“A business of your own, even a start-up, even a side-line and certainly a home-based business of your own, is the best tax shelter left in the United States.”


Hi, this is Michael Senoff with Michael Senoff’s www.hardtofindseminars.com  Here’s another money making interview. It’s with a gentleman named Ed, the Tax Man. Ed began his career as a legislative analyst for representatives Jack Kemp and Dick Cheney. He earned his law degree at the University Of Cincinnati College Of Law where he served as the Executive Editor of the University of Cincinnati Law Review. Ed, the Tax Man, currently focuses his tax practice helping entrepreneurs and investors avoid tax mistakes. He has appeared on over 200 radio and television broadcasts, including CNN, Fox News and even the short-lived Roseanne Barr show. I sent questions out all over the world to my students at www.hardtofindseminars.com  asking them to send Ed their most pressing questions on how to save money paying fewer taxes. You want better tax strategies? Don’t pay more than you have to. Listen to the answers Ed gives flawlessly about commonly ignored deductions. You need to claim every deduction that you’re entitled to on your tax return. That means taking the time to review these frequently overlooked deductions. You’re about to hear the most commonly ignored deductions; deductions that could save you tens of thousands of dollars a year. Get ready. This interview is 75 minutes and I hope you enjoy. Please note after this interview, you’ll want to go to a more comprehensive Power Point presentation in recording #2, which can be found at www.hardtofindseminars.com/taxman.htm  There you’ll find a more detailed presentation which Ed refers to throughout this question and answer session. Enjoy.


Michael: I really appreciate you taking the time and talking and answering some of the questions from some of our subscribers here at www.hardtofindseminars.com . What a lot of people want to know is why are you qualified to answer these questions on taxes. How long have you been involved in dealing with saving people money on taxes?

Ed: Mike, I’ve been involved in taxes since I got out of law school, which was in 1992. I started as an Editor at the National Underwriter Company in Cincinnati, Ohio which publishes tax oriented books and magazines for insurance agents and financial planners. I was a financial planner myself for several years working hands on with investment clients and in 2000 I started my own firm where I created the original tax relief strategies. I’ve been using these in my tax planning practice with live clients for the last 7 years. So it’s a combination of training, academic background, and most important real world experience. I’ve worked with hundreds of business owners and entrepreneurs over the last 7 years, seen the challenges they faced, and helped them save a lot of money.

Michael: Ed, You’ve appeared on over 200 radio and televisions broadcasts including CNN, Fox News, and you even got on the Roseanne Barr show, that short-lived talk show where she dubbed you as the funniest tax guy in America. Is there anything funny about paying taxes?

Ed: Well, there’s nothing funny about paying too much tax. And the truth is, there’s a lot that’s entertaining about the tax system, it’s just so absurdly complicated. On the Roseanne show, I talked about voodoo animal sacrifice as a legitimate business deduction and I think it’s hysterical that our tax system is so complicated that we can make that argument and win.

Michael: You began your career as a legislative analyst for representatives Jack Kemp and Dick Cheney. What was that about? What was that like?

Ed: Well, that was my first position after graduating from college, working as a staff aid on Capital Hill. I had majored in history and minored in government in college and when I got out of college, the history companies weren’t hiring so I ended up working for the government. It was a great background in understanding how Washington worked, how politics worked and I was on Kemp’s staff when the 1986 Tax Reform Bill passed. So it became a foundation for my knowledge of the tax system and how it evolves and adapts over time.

Michael: From your experience over the years talking to thousands and thousands of businesses and people all related to paying taxes, what’s your take on the American public? Is the American public paying too much tax?

Ed: Absolutely! The American public is paying too much tax, simply because they don’t know all of the concepts and strategies they can use to pay less. And most accountants aren’t proactive. They don’t sit down with their clients and say here are the things you can be doing. You know the IRS talks about “the tax gap”; that’s taxes that people don’t pay because they’re cheating or not reporting their income or whatever. Well, I think that the “over tax gap”, the amount that people pay more than they have to, is probably just as big as that uncollected tax gap. People simply don’t have the right information and I’ve built a career around delivering that information in plain English, in usable format, and with some humor that’s the spoonful of sugar that helps the medicine go down.

Michael: When I sent out the mailing to my list at www.hardtofindseminars.com , I fielded questions from thousands of people all over the country and all over the world. I did note that you were a U.S. tax expert and many questions came back and we picked out the best of the best. And so I’m going to ask you on behalf of my subscribers some of their most pressing tax questions. I do want to note that many of the questions came back regarding the conspiracy theory that we don’t really have to pay income tax and I want to start out from the beginning. I want you to give a disclaimer, or I’ll give a disclaimer, that this is not an interview related to ways of avoiding paying income tax.

Ed: First of all, let me start by saying we are talking about ways to avoid the income tax. We’re talking ways to avoid a legally imposed tax. Where you run into trouble is when you look for ways to evade paying a legitimately imposed tax. There are all sorts of theories as to why the tax is illegitimate. The 16th Amendment to the Constitution was not properly ratified; filing a tax return violates 4th Amendment, 5th Amendment, 13th Amendment, 14th Amendment rights. Some very clever arguments. My favorite argument that people have actually taken to court is that the U.S. Federal Court, the flags in the Federal Court have a yellow fringe on the yellow court. That means it’s a court of Admiralty and has no jurisdiction over the tax protestor. And it amazes me that people have taken that argument to court. The bottom line is, you can believe these theories if you want, and frankly, I think a lot of people believe them simply because they want to believe them. But they don’t matter until the Supreme Court says that the tax is unconstitutional. That’s simply how our government works. The tax is constitutional until the Supreme Court says it’s not; that’s not going to happen in your lifetime or mine. The arguments, while entertaining and clever, ultimately have no legal value. And there has been no case in U.S. judicial history where the court has found that the tax was not constitutional. There have been cases where tax protestors have been found not guilty of criminal tax evasion but that’s a very different thing from saying that you don’t have to pay the tax. Unfortunately, for better or for worse, you have to pay the tax.

