[harryn]

Hi, I am not a tax law expert or advisor, but I have to pay taxes just like most people, so I tend to read about this stuff.

I would like to use this thread to gather information about the tax changes that passed ands strategies to deal with them, because they are in fact quite significant to the average machinist and machine shop owner. People that read / post here on tax ideas should keep in mind that I am talking about following the tax laws, but using the wild and crazy ideas of our congress to pay only our fair share.

Again, this is not anyone's "formal advice" just people's ideas, similar to comments people make about wood or metal cutting strategies.

[harryn]

Social Security / Payroll Tax Change

The first thing that strikes me about the law that so many politicians said would not increase 97% of American's taxes - is that it increases (total) taxes on most Americans, at least as far as I can tell.

The most obvious is the payroll / social security tax.

If you are an employee making an example $ 20 - 50 K, the largest tax you pay is in fact payroll / SS tax. In normal years, this is
- 6.5% paid by the employer
- another 6.5 % paid by the employee.

If you are self employeed like me, we get the joy of paying both sides of this tax, for a nice 13 % hit on income, before we pay income tax.

The main tax break most Americans received the past few years was a 2% reduction in the employee side of this tax. IMHO, this was the main boost the economy in 2012 and kept a lot of businesses solvent.

This tax break was eliminated in this grand deal, so the average American is going to "feel" like they got a 20 - 30 % tax Increase in 2013, rather than "no change".

Feel free to comment / let me know if I am mis reading this.

[harryn]

Capital Gains Taxes - the big winner

It should come as no surprise that the big winner in this deal are those that play the "rigged game" of wall street roulette.

If you earn your money directly (or indirectly) from capital gains rather than a "normal paycheck", then you have won big on this deal.

People earning their money via capital gains appear to me to have several significant benefits:

a) No payroll / social security tax on this income
b) The rate for the first $ 400 K appears to have remained 15 %, and does nto rise until after $ 400 K of capital gains income

As far as I can tell, this means that if you earn between $ 50 K and $ 400 K AND your earnings can be called "capital gains" rather than "payroll", your total taxes are about 50 % compared to a payroll based wage earner.

[harryn]

Possible Tax Strategy

For small businesses located in California, between changes in:
- Federal tax law
- New health law
- CA special tax changes

My perception is that most small businesses here will pay 3X as much in 2013 vs 2012. If they do nothing, my perception is that few can withstand this shift.

This makes it interesting for small business owners to have conversations with their accountants, and possibly a tax lawyer about re - organizing their business structure to match what congress is pushing us toward.

My perception (and I am still trying to figure this out myself) is that it might be possible to re organized a business structure so that your income is coming from "capital gains" rather than "payroll" or "new profit".

It could turn out that this approach might result in a substantial difference in tax at the end of 2013. Then again, this is never completely straight forward.

[packrat]

Social Security / Payroll Tax Change

The first thing that strikes me about the law that so many politicians said would not increase 97% of American's taxes - is that it increases (total) taxes on most Americans, at least as far as I can tell.

The most obvious is the payroll / social security tax.

If you are an employee making an example $ 20 - 50 K, the largest tax you pay is in fact payroll / SS tax. In normal years, this is
- 6.5% paid by the employer
- another 6.5 % paid by the employee.

If you are self employeed like me, we get the joy of paying both sides of this tax, for a nice 13 % hit on income, before we pay income tax.

The main tax break most Americans received the past few years was a 2% reduction in the employee side of this tax. IMHO, this was the main boost the economy in 2012 and kept a lot of businesses solvent.

This tax break was eliminated in this grand deal, so the average American is going to "feel" like they got a 20 - 30 % tax Increase in 2013, rather than "no change".

Feel free to comment / let me know if I am mis reading this.

The pay roll tax break was a "tax holiday". It was never meant to last forever, when it expired it was a natural thing. It was something the Republicans never liked from the start of it.

[harryn]

The pay roll tax break was a "tax holiday". It was never meant to last forever, when it expired it was a natural thing. It was something the Republicans never liked from the start of it.

I agree that it was a temporary break, and one of the few that actually lowered the taxes on people in the $ 20 - 50 K earned income range.

There are a whole slew of items which were considered temporary, such as the reduced capital gains tax rate and many other tax rates, often called the "Bush tax cuts". All of these were planned as temporary.

Most payroll based employees don't mentally separate social security / Payroll tax from their income tax, because both come directly from the pay check and both show up on their 1040 form as income tax due. For most Americans, this is a portion of their income tax.

I am not debating the relative merits of the taxes and their application, I am just making observations about how people will "perceive" their total tax bill. In many cases, it will "look" like their taxes went up 20 - 30%.

I am just starting a dialog in this "business practices" section about the relationship between company structure and taxes so that people can think about the situation and plan ahead.

[dsnellen]

Possible Tax Strategy

<snip>

My perception (and I am still trying to figure this out myself) is that it might be possible to re organized a business structure so that your income is coming from "capital gains" rather than "payroll" or "new profit".

<snip>.

Harry,
Unless you are operating a hedge fund, business net income is fully taxable. Not sure if the phase "your income" refers to the business or the individual. As a small business owner, you already know the advantages of operating a small business. The best thing you can for yourself is create a company funded 401(k) type retirement plan for yourself. It is a direct expense to the company aka non-taxed, and you will benefit at a later date aka deferred taxation. Further structuring will allow you to create a "capital gains" income or a tax free income. Ensure the business is paying its fair share of all expenses. Depreciation of new assets and charitable donations of older equipment will also help. You need a good business advisor and CPA to ensure you are not leaving money on the table for the government to pick up. And don't forget: DO NOT over react to current events. Tax laws come and go and can be made retroactive so tax planning is difficult at best. Stick with the basics and things will work out.

Dave

[harryn]

Hi Dave, thanks for the reply.

I am looking at two businesses actually:
- Mine, which is setup as a C corp
- My son's, which is setup as an LLC

As you can imagine, we have interesting discussions about which structure(s) can provide the best tax treatments.

The 401(K) is an interesting one. It does of course have the downside of pushing a person's investments toward the stock market.

The hedge fund idea is also an interesting approach, not so much for my business, but for some larger ones.

At one time, life insurance was used to defer some personal income, but I think this is not as good of system as it used to be.

[dsnellen]

Harry,
I wrote a nice reply already but since this site is a blacklisted site I had problems and lost the write up. I wish the owner would fix this. In summary, create a company funded retirement plan for yourself and other employees. A 401(k) type plan is probably best and you can also contribute along with the company. It is an expense to the company (non-taxed) and an appreciating asset for you (deferred taxation). Yes, you will invest in equities but this is the only way to beat inflation. Life insurance is a non-starter as it doesn't benefit you.

An LLC doesn't have to file a tax return. A C corp and S Corp do, so they require additional bookkeeping and a separate taxable structure. I can go into great detail on these subjects if you like.

Dave

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