Jeane Sloan interview with Bonnie Lee, April 2013.

Fountain PenI’ve started writing my next book.

I’ll share snippets from the book with you it in future posts.

Join Bonnie Lee, E.A., author of Taxpertise, for tax tips for foodies at the epicurean connection.

For details, contact: | 707.935.7960 | 122 West Napa Street, Sonoma, CA 95476

Redwood Writers Meeting 2:30-5 PM at the Flamingo Conference Resort & Spa, 2777 Fourth Street, Santa Rosa, CA 95405 • Phone: (707) 545-8530  Click here for map.
We ask for a small fee of $5 from members and $8 from non-members to cover costs.

Bonnie Lee

Bonnie Lee

Sunday, November 11th, 2012, 3-5 pm

“It’s All About the Benjamins: Taxes 101 for Writers”

Join Bonnie Lee as she brings comedy to the topic of taxes for writers. Taxes can be boring, yes…especially for artistic types who prefer to deal with word play rather than dollar signs. Do you want to keep more money in your pocket? Lee will teach you legitimate ways to do so. You will be informed and delighted by this entertaining presentation.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service.

Lee founded Taxpertise (formerly Symmetry Business Services) in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. For more than two decades, she has specialized in tax issues relating to entrepreneurs. Learn more at her website.

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31 of the Best Business Books for Solopreneurs and Micro Business Owners
Tuesday, July 6, 2010 at 7:00AM
Knowledge is power and this is especially true for small business owners; solopreneurs and micro business owners. Whether it’s staying ahead of the curve or operating your business with limited resources, you have to be able to make adjustments and decisions based on relevant and current information as it applies to you and your business.

We asked over 97 solopreneurs and micro business owners what business books have they read that not only have they read multiple times, but made such an impact on them or that they found it so profound, it changed the way they do business. Some of the books are well known and others are considered “best kept secrets.” One thing is for sure, these books can be powerful tools for you to build, develop and grow your business.

When you read business books, it important that you take action where necessary, delve deeper when needed and re-read for reminders.

Get the most from your business books:

Read one business book a month or quarter, implement one or two new practices and see where your business ends up after a year.

Create a business book club within your network. Each person reads a business book shares or reports back to the group key insights and tips or the most important aspects of the book.

Swap or trade business books with your network, colleagues and friends.

Many of the tips, tools and techniques found in the following books have been found to be useful, empowering and inspiring. Here are 31 of the best business books for solopreneurs and micro business owners:

1. 4-Hour Work Week by Tim Ferris – Provides a variety of tips and practices to achieve the 4-hour workweek the title refers to; however, it is NOT a get-rich-quick-scheme book. Submitted by R. Kaplan,

2. 9 Lies That Are Holding Your Business Back by Steve Chandler and Sam Beckford – Helps shed light on some of the biggest mistakes that entrepreneurs make and how to prevail. Submitted by T. Scarda,

3. 80/20 Principle by Richard Koch – A little-known must-read. I took it out of the library 4 times before I realized I had to buy it, have multiple copies, and distribute to everyone I know. Submitted by L. Enock,

4. 163 Ways to Pursue Excellence by Thomas J. Peters – Reference for business practices that produce immediate results. Great for those with short attention spans. Submitted by L. Baer,

5. Become Your Own Boss In 12 Months by Melinda Emerson – Step-by-step guide for stepping out on your own the SMART way, the PRACTICAL way… the ONLY way. Submitted by A.Michelle Blakeley,

6. Book Yourself Solid by Michael Port – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by M. Tremblay

7. Coherent Strategy and Execution: An eye-opening parable about leadership and management by Ravi Kathuria – Part fiction but based on real business, not just theory. Ultimately, the company is a success, but only because the CEO was willing to let down his guard, listen to a mentor and realize that he still had a lot to learn – a lesson many small business owners still need to learn. Submitted by B. Price,

8. Crush It by Gary Vaynerchuk – Teaches honesty and transparency above all else, as well as “getting into the trenches” through social media to effectively interact with customers, peers and the media. Submitted by B. MacGregor,

