Im looking to reduce my tax liability for the current tax year. One way to do this is to spend money on the business - but I have all the computers and equipment I need and Im paid up on the hosting.
What else can a web designer do to reduce her tax? Ive thought about spending money on Adwords and then at a later date I can use that on marketing a client's website. Is this possible? Is there a pre-pay option in Adwords?
Yes, you can deposit funds in your adwords account. But this is just delaying the inevitable, you'll still have to pay tax at the end of the day unless you are expecting next year to be a lot worse than this.
Do you need any new tools that can be listed as capital expenditure?
I am not an accountant, and you need to consult one to make sure this idea has any merit. But this is what I am thinking:
Premium domain names have a value, but in reality they are something that we have to pay on an annual basis to keep it alive. Would the purchase of a premium domain name, which you can develop/improve based on your abilities be something that can be expensed fully during the year that you acquire it?
Of course, it better be something that is actually worth the money, and that you have the ability to improve.
Also, I am thinking from a US based perspective here. Not sure about other countries' tax codes.
loanuniverse: Thanks, that's interesting. I'll keep that in mind, although at the moment I don't have the time/motivation to buy a domain and develop a website that will make use of it.
irishman: I work part-time, and spend the rest of my time freelancing. I don't push my freelance side much, so next year's freelance earnings could be a lot worse - although that's what I've thought for the past 2 years!
I did have a thought last night: If I did pre-pay money into an Adwords account, then I could offset that against my income (thus reducing my tax bill). However, when I come to use that budget for marketing a client's website, Ill invoice them for that budget (plus my time to implement the campaign) and Ill be taxed on that invoice amount!! . I suppose - if I get my figures right - Ill be paying the lower tax rate rather than the higher tax rate.
Before buying a high value domain name, do double check with your accountant as to whether this would be classed as an asset or a business expense, as in most countries this would affect the way you treat it in your accounts. Probably an asset, as it can be re-sold for a loss or profit, but the question is, can you claim depreciation on it.
This information is valid only for US taxpayers:
I did some research today. It looks as if one is not able to expense the cost, and instead the costs must be capitalized. This means that costs can not all be deducted on the year that they are incurred, and instead you get to either deduct a portion annually or only get to deduct a portion if the assets are impaired.
Website Development Costs
Generally, any website costs that are not software are classified as website content. This includes literary content, graphics, sound, and video.
Advertising content is deducted currently. All other content is capitalized if it has a useful life extending beyond the current year.
Internet Domain Names
Domain names are generally regarded as intangible personal property. The nominal annual domain name registration fees are generally deductible.
However, if a retailer acquires a domain name, then capitalization should be considered under Treas. Reg. 1.263(a)-4(b). The retailer is paying for a property interest that meets the definition of a purchased intangible.
Some retailers may acquire multiple domain names at premiums to protect the reputation of their business which may be considered for capitalization.
My advice would be reconsider the whole thing. If there is something you need that is tax deductible, that's great. But looking for something to buy just to reduce your taxable income by the amount of the purchase seems like a poor strategy to reduce taxes.
The low hanging fruit of tax reduction are things like retirement accounts, etc. Some people are predicting an increase in tax rates and would prefer to pay tax on income today rather than deferring it (which is all you are doing, in a way) and would actually take more cash out and into a ROTH account.
Regardless, I'd rather have ($x) than ($x - somethign I didn't really want) any day!
I do like the idea of burying money in the Adwords account, from an accounting viewpoint
it's very much like a speculative investment. There's no way of getting the money back
directly from Google and the outcome of a campaign is never certain.
Go speak to an accountant they should be able to save you more money than they charge
for their services if they cannot then they are
a: not very good and
b: overcharging you lol!
They will be well versed in the finer points of the local taxation sysyem and will probably
surprise you with what can be moved into the colum for deductable expenses.
Ours came up with a nice way of getting more deducted from our electricity bill than
the normal flat percentage that typically applies to those working out of home. We bought
an old electric meter and connected the 'office' shed through it so we can now prove
how much juice we use and get it all deducted as a running expense.
Our dogs arealso on the company books as security guards, we could not quite swing it with wages
for them (no social security number) but now their medical insurance is also offset.
Dining out/ Ordering In takeaways = entertaining prospective clients
Paying the kid next door to paint the garden shed = office/ property maintenance
Prolific writers of content such as movie and video reviews can also justify
cinema tickets and rental fees as legitamate 'research' expenses and dare
say this could be expanded to cover other areas.
From the tenor of your post I'm guessing that you are located in the USA and if you are, you should incorporate now. Not next week; now. As things are for you now, you are spending much more than you need to spend becase you are paying tax on all your income and therefore anything that you buy actually costs you more, effectively in some cases as much as 25-28% more than they should because you are paying tax on the money you use to buy those things. If you look at it that way I think you can get the point.
With a corporation, you are spending pre-tax funds and the corporation may well owe NO tax at the end of your tax year. You would of course owe tax on whatever personal income the corporation pays you but since the corporation is the the entity buying the required goods and services for the business, your personal income need not be all that high if you want to keep your personal taxes low. This is all legal and not nearly as complicated as it might sould. Do a little homework and don't get caught up in the "double taxation" stories about corporations because there are quite legal and effective ways around that!
I am sorry, but this is incorrect. Business expenses are deductible even if you are not incorporated.
I did not write that business expenses could not be deducted as a sole proprietor. I suggested that the corporporate structure is much more advantageous than a sole proprietorship and it is.
