Discussion:Best way to maximize deductions

How about inc'ing the biz, reducing her SE income to the reasonable salary level, and then buying the loft for office use, personally, taking rent out of the corp, etc. Then, her solo 401k number just went to 25% of salary plus the deferral amount.

These are based on 2007 numbers, so they may have changed a bit. But the bottom line, as I read it, is there's no real benefit to one over the other in my client's case. On the other hand, if the self employment earnings were small and provided a secondary income, then the Solo 401K would be more attractive because you'd be able to contribute a lot more to it (because the first $15,500 contributed would not be limited to 20% of income).

I think the most important thing here is deciding whether 'one swallow makes a summer' in that once the loft is purchased, will business prospects continue as now. And don't use the argument that the real estate can be sold if business falls. Have a photographer client who bought a loft in a similar situation 6-7 years ago and now is moving into it to cut his living costs since his residence will be easier to sell in a buyer's market.

Thanks for the thought--it's an important point to consider. In this particular case, the business is about 10 years old and continues to grow despite economic times, unlike some photographers I have as clients (one now deliver pizza at night to generate extra income, given the downturn in advertising and marketing revenues for him, even though his photography business is also about 10 years old). Appreciate everyone's input--exactly what I was hoping for.

Of course, given his sales are 1 Million plus, he/she will fall in to the new administration's 125% tax bracket in future years so there would be potential for a 25% savings. That'd be if the new administration didn't begin phase out of all business deductions once a company hits $17,500 of gross income! BWA-HA-HA that should start a fight there! :D

Michael

Just note that while not a bad idea, the owner better make very good and sure he/she comes up with a reasonable salary that the IRS will buy. Even during the Bush administration, S corporation reclassifications were taking up a lot of the IRS's time. I would imagine that the tax everything that moves perspective of the obama administration and the feeling that only 'rich' people use S corporations to avoid SECA taxes, that will increase.

I would think--no verification of this--that transitioning a successful business from a SMLLC to S Corporation would just scream AUDIT ME! RECLASSIFY ME! CASTRATE ME! :D I would also think that a business owner with a history of being taxed on a very large income is going to have a tough time satisfying the IRS that $50,000 or even $100,000 or even $250,000 is a reasonable income. Remember reasonable in this case is the IRS's reasonable not ours.

Be careful of this option and be sure it is bulletproof.

Michael

I don't see anything wrong with incorporating. I think I would go for it (if I hit the $1 million mark). I am very cautious, and I don't see a big red flag here.