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There is a little known government program that every self employed person should be using. You now can take advantage of tax saving that big companies have been using since 1954. This program helps you reduce the cost of your health insurance. It can provide you with tax savings. It is an HRA (Health Reimbursement Arrangement Section 105).

The self employed can also benefit from the HRA (Health Reimbursement Arrangement) with an average tax savings of $3,000 to $5,000 a year.

The HRA allows them to deduct 100% from their business a large list of eligible medical expenses such as braces for children, lasik surgery, alternative care, massages, and traditional costs from illness and injury. This program also allows the self employed to eliminate paying the 13.3% self employment taxes for Social Security and Medicare.

Let's examine that a little closer. Right now you are probably deducting the cost of your health insurance premiums when figuring out your tax liability. That probably saves you a nice amount of money on your taxes. By installing an HRA your can save more, much more. With an HRA you can deduct, as a business expense, your deductibles and coinsurance. So if you had an episode that left you hospitalized and you had to pay $5000.00 in out of pocket costs having an HRA you will be able to deduct the full $5000.00 from your business taxes.

If you have to buy glasses $600.00, that's a deduction. You have lasik surgery $2500.00, that's a deduction. Your kid needs braces $3500.00, that's a deduction. Alternative therapy, massage, acupuncture, all deductions. You can also deduct the premiums on supplemental insurance, accident, long term care, term life, vision, dental and critical illness. In fact there are hundreds of medical expenses that qualify as deductions under the HRA.

An HRA + The Affordable Care Act = TAX CREDITS

We've discussed how an HRA can save you money on your taxes by provided you with more tax deductions. A tax deduction is an amount of money that you deduct from your gross earnings. This lowers your gross earnings which lowers the amount of taxes that you pay.There are also tax credits you can take advantage of. A Tax Credit differs from a tax deduction. Tax credits are real money that the government provides you to pay your taxes with. If you had a tax liability of $4000 and a tax credit of $1500 you would owe $2500 in taxes.

Do you know what the Affordable Care Act can provide for small business? Potential tax credits of up to 35%! There is a small group tax credit for contributing to employee heath insurance premiums: If you have fewer then 25 employees and provide health insurance, you may quality for a tax credit of up to 35% to offset the cost of insurance. This makes the cost of providing insurance lower.

IF you install an HRA plan in your company, you may not need to have a group health plan to qualify for the Affordable Care Act tax credit, provided that you meet a few simple rules. An HRA allows you to take the tax deductions and receive the tax credits without the cost of providing group health insurance.

By install an HRA plan your company can save thousands by reducing their tax liability and receiving tax credits without the cost of group health insurance. This could just be the biggest tax break that the government has ever given to small businesses.

Michael J. Ferro
President
Ferro Financial Services, Inc
http://www.ferrofinancialservices.com/

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Today we are tackling the issue of:

"I only want to pay taxes on the services I use."

While we agree that this argument sounds fair on the surface, it would never work in the real world. First off there are over 300 million people in this country, do you think that we could actually agree on a unified tax code? We can't even agree on who should win Dancing With The Stars! In addition, we live in a country where money talks and those without money don't have much of a voice. With this in mind, is it the wealthy minority or the poor and working class majority who should get their way? This is why our tax code is so complex.

This relates to arguments made by both high income and low income tax filers. For high income tax filers they usually gripe with tax loopholes that benefit the lower and middle classes. Lower income filers, in contrast, have issues with the business and upper class tax benefits. If we chose to let the majority decide then there would not be the same production based tax benefits that helped grow this country into the #1 economic superpower. On the other hand a lot of the consumption based benefits such as welfare, Medicaid and education assistance would be eliminated. Most who will never benefit from these programs directly are perfectly fine with eliminating what they consider wasted money and programs that are often abused. The reality is that these programs sprung up from all of the abuses of unregulated capitalism. First it was the monopolies of the late 19th and early 20th centuries. Then it was the Great Depression which resulted from a major wealth inequality caused by greedy business owners and a greatly underpaid work force. Through the rest of the 20th century with the Civil Rights Movement, the Cold War and the Tech Revolution, there was always a need to give opportunities to those less fortunate.