Michael: Okay, great. Let’s go into some questions. Here is a question from Lalita. Ed, our company is a single member LLC in New Jersey and the member is not an employee or W2. The LLC is being taxes as sole proprietor. The company has one employee that is the son of single member aged 20. Can this LLC open solo 401(k) and contribute both employee, self employment, or employer contributions? If so, what is the maximum amount and are these deductions tax deductible?

Ed: This is a great question because it’s such a typical situation. A small family owned business looking to grow; looking to provide some employment for family members and looking to find ways to shelter income. Now the LLC can open a 401(k). The member, who is considered self employed, can participate. The employee can also participate. They cannot do a solo 401(k) for both because the solo 401(k) rules allow a participant and their spouse. So we’re out of the solo 401(k) territory. The business can open a solo 401(k) and exclude employees under age 21 so there’d be a chance to do the solo 401(k) for this year only, but that’s clearly not his goal here. So the company can open a regular 401(k). She and her son can participate as self employed and employee. The member and the employee can each defer up to $15,500 from either self employment income or salary. The business can then match 25% of their covered compensation and in the member’s case that would be the net income from the LLC; in the employee’s case that would be his W2 compensation.

Michael: Great, here’s a question from Beverly Smith out of Memphis, Tennessee. Ed, I’ve started my first home based business this year and I just wonder what are some things I could write off. Of course, I’m referring to write-offs that wouldn’t easily come to mind to the typical person.

Ed: Another great question because a business of your own, even a start-up, even a side-line and certainly a home-based business of your own, is the best tax shelter left in the United States. It goes to the heart of who I do my work for. If a client comes to me, let’s say it’s a firefighter married to a RN; they’ve got a couple W2’s and a 1098 for their mortgage interest, there’s not a whole lot of tax planning I can do for them under those circumstances. But if one or the other or both open a business, now we’re talking. Now we’ve got some opportunities. So the typical write-offs would be anything related to the business. My question for Beverly would be, would you spend this dollar if it were not for the business, and if the answer is no, I wouldn’t spend this dollar if it weren’t for the business, then it will probably be deductible. The next set of deduction strategies she should be looking for would be the same kind of employee benefit and retirement plan strategies that you would use with a bigger business. If she has children who are in a lower tax rate than her, she can hire them to work for the business. If she has out of pocket medical expenses, she might be able to set up a medical expense reimbursement plan and write off those medical bills through the business. If she has net income from the business, she can find several ways to shelter that income from retirement plans. So the key for Beverly is not to look at the business as a start-up or a home-based business; the key is to look at it the same way she would look at any other business.


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Ed: At this point, I’d suggest you take a look at the special Power Point presentation that Mike and I did. You’ll see several categories of deductions, some employee benefit oriented deductions, and also some more typical deductions for things like car and truck expenses, meals and entertainment, and home office deductions. You’ll find the link to that presentation at the end of the transcript for this presentation or the end of the description on the web site. So there’s a couple of different ways to get that.

Michael: Okay, Ed, do you know where I can find information on taxes for traders in Canada? This is from Granislav.

Ed: I wish I did. I occasionally get questions from people who stumble onto my web sites or into my seminars who have questions on Canadian taxes. Also, sometimes they have questions on British taxes and Australian taxes. I simply haven’t been able to find the equivalent of this sort of proactive materials for revenue Canada. I wish you luck and if you find it, let me know.

Michael: Very good. Here’s a question from Andrew Cavanaugh. Andrew Cavanaugh is one of the world’s best copywriters, believe it or not. He’s written some copy up on my web site and he travels back and forth from Australia to the U.K. and here to the U.S. His question is, if you’re from a foreign country with a high taxation like Australia and the U.K. and you do a lot of business in the U.S., is it worthwhile to set up an American corporation so you can get taxed under the U.S. Corporate Tax system?

Ed: That’s a great question and the answer is, yes. The United States taxes citizens and resident aliens on all of their worldwide income that they earn anywhere, it’s going to tax foreign citizens on the income they earn in the United States. Now there are tax treaties between the United States and countries like Australia and the United Kingdom, where the intent is to avoid a double taxation; however there may be opportunities to lower the taxable income that would be recorded in the United States and passed through to the foreign tax payer. So it can definitely be worth setting up a separate entity to segregate that income, make it easier to account for that income, and take advantage of some U.S. opportunities that you might not find elsewhere.

Michael: A question from Rick Thomas. Ed, I’d like to know at what income (this is net level), does it take to incorporate an ongoing business? What income level for the business and a married couple filing together? We’re going to hit 80 grand net level for the business this year, which is almost pure profit and very, very low expenses. And I want to also know what would be the best type of corporation; S or C Corp? We are a 2 person organization, no inventory, and very, very little chance of being sued for anything we do.

Ed: That last piece is very important because there are 2 reasons to set up a separate entity for a business. One is for asset protection from legal liabilities; the second is for tax planning strategies. I generally recommend that anyone who has a risk of being sued, particularly if they have outside employees, form a Corporation or a Limited Liability Company, to operate their business. We know from Rick’s question that there’s no inventory and very little chance of being sued for anything they do. Having said that, I would first look to an S Corporation. The reason for that is the S Corporation lets Rick and his wife take part of their income in salary, which would be subject to employment tax, and part of their income as net income pass through, not subject to self employment tax. That can be a pretty significant savings over a sole proprietorship. At $80,000 net income, they’ll pay self employment tax of about $12,000. If they set up an S Corporation, take $40,000 in salary and $40,000 in income, now they’re looking at about $6,000 in self employment tax. So the question that he specifically asks, at what income level does it pay to incorporate, we look at the cost of establishing and maintaining that S Corporation versus the tax benefit. Rick, if you take a look at the Power Point presentation, you’ll see a pretty detailed discussion of this exact question, how can you save self employment tax, and it walks through how the S Corporation works versus the sole proprietorship. In my mind, somewhere around $40,000 a year net income is usually the trade-off. That depends on what state you’re in because some states have separate taxes on S Corporations; it depends on whether you would handle payroll reporting yourself or hire a payroll service. But somewhere around $40,000 is the break even and that’s certainly the point at where you should be looking at forming an entity. So take a look at the information in the Power Point presentation. That should give you some guidance. And really create some very quick, very powerful savings.

