevada, but do all of the income producing work (or sales) from your location in Washington, California, Texas, etc., you have a legal obligation to register your business into that state. Once you complete the registration, your business is subject to state income taxes, just as if you’d formed it there in the first place.

Plus, as the owner of the company, nexus is often traced back to you and your physical location. If you pull a paycheck from your company and you live in Michigan, you have created Michigan nexus for company taxes. That’s the same for all states. Even if you don’t pull a paycheck and are a passive owner you can still create nexus. That’s certainly how California and some other states feel.

As I see it, you’re usually better off forming in your home jurisdiction unless there’s a strong legal and financial argument for a two-state registration. Sometimes it works, but many other times it’s a way for you to pay more without getting more.

FICTION: You can create a Nevada business presence through a virtual office, with mail forwarding, a local Nevada telephone number, and a Nevada bank account. Once the business presence is established, you don’t owe taxes.

FACT: Again, there’s no such thing as tax-free, so the first part of the above statement is busted. Second, these steps still don’t create true nexus. To create nexus in Nevada, you’d have to come here and do business within the state on a regular basis. If your bank account happens to be in Nevada, but all of your deposits and checks are processed through a branch in Nebraska, all of your business expenses are incurred in the Omaha area, your mail is forwarded to Nebraska, unopened and unhandled, and all of your phone messages are returned from a Nebraska-area phone, where are you really doing business?

It would be great if simply setting up shop in Nevada allowed you to escape Nebraska taxes – but if that really were true, why would anyone form a company in any other state?

DOES NEVADA EVER WORK? Yes. There are times when a Nevada company can work for you. But that answer is going to be different for everyone. Before you sign the check or send out your credit card information, make sure you work through your individual situation. Make an informed decision using facts, rather than fiction, and you’ll already be ahead of the game.

Related posts:

1. Got a Nevada Business? Get Ready to Pay a Little More
2. Fundamentals of Great Minutes
3. 4 Things You Must Avoid If You’re Filing an S Corporation Return

Some people want you to believe that your business can pay your mortgage and all your living expenses. If you’ve heard that claim, be afraid! It’s not true and it’s going to cost you a lot of money.

Both Diane and I have seen this idea come through on numerous occasions throughout the years. Create a C Corporation, put your home into the C Corporation, and have the C Corporation pay the mortgage and all your bills and lifestyle expenses. Why? Because, according to the folks pushing this scheme, it’s reasonable that your business provide you with suitable living arrangements so you can represent the company in its best light. Maybe you need to meet with clients, and use a custom-built home office for that purpose.

The truth is, your business can pay your mortgage directly, but you’re going to pay dearly for that privilege.

• If your business owns the property, then you lose all your deductions. You can’t take a homeowner’s interest deduction, or any of the other deductions you take now.
• You lose the ability to homestead your property. Homesteads must be in your personal name.
• You lose the ability to claim the gains exemption of up to $500,000 (for living in your home for 5 consecutive years or more).
• The property is now being held as an appreciating asset in a C Corporation. That means every dollar of profit made by the sale of the house will be taxed, and as corporations don’t have capital gain tax rates, it’ll be ordinary income.
• You may have put your house at risk. You can’t always protect your shares in a C Corporation from a personal claim against you.

But wait, there’s more!

If your business owns your home, not only do you lose all of the deductions and tax savings, you even get to pay more on top of that. You see, once the business is paying that mortgage, it becomes a taxable fringe benefit … to you personally. Now that $1,500 or whatever per-month mortgage amount is being added to your W2 at the end of the year and is taxed at your personal rate.

I’ve seen that argument applied to hair, clothing, jewelry and cosmetics as well. People need to be well turned out and presentable to represent the company. Again, the same logic applies – unless you’ve got some very unique circumstances, all of that stuff is going to be treated as a taxable fringe benefit to you.

On the other hand, if you want asset protection for your home there are some very good ways to get it done.

Consider using a disregarded LLC (an LLC owned by 1 person or a married couple filing a joint return). You’ll get asset protection, even from most personal creditors, and no need to file a tax return. Plus you keep all your deductions and the right to take the gain exclusion.

Or, consider filing a homestead exemption on your property, if you live in a state that makes homesteading worth your while. Some states allow you to protect your whole home, no matter how much it cost or is worth.

