Blah blah blah Business!!

We had our latest PUG meeting on Wednesday and Eric Foley led an awesome session called "Can we do this forever?" that was all about what it really means to stay in a photography business for the long haul and how much harder we all have to work to plan for the future than people in more traditional employment jobs do. Which really got me thinking about how very little is put out there about the nuts & bolts of actually running a business. I'm not even talking about things like word of mouth marketing or branding because I feel like there is a lot of sharing going on with things like that, which is awesome!! But just all the no-fun-at-all, gotta do it, hate to do it, super unglamorous sides to running a business. Like tax planning. YUM! Incorporation. super hot. And bookkeeping. And well c'mon it just doesn't get any hotter than bookkeeping! So like I said at the meeting, I think we all work really hard to share things about the latest trends, cool new actions, camera settings...and we should be working just as hard to share information that could help (maybe someday save?) someone else's business. So in an effort to get that ball rolling, I just wanted to share a couple things that we've learned for our business over the past couple years that might help somebody else out there.

TAX PLANNING (dah, dah, DAHHHHHH!)
If you've been around Justin or me in the past couple weeks, I'm sure you've heard about our ginormous tax bill. Yea, Uncle Sam as the schoolyard bully who pushes us down and takes our lunch money kinda big. :) See the funny thing is, we had been of course hoping & praying for our business to just explode this year...but we hadn't been doing anything to plan for that actually happening! Which reminds me of a story:

Two farmers desperately needed rain for their crops. So they both prayed about it. Then one of them went out into the field and began tilling up the soil. His bewildered wife asked him, "What on earth are you doing?" He replied simply, "I'm preparing for the rain."

So when that rain came down, guess which one was able reap the harvest. This is so true in life & business as well. We pray for God to rain down that abundance... but when He does, if we haven't prepared for it it can feel more like a flood. Which brings us back to tax planning! Of course you should go and get your own accountant because everyone's situation is different, but here are a few things to think about in the coming year to prepare for next year's taxes:

Mileage, Mileage, Mileage:
One of the best deductions out there. It's deceiving because it starts out so small, but it can really add up. For 2007, the deduction was 48.5 cents per business mile driven. This year it goes up to a whopping 50.5 cents per mile. So every two miles you drive for business, you get to take a dollar out of your gross income which translates to 10 to 35 cents off your final tax bill depending on your tax bracket. At the end of the year, this can take thousands off your gross income. A word to the wise, keep a detailed mileage log: where you were going, why, how far. This is good for two reasons: a) you can whip it out if Uncle Sam ever comes calling and b) if you keep track of it as you go you are far more likely to get in all those little trips you might otherwise forget about.

Retirement as a tax break!:
To Roth or not to Roth, that is the question. Back in Federal Income Taxation class in law school, I can fully remember the fabulous Professor Anne Alstott singing the praises of the Roth IRA, but I never really thought much about it until it was time to start my own IRA. To get started, I had to decide whether to make it a Roth IRA or a traditional IRA. Now at the time, there really wasn't much of a choice in the matter because I needed a big deduction to offset some summer earnings at a law firm, so we went with the traditional. Ok, so what's the difference? Tax exempt v. Tax deferred

Roth IRA: The money you invest in a Roth is still taxable in the year you invest it. So if you make $50,000 and you invest $5,000 in a Roth IRA your gross income remains $50,000. BUT when you withdraw the money you've invested (and it can be withdrawn at any time penalty free), any of that money you've put in plus all of the growth it has seen over the years can be collected totally tax free. It is really one of the sweetest deals out there for retirement. The Roth IRA is fully available to single people making up to $95,000 and married folks making up to $150,00 jointly (an example of the marriage penalties found throughout our tax system. If there are two people you would think it would be 2x 95,000 right? Not so.) So although you are taxed on the money going into the Roth, you are free from the tax on the money coming back out (which should be dramatically larger if invested wisely) thus making it tax exempt.