The irony here is that while there is abuse in programs such as welfare and Medicaid, there's also abuse in business tax incentives. That said, there is a lot of good that can come out of both sides. One good result of assistance programs is a more competent and educated work force. On the other side, businesses that get tax benefits have shown great innovations lately and continue to push the technological envelope.

A few examples of elective tax programs are both "pay to play fire protection" and pre-paid college tuition. The first is a service that some feel they have no need for where as the second is only for taxpayers with children. With "pay to play" fire departments there have been horror stories of individuals who thought they did not need the service only to have their home burn down while the fire department watched, all because they wanted to save money on their taxes. For tuition benefits, this is an example where you benefit from "pre-paying" for your children's tuition which is essentially investing in a fund and then letting that fund grow tax-free while not paying tax on the money earned to make the investment.

There are several other programs, however, it is clear that even if you don't personally agree with where most of your tax dollars are going, chances are you still reap the benefits of these same tax dollars you are spending. If not, then chances are you just need a better tax preparation service.

Clint Masser
Licensed Tax Patriot & Director of Marketing
Jefferson Franklin Tax Services
Goodyear, AZ

Working on tax returns since 2006, Clint is currently a licensed tax professional in the process of studying for the Enrolled Agent exam. All of his work has been performed under the guidance of his father, a CPA/Enrolled Agent with over 30 years of experience who has provided tax preparation services and tax strategies for everyone from minimum wage employees to multi-millionaire business owners.

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In a previous article, I discussed reasonable compensation and how it applied to owners of C-Corporations. With those type organizations, the issue is usually an owner compensation that is unreasonably high. In that situation, it could be construed that the compensation was actually a dividend, which would not be deductible at the corporate level.

But most businesses, particularly small businesses are 'pass-through' type entities. These include S-Corps, LLCs, and sole proprietorships. The problem is not a compensation that is unreasonably high, but one that is unreasonably low.

If you own one of these pass through type entities, you probably are aware that you pay taxes on the businesses earnings even if you take no money from the business. You might pay yourself a salary, on which you pay taxes, or you might take a distribution from equity. This distribution has already been taxed to you since earnings are passed to you personal income tax return via a K1.

So why would the federal, state, and local tax folks care if your compensation was too low? It has to do with payroll taxes, or more specifically FICA, Medicare, FUTA, SUTA, and in some cases local occupational type taxes. These type taxes are levied on compensation, but usually not on distributions Let's say your business earns a half million dollars. And let's say you are taking an annual salary of $10,000.00. You get a K1 for the $500,000.00, which goes on your income tax return. Your payroll taxes are applied to the ten grand, an not the $500 grand, and you congratulate yourself for making such a smart business decision.

Beware! Unless you can show that the relatively low salary of $10K is reasonable, you could be challenged in an audit, and receive a substantial bill for back taxes relating to the payroll taxes mentioned above. Note that these taxes have some very harsh punitive penalties associated with them. Suddenly the idea of keeping payroll taxes low by paying your self a salary that is below the market value is looking to be not such a goo move. To avoid this situation, the answer is simple: pay yourself a reasonable compensation.

That begs the question: "how does one determine what is reasonable?" to which the answer is not so simple. In many areas of tax law, there are specific rules for determining various amounts. There are safe harbors, there are online calculators, and there are schedules. With 'reasonableness', you are somewhat on your own.

While this gives the IRS some advantages in that they can challenge you from more than one angle, it actually works to the taxpayers advantage, since you can justify your claim of reasonableness using one or more criteria that people in business typically use. You can use simple things like hours worked, average salary for similar jobs in your industry, or you can use a return method such as commission or percent of profits.

It all begins by documenting your formula and criteria for paying yourself. If you do that, you are ahead of many small business owners in justifying your compensation to a tax auditor. You just want to make sure the formula and criteria used is, well,... reasonable.

