Host: Welcome to the Small Business Tax Seminar

Our featured guest this hour is Barbara Weltman. Barbara is an attorney with over 20 years of experience in the areas of taxation for individuals and small businesses small business planning, trusts and estates and elder law. She is the author of several books on business, including: J.K. LasserÍs, "Tax Deduction for Your Small Business" - 3^rd Edition and "The Complete IdiotÍs Guide to Making Money after you Retire". In addition to teaching and serving on the advisory board of Tax Hotline, Ms. Weltman has appeared as a tax and small business expert on CNN, CNBC, and numerous radio stations nationwide. Welcome Barbara Weltman.

Weltman: Hello small business owners (and those of you who are thinking of joining the growing ranks of small business owners) With the tax filing deadline coming up, thereÍs still time to take the steps that will reduce your 1998 taxes and improve your bottom line The key is knowing what opportunities you can use now to lower your taxes today In the following hour IÍm going to walk you through some strategies that will cut your taxes on your current return and provide you with tax savings in the coming years. These strategies can be used by just about any business„if you know the rules.

• Make smart tax elections: Many tax rules allow you to decide how to treat a business expense or transaction. For example, if you bought a computer for your business in 1998, you can deduct the entire cost on your 1998 return ("expense it") or write off the cost over several years ("depreciate it") ItÍs your choice, assuming youÍre eligible for expensing. So, first determine if youÍre eligible to write off the cost of equipment up to $18,500 in 1998. Then, see if youÍd be better off in the long run by choosing not to expense this item. One reason for not expensing: YouÍve just started your business, and are showing losses (you canÍt benefit from expensing this year).
• Fund retirement plans. Even though 1998 has closed, you have until the due date of your return, including extensions, to make contributions. If youÍre self-employed, you must have set up a Keogh plan by December 31, 1998, in order to make contributions for the 1998 year. But if you failed to so do, you may still be able to set up and fund a SEP (simplified employee pension). Contributing to a retirement plan not only provides savings for the future but also reduces your taxes now. However, if you have employees, be sure to factor in the cost of providing benefits for them.

Host: Anonymous Question: where can I get all the tax information that I need to completely set up my business?

Weltman: There are lots of ways to find information You can check out the IRS web site. Look for "Small business" ThereÍs a start up kit with information you can use You can also check out the quicken.com site at the small business channel

Host: Question from SirLantz: ok, I havenÍt done my taxes in about two years. What kind of trouble can I get in and how should I take care of this?

Weltman: DonÍt continue to put off filing. Catch up now. Interest and penalties will build up. If you have special questions, talk with a tax professional. Generate cash flow for the business. What business owner couldnÍt use more cash? Did you have other losses that generated a net operating loss? Did your business suffer a disaster loss? You can decide when to take your losses. For example, in most cases net operating losses can be carried back for two years, generating tax refunds in those two prior years. Similarly you can choose the year in which to deduct a loss resulting from a presidentially declared disaster: in the year of the loss or the prior year. Claiming the loss in the prior year may give you you an immediate tax refund-cash that you can plow back into your business if needed.

Host: Question from crjotr: How can I deduct the cost of my computer for my business, I opened the business in 97 and bought the computer in 98. I am a sole proprietor

Weltman: Since you bought and placed in service the computer in 1998, you have a choice on how to handle your deduction for it. You can elect to expense it (write off its cost entirely in 1998). or you can depreciate it over five years. The decision is up to you. it depends on the situation youÍre in. You need to have taxable income in 1998 in order to be able to use the expense deduction. And thereÍs a dollar limit on expensing: $18,500 for 1998. Pay attention to new law changes. The tax law changes every year. DonÍt assume that the treatment of a particular expense on your return last year year is the same for this year. For example, on 1997 returns you were not allowed to use the IRS IRS standard mileage rate for deducting business use of a car you leased. In 1998, you can use the standard mileage rate. And, in fact, that rate has increased on the 1998 return to 32.5¢ per mile. Another important change to note is an increased deduction for health insurance premiums for self-employed individuals and more-than-2% owners in S corporations. The 1998 limit is 45% of premiums on the ownerÍs personal return. Of course, all of the cost of coverage for employees is deductible against business income.

Host: Anonymous Question: Please comment on the advantages of leasing a vehicle for a small business.

Weltman: The decision to buy or lease a car for business involves tax and non-tax considerations. Leasing may be better for your balance sheet. From a tax view, you can write off the business use whether you buy or lease. This year, you can use the standard mileage rate (32.5 cents per mile) whether you own or lease. However, if you use the actual expense method to deduct business use, the rules are slightly different. You might want to look at IRS PUB 463 for the rules on writing off business use of a car

Host: Anonymous Question: I have a sole prop. How do I know what I can write off as a business expense and what I canÍt? Is there reference material to help with this?

Weltman: The starting point for you is to review Schedule C. ThatÍs where you claim your business expenses and report your business income. You can also check various resources: IRS Publication 535 covers business expenses.

Host: Anonymous Question: I sold my business in 95 and carried the note on the sale for 5 years personally, but never received a payment and last year I had to claim bankruptcy, is this a deductible personal loss?

Weltman: This is a very specific question. You should consult a tax professional.

Host: Anonymous Question: If you used the standard mileage rate one year is it difficult to change to the actual vehicle expense deduction?

Weltman: If you use the standard mileage rate in the first year you used the car for business, you can switch to the actual expense method. However, for depreciation purposes, youÍre limited to straight line method over the remaining useful life.

Host: Question from Jack_guest5757: I am a custodian for an account I started for m Grand Daughter. What forms does she have to fill out each year and at what point does she have to pay taxes?