Michael: Here’s a question from B.E. Waters, we may have answered it a little bit in that last question with Rick Thomas. Ed, I’d like to ask a question. What do you do if you’re looking to start a new S Corp and you want to pay the lowest taxes? Does your filing structure matter? Also, how would you start finding support for a small company just starting out?

Ed: This is a related question, particularly with the S Corporation angle. Let me be clear about something. The S Corporation structure will lower employment taxes. It doesn’t actually lower income taxes. So the C Corporation doesn’t give you the opportunity to lower your employment taxes the same way the S does. The C Corporation does give you a bit better treatment for employee benefits (things like a medical expense reimbursement plan), and the analysis is pretty complicated. I’d love to give an easy, pat answer. In this case, I have to say it depends on the S versus the C. Having said that, the S Corporation probably will be the fastest way to save taxes by avoiding that employment tax. The filing structure does matter. The question is, are you looking to save more on the employment tax or can you save more through employee benefits? Having said that, a lot of business owners will have both an S Corporation and a C Corporation. They’ll split their income between the 2 entities, take the bulk of the income out of the S Corporation and funnel enough income through the C Corporation so that they can then take it out in the form of tax free employee benefits. As for how you would start finding support for a small company just starting out, that’s the million dollar question. I mentioned at the beginning of our conversation, Mike that most accountants just aren’t proactive and planning is the key to beating the IRS legally. You’ll find that discussion in the first few slides of the Power Point presentation. Planning is the key to your financial defense; it guarantees results. And let’s face it, beating the IRS is fun. But I don’t care how good your accountant is with a stack of receipts on April 15th, if you didn’t know that you could set up an S Corporation, if you didn’t know that you could set up a medical expense reimbursement plan, if you didn’t know that you could pay your high school age daughter with money that’s going to be taxed at her lower rate; by April 15th it’s too late. So the key is finding an accountant who’s proactive, who’s willing to sit down with you, who’s willing to go through your circumstances and look at your family, your home and your job, your business and your portfolio, and look for those proactive strategies for cutting taxes. So the key is finding that proactive person. I would suggest that you take them to the Power Point presentation, sit down with them and go through the presentation with them. You’ll find the link at the end of the transcript to this presentation, also at the end of the description on the web site, and that way you’ll be able to make sure that they understand all of the strategies you’re bringing to them.

Michael: Here’s a question from Rob; Ed, I have a client who’s thinking of selling his business in a few years. It’s worth around $1.2 million right now, maybe more in a few years. To pay less taxes when he sells, could he put the business into a parent corporation or have the parent corporation buy his personal house from him as an investment which he would then manage for the corporation to pay less taxes on the sale of his business? Assuming the house is worth $400,000, how much of a tax advantage would this be? What are some other ways to minimize taxes when selling a business?

Ed: First comment; Rob’s asking the question on behalf of a client and Rob’s looking to be proactive. That’s good. Not enough professionals think that way. Having said that, I don’t see any advantage to the buying the house strategy. In fact, there can be a couple of disadvantages. When you sell your personal residence, you can exclude up to $250,000 of gain on that residence from your income tax. If you’re married filing jointly, you can exclude up to $500,000 worth of gain. You can’t do that if a corporation owns the house. So you’re compromising your ability to take a tax free exclusion when you sell the property. I’m also not sure how he’s thinking that the house inside the corporation would lower the tax bill on the sale of the business. Having said that the key question, what are some other ways to minimize taxes when selling a company; it gets to the heart of what exactly you’re selling and how you’re selling it. The first question is going to be is the client selling the assets of the company individually (the good will, the inventory, the equipment, the customer list) or would he be selling the stock of the corporation? That’s more of an issue for the buyer because the buyer can depreciate things like good will, inventory, customer lists, over time and save taxes whereas they can’t do that with a stock sale. But there are some ways that you can sell a business either over time or through a particular structure to lower that tax bill. For example, if you sell the business in 2007, if you close the business and take a check for the $1.2 million or whatever the business is worth, you’re going to pay the tax bill in 2007. If you use what’s called an installment sale and sell the business in exchange for payments over time, you can defer the tax on those payments until you actually receive them. So that’s one way to stretch out those taxes. You can use something called a structured sale, which lets you trade the business for an insurance annuity payable over time, a lifetime annuity; that will take the value of the business out of your taxable estate and defer taxes while guaranteeing that you have a lifetime income from that sale. You can also use charitable vehicles like a charitable remainder trust. Rob’s client might set up a charitable remainder trust, transfer the business to the trust, then have the trust sell the business. The trust won’t pay any tax on the sale of the business and Rob’s client will get a real nice charitable deduction this year for the gift that he makes to the trust. So there are all sorts of strategies that you can use, variations on those themes, to either defer or in some cases, eliminate the tax on the sale of the business.

Michael: Wonderful; here’s a question from Trish Erin Mesera. As the owner of a micro business, my income has never been large enough that filing quarterlies were a necessity. While I realize it’s important, I’ve just never had to do it. As of the second quarter of this fiscal year, my business has expanded immensely. I realize that my income will be more than the percentage over last year’s income that would require me to file quarterlies. Now, on top of my business, my husband works and I work another job where they take taxes out of my income. First, would I be required to file the quarterly and second, would I be able to, since I didn’t file them in the first quarter, would there be penalties?

