How To Cut Your Taxes To 10% Or Less

Written by Greg | 21 December 2009

Introduction 

Most people are overpaying their taxes-significantly.  If you are paying more than 25% in income taxes (federal, state and self-employment) then you are paying too much.  The average person currently pays 31% and, with the changes expected from the Obama Administration, it could be closer to 50%.  Yet, our typical client pays less than 15% with many getting their taxes into the single digits.  You can achieve similar results.  The strategies contained in this document will provide insight as to how. 

Your PEPP Network Provider has worked with more than 4000 clients and students, saving them millions of dollars. These PEPP Network Providers are affiliated with the National Association of Tax Professionals, the National Society of Accountants, American Society of Certified Public accountants, The National Society of Tax Professionals, The National Association of Tax Consultants, and the American Bar Associations. 

If you are a business owner, investor or professional, PEPP Network Providers can help you cut your taxes in half, perhaps less.  This team is made up of dedicated lawyers, accountants, CPAs, former IRS agents and auditors, who all share the philosophy outlined in the famous tax case, “Helvering v. Gregory” F2d809 (2d Cir 1934), that says; “it’s your right as a taxpayer to pay your fair share and not one penny more”.

Not a single one of the strategies utilized has ever been denied by the I.R.S. Not only do they save clients millions of dollars, they also help them audit-proof their records, something that is sorely needed by taxpayers today. 

 The Strategies 

The following is a small sample of the strategies the PEPP Network Providers employ for clients.  Each is time-tested and stands on solid legal ground.  Yet, these strategies are underutilized by the majority of tax professionals.  Some are avoided because they are considered “risky”, even though they come directly out of the Tax Code.  Some are underutilized because they are misunderstood or applied incorrectly. Others are missed all together because they are simply not known to even the highest paid and most respected accountants and CPAs. 

As a successful business owner, you probably pay your accountant a lot of money to do your taxes, and you expect that they are committed to saving you money – legally. Yet, experience has proven that this is not true.  Most firms, large and small, do not dedicate the resources to maximizing the benefits available to you, their client, under the tax code.  When asked about their accountants, many people respond that they are an old friend, a nice person or someone of good standing in the community.  Yet, this is not an accurate test of whether you are overpaying your taxes. Simply put, the test is whether you are paying more than 25% (federal, state and self-employment combined).  If you are, you are overpaying your taxes. Thankfully, you can do something about it. 

Here is a small sample of the strategies you should consider: 

STRATEGY 1 – DEDUCTING YOUR HOME OFFICE 

This strategy is often advised against for one of two reasons:  it’s either called “risky”, something to be avoided for fear of raising ‘red flags’, or it is labeled “not worthwhile”, as the savings are too small. Yet, neither of these statements is true. 

IRS Section 280 clearly states that, as a business owner, you are entitled to have a home office.  In Commissioner v. Soliman, an update to the code the same year [280 (A) (c) (1)], the law clearly allows you to have both a standard office and a home office.  So there is nothing inherently risky about this deduction at all. The problem is that most people don’t keep the right documentation, yet that’s no different that most other deductions they take. (We’ll discuss the need for proper documentation later in this article).  So, the answer isn’t to avoid it (and lose out on a perfectly valid deduction), the answer is to learn to do it properly and safely so that you get the financial benefit. 

Even people who do take this deduction are grossly underutilizing it.  That’s because in addition to the actual “office space” (usually about 150 square feet) there are “bonus deductions” that can also be added.  For example, you can deduct the hallways, closets, foyer and stairway.  Add to that a storage shed, garage or basement if you use those areas for business. Then there are programs, snacks, and certain meals.  Combined, these items can bring the value of this deduction from $1500 to $2000 a month (or more).  That’s $24,000 a year in deductions!  That’s real money and a worthwhile deduction to implement. 

STRATEGY 2 – EDUCATION 

When today college costs can run between $20,000 and $40,000 per year!  Most believe tuition is not deductible.  

In fact, the Tax Code provides at least four different ways to pay for education – both for you and your children.  By hiring your children, their salary can cover the cost of informal education like music lessons, karate and dance.  Also an Educational IRA and Educational Assistance Plan can be used to pay for private school.  Then, there is the Educational Assistance Plan (Sec 127) which can cover up to $5250 in educational expenses.  And the Treasure Coast trust (sec 419) allows you to pay for all institutional education, including college and graduate school, with pre-tax dollars.  In other words, all kinds of education can be paid for, both for you and your children completely tax free! 