For example, as a sole proprietor you can deduct the cost of mileage you drive for the business but generally cannot deduct the cost of the car, except as depreciation. You can take the standard deduction or use all expenses connected with maintainence, insurance, etc but only to the extent that the car is used for business.
Buying the car through a corporationi allows you to deduct the whole thing in one way or another, generrlly without the risk of rsaing the spectre of an IRS audit.
For insurance purposes it may be preferable for the corporation to own the car. If the corporation owns more than one car it may obtain better insurance rates. If a corporate-owned car is involved in an accident, its rates for other cars generally are not affected and your personal assets are protected in case of a law suit against the corporation arising from an accident.
More examples of deductions available to corporations not available to sole proprietors:
When you incorporate there are numerous tax advantages at your disposal that are virtually impossible to accomplish with other business entities. When you incorporate you create a separate and distinct legal entity. Because of this, there are many transactions that you can structure between you and your corporation to save big money on taxes. For instance, if you own a building you can rent office facilities to your corporation and claim depreciation and other deductions for it. Your corporation can then claim the rental expense. You are prohibited from doing this if you are a sole proprietor or a partner in a partnership.
I did make one error in my original reply in this thread which was due to sloppy editing on my part. I wrote "....all of your income...", when I should have written something like "...more of your income and generally at a higher rate..." Sorry of this error created any confusion!
In my poor country, Vietnam. All of people and and enterprises want to reduce tax, for my company, i opened an offshore company in Hongkong because this is free zone. When i purchase something from other countries, i will make payment out from my bank account in Hongkong and when shipment arrive Vietnam. I will under invoice for customs clearance, in this way i can reduce import tax and income tax. For example: if i purchase a car with value $100,000 from Japan, i will make payment of this amount to car supplier from my bank account in Hong Kong. After shipment arrive in Vietnam, i just clear customs at price $70.000 and i can reduce tax. In my country, most of products the government do not apply "anti-dumping price"
This is all fine and good, but spending money to avoid paying taxes is an awful way to reduce taxes.
I would recommend learning about things like SEP-IRA's, and other more sensible techniques to save on taxes. You will never get rich using tactics like sticking money into Adwords or putting your dog as an expense. Concentrate on making MORE MONEY and get into bigger ticket tax-avoidance techniques, and you'll be better off in the long run.
Having reread your post, I take serious issue with the advice that you are giving on this forum. Note that the original poster may not be earning enough to make an LLC worth it, may not have an understanding of what it takes to handle an LLC taxwise, and you have no idea of what his tax picture looks like.
How can you so aggressively suggest that someone incorporate 'now, not next week, now' when you have no idea of their situation? You have the benefit of anonymity, but are you a CPA, tax expert, attorney, or otherwise qualified to make such strong conclusions? From your username, my guess is that you are in the business of incorporating which makes your posts even more suspect.
Further, telling someone that they 'may well owe NO tax' at the end of their tax year is ridiculous. What is the basis for that? Anything is possible, but is that a likely or even realistic scenario? You comment about the 'double taxation' stories makes no sense either. It's possible to elect s-corp status and pass-through, but that doesn't even apply to an LLC which would be taxed as a partnership unless otherwise elected. But, the concept of double taxation is alive and well - it just has no context here.
Finally, this whole sentence is mind-numbing and makes little sense: "You would of course owe tax on whatever personal income the corporation pays you but since the corporation is the the entity buying the required goods and services for the business, your personal income need not be all that high if you want to keep your personal taxes low. " What is your point? Everyone knows you can reduce personal income by buying stuff through an entity and deducting it, but unless you have a strategy that makes sense and you have actual, useful expenditures that you can take through the LLC you are not going to be successful reducing taxes unless you are also willing to trade your income for a lot of 'stuff' that you may or may not need.
People come to this forum for thoughtful advise and all of them are at difference levels of sophistication with regard to business and finance. It's important to keep that in mind when giving out important advice about legal/taxes - bad advice can really hurt people.
Sorry abut not replying sooner but I was out of commission for a few days with the flu. The weather changed drastically here and half the people I know came down with the stuff! You have indeed made some good points but I must take issue with a few of them.
First, I don't deal with LLCs at all. LLCs work for some people and that's fine. I don't like them for general business applications, especially internet marketing and I could write a book on why not but there is no need. I just don't deal with them at all.
"S Corp" election is up to the taxpayer and may be a beneficial choice, depending on the circumstances but "S Corp" election may affect liability potential and it is my considered belief that anyone who is engaging in internet marketing in any serious way, at least if located in the USA or wants to do business in the USA should engage in that business through a corporation.
I referred "double taxation" only because many people out there avoid the corporate model because of that particular old worn-out diatribe and although it is true that the same money can indeed be "taxed twice", it all depends on how the corporation disburses its funds.
Yes, indeed this forum is about helping people and I have simply offered what I beleive to be true and do suggest that anyone considering the corporate model do some homework. If you're in business you're going to have to have some setup and the corporation in my opinion is the best and safest way to go and need not be all that expensive to set up. Concerning accountants, most of whom are very conservative; they fill out forms and generally possess the creativity of a lump of sandstone. Make an accountant earn his/her money and if the accountant is too conservative and won't avail you of all the advantages of the coroporate structure, find a new one!
I'll cut this short now with this:
I know a fellow, elderly now and a millionaire many times over and you might have even had a sort of contact with him if you've ever been given a radar-based speeding ticket. He's the guy who brought the radar gun to law enforcement. He's fond of saying that there is no corporation that he cannot keep on the verge of bankruptcy and dead broke, paying as little tax as possible.
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