The idea of a cost-free lifestyle is a mistaken belief we want to believe in – after all, it sounds great. Sadly, the truth is anything but. Even unwinding this kind of transaction can cost you, in time, recording fees and/or transfer taxes. If you’ve heard about an idea or strategy that sounds great, run it past your CPA or tax preparer first. And if you don’t have a CPA or tax preparer, why not contact Richard@USTaxAid.com and join one of our tax preparation programs for business owners and investors? With our programs, you pay a low monthly amount to get your returns prepared … plus you can ask all the questions you like, without getting an extra bill.

Related posts:

1. How Should You Hold Title On Your House?
2. S Corp Tax Bill Passes House
3. What’s in Your Business Records Book?

If you want to sleep at night, get your Operating Agreement prepared properly. If you don’t care, go cheap, or don’t bother with one at all. Just remember that when you’re writing all the checks.

I get lots of clients asking me to take a look at their Operating Agreements. Some are prepared well and get the job done. Others are prepared poorly, and are missing key information. And others still are prepared so wretchedly that unsuspecting business owners could set themselves up for unexpected liability or costs.

I saw this recently with a Series LLC. This is a hot area right now. People are cottoning onto the idea that a Series LLC can be the last entity you ever need. Investors and entrepreneurs love the structure, for its ability to let you create fully formed subsidiary LLCs in minutes, each with full legal protections from the others, with the ability to be taxed separately, and with the ability to have separate ownership and management.

But to make sure the whole structure hangs together properly, you’ve got to have an agreement that is detailed enough to cover your bases. It’s got to have the framework for creating, operating and dissolving separate subsidiaries. It’s got to be clear on the powers granted exclusively to the Series Cells to deal with their own business, and that they clearly aren’t part of the main LLC unless specifically stated. It’s got to deal with tax treatment, not just for the main LLC, but for the Series Cells. It’s got to deal with the powers of the main LLC Manager versus the Series Cell Managers. It’s got to deal with ownership, rights of members and subsidiary members, and so on. And, don’t forget, each Series Cell needs its own Operating documents as well.

I recently reviewed a Series LLC Operating Agreement that was 7 pages long and missing just about everything I’ve mentioned above. Heck, it didn’t even allow the owner to bring in partners! To me, it looked like a short agreement, specifically designed for a 1-owner LLC that had just been amended to add in a few clauses allowing it to be a Series LLC. It wasn’t even a good short agreement for a single owner LLC, let alone a Series LLC. A typical agreement for a Series LLC starts at 25+ pages and I’ve seen them go to 50 pages or more. Is there some extra legalese in there? Sure! Is it necessary? I think so, yes.

Because this is a new area of law (new is relative – Series LLCs have been around for about 14 years now) there is confusion and uncertainty. States have rushed to add Series LLC laws to their books without thinking through some of the underlying issues. And, any time that happens, lawsuit potential over the contract increases.

With an incomplete Operating Agreement, you’re at the mercy of state law. If your Operating Agreement doesn’t cover the situation or issue at hand, and state law does, you’re stuck with whatever state law says - even if it isn’t what you want. Same with a completely missing Operating Agreement. But with an incorrect Operating Agreement, you’re risking compromising your whole structure. You could find your structure collapsed into a single structure, and liability in one Series Cell tainting the others. You could have tax issues, as different businesses get mushed together. It could cost thousands in lost time, extra taxes, and legal fees to get sorted out … assuming you can sort it out at all.

An attorney friend of mine once told me that her job was to litigate all the mistakes that contract-drafting attorneys made. As far as she was concerned, the more poorly written a contract or an agreement the better for her and her client. She loved to fine-tooth comb documents looking for things that didn’t match up, contradictions … all of the things that can happen when people don’t understand what they are drafting or don’t take the time necessary to get it right. I always keep her in mind when I’m drafting documents!

Want to learn more about how to protect yourself and create an Operating Agreement that’s good for more than just lining a bird cage? Join Diane and I on July 24th, for the teleseminar, Protecting Your LLC. You can sign up here — best of all, it’s absolutely FREE! We’ll be talking about both regular single-entity LLC Operating Agreements, plus we’ll touch on the Series LLC and some of the things you need to think about.

Related posts:

1. 3 Ways an Operating Agreement can Impact Your Business
2. S Corp Salary Mistake Costs Thousands of Dollars
3. How Much Do the New Tax Changes Really Cost?

A Sole Proprietorship will cost you more in taxes than any other business structure because there is a 15.3% self-employment tax due on the net income from the business. I see a lot of fairly new business owners get caught in that trap when I do a FREE! CPA review of their past tax returns. (If you’d like to get a free review of your tax return, just drop an email to Richard@USTaxAid.com)

The trap is that the business owner ends up paying more in self-employment tax (double the regular payroll tax amount) then he does for his income tax.

