[Grumpy]

here is an idea I had last night while trying to fall asleep (Yes I dream about money). Many contractors find ways to mask their incomes to limit taxation. I won't name any names

You can take some of your personal funds and make a loan to your company with a high interest rate. It doesn't matter if your company needs the money or not. The interest may be tax deductable, and definetly counts against your company's bottom line. Mean while the money comes to you no matter what it just decides to drive a different street to get to your pocket

Run this idea past your accountants. Let me know what they think.

 

[pgriz]

The problem with many of the methods used to "disguise" income is that they work up to the point the Internal Revenue people audit you. If they have any suspicions, all your accounts can get frozen and it will then be up to you to prove that you did nothing wrong. Proving this takes money, and the US government has more of it than you do. Practically speaking, if they have suspicions about your income, you're as good as out of business. While the chances of being audited are pretty small, all it takes is someone who doesn't like you (competitor, ex-employee, unhappy customer) to make the allegation and you're on the hot seat. If your books are clean, and your expense ratios reflect the "normal" patterns, then you're off the hook, otherwise you've just landed in a swamp. I know too many people who got caught and ended up losing their business and sometimes their homes and property. They now make their living selling (or installing) for others and have little leverage with the people who employ them. Also don't forget, that even if an accountant says it's OK, will the revenue people accept his/her opinion, or will they challenge with their own experts? Being in roofing, I've been audited three times in seven years, and each time I've gotten a clean bill of health from the tax authorities, but the experience is never pleasant.

 

[Grumpy]

Canada must hate roofers, if youve been audited that many times!

I'm not encouraging doing anything wrong. I'm not encouraging cheating. I'm encouraging limiting your taxation. In the many forums I have posted this idea, it's received criticism from many contractors, including those that I know have done similiar techniques to limit their taxation. Strange. Strange indeed.

 

[pgriz]

Canada must hate roofers, if youve been audited that many times!

I'm not encouraging doing anything wrong. I'm not encouraging cheating. I'm encouraging limiting your taxation. In the many forums I have posted this idea, it's received criticism from many contractors, including those that I know have done similiar techniques to limit their taxation. Strange. Strange indeed.

The problem is that roofers fall into that group of contractors where all kinds of shenanigans go on. So the audit people treat almost all contractors with deep suspicion. Fortunately (unfortunately?) there are a lot more contractors than auditors, so the chance of someone getting audited is relatively small. However, once you're on their radar screen, they seem to want to come back. Maybe I'm part of their quota system, as in "Gotta audit three companies before lunch".

As for your getting responses from contractors that are doing "funny stuff", maybe they think that they won't get caught. As my accountant told me in my first year of business "tax avoidance is a duty, tax evasion is a crime". So every year we sit and review the situation and see what options are available to me to avoid paying excessive taxes (don't forget, we're the north american champions in terms of getting taxed). Once we have a strategy, this is documented, and we proceed. It's the documentation that keeps the tax people off my back. The first audit, they were in my office for several days. The second audit, it took all of one morning. The last one, they did over the phone and I faxed in the backup to the items they wanted to review.

 

[Mike Finley]

The interest would be an expense against income in your business. So the tax savings would be equal to the tax rate of your business entity. However, the earned interest would be taxable as personal income, so it is going to be a wash or it could cost you money.

 

[Guest]

How does that help?

The business then writes off the interest as part of doing business, but must show the money borrowed as an asset or show that it was spent/lost not invested or it is again an asset for the company. Then you as an individual must show the interest earned as personal income and pay tax on it?

Keep the money in your personal account.

 

[philner]

I Know a Guy ( to not name names) who pays himself most of his income as dividendsnot payroll.(This real close friend of mine is an S corporation). This allows him to not pay self employment tax,unemployment tax or workers comp. on that income. saves about 20% of income that way.this was suggested by his CPA. The man with no name

 

[wireless]

I Know a Guy ( to not name names) who pays himself most of his income as dividendsnot payroll.(This real close friend of mine is an S corporation). This allows him to not pay self employment tax,unemployment tax or workers comp. on that income. saves about 20% of income that way.this was suggested by his CPA. The man with no name

That is perfectly legitimate if he is taking a small salary and the rest in dividends.

 

[philner]

That's what his CPA says. I would never reccomend doing anything illegal on you taxes.

 

[Double-A]

That is perfectly legitimate if he is taking a small salary and the rest in dividends.

Not taking a regular salary and taking your wages out in dividends only can open your s corporation to be declared a front and the corporate veil that protects your personal assets can then more easily be pierced.

 

[philner]

You do need to take a nominal salary in addition to the dividends, But legaly the entity is a corporation and you are a stock holder and the board can declare a dividend and if you are the only stockholder the entire declared dividend goes to you.