STRATEGY 3 – ANNUAL MEETINGS 

Corporations were created to protect the assets of you, the business owner.  Yet many people unwitting lose that very protection by failing to conduct and document their annual meetings.  The Business Corporations Laws of each state require that certain corporate formalities be adhered to.  For example, corporate minutes and resolutions, minutes of shareholder meetings and the like.  Most business owners don’t realize this and their tax and legal professionals fail to advise them of the consequences.  Imagine what would happen if you were ever sued and the judge disregarded your corporate protection by “piercing the corporate veil” because you didn’t follow these necessary corporate formalities.  You could lose everything to a money judgment, including your house, your cars and your bank accounts. 

Consider this – if your corporate book is collecting dust somewhere in your house, or worse yet, on a shelf at your attorney’s office, you should be concerned.  You must immediately update those corporate records and keep them in good order. 

There is also a tax benefit for adhering to these requirements. Conducting your annual meeting in an appropriate setting is a legitimate business reason to travel.  So, why not hold your annual meeting in a resort setting. For example, you could bring your entire family to Aspen, Colorado or Orlando, Florida.  By conducting your annual meeting there, updating your corporate records, discussing marketing ideas and perhaps creating a new business plan, most of the trip (including the fun activities) can be deducted through your corporation. 

STRATEGY 4 – ENTITY STRUCTURING 

The choice of the best business entity(s) for your needs is important and complex.  We have seen many business owners, even with the advice of counsel, make the wrong decision or make no decision at all by operating as a sole proprietorship or general partnership.  This can have devastating consequences both from a tax and asset protection perspective.  Some tax professionals counsel their clients to wait a few years before setting up a corporation in order to save the extra costs of filing a corporate return.  Or they recommend “keeping it simple” with an “S” Corporation, ignorant of the insufficient protection this structure provides. 

Here’s a lesson from the school of hard knocks – all it takes is one lawsuit gone bad and the small cost of setting up the right structure will pale in comparison to the damage you incur.  A single judgment could cost you millions of dollars and follow you for the rest of your life.  That’s a bad trade in anybody’s book. 

There are millions of lawyers in this country and many earn a living suing people – people just like you.  In fact, one in four people will be involved in a lawsuit in the next twelve months.  And the statistics are worse for business owners. 

There are powerful strategies to limit your risk and actually deter lawsuits.  There is no need for risky offshore trusts and International Business Corporations which have come under scrutiny with the IRS and Federal Government.  Your PEPP Network Providers use tried and true strategies and structures to enhance your wealth and protect your assets. 

LLCs and Limited Partnerships come with the built-in benefit of the charging order.  This can create and enormous asset protection advantage for you – for no additional cost.  Yet, few, if any tax professionals fully understand these entities, so they leave you unnecessarily exposed.  Properly utilized, the charging order can prevent creditors from seizing your assets while at the same time creating phantom income (and therefore huge tax liability) for the creditor.  The net result is that the ‘bad guy’ would be worse off it they sued you and won the case, than if they had left you alone in the first place.  This ‘chilling effect’ is a powerful lawsuit deterrent tool because it forces a quick and favorable settlement of the claim. 

And then there are the tax benefits.  For most people, tax planning ends on December 31^st of each year.  That’s because December 31^st is the default year end for most businesses, corporations and sole proprietorships alike.  Yet, with the proper structure, you can shift income from one tax year to another, even to a place with more favorable tax rates. 

HOW IT WORKS IN PRACTICE 

Most people take the profit from their business at the end of the year either as a bonus or in dividends.  This is done to save the FICA tax.   If you just leave the money in the business at the end of the year, Uncle Sam still taxes it – at your individual rate or at the corporate rates.  But, if you have two entities, each can have a different year end.  For example, you could have an “S” corporation with a December 31^st year end and a “C” Corporation with a June 30^th year end.  The “S” Corporation might be your core business and the “C” Corporation is established to do your sales, marketing or management.  The first step of income shifting, up-streaming, reduces the taxable income in your core business.  The second step is to expense off as much of this income from your management company as possible, using more of the 400 deductions contained in the Tax Code – we are only focusing on a few of these strategies in this report.  This can effectively reduce your tax base to a fraction of what it would be otherwise.

 The third and final step occurs if there is a remaining profit in your management company.  Simply downstream it back to your core company prior to its June 30^th year end where we can use more advanced strategies to reduce the tax consequences.

 Here’s an Illustration (note” results will differ depending on your income) 

Typical Business Structure – without a Management Company

 Superior Business Structure – with Management Company

 In this illustration, the management company allows you three distinct advantages.  The first is that you can alter the timing of when you receive income; effectively postponing it to a different tax year.  The second advantage comes from applying the additional tax strategies to your business. This greatly reduces your taxable income.  In this illustration, the actual tax savings is $195.000. This is just not a tax deferral, this is actual savings! 

