As you likely know, having your business hiring your   children as W-2 employees is a great tax saving strategy.

The hire-your-child strategy works best for the Schedule C proprietorship because when the proprietor hires his or her under-age-18 child, the tax code exempts both the child and the proprietorship from payroll taxes.

That’s great for proprietorship owners who have children under age 18. But if you hire your child and operate as a corporation or your child is age 18 or older, both you and the child suffer payroll taxes.

This article gives you a strategy to avoid payroll taxes on children over age 18 and on children doing work for your corporation.

Let’s say that you could pay your child $23,225 with this strategy:

• You deduct the $23,225 in your high tax bracket.

• Your child pays $1,028 in taxes. ($12,950 standard deduction, single tax bracket 10% of $10,275)

That’s a good return on investment.

First, The Rules – Net Earnings from Self-Employment

The tax code says, “The term ‘net earnings from self-employment’ means the gross income derived by an individual from any trade or business carried on by such individual . . .”

The Supreme Court ruled that to be in a trade or business, you need to be involved with continuity and regularity and that a sporadic activity does not qualify.

Second ,Putting the Strategy in Play

If you contract with your child to perform a one-time task such as build your business website, create several business videos, assemble office furniture, or paint the office or building, your child is not in a trade or business.

Most importantly, that one-time task is not likely to make your child an employee. Make sure you don’t cross the line and make your child an employee or you will destroy the strategy.

And since this is not a trade or business and only a for-profit endeavor, you don’t want your child to incur any expenses, because the Tax Cuts and Jobs Act disallows, for tax years 2018-2025, miscellaneous itemized deductions subject to the 2 percent of adjusted gross income floor.

If you need the office painted, your best bet is to have your business buy the paint and materials.

If you mess this up, it’s likely that your child can deduct the costs of the paint and materials.  But that creates paperwork for the child and possible disagreeable discussions with the IRS.

Takeaways

The one-time project can avoid having your child on the payroll, and it can give you the best of all worlds.

For example, say you are in the 40 percent federal bracket and you pay your 20-year-old college student $23,225. You deduct the $23,225 and save $9,290 on your taxes.

Your child pays $1,028 in taxes.

Think of it this way: the family unit (you and your child) saves $8,262 ($9,290 – $1,028).

The post PAYING FOR COLLEGE- A NEW TWIST ON AN OLD STRATEGY appeared first on Forrest W Cameron CPA, PC.

Almost every new client that comes to me has one thing in common – A nonexistent or crappy mileage log.  

However, what one record receives special attention during an IRS audit? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records? And for those of you that need an overhead audit, what one record can cause your rate to plummet?

Let me address a big myth - There's a common misconception that if you keep track of actual expenses, you don't have to track mileage. But you can only deduct business expenses, so you still have to track mileage to separate the business miles from the personal miles. How do you accomplish that task?

Yep, that pesky and annoying mileage log.

Here is why it’s such a big deal:

The Problem:

Taxpayers That Fail to Keep an Adequate Mileage Log are Getting Crushed by the Courts

The IRS imposes strict substantiation requirements for business mileage.

As a business owner, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:

1.         Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)

2.         List your total business/investment miles on each vehicle.

3.         List your total commuting miles on each vehicle.

4.         List your total personal miles on each vehicle.

The mileage log is the record of proof that you need to use for your answers to the tax form questions.

When it comes to logging business mileage the IRS defines adequate records must include:

Mileage for each business use

Total mileage for all purposes during the taxable period

The time (date will do) and place (your destination)

The business purpose of the use

Right now, you are probably asking yourself “How bad can it be?”  The answer – BAD, REALLY BAD.

Let’s take the court case of Paul Martin v. Commissioner, the IRS disallowed Mr. and Mrs. Martin’s auto and travel expense deductions of $9,185; $30,807; and $40,627 (for 2012, 2013, and 2014, respectively). The IRS noted that the Martins failed the mileage log and travel substantiation requirements of tax code Section 274(d).

Under this tax code section, the IRS says in its regulations that substantiation of vehicle use and travel expenditures by adequate records requires the taxpayer to maintain an account book, diary, a log, a statement of expense, trip sheets, or a similar record prepared contemporaneously with the use or expenditure and documentary evidence (e.g. receipts or bills) of certain expenditures.

The IRS considers a mileage log that is kept weekly as contemporaneous for this purpose.

To substantiate their auto expenses, the Martins submitted mileage logs to the court that appeared to show how many miles they traveled each week but not the individual dates of travel or the places to which they traveled. Because of the failed mileage log and no proof of travel, the court agreed with the IRS and denied the Martins their $81,619 of claimed auto and travel expense deductions.

The Solution:

Hopefully, this cautionary tale has convinced you that it is time to implement a new strategy. If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day, and there are some great options.

Good mileage logs range from paper logs, online and phone apps, and even GPS models you install in your vehicle.

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