In this article, Dennis explores the benefits of employing spouses and family members in a business:

Should You Employ Your Spouse, Your Child and Claim Other Deductions?

The typical discussion about employing your spouse revolves around are you better off paying payroll taxes in order to get an additional retirement plan contribution and the related tax deduction? Based on the type of retirement plan you have the answer can vary. The payroll taxes will be close to 16%, the retirement contribution by you, the employer, can be 25% (or more if you have a defined benefit plan) plus the working spouse can defer wages if you have a 401K or SIMPLE. Generally, if you have some form of retirement plan the business owner is better off employing his or her spouse.

Business Trips

However, regardless of whether the owner has a retirement plan, there is a much more compelling reason to hire your spouse. In order to deduct the cost of your spouse accompanying you on a business trip or entertainment outing, the IRS requires that your spouse must be an employee of your practice. Whether it's a dinner with a colleague, the annual shareholder/strategic planning meeting in Maui or the host of other activities your spouse attends with you, your spouse must be your employee if you plan on deducting the cost of your escort. The amount of compensation is less important than the employment relationship.

Documentation

In real estate you always hear "location, location, location", in the tax world it's "documentation, documentation, documentation". Often I'm asked: "Is it a red flag?" "Will it cause an audit?" The incidence of tax audits is increasing. I believe the question should not be will it cause an audit, but rather will I prevail if I am audited, because statistically you will be audited, eventually.

If you want to deduct the cost of a business car, document your business usage. If you want to write off your entertainment, make sure you keep records of:

1. Who you were with,
2. Where you went,
3. What you talked about,
4. When you went and, of course,
5. How much did you spend.

Having boxes full of restaurant receipts will mean nothing unless you have documented these five items. If you use credit cards, just write down who and what for on the back of the receipt, the other three items are already documented. If the expenditure was $75 or less, you don't need a receipt, just write down the five pieces of information.

Agendas

That trip to Maui (or anyplace in the United States) can be deducted, but you'll need records. The IRS deems a business day is five hours or more. Make an agenda of your business discussions and meetings that will justify five hours or more each day. If the reason for the trip is business (have a good agenda) the whole cost could be deducted. But if the reason is pleasure, only the actual business expenses you incur would be deductible, not the lodging or transportation costs.

Should you hire your children?

If you document their job descriptions, your dependents could be earning their college funds and you could get a tax deduction for their education. If you're self employed, you can even avoid paying payroll taxes.

The form of documentation is not prescribed by the IRS. It does not have to be fancy. You should develop a method of documentation that is simple, yet adequate, and commit to making it a habit. Too busy? Assign a staff member to create the document from the information you provide. Don't worry about an audit, prepare for it.

Have a question? Please call me and ask.

Dennis Nelson, CPA, APC has served the Sacramento Area dental community since 1991. He can be reached at 919-988-8583.