Who here has constructive philosophy regarding taxes?

Hello,

I am looking for some discussion on taxes I can follow to an educational end... politics are not helpful here...

In a machine shop we sell product, pay for materials and other expenses, finance a variety of things, and try to save what we can for a rainy day. When feeling lucky we buy new technology.

I am looking for the simplest possible comprehensive way for a single member LLC look at these activities (plus those I have missed) from a US tax perspective so that I might keep them in mind while making business decisions in the future.


In the next 5 years we would like to build a shop (owned by an llc) and convert the business to an s corp.

This is kind of a dry subject, but I believe it is key to growing a business in this country. Thanks in advance for ideas.

Get a good accountant, and talk to a tax lawyer.

Minimize the taxes you are subject to, and pay on time. Don't ignore state and local and property (including personal)- they are a big piece of the pie.

Expense or depreciate capital investments based on the marginal tax rate- only take your marginal rate down one level the first year. Apply the deduction only against your highest taxed earnings.

oompa said:

Hello,

I am looking for some discussion on taxes I can follow to an educational end... politics are not helpful here...

In a machine shop we sell product, pay for materials and other expenses, finance a variety of things, and try to save what we can for a rainy day. When feeling lucky we buy new technology.

I am looking for the simplest possible comprehensive way for a single member LLC look at these activities (plus those I have missed) from a US tax perspective so that I might keep them in mind while making business decisions in the future.


In the next 5 years we would like to build a shop (owned by an llc) and convert the business to an s corp.

This is kind of a dry subject, but I believe it is key to growing a business in this country. Thanks in advance for ideas.

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need to talk to accountant as laws are complex. compound interest can be complex
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something not often mentioned if you have no money saved and take out a $1,000,000. loan on property you pay
loan interest
property tax
combined that can be 10% loss or $100,000. loss per year
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if you have $1,000,000. in stock market mutual fund making over 6% interest thats $60,000 income (long term decades average) if inflation is 4% stock market gains 6% over inflation so those years you see 10% gain in stock market. so if you buy business taking $1,000,000 out of stock market you go from 6% profit to 10% loss. you need 16% profit in the business to come out ahead
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some people say but i sold property for more than i paid for it. cause of inflation $1,000,000. is only worth $900,000 in todays dollars in sometimes just a few years so if with taxes and interest you pay $2,000,000 for property that initial price of $1,000,000 and sell it for $1,200,000 decades later thats only worth $1,000,000 in todays dollars you lost a million or more even when you thought you made money. inflation is a concept many have difficulty with. property is not worth more so much as dollar is worth less cause of inflation
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i have heard it said unless business makes at least 10% profit after all expenses and i mean all expenses many say dont keep business going if profit falls below 10% after inflation so thats
11% profit at 1% inflation
20% profit at 10% inflation.
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just saying many who invest in property think they are making money but often they would have made more in the stock market in a mutual fund of course where risk is spread out over dozens of stocks so even if any one is at a loss the majority gain over decades.
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and i am not even talking about taxes paid on company profits. literally at 10% income you might think you are ahead but actually loosing money after inflation, depreciation, interest, taxes, etc

Talk to a CPA.

But, if you buy a building then do it personally and lease it to the LLC or S corp, do not have the corp own the building. There are many things that can be done but involve a lot of paperwork, maintenance and costs that may or may not pencil out. Remember, it's what you keep in your pocket that counts. Once again, talk to a CPA.

Yes, you need a good CPA who specializes in small businesses. They can be the best CPA in the world for charities, non-profits, and trusts and not know a depreciation schedule from a Section 179. They have to know small manufacturing businesses. Also, make sure they are enrolled to practice before the IRS.

Don't focus your attention on federal income tax even though it gets all the press. While its not your friend, income tax certainly isn't your enemy. Heck, for a business, it isn't even named correctly. Its a profit tax, not an income tax.

Its all the other taxes and fees that reoccur whether or not you made a profit that can eat your lunch before you even have time to find a seat at the table. Unemployment, property, local gross receipts, sales, franchise, ITAR, excise, building permits, and the list goes on. After you establish your business there isn't as much you can do to minimize these taxes.

You can make comparisons among different locations as to the amount of these taxes and see what services you are getting in return before you locate your business. Great schools, good museums, libraries, and good parks and maybe you are getting your money's worth. Overpaid bureaucrats with fat pensions, high dollar arenas where overpaid entertainers play games, and crappy roads would show you may not be getting your money's worth.

We started as a sole proprieter and then went llc and are now an s corp. We carved the whole business up into llc s they own the building another owns equipment and another owns the product line. Keep the one that owns the product line broke by having everything pledged to a trust that is based out of south dakota. The llc that owns the building will have a lean on the property that is held by another part of the trust. Everything must be incumbered by a lean or a debt if you want to avoid being sued if you ever have a law suit against you. Owning nothing is key. There is no need to do any of this till you start making money. We did nothing till a few years ago because I didnt have a pot to piss in. The attorneys can set all of this up for under ten grand and its tax deductible. Then make sure your accountant is not just plugging in numbers or you can really screw up everything. We are having ourselves audited because we over paid by a lot and hope to get a refund. Dont try to do your own taxes hire real cpa s.

Just idly wondering ... can you register a company overseas and just let it do business in the US ? All the bigshots do that crap.

^^ On this, the overhead in lawyers, accountants and general paperwork may make it solely a rich man's game. Not rich, personally, so only a guess.

For the OP's original post (), you should plan to remain flexible in your business structure until the dust settles on the tax bill now in play. I'm hoping my accountant will be able to run the last year or two worth of data thru their tax software once it is adjusted to the new tax plan... once that tax plan gets thru committee. Based on news headlines and just a few data points, it appears we'll be fine, but many, many people will not be. Some of those people may work for you in the coming years. You may have difficulty affording to hire them, or they may have difficulty affording to work for you.