Ed: Great question and, Trish, congratulations; I’m glad to hear that you’re making money. The quarterly tax system is a way for you to pay taxes into the IRS that aren’t withheld from your job. So a couple of basic questions; if you didn’t file quarterlies in the first quarter, there’s no reason not to file the quarterlies in the second quarter. And there is a way at the end of the year that you can tell the IRS when you earned that income and not be penalized for not having it paid in the first quarter. So if all of the income from your side business was earned in the second quarter, let’s say you made no income at all in the first, third and fourth, you can take care of that income with a second quarter estimated tax payment. If you haven’t got the taxes paid in on time, there’s penalty and interest for failure to make the estimated payments. IRS interest rate, I think right now, is 7%. There’s a penalty of a quarter of a percent per month. It’s something that gets calculated and added on to your tax bill at the end of the year. Now, having said all that the IRS does look at those quarterly estimates to see that they’re paid on time as you earn the income. But, Trish, income that you pay tax on through withholding is considered to be paid equally throughout the entire year. So if you’d like, you or your husband could actually bump up the amount that’s withheld from your paycheck and use that extra withholding to cover the tax liability. You can even wait until the end of the year, see what your estimated tax liability would be from the side business, and have it all withheld in a single lump sum from a final paycheck and avoid any interest or penalties. So this is something that you might want to run by an accountant to do some projections on your tax bill for the year. You’re asking the right question at the right time of year and the answer is yes there are ways to avoid any penalties even if you haven’t made that first quarter’s payment. Finally, take a look at the business tax strategies that you’ll find in the Power Point presentation with the link at the end of the transcript or the end of the description. Those will give you some ideas for ways that you can lower the tax on the business in the first place so that you don’t have to make those quarterly estimates.

Michael: Gary Brownly wants to know, Ed what do you do when an auditor asks such questions as, what is Pay Pal and subsequently disallows all expenses and declares your business a hobby?

Ed: That’s a scary question when an auditor doesn’t understand what the expenses are for your business and disallows expenses by declaring your business a hobby. But he raises two good points. First of all, how do you categorize the expenses that go into your business? Generally a dollar of deduction is a dollar of deduction, whether you put it in office supplies, small tools and equipment, postage, utilities or any other category and the tax forms themselves offer categories. When I work with my clients, I tell them here are the categories that I want you to group your expenses into. Don’t lose sleep over whether something goes into training and education or office expense; a dollar of deduction is a dollar of deduction in those categories; that’s not the important issue. So what is Pay Pal? Pay Pal income, it may be a source of incoming coming in. Pay Pal fees may be the fees that he’s paying to use the Pay Pal system to collect income from his customers. The second question, what do you do when the auditor disallows all expenses and declares your business a hobby? This is a great question because it’s so misunderstood. The tax law says you can take losses from a business against your outside income. So you have a 9 to 5 job, you have a side business; the business loses $3,000 in a year. You can deduct that $3,000 against the salary you earned from the 9 to 5 job. You cannot deduct losses from a hobby against your outside business. So there’s the crucial distinction. Now how do we define a business? A business is something you operate with the intent to make a profit; that’s the key – the intent to make a profit. You don’t even have to expect to make a profit; you just have to intend to make a profit. The IRS is going to look at whether you make a profit and if you show a profit in 3 out of 5 years, they will presume that you’re operating the business with the intent to make a profit; that’s a safe harbor. But, Mike that has raised an impression in the public that if you show losses 3 years in a row, you’re automatically not a business. You see how that can happen? It’s simply the reverse. But the truth is you can lose money year after year after year and still deduct those losses as long as you show that you’re operating the business with the necessary profit intent. To do that, you want to have a business plan; you want to keep business like records; you want to have a separate banking account for the business; you want to show that you’ve done training and continuing education to be able to succeed in your business; you want to be able to show the marketing and advertising you’ve done for the business. And if you do that, you can beat the IRS even if they disallow the losses as a business. There’s a great tax court case that came out earlier this year; the Tracy Topping case. Tracy was a divorced housewife in Palm Beach County who liked riding horses and she decided to start a business designing houses and barns for horse people. She spent $500,000 on her horses over a 3 year period, lost $500,000; her business plan was to compete in the Palm Beach Polo Club’s Winter Exhibition, get in front of rich people who were looking for a designer. And the IRS said no, that’s a hobby. You’ve been riding horses since you were a little girl; we’re going to disallow those losses. Well, Tracy in those 3 years had made a million and a half dollars designing houses and barns. So she went to the tax courts she showed the tax court that the horseback riding was an integral part of her business, it was her business plan. She showed that it generated 90% of her clients and the tax court said you can treat them as a single activity, it’s an ordinary and necessary business expense, bottom line Tracy wins. That’s the key. And it’s a great question for anybody who’s starting a business, particularly if the business is something fun that they would do without the business motive, like horseback riding. Gary Brownly asks a question, we don’t know what his business is; we don’t know if there’s an element of pleasure in it. But that makes it more likely that the IRS will disallow those losses.

Michael: Great story; here’s a question from Jason Freeman. Ed, I’d like to hear more about this AMT, alternative minimum tax; what it is, how it affects tax planning, and how it affects deductions.

