Tag: Partnership

Posted on by Jan Roberg

Small Business Expenses: Advertising vs. Charity (Purple Pig Purchases)

Purple-Pig

 

 

 

At first blush, you might think that advertising and charity don’t go together at all.  But when you own a small business, your advertising and charity might just go hand in hand.  Let me explain.

 

When you own a small business, you’ll get lots of calls from organizations wanting your business to make donations to charities.  When you’re a sole proprietor, partnership, or S Corporation, your charitable donations don’t reduce your business income, they only count as a charity donation on your Schedule A personal tax return.

 

So—let’s say you want to donate $100 to Cystic Fibrosis from your business.  That’s all fine and good, but that donation doesn’t reduce your business income by $100.  It doesn’t reduce your business income by anything at all.  You still get to deduct it on your Schedule A—but if you don’t itemize your deductions, that $100 donation doesn’t help your tax return at all.

 

This is where advertising comes in.  Instead of just donating $100 to a charity, you can buy an ad in a charity event program, that way you’re giving money to the charity, and getting a 100% business write-off for the advertising.  The charity still gets your money, and you get a better write-off.

 

Why do you want to your business donation to be  advertising?  The taxes!  If you have a sole proprietorship and you’re in the 25% tax bracket, your business income is actually taxed at 40.3%.  (25% regular tax rate plus 15.3% self employment tax.)  If you itemize your deductions, your $100 donation would really only cost you $75 (but only if you can itemize your donations.)  But if you can count it as a business expense, then your $100 donation would really only cost you $59.70. ($100 minus $40.30) See why this is a good thing?

 

Of course, there are some things that are just going to be charitable donations no matter how you try to align them.  Your tithe or temple dues simply won’t count as advertising.   But when you’re looking at charities that you like to support, be sure to check out the advertising opportunities.

 

So what’s with the purple pig?  A not for profit I support held an event for kids.  Instead of just donating money, I got to set up a booth and hand out my fliers to the parents.  The pig was part of a pig race game for the kids.  The pig is a 100% deductible business expense—and he’s really cute.   Cute and deductible—that works for me.

Posted on by Jan Roberg

Inheriting a House and Converting to a Rental

House

Photo by Kevin Saff on Flickr.com

I’ve gotten this question a couple of time recently so I decided to post about it.  Here’s the question:

 

“My Dad died and my sisters and I want to keep the house and rent it out instead of selling.  How do we handle the taxes on this?”

 

First, you need to change over the house to your names. That’s important.  Get the house out of the estate before your rent it.  Also, some day you might sell or something; you want to fix that now.

 

Now—you and your siblings are going to become a partnership. I recommend becoming an LLC—that means Limited Liability Company. It gives you a little protection in case someone you rent to decides to sue you. Here in Missouri, it only costs $50 to file online. Do file in whatever state you actually live in though—don’t do one of those “file in Nevada” things you see online—big mistake, unless you actually live in Nevada.   File your LLC in the state you live in (or the state the house is in if that‘s different.)

 

After you file for your LLC, you will want to get an EIN number. Here’s information on that: http://robergtaxsolutions.com/2010/11/how-to-get-an-ein-number-for-your-business-for-free/ .  Because you have a partnership, you’ll need the EIN number to file a tax return.

 

You will also want to have a separate bank account for the partnership. You’ll use the EIN number to set up that bank account. It’s important to do that. If you use your personal bank account for the LLC then you have (legalese here) “pierced the veil” of the LLC.  That means if there was an issue, then you could be sued personally—so the bank account is important.

 

Okay, so now you’ve got the LLC, the EIN, and the bank account. You rent out the house, the tenant writes checks to the partnership, and the partnership pays bills out of the bank account—all good.  If you have a profit, the partnership can make distribution payments to you and your sisters (the partners.)

 

At tax time you will file a partnership return, Form 1065. They’re due to the IRS by April 15th, but really they need to be done before then because you need that information to file your personal return.

 

The partnership will issue a K-1, tax form to each of the partners. The K-1 form is how you report the partnership income on your personal return so that you can pay your share of the taxes.  Let’s say the house had a profit of $5001. The three of you are equal partners, so you’d each get a K1 saying that you had a profit of $1,667 that you would report on your personal tax return. Or if there was a loss, you’d report the loss which would offset your other income.)

 

As long as you and your siblings all agree, you should be okay. You might want to sit down together and write out some stuff like, what happens if one of the partners wants out? Who’s going to run the rental (collecting rent, making sure house is okay and stuff). Does the person managing that get paid something extra?

 

You are not required to have an attorney write up a partnership agreement. (You might want one, but it’s not required.) But do think through potential problems and decide how to solve them before you start. Example: what happens if one of the siblings falls on difficult financial times and needs to sell her share of the house? How will you handle that? A partnership is kind of like a wedding.  It’s easier to get into than to get out of.  Planning ahead will make those transitions easier.