Weltman: Your grandchild must file an income tax return if sheÍs over the filing threshold. If sheÍs under age 14 (as I take it from your question), she must file if her income is over $700. Whether she can use a short form or must use Form 1040 depends on her income. If there were any capital gains (such as a capital gain distribution from a mutual fund) sheÍll have to use Form 1040 and file Schedule D.

Host: Question from sandra_newman: If a person has a Sch C business and their spouse pays for health insurance where they work, can the Sch C person take the deduction on their business?

Weltman: A self-employed person can deduct his/her health insurance only if neither he, nor his spouse, is covered by other health insurance. In your case, if the spouse has coverage, the deduction may be barred for the self-employed person. The spouse may be "paying" for the coverage on a pre-tax basis (for example, with a flexible spending account).

Host: Anonymous Question: If one of three employees want health insurance, can the other two decline, and the one get the insurance?

Weltman: If youÍre providing coverage, you must do so on a nondiscriminatory basis. However, if you know that some employees donÍt need the coverage, there are alternatives for you., You can set up a premium only cafeteria plan. This lets your employees decide whether to pay for coverage or opt out. If they opt out, they get additional compensation. Talk to a tax special about this type of plan. It can be a win-win situation for small business owners and their employees.

Host: Question from Marsha_Douglas: Husband and self formed S Corp, we are the only stockholders, employees. When we take "dividends" is that considered the same as taxable income.

Weltman: As S corporation owners, all of the businessÍs profits are taxed to you. However, how you label that income has other ramifications. Taking money out as dividends means you (and the corporation) donÍt pay FICA on the income. However, you must take a reasonable salary for your personal services to the corporation. Both you and the corporation them pay FICA on this salary.

Host: Question from emilyann1: I have 18 employees and would like to setup a retirement plan. However, my funds are pretty tight. What is the most cost effective way to do this?

Weltman: As a small employer you have a number of choices when it comes to retirement plans. Consider looking at the new SIMPLE plans. This lets your employers contribute on their own behalf on a pre-tax basis. You must make certain required contributions on their behalf. However, these contributions are modest.

Host: Question from jigsup2: does any loss presidentially declared mean a loss you had if the state was claimed a disaster

Weltman: A presidentially declared disaster is one that qualified the local inhabitants for federal disaster relief. A loss in a disaster area results from the destruction of your property because of that disaster. A loss can also result from damage to your property.

Host: Question from jandjproductsP: I am a sole proprietor and plan to relocate my business 250 miles from here. Can I deduct expenses incurred to look for a new home?

Weltman: You can deduct your moving expenses. However, as a self-employed person, you have a longer period before qualifying than employees who relocate. Review the eligibility requirements for the moving expense (look at Form 3903).

Host: Anonymous Question: At what point does IRS consider you "in business" i.e.- I bought my computer and office set up, but donÍt have any income yet, but am I in business in their eyes?

Weltman: ThereÍs no clear cut line of when youÍre in business. YouÍre in business when you start trying to make a profit. Did you advertise? Did you do all the preliminaries (stationery, business phone line, bank account)?

Weltman: Once youÍve done the basics, youÍre in business.

Host: Question from ibud1: As a 2-person S-corp, should the salary I pay my wife and me be reported as Compensation of Officers or Gross Wages? Does it really matter? Should the Keogh money be employee benefits or Comp of Officer

Weltman: If youÍre both officers, then report the salary as such. Both you and your spouse must take a reasonable salary if youÍre performing services for the corporation. As an S corporation, you canÍt set up a Keogh (thatÍs only for self-employed people). However, you can certainly set up a qualified plan (for example, a profit-sharing plan).

Host: Anonymous Question: We have an LLC which reimburses standard mileage rate to partners and employees. Can we deduct costs that exceed that on personal taxes?

Weltman: An LLC can reimburse a member who works for the business for business use of a car. If the reimbursement is at the standard mileage rate (32.5 cents per mile for 1998), then that should cover you.

Host: Anonymous Question: Can Turbo Tax software be used for C-corps?

Weltman: You can use TurboTax for Business to file your return for the C corporation. You canÍt use Turbo Tax (thatÍs for personal returns).

Host: Anonymous Question: Where can I seek information on tax laws concerning what expenses are deductible for an attorney who operates as a sole proprietor?

Weltman: ThereÍs an IRS Publication (number 535) that lists "business expenses" That publication will also direct you to other pubs. on more specific topics.

Host: Question from spanky_guest8749: I would like to know if there are any Beginners books on the Small Business are Kits that are available from the IRS and if so where can they be acquired

Weltman: My book, J.K. LasserÍs Tax Deductions for Your Small Business, might be helpful in your situation. You can also look at the IRS web site at "small business." And check out the small business channel at quicken. com.

Host: This will be the last question for today.

Host: Question from shelly777: Have self-formed S Corp. Am I also entitled to deduct 450f dollars deducted from my social security monthly for medicare?

Weltman: The Medicare premiums deducted from your Social Security benefits is a personal matter. You can treat the premiums as a deductible medical expense. Such expenses are deductible on Schedule A of your Form 1040 if they exceed 7.5% of your adjusted gross income.

Weltman: For the past hour weÍve touched on many tax issues of interest to small business owners. YouÍve put some challenging and important questions to me. IÍm sure many other small business owners appreciate getting the answers to these questions. WeÍve discussed ways to reduce your 1998 taxes and steps you can take now to improve your 1999 tax picture. More specifically, weÍve covered:

• Making smart tax elections
• Funding retirement plans for the 1998 tax year.
• Generating cash flow now
• Paying attention to new law changes.

I want to thank all of you who participated in this seminar, those of you who submitted questions as well as those who were just interested observers. I donÍt know if all of your questions have been answered. But IÍm sure weÍve all learned something about what small business owners are concerned about.