Tag Archives: contract manufacturer

Why You Will Always Pay too Much in Taxes

Nothing is more complex than income tax. Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year's taxes by increasing next year's taxes.

Einstein stated that “The hardest thing to understand in the World is the income tax.”  Yet, most small business owners meet with their CPA at year end with the fantasy that this will save taxes. At best, it reduces this year’s taxes by increasing next year’s taxes.

  Let’s face it; the income tax law is complex. Think of 1,000,000 pages written over 100 years by different people with different agendas.  Great Depression tax laws apply to international businesses.  World War II tax laws apply to small (and big) business.

Starting  50 years ago (1967), our Government began using  “patches” to get the Tax Code to make social changes (this is known as socialism).

Now, don’t blame anyone party.  Both sides jumped on patch bandwagon.  The result is 1,000,000 of pages of conflicting laws.

Most small business owners budget an hour or so of their CPA’s time for “year-end” tax planning.   Meanwhile, the news reports that firms like General Electric have 2.3% tax rate over the last decade.     GE’s tax department is larger than all of the IRS’s international tax department.

Great firms invest in their tax structure.   Tax planning fees are tax deductible. Here, in my lovely state of California, $10,000 in tax planning fees is only $4,700 of after-tax dollars (our marginal highest tax rate is  53%).

Conflicting laws are very complex.  They also created 1,000s of tax strategies.   Here are a few that your CPA may not have told you:
1.  Cash advance payments can be tax-free for decades (more on this link).
2.  Small business owners over age 57 have huge tax savings with private pension plans
3.  Importers can use the Bush administration contract manufacturing laws to avoid taxes (more on this link) legitimately.
4. The IRS has designed a new type of trust to help you avoid state income taxes and protect your assets (more on this link).
5.  President Reagan’s privately owned insurance company tax law allow you to have your insurance company.  You can self-insure and pay your domestic insurance corporation up to $1.2 million a year tax-free.  This is known as a captive insurance company (more on this link).
6.  Defer taxes (like Disneyland) with gift cards and other private money (more on this link).

Thousands of other tax strategies.  Your CPA does not have a book of these.  Your CPA must spend time with you and learn the details of your business.  Your tax loophole maybe your inventory method, your e-commerce website, your multi-state transactions, your business insurance (or the items that you are not insuring) and the list goes on.

For example, Bob has a successful web based business.   He has a few part-time employees and independent contractors assisting him.   He wants to be a tax haven. Yes, Bob, himself wants to be a tax haven.  He learned about the new solo 401-K tax law.  Bob can be the sole trustee, sign on the bank account, buy real estate that is financed, buy stocks, bonds, and stock funds.

He started the fund in November.  By January he placed more than $100,000 tax deductible dollars into the plan.  This saved him $50,000 in taxes.  Of course, the investment profits will be tax-free.  He hired a law firm to establish the plan and maintain the plan.  The cost over two years is $10,000 deductible dollars (so after tax $5,000).    $5,000  saves $50,000.

Bob also used a 1954 tax law on medical reimbursement plan.   He paid $15,000 to his attorney to draft the plan.  This plan does not have to file a tax return, so there is no annual cost.  The plan pays for all the supplements required by his doctor, his co-pay, and therapies not covered by insurance.   He saves $10,000 a year in taxes for a $5,000 one-time deductible ($2,500 after-tax) cost.  $2,500 saves $10,000 year after year.

If you would like to discuss your tax concerns, ,then call me Brian Dooley, CPA, MBT at 949-939-3414.  Telephone calls are free.

Hidden Tax Savings in Preparing Form 5471 for the Controlled Foreign Corporation

Form 5471 is full of international tax planning and tax savings.  As you prepare Form 5471, carefully look at the instructions.  They hint at the hidden tax savings. (If this is the first year or a late filing, then please see this link.)