Traditional IRA: investments made now are 100% deductible for the tax year in which you make them up to $5,000 for single people, $10,00 for married people (no marriage penalty here). So if you make $50,000 but you contribute the maximum $5,000 into your traditional IRA then your AGI (adjusted gross income) goes down to $45,000 right off the bat. However, you can not withdraw any of this money before age 59 1/2 without big penalties, and it plus any growth it has earned will be fully taxable at the time you withdraw it. Tax deferred

So what's the deal? If you need a big tax deduction right now, traditional is the way to go. But for long term retirement planning, Roth is usually the winner. This will all depend on what you anticipate your tax bracket to be at retirement v. your tax bracket now. If you intend to be wealthy in your golden years, the Roth is your way to go.

Home Office, blah blah blah:
I feel like most people know about this one so I won't go on too much about it. Suffice it to say, you can deduct the percentage of your mortgage/rent, utilities, etc that correspond to the percentage of your home that your business office takes up. For us it was 33%. So we could take one third of our rent, electric, etc. as a deduction. Be careful with this one, I've been told that if an IRS agent came into your home and found anything personal mixed in with the "office" space (lol, Office Space!) they would void the deduction.

LLC v. S Corp
There is a LOT of talk lately about going LLC v. S Corp for your incorporation. First off, why should we incorporate at all? Because it protects your personal assets in the event that your business is ever sued. It basically sets up what is called in Business Law world a "corporate veil" between you the person and you the business. So what are the differences between an LLC and an S Corp? Both offer liability protection. Both offer pass through taxation (members of traditional corporations have to pay tax twice: once as a corporation, once on their own income). But with an S Corp or an LLC you only have to pay tax once, as a sole proprietor would. The real differences between the two are a) flexibility and b) self-employment tax savings. ( I soo should've remembered all of this from taking Biz Orgs at Yale, but actually most of this comes from doing Google searches. Yea that would've been the cheaper way to go.)

LLC: Super flexible in every way. You can set up how profits will be distributed. No formal requirements such as board members, issuing stocks, annual meetings, minutes, etc. And the members can decide any way they want to split profits. But , there is no self-employment tax protection.

S Corp: Much more formal. Requires annual meetings, minutes, the issuance of stock, etc. More restrictions on how profits are split. But it does offer substantial savings on self-employment tax.

As business owners, we are subject to a hefty 15.3% self-employment tax (note that this is on TOP of your federal and state income tax, although 50% of it can be deducted for income tax purposes) that goes toward social security and medicare. More traditional employees split this tax with their employers. For us, this amounted to more than half of our tax bill. The S-Corp, however, offers self-employment tax savings. Here's how it works: only an employee-owner's salary is taxed for self-employment tax purposes. Any other income they receive from the company is deemed a "distribution" from owning stock in the company and is not taxed as self-employment. Ex: Your S Corp makes $90,000. You deem $50,000 to be a fair market price*** for a principal photographer and pay yourself that income. You have self-employment tax of $7,650 ($50,000 x 15.3%) on that amount. The other $40,000 is not taxed for self-employment purposes because it is deemed a distribution. Under an LLC you would have self-employment tax on the whole amount of $90,000 equaling $13,770 ($90,000 x 15.3%). So the S Corp would offer you a tax savings of $6120. However, coming back to its super-formal roots, the S Corp then requires you to set up your tax payments as monthly payroll taxes instead of a one time April 15th self-employment tax payment.

***Note that you MUST set a salary for yourself that is a fair market value or the IRS will eat you alive! So don't try to pay yourself $1 and call $89,999 a distribution.

So what's the deal? Hire a tax professional if you want to get into this murky water, but the tax savings could definitely make it worth it. There is also a third option to be an LLC filing as an S Corp which we are currently looking more into. Ideally it would offer you all the flexibility of the LLC and the self-employment tax savings of an S Corp. We'll see.

Hope this helps somebody out there! Sure beats putting pennies in a jar. :)

Feel free to email if you have any questions!