Thursday, July 30, 2009

Renting Out a Home Office to Your Company

Believe it or not, questions on deducting a home office are still one of the most frequent questions I get. The ability to deduct a home office is tough even if you are the owner of the company. Even if you can qualify for the deduction, itemized deduction limitations and/or the alternative minimum tax may eliminate any tax benefit.

The best strategy to deduct a home office is to rent the office to your company. The company can deduct the rent payments as a business expense. True, you as the owner/employee must still pay income tax on the “net” rental income, but no employment taxes are owed. In some jurisdictions such as New York City, there may be even greater tax savings.

The reason this works is because regular or “C” corporations are not subject to the home office deduction rules. Caution: this will not work if you are the owner/employee of an S corporation. A pass-through entity can’t deduct rent paid to an owner for a home office (an S corporation is a pass-through entity).

Here is one possible way of working around the above rule:

1. Have the S corporation require the owner/employee to provide office space as a condition of employment. (Yes, it seems like a “sham” but it needs to be done).

2. Establish an accountable expense reimbursement plan to reimburse you for costs incurred for work.

3. Submit adequate documentation for these costs.

4. Have your S corporation reimburse these costs.

Result: the S corporation reimbursement is a deductible business expense and you have no income recognition or other tax reporting.

Thursday, July 23, 2009

Life Insurance Settlements

Besides providing loved ones with a source of funds for income replacement in the event of an untimely death of the family's breadwinner(s), people buy life insurance for a variety of reasons:

· To fund a buy-sell agreement or key person insurance for a business.
· To satisfy a lender's requirement when a loan was made.
· To fund expected estate taxes that might have decreased since the policy was taken out.

Whether it was one of these needs or something else, circumstances change and sometimes people find that they no longer need, or perhaps, can no longer afford, policies that were taken out several years ago.

If this describes your situation, before you allow a term life policy to lapse (or turn in a whole life policy for its cash surrender value), I recommend that you consider whether it might be more beneficial to sell the policy. Known in the industry as a life settlement, selling a policy can sometimes net the policyholder a sufficient sum that's far in excess of a whole life policy's cash surrender value or a term policy's unearned premium.

Although such arrangements are still fairly new, the IRS recently released guidance on the tax results of such a transaction. If you have an unneeded policy that you're thinking about getting rid of or just letting it lapse, I would be glad to talk to you about whether it might make sense to try to sell it instead.

Wednesday, July 8, 2009

The Service Guarantee

When pitching new business, consider a service guarantee. By this I mean an unconditional money back guarantee. The guarantee should be “If for any reason you are not satisfied with our services, you will receive a 100% refund of the price.” Why do this? There are several advantages: (1) It gives the client/customer an incentive to complain, since 96% of customers will not share their gripes-they will simply switch firms. You should encourage complaints in order to improve your service delivery. (2) This will commit your entire firm to delivering “Total Quality Service” because your money is on the line. And (3) it informs your customer how much better you are then the competition because you are willing to back your promises. Why should the customer bet on you if you won’t?

All things being equal, services with a 100% guarantee will command a higher price than those without. Whether you realize it or not, you are probably doing this already! If one of your customers complained loudly enough, you would most likely refund or not collect the fee. Why not take this covert policy and put it into your agreement so the customer can perceive a higher value in dealing with your firm.