Ed: Jason, good question, and I wish there was more that a planner like me could do for you with the AMT. The AMT is Congress’s answer to the rich and I say that with quotations around it; the “rich” who skate by without paying their fare share of taxes. The problem is it’s hitting people who are making $80 or $100 or $120,000 a year and in most states, $80 or $100 or $120,000 a year doesn’t make you rich. It may be a nice, comfortable middle class or upper middle class income but it certainly isn’t rich. So the AMT starts out with your regular taxable income, then you add back deductions for things like state and local taxes that you could deduct for the regular tax; part of the medical expenses that you could deduct for your regular tax; miscellaneous itemized deductions that you could deduct for your regular tax. Then you recalculate the alternative minimum tax and if the AMT is higher than the regular tax, you pay the higher amount. So it is defacto a flat tax for millions of Americans, particularly in high tax states. If you have high state and local income taxes, you’re more likely to be subject to AMT. So the states where the AMT hits most people are states like Connecticut, New York, New Jersey, Massachusetts and California, I think are the top 5. Now what can you do about it? There really isn’t anything you can do about the AMT specifically; however, anything you do to bring down your overall taxable income, that will bring down your AMT as well as your regular tax. So that’s the real key; bringing down the overall taxable income. You would want to use all of the business tax strategies that we discuss in the Power Point presentation that you’ll find at the end of the transcript or at the end of the description for the transcript. Those are going to be valuable for AMT as well as the regular tax. There are some strategies you can use for the AMT, for example miscellaneous itemized deductions aren’t allowed for the AMT. That miscellaneous itemized deduction category includes tax preparation fees. Well, if you have a Schedule C business, make sure that the accountant who prepares the taxes itemizes a separate amount for the business so that you can deduct it on the business Schedule C rather than deducting it as a miscellaneous itemized deduction and losing it all to the AMT. But the real key here is to take advantage of all of the strategies in the Power Point presentation to bring down the overall taxable income.

Michael: Ed, Lawton Chiles of Chile’s advertising (Lawton’s a young up and coming copywriter); he asks I’m a freelance copywriter and ad consultant who also is legally blind, meaning I do not drive a car. Are there certain write-offs I can take advantage of?

Ed: I’m impressed that he can be a copywriter and ad consultant who’s legally blind. He sounds like a pretty impressive guy. In terms of certain write-offs he can take advantage of, there is an additional write-off available for blind taxpayers with a personal exemption. In terms of transportation, he can still deduct all of his transportation expenses he incurs presumably including a driver. So while most of us are going to take a mileage allowance or a percentage of actual expenses that we spend driving our car as a deduction, he can take all of those expenses plus the expense of a driver. Any additional expenses that he incurs because of his blindness for things like special software to use voice recognition with a computer, additional costs of Braille materials, deliveries of materials and any kind of medical expenses that would be related to whatever condition causes his blindness would be deductible as well. Again, the key is don’t just look at specific deductions for a specific expense. Look at all of the business deductions that are outlined in the Power Point presentation so that you can take advantage of the variety of strategies.

Michael: Alex Esteppa wants to know, Ed if I make over $100,000 online selling e-books and tele-seminars, what kind of tax strategies can I use to avoid paying so much in personal income tax?

Ed: Alex, I think that’s great. I think $100,000 a year is a milestone for online sales. The key is again to structure the business and take advantage of all of the tax strategies. We talked a little while ago about the S Corporation as a way to minimize employment tax. Alex can set up an S Corporation, pay himself a reasonable salary for the work he does managing and marketing the web site and avoid employment tax on the remainder of that income. He can look at retirement plan strategies, he can look at employee benefit strategies, he may want to hire his children for example. I have clients who are hiring their 12 or 13 year old children to do their web site work. We know that the professional web site designers, they all started out as 13 year old kids hacking into the Pentagon anyway. Well, you can pay your child a reasonable wage for the work they do and if the reasonable wage for a website designer is $50 or $60 or $80 in your area, that’s what you can pay the child. So we want to look at the total variety of strategies that are outlined in that Power Point presentation. I would say the first strategy to look at would be setting up an S Corporation.

Michael: Here’s a question, Ed, from Aria Ray Green; he’s an HMA Marketing Consultant in Tampa, Florida. He asks, Ed for individuals starting a consulting business, what is the most advantageous form the business can take . . . single owner/operator, incorporate, or LLC?


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Ed: In Aria’s case, I think the best structure is going to be the S Corporation. Most of the work he’s going to do, he’s going to generate fees for the work he delivers to his clients’ that’s going to come in as ordinary income. If he is a sole proprietor or single member LLC, he’s going to pay himself employment tax on all that income. If he incorporates as a C Corporation, he’s either going to have to take it all out of the business in the form of salary, or if he leaves the profit in the corporation, the corporation will have to pay a separate corporate level tax before it passes it through to him as a dividend. So the S Corporation gives him the best combination by letting him avoid self employment tax on some of his income while also avoiding the double taxation that he would face with a C Corporation. And he’ll find the discussion of the S Corporation in the Power Point. Again, take a look at the end of this transcript or at the end of the description on the web site. That discussion walks through what the S Corporation is; how it works; as well as some of the technical requirements for making it work.

Michael: A question from Dr. Joe Kabukaba. I’m a U.K. citizen and I’ve just set up a business in Nevada to supply health and wellness products and services. What would be the best tax strategy for me . . . to pay taxes in the U.S. lower rates or opt to be taxed in the U.K., much higher rates taking into account the current tax treaty between the U.S. and the U.K.? Are there any other factors I should put in place or look out for to maximize my tax position?

Ed: Good question, I’m going to start off by saying I’m not an expert in the U.S./U.K. tax treaty. I would look at finding ways to use the Nevada corporation to lower the net income that’s passed through to him as the United Kingdom citizen. If there are strategies that he can use, for example, to leave assets in the United States before having them taxed either at American or British tax rates, he may find that he does better than choosing whether to be taxed at U.S. rates or British rates. Again, they key is take advantage of all of the available strategies that are outlined in the Power Point presentation, see what you can do so that the net income level from the U.S. Health & Wellness business shows the lowest taxable income under either system.

Michael: A question from Brian Jones: Ed, how can I keep from paying taxes on annuity income and #2, how can I use annuity income to pay for long term care insurance tax free?