Definitely start the selection process for a CPA who understands your business, your goals, and with whom you agree on business structure and risk tolerance. Pick them carefully, and consider their advice.

I've tried to remain apolitical -- it's just a whole bunch of stuff is set to change, and no-one knows how much, when, and in which direction.

Chip

oompa said:

...we sell product, pay for materials and other expenses, finance a variety of things, and try to save what we can for a rainy day. When feeling lucky we buy new technology.

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As a philosophy, that isn't bad at all. You don't need any help with strategic thinking—that's all you, it can't be delegated. The help you need is tactical, i.e., a CPA who handles your tax accounting himself without turning it over to some drone in his office, and an attorney who treats your work the same way.

As Oldwrench says the CPA and attorney are basically tactical so they can advise on the consequences of your strategic plans and suggest adjustments to minimise tax. But you still need a general idea of the tactical playing field involved when sorting out your strategy. Sort of like ace coach may be great for better football plays but maybe you should be playing cricket instead.

When I went self employed my accountant gave me a spreadsheet to play with so I could evaluate the effects of doing things different ways for myself. Self employment was always going to be a short term deal for me (5 years in the end) but that playing around probably netted me something approaching £50,000 more at close out / liquidation time than the bog standard approach would have done. That said his bog standard would have got me a similar amount more than a simple "hey I'm a one man consultancy / prototype shop, I'll just pay taxes like when I was employed" approach would have done. Still surprised that it was all legal tho'.

Hopefully your CPA will have something similar you can play with.

Clive

You dont really have to worry about any of this stuff till you make money. I had no tax issues the first ten years. I wasnt really making money I was paying my bills and living week to week. After ten years we started to get some traction and thats when the tax man commeth. You start to own property and rent it to yourself you start owning the machines out right and leasing them back to yourself. You get employees and then start a profit sharing program to lesson your tax liability. I knew and still know very little but I have learned some very hard lessons about hiring accountants and book keepers. IF they are not good you will pay thousands apon thousands of dollars in additional taxes because they mis catagorized stuff. The real tax people and attorneys are worth the money. Just like machinists there are guys who mark it with a crayon and drill it with a hole saw and then there are the guys who bore it with a jig bore and make magic. If you are making money you need the magic or the guy with the crayon will bankrupt you.

the key is a good tax accountant - makes or breaks you- more important than a good tool salesperson... yep... even a good looking one.

Modern Machine Shop magazine used to have a monthly column
called "Blackman on taxes", he had a plan for anything.

One additional comment regarding tax "philosophy." While it is true that you don't really need to worry about the tax treatment of the various segments of your operation until you are actually making money, you still shouldn't let your plans be hijacked by tax consequences when you are making it. If you're doing what you want, and all at once you find yourself in the 39% tax bracket, consider it a rite of passage. Be glad you're making enough money that the government wants to confiscate some of it.

As Mae West put it, "I've been rich and I've been poor. Rich is better."

Chip Chester said:

^^ On this, the overhead in lawyers, accountants and general paperwork may make it solely a rich man's game. Not rich, personally, so only a guess.

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Say the magic words
Say EB-5
And the money's on its way !
No gift so bright
So gay so right
As the cash in hand today !




It's not as hard as people think ...

Potter's posts are good advice.

Corporate structures are useful for limiting liability and dividing profits, but can be a nuisance compared to a proprietorship. As long as you are extracting all the money out of a business, proprietorships are a lot easier to run. Just make sure that in the 1% chance you get sued, that they get nothing. Don't get insurance, it just wastes money and gives people a reason to sue you.

CPA's generally are no magic pixie dust. If you are screwing up so badly that a CPA can save you a lot of money, you have bigger problems than taxes. A CPA should save you time, not money. If a CPA is saving you money, it means you need to learn more about how taxes and business works.

The main tax issue for a manufacturer is inventory. Having to pay taxes on unsold inventory is the key profit killer for a small business. You only have to do this if you are forced to use accrual accounting, rather than cash accounting. You should always use cash accounting. Normally you only have to use accrual accounting if you have annual sales over $1 million. So, if possible this should be avoided, so you can stay on a cash basis.

If your business is large enough that you are forced onto accrual, then it is critical to minimize inventory. Just make things to order, don't stockpile materials or make product in batches.

Also, avoid borrowing money from 3rd parties and maintaining fancy books that will look good to a banker. Remember: a set of books that looks good to a banker will look good to the IRS. Don't maintain a line of credit--that's the sort of thing that attracts unwanted attention. It is far better for the owner to keep a private cash reserve. If the business can't make payroll, then the owner just "loans" the needed amount to the company, which pays it back the next month. Self financing this way will save a lot of money and keep your finances secret and safe from prying eyes.

jscpm said:

Also, avoid borrowing money from 3rd parties and maintaining fancy books that will look good to a banker. Remember: a set of books that looks good to a banker will look good to the IRS.

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Every company in China has three sets of books - the ones they show the government, the ones they show potential investors, and the real ones

Not sure if its the same there, but over here you can employ any firm, consultancy, tax specialists, you wish, but when they screw it up, remember its you thats still liable not them!

jscpm said:

Don't get insurance, it just wastes money and gives people a reason to sue you.

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So what do you do when the Contractor requests a COI before awarding the contract? Having insurance opens up a whole lot of job opportunities that are unavailable to the uninsured

Tax Philosophy:

One has an obligation to pay your taxes and a legal duty to pay as little as possible.
Get a CPA.

Chazsani