HOME OFFICES: FOLLOW THE RULES
Congress cracked down in 1976 on deductions for using your home as an office. Now a Tax Court ruling has made it clear how firm (or perhaps heavy-handed) that crackdown was.
A high school track coach was denied a deduction for the cost of maintaining a room in his home where he reviewed films of his athletes' performance and did paperwork required by the school. Even though the coach had no office at the school, the court ruled that his principal place of business was the school's athletic facilities. The home office, the court said, was "incidental although important."
Under the law you can get a deducation for home office expenses only if that part of the house is used exclusively and on a regular basis either as your principal place of business or as a place to meet with patients, clients, or customers in the normal course of business.
VALUE NOW, SAVE TAXES LATER
Valuing a company when it's sold by a living owner is relatively simple. Two people -- a seller and a buyer -- negotiate and hammer out a price. If the two parties can't agree, the seller simply walks away from the deal. Transfer of ownership after death is a different matter. In a majority of cases the company will be passed on to the next generation of the family, not sold to an outsider. Yet for tax purposes, passing a business from parent to child is like a sale.
Fixing the price of such a "sale" can be a complicated business, because it involves making an imaginary deal between imaginary parties. Yet a real dollar amount comes out of the process and that "price" is part of the total on which your estate will be taxed.
There are two solutions to this problem. One is to actually sell your business while you're still alive. For most owners that's an unattractive answer. They want a place to hang their hats, and they want to keep control of what they've built, at least to some extent, as long as possible.
The alternative is to have your business professionally appraised now. Then issue preferred stock, which assures voting control of the company, to yourself, and common stock to your children. Because your preferred stock controls the company, the value you attach to it becomes the value of your business for estate tax purposes. This process, called a "recapitalization," is free from any current tax.
Your executor and the Internal Revenue Service will still value your estate for tax purposes when you die, but because you've "frozen" the value of your stock in the company while you're still alive, your heirs will pay a reasonable tax on your assets, not a tax based on inflated values that might force them to sell the business to save it.
DEFERRED COMPENSATION BENEFITS
One of the best ways to beat the tax/inflation spiral is to adopt one or more of the range of qualified deferred compensation plans. Available options include pension plans, profit sharing, and Employee Stock Ownership Plans (ESOPs).
These plans are a good deal for companies and employees alike -- so good, in fact, that the Internal Revenue Service limits the amount you can contribute to a plan in any given year. Contributions by the employer to the trust that administers a plan are fully deductible for corporate tax purposes. Earnings from contributions invested by the trust are tax free to the trust, and neither the employer's contributions nor the earnings are taxable to the plan participants until retirement, disability, or death.
Last but not least, when an employee receives his share back from the trust, the income is subject to several favorable income tax alternatives.
Effective January 1 of this year, the maximum annual contribution to each participant's account in a plan was raised to $41,500 by the IRS. The maximum limit for annual benefits payable to participants has also been increased, to $124,500. Plan administrators may adjust contributions up to the new maximums without requesting specific approval from the IRS.
You'd be wise to talk over your alternatives with your own professional tax adviser.