9. Dig Your Well Before You’re Thirsty: The only networking book you’ll ever need by Harvey Mackay – Details what it means to network and the types of people one should have in one’s network. Submitted by T. Lobell, Ph.D.,

10. E-Myth by Michael Gerber – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by H. Cohen,

11. Four Steps To The Epiphany by Steve Blank – A heavy focus on truly understanding customer needs before you determine the business model that is right for your business. Submitted by A. Rodnitzky,

12. Getting Real by 37 Signals – Learn how to limit your hours to 40 hours maximum every week to maintain steady, sustainable motivation. Submitted by D. Croak

13. Getting to Yes: Negotiating agreement without giving in by Roger Fisher and William Ury – Negotiate fees and terms that benefit you, your company and your clients. Submitted by S. Bender Phelps,

14. Go Givers by Bob Burg and John David Mann – This book gives new relevance to the old proverb, “Give and ye shall receive.” Submitted by C. Hasbrouck,

15. How to Become a Rainmaker by David Fox – Recommended reading for all my existing and new clients. Submitted by N. Anderson,

16. Interview Tactics: How to survive the media without getting clobbered by Gayl Murphy – Helpful guide to learning how to make the most of media interviews. Submitted by S. Levin,

17. Made to Stick by Chip and Dan Heath – Teaches one how to convey ideas in very powerful ways that “stick” in your listener’s brain. And what’s more important than that when you’re trying to sell an idea, a service or a product? Submitted by M. Lindenberger,

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson,

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson,

19. Million Dollar Consulting: The Professional’s Guide to Growing a Practice by Alan Weiss – Recommended for anyone starting of any type of business. Worth re-reading at least once a year. Submitted by C. Smith,

20. Mommy Millionaire: How I turned my kitchen table idea into a million dollars and you can too! by Kim Lavine – Step by step guide. Unlike other books that are just motivational, Kim describes her personal experiences with buyers, how to get their numbers, how to determine pricing, how to manufacture your product, etc. Submitted by S. Krikelis,

21. Never Eat Alone by Keith Ferrazzi – A book full of strategies, advice and confidence builders for networking, connecting and building your brand. Submitted by B. Carnduff,

22. Off the Wall Marketing Ideas by Nancy Michaels and Debby J. Karpowicz – Full of fun success stories and anecdotes. The book never gets old; its lessons are just as applicable in everyday life as they are in business. Submitted by A. Fisher,

23. Permission Based Marketing by Seth Godin – Marketing in the modern environment. How to focus not just on selling your products but on gaining permission for further contact through newsletters, blog subscriptions, e-blasts, etc. Submitted by L. Sanders,

24. Predictably Irrational: The hidden forces that shape our decisions by Dan Ariely – This book makes behavioral economics fun, interesting and even laugh-out-loud funny while providing real world examples. It also saves you from making poor buying decisions because you’ll soon know why the human mind really wants things like that free gift with purchase–even when you know you don’t need it. Submitted by S. Karacostas

25. The Art of the Start by Guy Kawasaki – The phases a startup company should go through to be a successful company. Essential for creating a progressive company focused on excellence instead of marginal company. Submitted by Ellen Lytle, M.A., M.Des.

26. The Heart of Marketing: Love Your Customers and They Will Love You Back by Judith Sherven, Ph.D., and Jim Sniechowski, Ph.D. – It is the solopreneur’s guide to heart-based, client-oriented, soft-sell marketing. Submitted by S. Dayhoff, Ph.D,

27. The Long Tail: Why the future of business is selling less of more by Chris Anderson – Shows the power of the Internet to sell products and services that would never have been viable on the offline world. Submitted by B. Fuhrmann,

28. The Success Principles by Jack Canfield – Following along with the adage “how you do anything is how you do everything,” I’ve slowly incorporated many of the lessons in the book into my life and my business has flourished because of it. Submitted by A. Faiola,

29. The War of Art: Break through the blocks and win your inner creative battles by Steven Pressfield – Hits head-on so many of the excuses used in small business and how to change and adjust your mindset. Submitted by W. Riggens-Miller,

30. Think and Grow Rich by Napoleon Hill – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by R. Williams,

31. To the Rescue: The small business survival guide by Ray Silverstein – How to translate “tighten your belt,” “do more with less” and “think creatively” into specific actions. And what do you do if you are already in trouble. Submitted by J. Levine,


Make Today County by John C. Maxwell – Get your personal priorities in order and your business priorities will follow.

Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know by Bonnie Lee – In a conversational tone, tax issues for small business from what you can or cannot deduct to self-employment tax (the big hit that can put even low income entrepreneurs into a 50% tax bracket) to home office, to IRS problem resolution including the formula the IRS uses to determine an acceptable offer in compromise on delinquent tax liabilities (pay pennies on the dollar!) are addressed.

WANT TO RE-POST THIS ARTICLE ON YOUR BLOG OR USE THIS ARTICLE IN YOUR EZINE, E-NEWSLETTER OR WEB SITE? You may, as long as you include this complete blurb with it:

A.Michelle Blakeley is in the listening business. As a Micro Business Therapist, she provides an open-minded and non-judgmental ear to listen to the real issues and concerns that start-up, emerging and women entrepreneurs experience and negotiate solutions through comprehensive discussions and practical micro business plans. She is featured in and the Financial Post as one of 30 Women Entrepreneurs to Follow on Twitter, contributor for the San Francisco Examiner and Fearless Woman Magazine; the host of Simple Truths for Women Entrepreneurs on and author of the NEW e-book: “Get it Right and Move Along… a collection of practical tips, tools and techniques for small business owners.”

The economy is swimming madly back to the surface. Yet many folks, especially business owners, are still suffering. A lot of you have delinquent income tax liabilities. And if the amount owed is unmanageable, staggering, you might feel overwhelmed. Perhaps you believe that you will never be able to repay the debt. You fear liens and levies and knocks on the door.

Then one day you hear a radio commercial: Step right up! Pay pennies on the dollar to get rid of your tax liabilities! Sounds good, a miracle answer. A solution is at hand. But if you’re smart, you’re skeptical. Does the IRS really compromise with taxpayers? Will they really let you off the hook that easily? And can these firms who make this claim really help or are they scamming taxpayers out of their money?

The answer is: it depends. In the next several segments, I will educate you on this topic so that you will know whether your offer will fly before paying good money to a professional.

Five years ago, the IRS issued a warning (IR-2004-17) to taxpayers to check carefully before applying for Offers in Compromise. The IRS commissioner at the time, Mark W. Everson said, “This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements. We urge taxpayers to not be duped by high-priced promises.”

As of this writing, the IRS accepts only 24% of all presented offers. Here’s how to determine whether or not you meet the program’s requirements.

First of all, if you are looking to compromise payroll tax liabilities, forget about it! The payroll taxes you failed to pay are considered a “trust” fund. They are made up of the employee’s withholding taxes, which was never your money to begin with. For that reason, the IRS will not compromise. If you have a choice, always pay your payroll tax liabilities before you pay your income tax liabilities. And if you can only pay part of a payroll tax liability, add up the trust fund portion (the withholdings) and pay for those. Be sure to indicate “trust fund-employee withholdings” on the memo line of your check.

Secondly, you need to determine the reason for the compromise request. There are two categories the IRS looks at: 1) Doubt as to collectibility and 2) Doubt as to liability. The first category is obvious – you don’t have the money now nor will you have it by the time the statue of limitations runs. The second category regards innocent spouse issues (my flaky ex owes this, not me!). Or involves changes to your tax return creating a new liability that are the result of an audit or other adjustments. You disagree with the changes but the statute period to prove your case has run out. Most offers in compromise fall under the heading of doubt as to collectibility.

The IRS expects you to pursue other routes before trying for an offer in compromise. If you have room on a credit card, they expect you to use it up to pay them. They want you to tap into family members and friends for loans, or refinance the house (which is probably still swimming madly toward the surface as well). They want you to try for an installment agreement with the IRS. This involves completing IRS form 9465, Request for Installment Agreement, and form 433-A, Collection Information Statement for Wage Earner’s and Self-Employed Individuals. From the data collected here, the IRS will determine if you can comfortably make monthly payments toward your tax liability.