 It is here, hidden in the fine but dull print, that you will find your tax savings.  For example, does your tax preparer know that an offshore corporation acting as a finance company can avoid U.S. taxes?  

Or that a foreign contract manufacturer related party sales are tax-free?

My video below is from an international tax class that I gave to the California Society of CPAs.  If you want to start to save taxes while preparing your Form 5471, then call me, Brian Dooley, CPA, MBT at 949-939-3414.

Save Taxes with this Never Before Seen IRS Audit Guide on Small Manufacturers including Contract Manufacturing

International tax planning for the Contract Manufactuere

International tax planning for the Contract Manufacturing

Our researchers found this internal IRS document on the auditing of the garment and other clothing manufacturing.    The IRS audit issues are the same for other small manufacturers and distributors that assemble products.

I have the IRS document below in blue print.  If you find yourself under an IRS audit or just want to be ready for one, this blog will tell you what to do and not do.    If you need help, then please call me, Brian Dooley, CPA, MBT at 949-939-3414.

Though some of these areas will be addressed in detail later in this document, the following are examples of adjustments that were made:

  1. Inventory.
  2. Writedowns, costing errors, omissions, uniform capitalization.
  3. Purchases — improper accruals.
  4. Shareholder Loans.
  5. Imputed interest under IRC section 7872, loan write-offs against salary payable that is not included in Form W-2 income.
  6. Related Party Transactions.
  7. Sales of assets, excess payments to related contractors, management fees, consulting fees, unreported income received from a related party.
  8. Relief of Liability Income.
  9. Acquired Net Operating Loss.
  10. IRC section 269.
  11. Disallowance of Entertainment Facilities.
  12. Condominiums, boats, country clubs, etc.
  13. Unallowable Accruals/Reserves for Sales Discounts and Returns and Allowances.
  14. Travel and Entertainment; IRC section 162 and section 274.
  15. Trips abroad, excessive auto deductions, restaurants, payments of various personal expenses.
  16. Auto Expenses and Depreciation.
  17. Commissions.
  18. Unreported by shareholders or employees, particularly when no Forms 1099 are issued.
  19. Legal Fees.
  20. Nondeductible capitalized.
  21. Bad Debt Disallowance.
  22. Life Insurance.
  23. Shareholders, key employees.
  24. Pick-up of Related Shareholder Returns.
  25. For issues related and unrelated to manufacturer’s return.
  26. Employment Tax Adjustments.
  27. Independent contractors versus employee issues, bonuses to employees, other payments to employees constituting “wages,” backup withholding.
  28. Form 1099 Penalties.
  29. Failure to file, incorrect ID number of the recipient on the Form 1099.

Examiners are sometimes contacted by individuals (informants) who offer information of sales “off the books,” and these leads are always evaluated as potential audit leads.  

SPIN-OFF RETURNS

A significant portion of the total deficiencies generated by an examination of a garment manufacturer may be attributable to “spin-off” returns. These are returns that, if not for the examination of the manufacturer, may never have been audited. Given the frequency with which these returns were found to contain significant adjustments, take more than a quick glance at any returns provided for inspection as part of the Required Filing Checks. Also, returns provided for inspection purposes should be referred to at various points of the examination for consideration of audit potential.

What follows is a brief discussion of the most common types of spin-off returns.
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Easiest to Read International Tax Book for the Contract Manufacturer and E commerce

SMOKE STACK INDUSTRIAL AGE

Is you tax planning using last century’s smoke stack tax laws?

The 21st century business as a unique tax advantage.  U.S. international and offshore tax laws are written for the 19th century industrial age.   The tax laws were written by men born in the 1800’s.

Just think about contract manufacturing and air cargo or cheap shipping.  When tax laws were passed in the 1930’s,  manufacturing was by one’s factory.  E-commerce was not even a concept.

Here more on the best foreign tax planning book and also the easiest to read (in just two hours).  Amazon has it on sale (on this link) for only $9.50 or read the first three chapters for free by clicking on this link.