In addition, you have added another layer of asset protection.  In effect, you no longer have all your eggs in one basket.  You have separated your assets into two different entities, thereby reducing your risk exposure.  This makes your asset bullet-proof. 

STRATEGY 5 – DOCUMENTATION

  The Keystone to audit-proofing your tax records 

Proper tax documentation is accomplished through the proper use of a tax diary.  If you are thinking to yourself “What is a tax diary?” you’re probably in trouble already.  Without a tax diary, you can lose deductions you’ve already taken, plus be charged with interest and penalties.  Yet less than 5% of taxpayers have a tax diary.  Most have simply never been told by their accountant that they need one.  The only thing worse than missing legitimate deductions is failing to document the deductions you are taking and loosing an audit.  

A tax diary is a separate bound document that provides copies of receipts and other documentation like your medical reimbursement plan, educational assistance plan, etc, plus written answers to the following key questions about your deductions: 

• Who – did you meet with?
• What – did you discuss?
• When – the date of the meeting
• Where – did the meeting take place?
• How much – was the cost of the meeting, meal, etc.? 

You must have a tax diary that properly documents all of your deductions, not just the ones that our PEPP Network Provider teaches.  The point is that, if your current tax professional has not insisted either that you keep a tax diary or that they keep one for you, they have left you dangerously exposed. 

A Tax Diary actually gives you a legal advantage concerning the burden of proof.  You are probably aware that, in a criminal matter, the accused is presumed innocent.  The burden is on the State to prove the person’s guilt.  In other words, the burden of proof is on the State to prove that the crime was committed. 

Yet in tax matters, the opposite is true.  The burden of proof is on the taxpayer to prove the legitimacy of each deduction that they took.  This burden is very difficult to overcome thus in an audit, the agent has the upper hand. 

Unless that is, you have a Tax Diary.  The Tax Diary actually shifts the burden of proof off you, the taxpayer, and onto the IRS.  This tilts the tax laws in your favor.  This advantage is so great that it will bring and audit to a quick and favorable conclusion. 

IT’S NOT YOUR CPA’S FAULT 

Most accountants and CPAs are pulling from a list of 50 to 75 deductions – the most typical and well known.  Yet that’s not even a fraction of what is available in the Tax code.  There are more than 400 legal deductions available when properly implemented and documented. 

The majority of tax professional’s work occurs in that two to three month period culminating on April 15^th – tax day.  They may have to prepare several hundred returns in that short period of time.  They often ‘staff up’ with temporary workers and work 80-90 hours a week just to keep up.  It is impossible for them to provide you with the level of research and analysis you would expect. 

Additionally, CPAs and Tax Professionals have been deputized by the IRS, which severely penalizes them for submitting returns with questionable or undocumented deductions.  This forces them to play it ultra-safe because most people do not have the proper documentation.  One report found that “The IRS maintains that CPAs should have loyalty to the US tax system and act as government agents” *Brody and Masselli 1996, IRS). Most people find it stunning to learn of the extent to which their CPA has effectively been handcuffed by the IRS.

SUMMARY 

You are probably getting a sense that you are not taking every deduction legally available to you and, as a result, you are significantly over paying your taxes.  This document covered only 5 strategies yet there are over 400 distinct deductions available to you in the tax code. These deductions, alone and in combination with one another, can cut your taxes in half.  You’ve seen, by the case and tax law citations given, that these strategies are all legal and they have withstood the test of time. Not one of the strategies taught by us has ever been overturned in an audit. 

The key is having the right documentation.  If you don’t already have a Tax Diary, you need to put one in place immediately.  You’ve been left grossly exposed. 

And throughout this document you’ve learned about the need for proper entity structuring and the disasters that come from not heading that warning.  Structuring your business and assets properly can provide superior asset protection and peace of mind. 

“OUR OFFER AND OUR COMMITMENT” 

We have only scratched the surface of all the benefits that are available to you.  Whether you make millions of dollars a year or you are just getting started, you qualify to use these strategies to save yourself money. 

We offer a no-risk, live, interactive Tax Saving Training which we hold for people just like you.  If you don’t think that this training is the most valuable tax saving experience you have had, then it’s on us, that’s right no charge to you.

Think about it. 

It is time you claimed your instant pay raise from the government.  We hope you found this time well spent, and look forward to helping you reach your financial goals. 

The following is a sample of the strategies and deductions taught in detail during these training sessions. 

• Up-streaming income
• Education, even unrelated to business
• 100% of certain meals
• Tax-free rent
• 100% of medical expenses, with no minimum or maximum
• 100% of children’s education
• Season tickets and club memberships
• Domestic or international travel
•  Tax-free income for your kids
• Awards and achievements
• Checkbook-controlled retirement
• And much more