If they decide you cannot afford an installment agreement, they may deem you uncollectible. When that official designation comes down, you will be left alone for an entire year. No collection efforts, no garnishments, no liens, no levies; you enjoy a reprieve. Penalties and interest will continue to accrue, of course. But you won’t have to worry about Roscoe and Vinnie showing up at your door. Once the year is up, they will send you a threatening letter, designed to make you shudder and cry. But don’t be alarmed. It’s spit out from a computer and it’s just their way of getting your attention, of making you respond. Do so. Reevaluate your financial status and go for the installment agreement if you’re able, or get deemed uncollectible again or if it looks like your dire straits will continue unchecked forevermore, consider an offer in compromise.

Stay tuned. In the next segment I will discuss how to complete form 433-A. You might be surprised to find that the IRS has a different take on your finances than you do. If you’re hell bent on getting this information immediately, purchase my book Taxpertise, The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know, available at

Dear Bonnie or Harley the Dawg,

When will the IRS send out the rebate checks and how do I find out how much I will get?


Dear Harley the Dawg,

I just got a divorce and my ex-husband is giving me $50,000 from a CD we had together. Do I have to pay taxes on that? If I do, I’m gonna be hella mad.


This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from

Dan, a new client, arrived at my office for his tax appointment. He had dutifully filled out the tax organizer I had mailed to him. His penmanship was like a draftsman’s–perfectly aligned, square, and consistent.

I flipped to the first page of data. Dan had copied every figure from every box of his W-2 onto the organizer despite my telling him he needn’t do that. Just give me the W-2; no need to do any copy work. And, like most tax pros, I prefer to work from the document itself. The numbers written onto an organizer could possibly be transposed or illegible. Hey, no problem. Lots of folks like to mark up the organizer; I just hate to see them go to all that extra work.

I flipped a few more pages and found that Dan has a side business as a computer consultant. He has a home office and travels quite a bit to his clients’ places of business. I turned to the home office worksheet, and lo and behold, Dan had actually prorated his mortgage interest, insurance, property taxes, and utilities between personal and business use of the home. Poor guy. Another waste of time since the tax software does that for me automatically.

Content Continues Below

When I turned to the section regarding business use of the automobile, my eyes bugged out. You’d think I’d found a black widow squashed onto the page. What I saw was something I had never seen before and have not seen since: A complete six-page mileage log detailing to the tenth of a mile every destination by date for the entire year. Beside it was listed Dan’s actual expenses, including gas, vehicle registration, repairs, insurance, and auto loan interest. He listed his grand total mileage, his commuting mileage, his personal mileage, and his business mileage.

Absolutely amazing.

It is rare for a client to list his automobile expenses because most clients don’t track their costs during the year. Rare for a client to even know his total mileage. But to show every expense plus attach a mileage log with so much detail wasn’t just rare–it was a once-in-a-lifetime event. With any other client, even the most anal retentive of the lot, the page is usually blank. And it’s typically accompanied by this conversation:

Me: So, Bob, did you use the van this past year in your mobile repair business?

Bob: Yep.

Me: So how many miles did you drive, Bob?

Bob [His head rears back and his eyes dart skyward as though the answer were inscribed on the ceiling. In fact, I think it would be great fun to take a marker and write “19,497” right up there above the client chairs.]: Uh, I don’t know. Probably about the same as I did the year before. How many miles did I drive then? Whatever it was, add another thousand.

As if mileage inflation ran side by side with economic inflation. Dan was the client from heaven by comparison. All I could do was stare at the mileage log. Dan shifted in his seat and cleared his throat.

I finally picked up my jaw from the desktop and closed my mouth. Where did I put that box of gold stars? I wanted to offer Dan a job. What else do you do with someone like that? I mean, there would be no lost files, ever. Every client conversation would be documented in great detail. Every figure on a tax return would be backed up by tapes and logic and citations of tax code and photographs and schematics. He would be the perfect employee. I wouldn’t have to spend years carrying on about the importance of documentation. He already got it.

It was either that or ask him what the hell is wrong with him. Find out if he was being treated for obsessive-compulsive disorder and, if so, did he remember to include a deduction for his meds?

