Freelance Forum March Meeting Was All About Dollars and Sense

By David Knope

 

Finances for freelancers was the topic on March 4, 2010, when Mark Wyssbrod (Pro@ctive CPA) spoke about taxes and how to manage cash flow in small businesses like ours. If you did not show up because you thought it was going to be just another boring black and white account you missed out! Wyssbrod was entertaining as well as informative. He used real life examples to help show how to use the tax code to your advantage. But more importantly he tied in how tax decisions can effect our business and not all “good” tax decisions are “good” business decisions.

 

Big Brother, Big Appetite! Due to government budget deficit issues it is more than likely taxes are likely to go up. But Congress believes tax rates are the appetizer, the main course is the likelihood audits will increase as the IRS seeks to recover missing tax money from scofflaws.

 

Watch out for claiming losses year after year! A business that shows a loss in three of five years is may not be considered a business, but a hobby according to the IRS, the current economy notwithstanding. You may be able to protect yourself by becoming a legal entity and having a written business plan.

 

Things that sound good for taxes, aren’t always good for us: We heard how good tax decisions are not necessarily good business decisions. Case in point: the seductive offers of tax-deductible SUVs back in 2002 that are now playing havoc with cash flow today. Such offers are often not so great from the cash flow perspective because all the deduction is usually in the first year while the financing extends over multiple years. Sometimes it could be cash flow timing. Although everyone loves to get a tax refund, as a business owner you want to try to break even so you have your monies throughout the year and are not having to wait for the refund to show up.

 

Wyssbrod also explained different ways to protect your assets in case your business implodes. Those include incorporating your business or becoming an LLC. Sole proprietors leave themselves vulnerable to business risk. All business entities should file for a business license.

 

Business owners need to protect assets: By setting up your own LLC or corporation you can begin protecting your personal assets from any business improprieties. In addition you can contribute to tax-advantaged retirement plans which are protected from creditors (up to a million dollars per taxpayer) and can help diversify your savings from risk. Of course, that led to discussion of investment vehicles like IRAs (Traditional, Roth, SIMPLE and SEP), 401(k)s, and even the legacy artifact once known as a pension.

 

Expectations – The glass is half empty: We shouldn’t expect Social Security and Medicare to take of us in our old age. It was never intended to. And with the huge crop of boomers starting to retire, it won’t get better anytime soon, especially for the younger generations who will be funding the debts of these programs. We all need to be setting funds aside regularly to live on in our old age. 

 

Plan and then check: If you are set up as a corporation or s-corporation, check to see if the tax savings is paying for all of the extra work which needs to be completed (payroll tax returns and corporate tax returns). Three ways to take cash out of your business include compensation, dividends and employee benefits. Do you have the right balance of these items to be tax efficient?

 

Jumping through hoops: If you are set up as a corporation (s or c), you are an employee of your own business and must pay yourself a salary. That often involves paying for outside help with payroll and accounting. You should check each year to see if you’re really getting tax advantages from your current setup. You are jumping through hoops to help reduce your taxes, are you getting enough tax benefits to pay for the additional work?

 

Home office at the closing table: If you deduct expenses for a home office, keep good records because you may have to recapture depreciation deductions when you eventually sell your home.

 

Bottom line: Be aware, careful, flexible, realistic and entrepreneurial, and plan ahead.

 

Finally, some good news: Energy-saving improvements are smart moves and recent tax code changes make many of them deductible.

 

Cannot Forget And Don’t Miss Him Next Year: For a CPA, Wyssbrod does a very entertaining rapper imitation! Yes, that is correct. With hip-hop music blasting from the other room, Wyssbrod did not miss a beat. He used the hip-hop to his advantage to complete an entertaining dance and lyrical masterpiece. Wyssbrod made lemonade out of lemons with the music; I wonder if he can do the same with the tax code. Wyssbrod for Congress anyone?

 

Contact Wyssbrod at mark [at] pro-active-cpa [dot] com (mark [at] pro-active-cpa [dot] com) or 770-664-8583.