The solution? Incorporate. And that’s where you could fall into another trap if you’re not careful. If you form a limited liability company (LLC) with just one owner, called a member, you have a single member LLC (SM-LLC).

If you don’t take the extra step to then elect your tax treatment, you’ll get the default tax treatment of Sole Proprietorship. And that means you’re right back at square one – paying the highest amount of tax possible.

It’s easy to fix this mistake though. Not so easy to fix the independent contractor vs employee question. If you have an independent contractor working for you, make sure you’ve got the documentation you need in case the IRS asks.

This week we’re featuring “Winning the Independent Contractor Argument” home study course. This come complete with a template you can use for the necessary Independent Contractor Agreement. You MUST have an agreement if the IRS asks. Otherwise, you’ll be facing thousands of dollars in excess tax, penalty and interest.

Related posts:

1. Using a Single Member LLC to Protect Your Home
2. S Corp Payroll Trap
3. The IRS Wants To Turn Your Independent Contractor Into An Employee

We’ve been following a new S Corp tax through the Senate. The bill ended up passing quickly through the House and then fragmenting into three separate bills in the Senate, where none of them could get the requisite votes.

So, for now anyway, there is no new S Corporation tax.

I think it’s definitely showed Congress’s collective hand, though. They intend to find a way to tax income from an S Corporation, just as if it was a Sole Proprietorship.

In the past, S Corporations have been able to create two different types of income: salary and distribution. The distributions are not subject to payroll tax. That’s what the Bill hoped to change. They wanted to make ALL income subject to payroll tax.

The media got some of the reporting wrong, though. The bill would mean a tax of either 2.9% or 15.3%. Ironically, the lower income small biz owners would get hit the hardest by the tax (15.3%). If the biz owner had income over the Social Security limit, he would only pay 2.9%.

And if there were over 3 shareholders in the S Corporation, the tax was not applicable – specifically targeting smaller businesses.

At this point, S Corporations are safe. But, I’m not sure how much longer that’s going to be true. Keep track of tax law changes. Keep your business structures flexible. Don’t build appreciating assets inside an S Corporation (it’ll be a taxable event if you decide to distribute the assets to change the structures).

On July 13, 2010, we’ll go through the tax law changes to date this year as part of our regularly twice-monthly coaching program. For just $67/month, you can join us for this course and the 2nd one in July. Learn more about coaching HERE.

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1. S Corp Tax Bill Passes House
2. S Corp Salary Mistake Costs Thousands of Dollars
3. Is Your S Corp a Big Fat IRS Red Flag?

Yesterday we talked about the new bad news about Social Security funding. There’s one thing you can count of these days – more taxes.

In this case, it means more aggressive collection of Social Security and Medicare taxes. One of the things that the IRS is going to be targeting will be Independent Contractor status.

If you hire an employee, you have to pay payroll taxes. Your employee also has payroll taxes withheld from his check. That means the government is collecting Social Security and Medicare tax. It also means that the Social Security and Medicare tax is calculated based on the gross income.

As an employee (and an employer), it’s Earn * Tax * Spend.

On the other hand, an Independent Contractor is a business owner. She is responsible for calculating and paying her own taxes. The Social Security and Medicare tax is calculated on the NET income of her business, not the GROSS amount of her paycheck.

As an independent contractor, it’s Earn * Spend * Tax.

And as a business owner who contracts with an independent contractor, you’re not responsible for any of the Social Security and Medicare tax.

It’s no wonder that most business owners want to have independent contractors instead of employees.

And it’s no wonder that the IRS wants your independent contractors to actually be employees.

In order to prove that you have an Independent Contractor status for someone working for you, there are a couple of different ways that the IRS might look at it.

• The three common law rules:
  Behavioral: Does the company control or have the right to control what the worker does?

  Financial: Are the business aspects of the worker’s job controlled by the payer?

  Type of Relationship: Are there written contracts or employee type benefits?

• The infamous 20 questions:

There are 20 questions that help determine whether you have an independent contractor relationship or an employee relationship with the people that work for you. The questions have to do with which whether they are paid on a regular basis, by the hour, regardless of results and whether the worker is responsible for his own training and equipment. All of these things indicate whether the worker is more like an employee or an independent contractor.

