Do every legal thing you can to reduce your taxes

March 2, 2010
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I just received an e-mail from a member of the tax committee from the White House Conference on Small Business.

She tells of a case where the IRS re-characterized a church organist’s payments for Sunday services. The organist was deemed an employee. She had been receiving a 1099.

Bizarre? You bet.

Get ready for a new more aggressive IRS and expect the same from every other tax collector in the country.

This is a cycle. The pendulum has swung back to favor high taxes, abusive collection and virtually no sympathy or support from politicians. All levels of government have been on an irresponsible spending spree that has a momentum they cannot stop.

They have made commitments, like the Big Three, that guarantee insolvency, and like General Motors and Chrysler, to garner union support they were bailed out.

When the stimulus money ends, they will face insolvency or ruinous tax increases. You know what they will do: Washington, Lansing and almost every other unit of government will be like a shark-feeding frenzy.

What to do? Do the right thing.

This will last about five years. Small business needs to survive this period because it is the financial heart of America. If we cheat on our taxes like the high rollers in Washington, we lose the moral high ground we need to keep the public’s support.

Be honest, but be smart. Do every legal thing you can do to reduce your tax burden.

For your income tax, there are many tools to keep your liability to a legal minimum. There is bonus depreciation, section 179 expensing and pension plans. Make all the money you possibly can, and then plan your strategy to minimize taxes.

This is the time to make sure that you and your tax advisor are on the same page. Spend some time this summer and fall strategizing. A CPA is more valuable to you as a resource for information than a form-filler-outer.

If you ever doubted Michigan’s status as an anti-business zone, you need to examine the Michigan Business Tax. What a nightmare. Anybody associated with it should be ashamed. It taxes gross receipts and profit. What should you do about the MBT? Move to Indiana.

In the misguided belief that more taxes will raise more money, the politicians of Michigan are going to have a hard time explaining to the union bosses that a dwindling business community does eventually mean that their members are going to suffer the same fate as the business owners.

The natural inclination when someone is cheating you is to respond in kind. Our tax system is unfair and impossibly complicated, and the revenue taken from you is wasted by fools. If you respond in kind, you will have let them make you a liar.

For more on that issue, read a biography of Mahatma Gandhi.

If that doesn’t move you, think of this: The IRS is not only out to collect money; it has permission from Congress to punish you severely for transgressions. I get the feeling that, at the moment, the IRS wants to scare the business community. If you are smart, you will recognize the threat and not take the risk.

The IRS spent a lot of money making a church organist an employee rather than contract labor. Think of what they would spend to nail you.

Paul A. Hense, CPA, is president of Hense & Associates, a local accounting firm. He is also past chairman of the National Small Business Association and the Small Business Association of Michigan.

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