I didn’t do either. I simply prepared Dan’s taxes and have enjoyed a smooth and steady business relationship with him ever since.

Naturally, Dan never got audited. So I never had the pleasure of making an IRS agent’s eyes bug out the way mine did.

The funny thing is that what Dan brought me is exactly what the IRS wants. Or so then say. IRS regulations dictate that if you are using a vehicle for business purposes, you must keep a contemporaneous mileage log, which means you’re supposed to mark down your mileage as it occurs. That’s what Dan did. Dan and Dan alone in the entire country, in the entire universe, if in fact they have taxes on other planets.

The IRS can require us to keep logs all it wants. Just like our parents required us to make our beds and be home by ten and not hit our siblings. But let’s get real. Dan is the only guy out there who does this. The rest of us don’t have the time or inclination for this busywork. Like we’re really going to stare at our odometers and mark down “.8” every time we have to run over to the office supply store. As small-business owners, we’re spending our time changing hats and putting out fires. No time for crayons and clipboards. Sorry.

For that reason I will not lecture you about keeping a log. I know you won’t do it. Even if you make it a New Year’s resolution and you’re gung ho, I’d bet you dollars to martinis that by January 15, you’ll be off the wagon.

It’s damn near impossible to keep up that good habit. Well, guess what? IRS agents are reasonable human beings and most of them agree with me—no one’s going to keep a damn log. Every IRS agent I’ve dealt with over the past 25 years, even the most hard-boiled of the lot, the ones who have the look of disdain down pat, the perfected eye roll, the smug eyebrow raise, even they have agreed to allow reconstructed logs.

Unless you’re Dan, here’s what you should do: First off, even a reconstructed log needs a starting point. It’s very simple. Write your beginning odometer reading in your appointment book on January 1, and in bright red, mark “odometer:” on the December 31 page so you remember to record the ending reading at year-end. Now subtract one number from the other to find out your total mileage. It looks so much more believable and accurate to see 14,823 on the tax return under total mileage than it does to see 15,000, which is a dead giveaway that the student hasn’t done her homework.

Try as much as possible to note all business meetings, errands, and other business vehicle travel in your appointment book. In fact, if you can do it, track both business and personal miles for a two-week period every quarter. Keep the info in your tax file for use at year-end to determine the ratio of business versus personal use.

Provide the total mileage figure and business mileage to your tax pro.

Some people think they can get away with writing off 100 percent of their only vehicle for business. All they are doing is tempting fate. Bob is one of those. Remember him from a couple of pages ago? He’s such a bad boy; he keeps no records. Here’s the rest of our conversation:

Me: OK, Bob. So how much of the mileage would you say is personal?

Bob: Oh, I don’t have any personal mileage at all.

Me: But Bob, you don’t have another vehicle.

Bob: Oh I know. But all my miles are all business.

Me [Heavy sigh.] We go through this every year.]: But Bob, you certainly must go to the grocery store or have a girlfriend somewhere.

Bob: I do grocery shopping on the way home. And my girlfriend Susie? She does all the estimates and paperwork.

Me [eye roll]: Right. What about weekends? Don’t you have 49ers season tickets?

Bob: Yep, but that’s a business expense, too.

Me: OK, Bob, whatever. Fine.

Bob thinks I’m going to give him 100 percent. But he’s wrong. I know that old van is not 100 percent business use. So I knock off some points when he isn’t looking and figure we’re pretty square with the IRS.

So what is business mileage? First of all, you cannot deduct commuting. So forget about driving from home to your primary business location or from home to your first client. An exception is if you are self-employed and have a qualified home office. Your commute would be defined as travel down the hall or through the yard to the space that serves as your office. Once you are in the office, then every destination to which you travel to carry on business is considered business mileage.

See the logic? After all, if you have a regular job, you never deduct your commuting mileage against your W-2 wages. Once you get to work, if your boss requires that you use your vehicle for business travel, mileage for which you are not reimbursed is deductible.

You may also deduct travel between jobs. If you have two employers, you can deduct the mileage for travel from job No. 1 to job No. 2. Just don’t stop at home first. That will blow the deduction out of the water.