Steve A. Porter, CPA, CMA

Steve Porter has over 30 years of accounting experience helping clients with taxes, accounting, computerized systems, and more. As a professional accountant with both Certified Public Accounting (CPA) and Certified Management Accounting (CMA) credentials, along with practical industry expertise, Steve can partner with you and an be a valuable business ally.

Steve's Blog

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Many companies today are faced with a harsh reality, the need to cut costs in order to stay in business. Health insurance premiums have gotten very expensive, for many they are just too expensive. Every year they watch as their premiums increase by double digits. You know you have to do something to cut costs and what most employers are doing is cutting coverage or worse, getting rid of the group health plan altogether. There has to be a better way. There is! It's one of the best kept secrets and also one of the biggest tax give-aways that the government has. It's called the HRA.

Wouldn't you like to reduce employee and company costs by 30% - 40%?

You can do so by setting up an HRA ( Health Reimbursement Aggaingement ) for your company. An HRA is a tax favored health plan offered by the employer. As of 2006, a new tax legislation allows for an employer to reimburse 100% tax deductible dollars towards an employee's health insurance premiums by setting up an HRA. The dollars that the employer deposits into the HRA are tax-free to the employee. The employer has the option to reimburse all or part of the employees' health care premiums. If employer reimbursements are made, the employee is responsible to pay the balance which will be made on a pre-tax basis. This program includes individual health insurance policies from top rated national carriers. Below are some highlights of individual insurance:

Individual plans are priced lower than group plans which offers a savings to the employer and employee
The insurance plans can be customized to fit the needs and budget of each employee
The employee owns the policy and takes it with them if they change jobs or become unemployed
The plans can never be cancelled unless the premiums are not paid
The HRA program also eliminates the need for the employer to manage their employees' health benefits. This will give the company more time to concentrate on their core product lines.

An HRA maybe the way for your company to save on it's health insurance costs without sacrificing coverage. By switching from group coverage to individual coverage your company can save 30 - 40% on your premiums. Less cost and you still get the tax write off! Since the individual owns the policy and not the company there is are compliance issues, no management and no cobra to worry about. Your employees will have a choice of coverages that best suit them, not what best suits the companies budget.

Michael J. Ferro
President
Ferro Financial Services, Inc
http://www.ferrofinancialservices.com/

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Well, another tax season has come and gone. When it comes to taxes, there are two things to worry about, filing on time and audits. Since a majority of people have filed their taxes by now, we thought it would be beneficial to talk a little about IRS audits. Here is a look at some facts you should be aware of when it comes to being audited by the IRS.

The first thing you need to be aware of is that the IRS is being way more aggressive with audits than it has in a long time. We have all seen the recent financial drama caused by Government spending, which has dramatically increased in the last 10 years. For example, from 2002 to 2008 the national deficit increased 3.5 Trillion Dollars. And from 2009 to the present the national deficit has increased almost 2.5 Trillion Dollars more. How does the government plan to pay for the increase in debt? Well, the main source of funding for the government is through taxes. This means that the IRS is increasing, and will continue to increase, its efforts to collect taxes to help fight this dramatically increasing debt. The IRS will do this through auditing individuals and small businesses.

In addition to standard IRS audits, there is an increase in IRS letters going out questioning various tax deductions claimed on tax returns. Many people don't know how to deal with these letters from the IRS, so they just pay the bill and end up paying anywhere from a few hundred to a few thousand dollars in unnecessary tax.

Another way we can tell that audits are increasing is the amount of auditors being hired by the IRS. For example, a few years ago there were only two auditors in the entire state of Utah. Now there are over twenty. And in addition to more auditors, we have also noticed an increase in auditors making in person contact with individuals they suspect of owing tax by going to their homes and places of business. It has been years since we have seen actual IRS auditors going to someone's house or job. But in the last six months, we know of three people have an auditor show up in person to their home or work.

We are not giving you this information to scare you but to motivate you. We simply want you to know that you should be prepared.

There are several things you can do to be prepared. One great resource can be found at http://avoidbeingaudited.com/. They have some great tools to help you avoid being audited and to help you in case you are audited.

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