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A Surprising Gift that Keeps Giving All Year Long
By Robert J. Greene, CPA, CMA
Does even the mention of Valentine's Day make you feel guilty? If your home based business completely dominates your life and you're always a little late with the cards and flowers, here's a whole new way to approach the holiday. This year, think of Valentine's Day as a calendar marker for tax planning season. Stay with me on this one, there's a payoff later on!
For most entrepreneurial types, tax planning is right up there with organizing files and doing computer back ups: things we know we should do but don't until deadline or disaster becomes imminent. What most accountants end up doing around this time of year is usually triage for the previous year, and it gives us far less options than we'd like. Rather than adding up the deductions or the tax advantages, we end up figuring out three categories of triage: What's the most glaring tax error we can fix where we can still save you some money, what might we be able to save if there's time and cashflow, and worst of all, what options are completely lost?
For the truly savvy entrepreneur and their tax advisors, the first quarter of the year, with Valentine's Day marking the middle of the quarter, is the time to complete not one, but two important tax tasks.
One: Now's the time to carefully examine the financial transactions of the past year. Look for those that are business related but which may have been incorrectly classified as personal, such as supplies, entertainment, transportation, etc. Look also for expenses that were deductible but not recorded. Most frequently missed items are non-cash charitable and three different medical issues: mileage, miscellaneous and cash co-payments.
Two: In addition to closing out 1998 books, this is the time to plan out your tax strategy for 1999. That means making sure that you set your business up to examine and plan to maximize all legitimate tax opportunities. One of those is the concept of hiring your spouse and using a Spouse Employment Contract, or SEC to maximize your use of legitimate tax deduction opportunities. The truth is, most spouses of home-based
business owners do help out in the business in some way and they should be compensated fairly. No one works for free. What's love got to do with it? Think of it this way:
If you add up the tax deductions created in the first year of using the SEC for many self-employed business owners, in most cases you can cover the cost of installing a romantic fireplace. As for the bearskin rugs, firewood, and bottle of good wine that provides the finishing touches, those go to your spouse/employee as 100% tax-deductible gifts. What could be more romantic than that?
The Spouse Employment Contract (SEC) is an 8-page contract with 119 specific benefits in 14 different categories, that brings together many technical points scattered throughout the tax codes, and is rigorously kept up-to-date as tax law changes. It's 100% according to code, and every paragraph in the contract is carefully referenced to the specific section of tax codes that it relates to.
If saving thousands of dollars in tax deductions isn't romantic enough for you think about that fireplace – paid in full, without you having to work additional hours or be away from your home and family. And it's not just romantic – it's good business. It's good business to set up and structure your business and personal life so as to pay as little tax as possible, and maximize your after-tax profits. No matter what business you are in, as a self-employed home based business owner one of your key issues is how much money comes in and how much money goes out – and that includes expenses and taxes.
Valentine's Day gifts aren't the only tax deductible gifts either. Traditional holiday gifts of property with a low fair market value are fair game for SEC employee fringe benefits. No one can tell you what holidays your office can celebrate, and birthday gifts are also fully tax deductible, whatever the gift may be.
The entire SEC concept was developed from a 1994 private letter ruling, where the IRS allowed a self-employed professional to hire his/her spouse as an employee and provide medical insurance to the spouse and the spouse's dependents as an employee benefit, 100% tax deductible and at no tax cost to the employee/spouse. One significant requirement: a contract between employer and employee/spouse must be in place beforehand to document and define the employer's contractual obligations and the employee's job responsibilities.
The contract documents the relationship, responsibilities, compensation and extensive employee benefits. Without the contract, this kind of arrangement isn't legal and won't work. But with it, the tax savings are impressive.
But medical benefits are just the start. This all began several years ago when I started searching for additional tax advantages for using a formal spousal employee contract. What I found saves my own home-based accounting practice about $5,000 in taxes annually. But it's not a tax do-it-yourself program.
You can't just put your spouse on the books and start writing everything off. But using a Spouse Employee Contract that meets specific IRS guidelines, you can start adding up the benefits
Here are some of the deductions, big and small, made possible with the SEC
The Big Stuff:
Medical costs: Medical insurance is worth about $6,000 annually, but that doesn't include the value of all other medical costs for an employee and dependents. I offer my employee and her dependents both medical insurance and non-covered medical costs as health care benefits. That means all eye care and products, all dental care and products, mental healthcare costs, chiropractic, even holistic or alternative medical treatments and more.
On-premises Facilities: Big companies have on-site athletic facilities for employees – and they are equally valuable for small companies too. This can feature big items like exercise equipment or a swimming pool or small ones like a bat and a glove.
Home Security Systems: Almost every home business has an electronic security system, but most owners only deduct the pro-rata portion, which is correct, but only covers a small fraction. A business with an SEC employee can have the business pay for the entire home security system – installation, maintenance, service, etc. – as an employee benefit – and is allowed to write off 100% of the cost.
The Small Stuff, or "De minimus"
These are items that the IRS considers too small to ask any business taxpayer to account for, regardless of the company's size. But what's small for a multi-national corporation adds up fast for a home-based business economy. Examples:
Food: Coffee, juices, snacks and other food items that an office might typically offer to employees. Buy these items for your SEC employee, and it's a fringe benefit: deductible for the business and cuts grocery bills
Occasional supper money: This can be reimbursed or provided in kind for SEC employees to enable him/her to work overtime. Note that this is NOT entertainment, which is only 50% tax deductible, but an employee fringe benefit: 100% deductible.
Occasional entertainment: Tickets to theater, sporting events, comedy clubs, concerts, are a fringe benefit, just as an employer in a big firm would buy season tickets and give them to employees as a special thank you for a job well done. That usually includes transportation and dinner.
Holiday and birthday gifts and parties: Traditional holiday gifts of property with a low fair market value are fair game for SEC employee fringe benefits. And it's not just the Thanksgiving turkey either. No one can tell you what holidays your office can celebrate. Every month contains at least two holidays, and every employee has a birthday. Birthday gifts are also fully tax deductible, whatever the gift may be.
Spousal salaries tend to be on the low side, so you'd expect nice gifts or benefits from your employer. Once it's set up, using the SEC lets you take advantage of legitimate tax law to save thousands of dollars without working harder or selling more. | 