Ed: I’m going to assume from the way he asks the question that he’s currently drawing cash from the annuity contract. An annuity is an insurance contract that really offers insurance against living too long. The money accumulates tax deferred inside the contract. Then when the annuity owner draws the income out of the annuity, they’re going to pay tax on the gain until such point as they’ve paid tax on all of the gain and they are now drawing their original investment out. And the investment in the contract is not taxable. So how can I keep from paying taxes on annuity income? The first suggestion is to leave it in as long as possible. The next suggestion is to actually annuitize part or all of the contract. Let’s say Brian puts $100,000 into the annuity, it’s grown to $150,000. If he takes $50,000 out of the contract, it’s all going to be treated as income. It’s the last in, first out treatment. So he’d pay taxes on that $50,000. But if he annuitizes part of the contract and takes out say $10,000 a year for the remainder of his life, part of each of those payments is going to be treated as a return of his own principal and only the remaining part would be taxable as income. So that’s a way to take out some partially tax free income. Having said that, he can set up an annuity stream to actually pay for the long term care insurance. Let’s say he and his wife want to buy long term care insurance that’s going to cost $6,000 a year. They can set up the annuity so that the annuity payments are automatically directed into the long term care contract. If he’s annuitizing the contract, part of that income stream is going to be deductible. And depending on his age and depending on the premium, the long term care premium itself is deductible. So that’s probably his best strategy is to annuitize enough of the contract to cover the long term care premium and pay it that way.

Michael: A question from Yvonne Wilson: Ed, as a new associate in a MLM (Multi Level Marketing) business, what if any can you claim for or do you need to earn a certain amount of money first?

Ed: Good question, Yvonne, and there are a lot of good MLM programs out there that give you the opportunity to earn a nice income. There are even tax specialists across the country who work primarily with members of one program or another. There’s no minimum amount you need to earn. The key is as with the question on the hobby business, are you running the Multi Level Marketing business with the intent to make a profit? And as long as you show that business intent, you can take deductions that are greater than the amount you’re earning. If you’re advertising, for example, it just makes common sense that you’re going to have to pay money on the advertising first before you get the revenue that the advertising generates. I would caution you, however, with a network marketing business to dot your I’s and cross you T’s on that business intent because the IRS is on the lookout for network marketing businesses that are used simply as tax shelters to offset salary income. So make sure you can demonstrate that business intent. The other thing you might want to do is, if you have a second business, you might want to treat the network marketing business and the second business, as a single activity if the network marketing drives customers to the primary business. We talked about the Tracy Copping case where she used her horseback riding to attract customers to her design business. I have a client who’s a real estate agent; makes a lot of money selling real estate and is also a distributor for a network marketer. He does not show a profit on the network marketing business but he generates a lot of real estate clients from that network marketing business. He generates enough of his real estate business from the network marketing business that I feel very comfortable treating the two as the same activity.

Michael: A question from Joan: Ed, my husband and I are pretty sure we take all of the deductions we’re legally entitled to. We keep good records in Quicken and QuickBooks and do our taxes with Turbo Tax. Still I wonder if we’re overpaying. For people who see themselves as fairly knowledgeable about taxes, what are the common things they still overlook?

Ed: Joan, it’s a great question because so many people think they can run to the office supply store in February, pick up a copy of Turbo Tax and that’s all they need. Depending on your circumstances, it may be all you need. If you and your husband both work, you both have W2’s, you’ve just got mortgage interest, maybe some charitable contributions, Turbo Tax is going to give you pretty much most of what you can use. But Mike, I’m guessing that if Joan’s on your list and she’s writing in with questions, it’s because she’s running a business of her own. And having said that, there are a lot of business planning strategies that Turbo Tax simply isn’t going to give her. Turbo Tax isn’t going to say hire your high school daughter, pay her money that will be taxed at her lower rate and use the tax savings to help build her college fund. Turbo Tax isn’t going to say hire your husband to work for your business and set up a medical expense reimbursement plan so that you can write off all of the family’s medical expenses as a business deduction. So Joan, the key is, go to the Power Point presentation, take a look and see what mistakes you may still be making and what opportunities you may still be missing. You’ll find the link at the end of the transcript or at the end of the description and you should find plenty of things that Turbo Tax wouldn’t dream of telling you to do.

Michael: Here’s a question from Nick Gilburg from www.shyhost.com. This guy is a genius when it comes to Internet marketing and he’s actually launching a new product called The Gorilla Internet Marketing System, which if anyone is on my list will hear about. It’s really amazing stuff and growing an Internet business without advertising. But his question for you, Ed, a lot of MLM financial planners are pushing what’s called a Variable Life Insurance claiming this is like paying pennies on life insurance to save dollars in taxes whether you need life insurance or not. I notice the cost of this insurance is a lot higher than other kinds of life insurance and the fees and commissions paid to the agent seem kind of high too. Is it really worth paying for this life insurance to be able to withdraw from the policy tax free later on even though I don’t need life insurance? What if I did need life insurance? Then would it make sense to do variable universal life over say a 30 year term policy or even less expensive whole life policy? I also read that if I withdraw too much the policy will collapse and I will have to pay taxes on all the money I took out. If I live to say, 90, and start taking money out at 62 and the market only rose 1% a year from while I was 86 to 90, what are the chances of that happening?

