Home office: need advice on how to best structure for tax purposes

[Slav4ikMD]

Thanks again Johanna.  Ok stupid question re car:  if you can only reimburse for interest (and insurance/gas/etc), with interest really being pennies, why does does this make more sense than the miles method for a more expensive car?  Although I hate the concept of leasing, if I did lease, could I then deduct % of the entire payment?

Would you say the method I am doing is definitely wrong and would not be allowed in an audit or is just less preferred / less clean?  I am asking because I am still trying to assess whether my accountant just gives me bad advice, which is obviously hard to assess as this is not my area of expertise...   I am all for being aggressive and using loopholes but obviously not cool with just doing random things that are not allowed.

Sorry to be a pain.  Appreciate your presence here!

[jfoxcpacfp]

As for what you can deduct, the big expense you are overlooking is the depreciation of the car. For the right kind of expensive vehicle, that can be a big deduction - you are deducting a percentage of the cost for the first five years of ownership. However, if you continue to drive it for several years after it's fully depreciated (totally written off), then you are not getting any more depreciation for a vehicle that you are still using.

Driving a car, even a fairly expensive car, for 200k miles or more is going to yield a pretty big deduction using the mileage method. Owning an expensive car that you don't drive a lot and use 1/2 the time for business is going to yield a better deduction using the actual expense method. You can change from mileage to actual expense after the first year, but you cannot change from actual over to mileage. That's why it makes sense to assess which will be the better method for you.

So your CPA recommended you calculate your car reimbursement exactly like this? I think I must be missing some pieces of the puzzle - this just doesn't make sense. What you have told me is not correct but, since you admittedly are not quite sure if you are using the correct terminology, maybe there is just a misunderstanding. I have no idea what would or might happen in an audit, though, sorry. Pretty unlikely you'll ever find out, if that's any comfort!

[Slav4ikMD]

re car:  at this point my preferred way is to finance a car (around 50-60k cost) and drive it for 5-8 years and then trade in, driving around 15k miles a year, half used for business.  (If leasing makes more sense for me, I am ok doing that in the future, this is my first "nice" car.)  Yes, what he advised me to do is add the car payment plus insurance plus gas, etc and in my case multiple by 0.5 as I use it half for business and pay myself that amount out of the business account.  Now whether he does something else with the numbers on the tax return I honestly don't know, but that is what we do.  So sounds like you are saying that is wrong.  I am not sure how depreciation would be deducted, but I imagine there are formulas.

I really think I need a new accountant.  This is not the first time I am running into iffy situations or catching him not knowing something.  (This year *I* had to explain to him how I am able to put away so much pre-tax for retirement and he said he learned something new, that's a problem.)  Wish you were closer to me as I really prefer to do things face-to-face.  If you happen to know anyone in the NYC suburbs area, I will take a recommendation.  Larry Keller already gave me on.

Thanks again, don't want to bother you too much, enjoy your Saturday

[jfoxcpacfp]

Slav4ikMD wrote:

(This year *I* had to explain to him how I am able to put away so much pre-tax for retirement and he said he learned something new, that’s a problem.)

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Now THAT is funny. It sounds as if you got bad advice about the car reimbursement, sorry about that. The principle payment could kind of offset the depreciation, but that is a pretty slap-dash way to do it, imo.

It's tax season! What else would I be doing on a beautiful Saturday in March besides sitting at my desk  ?

[Slav4ikMD]

Oh with regard to the S-corp:  we did go through the pros and cons and he said I didn't have to do it, but leaned toward doing it as he felt it would allow us to be a bit more aggressive with deductions and makes things look "cleaner."  Also I think given my overall relatively low income from the business at this stage, this allows me to put away more for retirement doing a solo 401k (18k as employee contribution plus 11ish as "employer" contribution) vs doing a sepIRA, although it's close.

[jfoxcpacfp]

Slav4ikMD wrote:

Oh with regard to the S-corp:  we did go through the pros and cons and he said I didn’t have to do it, but leaned toward doing it as he felt it would allow us to be a bit more aggressive with deductions and makes things look “cleaner.”  Also I think given my overall relatively low income from the business at this stage, this allows me to put away more for retirement doing a solo 401k (18k as employee contribution plus 11ish as “employer” contribution) vs doing a sepIRA, although it’s close.

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You can have the same plans, with or without the S-corp. Have absolutely no idea what he meant by being more aggressive and "cleaner". The only logic I can get from that is filing and, therefore, getting paid for filing, extra tax returns for you. There, I said it.

You've got a lot of pro's to pick from in NYC. I am sure you can do better. Good luck!

[Slav4ikMD]

Maybe you are right.  Frankly he did not seem to be too aggressive or insistent on doing the S-corp, somehow I felt that it was the way to go based on hearing what other people in private practice are doing.  I assumed that you DO save a bit on taxes by paying yourself a salary and "aggressively" deducting business expenses (less chance of an audit?  or is that a myth?)  I guess what IS the other option?  Just be a sole proprietor with a PLLC?  Any other ways to go about it that I should be thinking about?