I often walk from my home office to the post office and sometimes to nearby client offices. On one such walk, I wondered how audacious it would be to write off my shoes. Maybe I’d have to keep pedometer readings in my appointment book to substantiate business use. Hey, why not? I bet, however, that my Manolo Blahniks wouldn’t be considered an ordinary and necessary business expense. The IRS would likely reduce that write-off to what one would spend for a pair of hiking boots, if they allowed the deduction at all. I can hear the auditor now: “You of all people should know better.”

If your vehicle is used 100 percent for business–say it’s a utility truck, a dump truck, a delivery vehicle, or a second vehicle devoted to business–and there’s no personal use, you must still keep a mileage log.

To determine the business-use percentage for a mixed-use vehicle, divide the business miles by the total miles driven, for example, 7,000 (business miles)/10,000 (total miles) = .70, or 70 percent.

Now that we’ve established the percentage of business use and the total miles and business miles driven, let’s put them to use. You need to determine if you are going to use the IRS standard mileage rate or actual costs.

You cannot use the standard mileage rate if:

your business provides cars for hire (limo service, taxi, etc.);

you have a business that has five or more vehicles being operated at the same time;

you are a rural mail carrier who has a qualified reimbursement plan; or

you are using an employer-provided vehicle.

If you wish to claim actual expenses, you can deduct gasoline, repairs, and maintenance (don’t forget car washes), vehicle registration fees, insurance, tires, car loan interest, lease payments, garage rent, parking, tolls, and of course depreciation, including the Section 179 deduction. Don’t forget to deduct the cost of those scented Christmas trees you hang from the rearview mirror.

Fill in the proper boxes on Form 2106 or on page 2 of Schedule C to take the deduction. If you are depreciating your vehicle, include Form 4562, Depreciation. Make sure you keep all documentation concerning this deduction in your tax file in case of audit.

And if you are audited and don’t have your paperwork together, don’t panic. Let me show you how understanding the folks at the IRS can be. A couple of years ago a new client, Spencer, came to see me. The IRS was in the middle of auditing three years of tax returns and was considering throwing Spencer in jail for tax fraud. And believe me it had a case; the tax returns he filed were as phony as Monopoly money. My firm compiled his books and created proper tax returns and a stay-out-of-jail card.

The auditor disallowed the vehicle deduction because Spencer hadn’t maintained a mileage log. I got to work and reconstructed a mileage log based on Spencer’s job files and a little help from Mapquest. The results proved his vehicle expense actually exceeded the amount he had claimed. He had likely paid cash for many of his gasoline purchases but had no receipts. I was excited!

But the auditor would not acquiesce. She had the right to deny the deduction because he did not keep a contemporaneous record. I argued that most auditors understand and accept reconstructed records, even reasonable estimates. “Oh c’mon,” I said, “He’s a contractor. He’s got a truck. I mean, duh, he’s got vehicle expense. You should allow something. It’s only fair.”

Finally, the reason for her stubbornness was revealed. The auditor uses her own vehicle and is forced to keep a mileage log so the IRS will reimburse her. And by golly, if she has to keep a log, then everybody else has to. Well, I finally wore her down and she accepted the reconstructed log and 100 percent of the deduction.

I know I have just relieved your mind. However, I’m not going to let you rest easy. Even though my clients and I have had good experiences dealing with the IRS when it comes to vehicle expense, bear in mind that the IRS does not have to accept reconstructed logs. And in our current political climate, when more tax revenues are required to pay for ever increasing government spending, economic bailouts, wars, and such, the IRS may decide to become stricter. You may find yourself walking out of an audit with a big tax bill because you didn’t keep a mileage log.

So go clean your room, quit hitting your sister, and at least mark your annual beginning and ending odometer readings in your appointment book.

Bonnie Lee is an Enrolled Agent (E.A.) admitted to practice at all levels within the IRS representing tax payers in all 50 states. She founded Symmetry Business Services to represent taxpayers in audits, offers in compromise, tax problem resolution and to help non-filers safely reenter the system. She has served as a champion to taxpayers for more than 25 years. She is the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from

Whether your business is small or large, incorporating is a worthy consideration under Obama’s new administration. Many think of Obama’s administration as small business friendly, however, there is a new mandate to close the $400 billion tax gap and empower the IRS to get every penny it is entitled. Now, more than ever, small business owners need to consider the concept of adding, “Inc.” to their name.