Ed: That’s a lot of questions packed into a couple of short paragraphs and there’s a lot of debate in the financial planning community over just the value of that strategy. But let me address it with some things for him to think about and help evaluate the decision. There are really 2 kinds of life insurance: there’s whole life which includes a savings element, that’s permanent life insurance; and then there’s term life where you’re just paying the premium and hoping that you don’t die. That’s the gamble with the insurance company. The purpose for whole life insurance is to create a savings fund so that ultimately that savings fund can pay the premiums for you. And you’ll still have the life insurance coverage without having to pay the premiums. Congress sees the value in that so there are tax advantages to that savings account. The money in that savings account grows tax deferred. You can take the money out tax free as long as you keep the policy in force and that’s a great tax strategy. Now first question, should he do it to begin with? You’ve got to look at the investment rate of return inside the life insurance contract versus investing it outside the life insurance contract. With a whole life policy it’s kind of like a bank CD in a tax deferred wrapper. The insurance company’s going to pay a stated rate of return with a lot of strong guarantees. With a variable life policy, with a universal life policy, the money can be invested in the stock market or bond market. The insurance policy will have sub-accounts that work like mutual funds inside the insurance policy and you can get a pretty decent market rate of return inside those funds. You’re going to have tax advantages because if you take the money out down the road in the form of loans, you’re never going to pay tax on it. That’s a tremendous value. Now, his question and it’s a real important question, he says he doesn’t need the life insurance coverage now and these policies are much more expensive than term life. Well, a variable universal life policy, every year the insurance company is going to take out part of the account balance to pay for the insurance. And that amount is going to be roughly what he would pay for a term life policy. So the insurance itself isn’t necessarily more expensive. The reason he’s putting more money in the policy is because he’s funding that savings account and the more money that goes into the savings account, the bigger the contract can grow. So the question is, does the tax advantage down the road justify paying for insurance coverage that he does not need now? I don’t know enough about his circumstances to know if that’s the case. I don’t know how old he is; I don’t know if he has a family now or he may plan on having a family later in which case he might need the life insurance. But that’s the key question; does paying the cost of the insurance coverage now justify the tax savings down the road? And that’s a question to walk through with an insurance agent or a financial planner and probably his own tax person to run some projections on how much money that might be saving him down the road.

Michael: A question from Dan: does it make sense for us little people to consider offshore tax shelters and if so, what ones and where?

Ed: Good question; a lot of people see offshore opportunities and wonder if they can turn them to their own advantage. The problem is most offshore tax opportunities apply to corporations, to investment partnerships, to groups like that and very little apply to U.S. citizens. As a U.S. citizen or resident alien, you’re taxed on all income that you earn worldwide regardless of the source. So going offshore isn’t necessarily going to protect you unless you’re invested in certain vehicles like offshore domicile partnerships where the income doesn’t get reported back to you. But even then income is generally going to be deferred; ultimately it’s going to come back to you as taxable income in the United States and you’ll pay taxes on it. That’s what a lot of hedge funds do. American investors put money into a hedge fund, the American hedge fund then invests in an offshore partnership; the offshore partnership operates the portfolio, the gains are not taxed until they’re brought back into the United States. But there’s really very little opportunity to be gained by going offshore and in fact, a lot of offshore opportunities really aren’t opportunities; they’re scams. There are various legitimate reasons to go offshore. Asset protection is a great reason to go offshore. If you have several businesses, you may want to consider owning them through an offshore limited liability company simply because they’re not subject to U.S. court jurisdictions. As for offshore opportunities for most of us, though, we want to diversify our portfolios to take advantage of foreign markets that may be going up when U.S. markets are going down, but the IRS is on the lookout for offshore transactions that may indicate fraud or tax evasion and it’s not an area that I discuss with my clients unless they bring it up with me simply because its opportunities are limited.

Michael: Here’s another question from Dan, he’s got a lot of question. Ed, is there any way for an employee to legally write off all of his family’s health premiums?

Ed: There’s a way for a business owner to write off all of the family’s health premiums and that is through a medical expense reimbursement plan. We go into quite a bit of detail on this strategy in the Power Point presentation. You’ll find the link at the end of this transcript. You’ll also find it at the end of the description of this transcript. That’s a way for the business to set up an employee benefit plan and reimburse the employee, presumably a family member, for all medical expenses they incur for themselves, their spouse and their dependents. As for an employee, generally the employee will have some form of health coverage from their employer; they may be buying insurance on their own. They’ll have some sort of out-of-pocket medical expenses. You can write them off as an itemized deduction if they’re more than 7 ½% of your gross income. For most of us, our medical bills aren’t that high. You can use a health savings account if you are buying your own health insurance or if the employer is offering a qualified high deductible health plan. You can set up a side fund called a Health Savings Account, make deductible contributions into the HSA and then take them out tax free for employee out-of-pocket medical expenses. However, the HSA contributions generally cannot be used for health premiums. Finally, if the employee is buying insurance through an employer, they can ask the employer to set up what’s called a Section 125 Plan, and avoid tax on those premiums. Most of us think of a 125 Plan as a flex spending account where we set up an account, put money in it and draw on it throughout the course of the year. An employer might not want to go through the trouble of setting up a flex spending account but they can still set up what’s called a POP Plan (Premium Only Plan) so that if the employee is paying let’s say $400 a month from their own salary for the premium that that comes with pre-tax dollars and that avoids the tax on those premiums. So if the employee does not have a side business, go to the employer, ask about health savings accounts or a POP Plan for their premiums.

Michael: Ed, we marketed a course on www.hardtofindseminars.com  by a business buying expert named Arthur Hamel and I’ve heard this come up, but Dan also wants to know when buying a business, is a stock sale or an asset sale preferable when buying a business and why? What’s your opinion on that?

Ed: That’s a pretty easy question to answer. When you buy stock in a business, that’s an investment. There’s no deduction for it, you hold that investment until the day you sell that investment and the price you paid for the stock is your basis in the business. When you buy the assets of a business, you’re buying depreciable assets. So if you’re buying inventory, it will be deductible once the inventory is sold. If you’re buying equipment, that equipment will depreciate over 5 or 7 years. If you’re buying good will and customer lists and intangibles like that, it depreciates over 15 years. So let’s say Dan’s looking at a personal service business, the only asset is customer good will. The business is incorporated and he’s going to pay $150,000. Well, if he pays $150,000 for the stock, he gets no deduction on that $150,000. If he sells the business down the road for $200,000 he’ll only pay tax on that $50,000 gain but he’s getting no current deduction now and he probably needs it most now when he’s taking on that new obligation. However, if he buys an asset, the customer list, he can depreciate it over 15 years. Now he can take a $10,000 depreciation deduction ever year so he’ll pay less tax on the income from the business now. Of course, he’ll pay more tax on the business when he sells it but most business owners would rather have that tax deduction now. $10,000 tax deduction today is probably worth a lot more than it might be 15 years down the road when the business is sold.

