Hi, I’m Leo Leydon from Financial Focus Advisory Services. You can see me at https://stocksandtaxes.com/. I’m a CPA; been a CPA longer than I care to admit.
So today we’re here to talk about small business tax issues. There’s three things I want to cover. Number one is home office. When I first started out, home office was a trap. You didn’t want to do the home office because it was a red flag you were going to get audited. Well, over the years that dissipated because so many people work from home now.
But a few years ago, they came out with what they call the simplified method. Well, when they come out with a simplified method, it becomes the preferred method, therefore do this method or get audited. So really, home office has nothing to do with deducting the expenses of your home office. What it really is is driving for dollars, okay?
Now, what do I mean by that? What I mean by that is everyone commutes. You have to commute. You can own the company or you’re an employee. No matter what, you commute. A commute is defined as from your home to the first business stop is your first commute; and then your last commute is from the last business stop, home.
So if you think of it this way, if you have an office across the street from your home, a formal office, what you would do is you would walk from your home to the office. That’s your commute. And then you drive to drive to a client, you drive somewhere else, you come back to that formal office. That would be – would still be business mileage, and then you walk across the street to come home. You’d walk your commute, pretty clear.
If you don’t have a home office and you only go to one client a day, what happens? You leave your home, you go to your first business stop – that’s your client – and then you go from that client back home, guess what? You have no business mileage; you only commuted. Combine the two and what do you get? You walk from your kitchen to your small office area within your home. That’s a business stop. Now you drive from the same location to your client, you do your work, you come back to that same location within your home but it’s your home office, that’s business because your commute is your walk from that area to the kitchen. You walk your commute.
So home office – nothing to do with deducting the home. It has 100% to do with driving for dollars. And remember, at about 55 cents a mile, it adds up quickly.
The second issue I want to talk about is retirement plans. Everyone knows you can do a SEP, right? That’s about 20% of your taxable income you can tuck away into a SEP; that’s the profit-sharing portion. Now, a lot of people don’t take advantage of the individual 401k. The individual 401k contains the profit-sharing, the same as the SEP. You can put 20% of your net taxable income into retirement. The due date for that is the extended due date of your tax return, same as the SEP. But you’re also treated as an employee under the individual 401k plan, and you can make elective deferrals the same as if you were an employee. So you can deduct about $20,000 dollar for dollar.
But another piece of that since this is for small business and entrepreneurs: If – and we’re going to touch on this point next, why you don’t want to be a single-member LLC. If you’re a multi-member LLC, you and your spouse, well, your spouse can do the same thing. So just think: You guys can do almost $40,000 in elective deferrals – depending on your age, you may even be able to do more – and that’s before even touching the 20% profit-sharing. Very good tax strategy that a lot of people miss out on.
The other thing is the single-member LLC. I’m not a big fan of it because what happens – if you’re a single-member LLC, then you show your income and your expenses down to your taxable income, shows up on Schedule C of your individual tax return. Therefore when the computer scans through your individual return, it sees the revenue, the expenses, and the net income. On a Schedule C, your probability of audit rises significantly once revenue exceeds $100,000, and we sure hope your revenue exceeds $100,000, right?
So what do you want to do? You want to be on a partnership return. And if you just have your spouse own 10% of the business – a spouse, a friend, a family member – then you get to file a partnership return. The probability of audit on a partnership return is very low because there is no tax at the partnership level. So you’re going to grossly reduce the chance of audit, you’re going to bring in the ability of your spouse to make a retirement plan contribution, along with many, many other benefits.
So I strongly recommend against the single-member LLC in favor of a full partnership. So there’s just a few tips that I can offer for you today. But if you’d like a personal consultation, feel free to give me a call – Leo Leydon. I’m at https://stocksandtaxes.com/ or call me at (781) 829-8626. That’s (781) 829-8626 and the first consultation is always free.