I often advise clients to consider incorporating their business once profits reach a steady $100,000 plus per year. Beyond the tax consequences, the legal aspects of incorporating should be discussed with one’s attorney. The tax consequences, as well as the ability to function within a more restricted structure, should be discussed with one’s tax pro. Employee benefit packages and retirement plans should also be studied for comparison with existing strategies.

Income Splitting

When it comes to the income tax picture, income splitting is the primary reason to incorporate as a C Corporation. As a sole proprietor, you are the business. You declare your sales and subtract business expenses on Schedule C of your individual income tax return. Then you pay both income taxes and self-employment tax (15.3 percent) at the individual level.

By incorporating as a “Sub S Corporation,” no tax is paid at the corporate level and all income flows through to your personal income tax return. Since the self-employment tax does not apply to dividends, you will also enjoy some tax savings.

Incorporating gives birth to a legal entity which will exist at arm’s length from your personal finances. If structured as a C corporation, this entity files its own tax returns and pays its own taxes.

Americans enjoy–using the term loosely–a progressive tax system, in which the more you make, the higher your rate and the more you pay. So if your income is cut in half and allocated between your C Corporation and your individual income tax return, you are likely to save a lot of money. You pay taxes on this income at the individual level when you draw income from the corporation in the form of wages, dividends, rents, etc. There may be other non-taxable forms of income, such as employee benefits and expense account reimbursements.

For example, the net profit after paying yourself a reasonable wage, is $100,000. You take a qualified dividend of $50,000 which is subject to a tax rate of 15 percent through 2010. The C Corporation pays corporate tax on the remaining $50,000 at a rate of 15 percent and you have no self-employment tax to worry about. The overall tax rate is 15 percent.

Same scenario but the business is set up as a sole proprietorship: Your tax liability would be about 25 percent on a profit of $100,000 plus an additional 15.3 percent for self-employment tax to fund your social security. Ouch!

Since you are taking wages from the corporation, the 15.3 percent self-employment tax rate will be built in to your withholdings and the employer’s matching share, all classed as payroll taxes, which is a write off at the corporate level. When a sole proprietor pays the self-employment tax, she cannot write it off as a business deduction.

Obama’s tax plan and new tax rates on those making more than $250,000 per year will be affective in 2011. Using income-splitting techniques these higher tax rates can be minimized.

Protection from the IRS

If a C Corporation gets in income tax trouble, the IRS can only go after corporate assets. Like any litigator, they may attempt to pierce the corporate veil, and tap into your personal assets. So make sure you follow the rules.

“There is no personal liability for corporate income taxes unless there is a liquidating dividend or the shareholders fail to maintain clear delineation between corporate finances and personal finances,” says Robert McKenzie, tax attorney for Arnstein & Lehr LLP. He added that if the company is operated properly and not a single member LLC treated as a C Corporation for income tax purposes, there is no personal liability for corporate income taxes.

But look out! If the C Corporation has an unpaid payroll tax liability, the IRS can hold you personally liable.

Why is this so important? Because the “newer and friendlier IRS” has left the building. Obama sees the $400 billion tax gap–unpaid tax liabilities, projected lost tax revenue due to nonfilers, cheaters, and the underground economy–as a potential source of revenue. His mandate to IRS Commissioner Doug Shulman is to “Sic ‘em!” So the IRS is retraining their keypunch staff (don’t need all those clerk typists now that more than 70 percent of the nation is filing electronically) for enforcement positions. The IRS is also adding an additional 3,500 positions in all areas of enforcement from audit personnel to special agents.

With this rocky economy, it might be wise to have a suit of armor to protect your personal wealth.

Consider these factors along with all the issues that pertain to your individual situation. Then sit down with your tax pro and your attorney to determine if incorporating your business is a logical next step.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know, from Entrepreneur Press. Follow Bonnie Lee on Twitter @BLTaxpertise or email her at Live stream her radio show every Tuesday at 1:00 PST by going to and clicking on Listen Now.

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