Michael: He also wants to know, and if I’m married with children and plan on setting up a corporation, how should we structure the stock for each family member to minimize taxes?

Ed: Well, he may want to consider putting some stock in the children’s names once they’re old enough that they’re not subject to the kiddie tax. This is a great question because it illustrates how Congress changes the law so often. Starting in 1986, children up to age 14 pay tax at their parent’s rate on unearned income. The theory was we don’t want parents putting assets in the children’s name to lower the overall family tax rate. Last year, Congress raised the kiddie tax age from 14 to 18 so now older teenagers are subject to the tax. And with the Iraq Funding Bill that President Bush signed on May 25th, the kiddie tax went up to age 19 and full time students up to age 23. So if children are subject to the kiddie tax, there’s very little benefit in putting ownership interests in their name. Once the children are no longer subject to the kiddie tax, if he wants to flow income from the business to those children he can certainly do that through ownership in the business and as he gets ready to retire, as part of his estate plan, he might want to consider gifting interests in the business to the children over his lifetime to avoid ultimate estate tax on the value of the business at his death.

Michael: He also asks, my in-laws are in their mid 70’s and have lived in the same home for almost 40 years. Their health is okay for the most part but obviously the inevitable will happen sooner rather than later. So what type of tax planning should they do now to protect their nest egg if they end up going into a home in the future? Home is free and clear and total assets I’m guessing might be about a half million.

Ed: That question opens a real Pandora’s Box. You’ve got tax questions and you’ve got health care financing questions. What he’s probably referring to is Medicaid planning. How does somebody pay for the cost of ongoing nursing home care which can be pretty frightfully expensive? Assuming they don’t have long term care insurance to pay those bills, they may not want to spend down their assets and there are some strategies that work in some states for shielding assets, either turning them into an annuity or gifting them to younger generations that will make them look poor on paper and qualify for Medicaid funding. That’s a good thing and a bad thing. It’s a good thing because the family doesn’t have to pay the cost; it’s a bad thing because if Medicaid is paying for the nursing home, Medicaid is going to tell them where they’re going to live and Medicaid’s going to have a lot of control over their life during the final years of their life. Those of us who saw the final episode of the Soprano’s and saw Junior Soprano sitting in the nursing home might think it’s worth losing some assets to have some dignity at the end of life. I’ve got to say that I’m not an expert in Medicaid planning, particularly because it varies from state to state. 50 states have 50 different laws; some of them are much tighter than others and the answer to that question, I would suggest that Dan goes to an elder law attorney practicing in his state. It really isn’t a tax issue because we’re looking at sheltering the assets themselves rather than any kind of income on those assets.

Michael: Dan has one final question, Ed. What is the single most important strategy that everyone should be doing in relation to saving money on taxes?

Ed: It’s a real easy answer and the answer is “planning”. Planning is the key to beating the IRS legally. As I said earlier, I don’t care how good your accountant is with a stack of receipts on April 15th. If you didn’t plan ahead of time, you lose opportunities. And a lot of these strategies are like Cinderella’s carriage; at the midnight on December 31st, they turn into a pumpkin. So if you don’t do your planning ahead of time, you lose a lot of opportunity. That’s why it’s so important to go to the Power Point presentation (you’ll find the link right at the end of this transcript). The Power Point presentation starts with the importance of planning; why you need to plan, when you need planning and what the benefits are of that planning. Then it goes through the most common mistakes and missed opportunities that I see with business owners. When you’re done with the Power Point presentation, you’ll find out about ways that you can actually implement those strategies and get some permanent savings for yourself. But the key is planning. You may be listening to this interview now in June, July, August and think why do I need to worry about taxes. This is exactly the time you need to be doing your planning and taking these steps to protect yourself from tax on April 15th next year. The Power Point is a great presentation but some of us know that we’re not going to sit through that. If you’re one of those people and you know you’re not going to sit through it, go to the link, take the Power Point presentation to your accountant or your financial planner and pay them to go through it on your behalf. One good idea can save you dozens or hundreds of times the cost of having them do that. At least make sure that you’re getting the benefit of that information even if you’re not doing it yourself. Taxes are too high to make mistakes. Taxes are too high to miss opportunities. And while I may be the funniest tax guy in America, there’s nothing funny about paying too much tax.

Michael: Ed, this has been awesome. And anyone listening, Ed you’ve barely even reviewed these questions and you didn’t slip up or fumble. You didn’t blink an eye. You had answers, real cash saving, tax saving answers to all of these questions and I’m really, really impressed.

Ed: Well, thank you. I’ve enjoyed the opportunity to speak and this is what I do for a living. It’s fun to sit down with a client, look at their taxes and say, here’s how much you’re overpaying; here’s how much money I can put in your pocket right now. And I’ve sat down with clients, looked at their tax returns and filed amended returns to get back over $20,000 in a single year in overpaid taxes.


I hope this interview has given you better tax strategies on how not to pay more taxes than you have to and how to identify commonly ignored deductions. Ed and I have put together a detailed Power Point presentation which you are free to view in more detail. You’ll see visually graphs that can outline more powerful deductions. If you’re the type of person who finds tax planning painful, you may want to take this presentation and give it to your CPA or your financial planner. Pay them the money to look at this hour long presentation. Certainly if they implement these strategies, it could mean saving you thousands of dollars every year. You can find this special presentation for a limited time at www.hardtofindseminars.com/taxman.htm . That’s http://www.hardtofindseminars.com/taxman.htm . Enjoy the presentation and thanks for listening.