(In case this matters my situation is that I have substantial W2 income and also earn in the low 100's from my own business and consulting.)  My main "goals" are to be able to maximize my pre-tax savings as well as use all possible deductions. (For W2 income I have a 457, which allows me to do either do a SEP or solo401k).

[EnjoyIt]

That is a great use of a side business.  Use a solo401K and not a SEP.  You can save more pretax in a solo401k based on your figures.

SEP IRA is 25% of income so if you make $100K then you get to save $25K pretax

Solo401K allows you to save $18K as employee portion and then another 25% as employer.  In your example ($100K-18K)*25% = $20,500 for the employer, plus the $18,000 for the employee portion for a total of $38,500.  Much better.  Plus you can still do a backdoor Roth with a solo401K but not with a SEP IRA

[jfoxcpacfp]

Slav, you are probably right and he's just doing what he has always done. I shouldn't have jumped to that conclusion and I apologize.

I don't know what you mean about "aggressively" deducting business expenses. Does that mean taking liberties with IRS code? Or just digging for and deducting every cent possible as long as the time spent justifies the results? I believe in doing the 2nd, not the 1st. However, once again, it makes no difference whether or not you have an s-corporation to deduct every cent you're entitled to.

It still doesn't matter if you are a PLLC or an S-corp as far as retirement plans. They are the same in either. I don't know enough about your moonlighting business to comment on whether you are saving that much on taxes. If it's being handled correctly, I doubt much at all.

Yes, I'd probably (in general, given the facts presented) recommend a simple PLLC. You would file on a schedule C, same as a sole proprietor, but you would not be a sole proprietor. As we've discussed on another thread in the forum, a sole proprietor may be fine as long as you have plenty of insurance coverage (liability, P&C, and umbrella).

[Slav4ikMD]

@EnjoyIt:  yes, doing a solo 401k makes more sense in my case and that is what I do:  18k plus 25% as employer contribution, although it is less than the number you presented as I pay myself a salary, so the numbers are lower.  Came out to 18 + 11 or so.  So then what Johanna is saying might make sense and I can save pre-tax even more.  I also save 18k with my 457 plan, so really I am hitting close to the 53k ceiling anyway.  (My wife also maxed out, out of her small self-employed income.)  My accountant said he's never seen anything like this, which made me very alarmed and I realized that he doesn't have many higher earner clients. (Although ironically the guy who recommended this accountant to me makes A LOT of money, way more than I do, but apparently doesn't save a penny. Sad.)

I think I really just need to sit down with someone face to face, this is a lot.  But thank you guys, lots of food for thought for me.

[jfoxcpacfp]

EnjoyIt wrote:

Solo401K allows you to save $18K as employee portion and then another 25% as employer.

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Since he has a "day" job with a 401k, just a reminder that he cannot contribute another $18k if he has already done so at his main employment.

[EnjoyIt]

That 53K limit is not exactly what you think.  Let me elaborate.

You can save $18K employee portion total over all the 401Ks that are out there.  You have a $53K limit for every employer that you have that you do not have a 5% or greater ownership stake in.  For example lets say you work for 2 separate hospitalist groups as an employee (W2) making $150K for each of them for a total of $300K and you have no ownership in either group.  You also have a side business that you own making $100K as an independent contractor (1099).  Lets say that each w2 employer offer a 20% employer contribution to a 401K.  that is $30K each for a total of $60K.  Plus your side business will generate another $20,500 employer portion of a solo401K and than your own $18K  for a total $98,500 pretax contribution.  This is obviously well over $53K and completely legitimate.  WCI has a great article describing this strategy that you may have to search and find.

Joanna is correct.  You can only contribute $18K max for a employee portion of a 401K.  But the employers have a max of $53K per employer.

 

My example is over simplified but the logistics are sound.

[Slav4ikMD]

For my W2 job I have a gov't 457 plan (no match, separate pension plan), I max that at 18k and with a 457 you CAN have a solo 401k as well!  (That was one thing I had to research on my own and explain to my accountant.)

I do have another W2 moonlighting source of income and I believe I don't have any options to save off that - as I understand it they offer a 401k (or maybe 403b, not sure) plan for full-time employees. (if I am wrong on that please tell me - always looking for options to max out retirement stuff).

[jfoxcpacfp]

You've got 3 jobs? Whether you can contribute to anything at your moonlighting W2 job (not the W2 from your corp) depends upon their plan so sounds like you may be OOL. But since you just "understand" it that way, check the SPD. They can limit you to 1,000 hours of service in a year or it could be less.

[Slav4ikMD]

haha  Yeah I like to think of myself as being creative when it comes to work and I multi-task   I also like to have various sources of income and not put all eggs in one basket, especially with the way medicine is going.  So I combine very different types of work, which are subsidized by rather different funding.  But it's a long story... I will probably aim to reduce some of the W2 work and increase my own practice over the coming years.  Given the fact that that income will hopefully only increase is another reason I am a little hesitant to undo the s-corp, but I will definitely sit down with someone to discuss this.  Thanks again!