And above all else, make sure you have an Independent Contractor Agreement for each service provider! It’s not enough to just have an agreement, but without one you’re going to have a very hard time proving the relationship.

We’re featuring the Independent Contractor Agreement package this week. You’ll find the questions an IRS agent is likely to ask you if you are selected for audit and you’re going to create an effective strategy to win the argument. Plus, you’ll get the template you need to create a good agreement for your Independent Contractors.

It’s such a small thing – an agreement – but without one, you could end up paying thousands and thousands of dollars in tax.

Related posts:

1. Independent Contractor or Employee?
2. How to Pass the Independent Contractor Test
3. 3 Reasons an Independent Contractor May Be the Answer

You’ve probably been paying in Social Security and Medicare tax for some years now. Contrary to public opinion, it’s not sitting in a vault somewhere, waiting for the day the money all comes back to you.

Instead, it’s cash-in, cash-out deal with the excess cash that has been collected going to fund the general fund.

We often talk about the Social Security deficit, but in reality it’s Medicare that is the biggest issue. That’s because people live longer these days and that means more medical care is needed and medical care costs a whole lot more than it used to.

At least that was what we used to worry about. We knew that Social Security was going to reverse as more Baby Boomers retired, but that wasn’t expected until sometime in 2016 – 2020. Until then, there would be enough coming in every year to cover the current year Social Security payments that needed to be made.

Then the recession hit. Fewer people are employed and paying into Social Security. And now there isn’t enough money to cover Social Security, starting in 2010.

This week we’re going to look at what that deficit means for you, even if you don’t have any intention of drawing Social Security in the near future.

Here’s an interesting article for additional information about the new report regarding Social Security:

http://www.theatlantic.com/business/archive/2010/03/social-security-goes-into-deficit/38019/

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2. The One Deduction Most S Corporations Get Wrong
3. Form 1099 Due Out By End of January

I generally do 1 or 2 live seminars a year and during them I’ll ask the audience for things they currently spend after tax money on. After tax money means you’re paying for things out of your own pocket. If you can shift that to before tax money, you’ll pay a lot less in taxes.

Of course, a business deduction needs to be ordinary and necessary to the production of income. Here are some of the things we talked about at a seminar a few months back:

• Movie tickets. If you are a screenwriter, video producer or otherwise involved in the film industry, you probably have a deduction here.

• iTunes cards. If you’re involved in the music industry in some way, you’ve got a deduction. Or, if you’re like me, you need the music for a live event. Make sure you get appropriate permission before you use music commercially. Or maybe you want to use the music for your office ambiance.

• Wine. Okay, we had to throw this one in there. If you have a party for your clients, vendors, prospects, staff or just about anyone that you can prove has a legitimate business purpose, you’ve got a deduction.

• Tips. This is a tough one. If you travel for business a lot, chances are you know there is a lot of money that you end up having to spend in cash.

Want more ideas? Check out the special WHILE SUPPLIES LAST offer: Buy “Smart Business Stupid Business” and get a free copy of “Loopholes of the Rich”!

Put more money in your pocket today!

Related posts:

1. Little Known Trick to Turn a 50% Meal Deduction Into 100% Deduction
2. When Is Your Travel a Tax Deduction?
3. Don’t Forget These Deductions For Your First Year in Business!

More deductions = less tax. It’s that simple.

If you have a business meal where the expense is clearly reasonable and ordinary for the production of income in your business, you’ve got a 50% deduction. In other words, take your accountant to lunch to discuss your accounting or tax situation and you can take a deduction for 50% of the bill.

Most business owners are happy to get any deduction for meals. But are you ready to get even more?

Here’s how to turn a 50% deduction into a 100% deduction:

Meals that are eaten on business premises for the benefit of the employer, are 100% deductible.

So, if you have a small business and bring in coffee and bagels for the mandatory morning meeting, you have a 100% deduction for the coffee and bagel expense. Likewise, if everybody needs to work at their desk and you order in pizza, you’ve got a 100% deduction.

Now let’s turn that even healthier. How about having a personal chef bring in meals when you have to keep working at your computer or in meetings at the office? 100% Deductible How about hitting your favorite coffee house for a latte to go so you can get a jump on the email? 100% deductible.

Of course, like all business deductions, you must have a business first. And you need to be able to prove that the expense is for the benefit of the employer.

Related posts:

1. When Is Your Travel a Tax Deduction?
2. The One Deduction Most S Corporations Get Wrong
3. Don’t Forget These Deductions For Your First Year in Business!