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| Personal Business Home Office Question |
Question:
I have a few questions about starting
my own business
in my home.
I have an engineering phd from a well-known
university, and plan to use my knowledge
to make and sell an electronic product.
This is genuine and I hope to make
a good profit. I am not doing this
just for a tax shelter!
I am also in the process of buying
a new home (was renting before) and
plan to use one of the rooms as a
home office.
But I am ALSO currently employed full-time
by a company.
(I think it is ok for me to have a
side business,
and I think it is ok with my employer
too.)
Anyway, my questions are:
(i) In the initial stages, I have
to do a lot of research and development.
And I have to spend time making prototypes
and samples, etc. This may even take
a year or two. During this stage,
obviously I will not be getting any
income, but will incur a lot of costs.
Are these costs tax deductible? If
not so immediately, can I defer the
losses ?
(ii) I would like to hire my dad,
mom and my wife to work for my company.
Is that legal?
dad - accountant mom - admin assistant
wife - software consultant
my dad has a cpa from a foreign country
and my mom has a BS in science and
my wife has an MS in comp sci.
I will pay social security, medicare,
unemployment taxes, etc for them.
Can I hire and pay these people even
though my company is not making a
profit now? what are the tax implications?
(iii) To qualify my home office for
tax deductions, while I also have
an alternate full-time job, what are
the legal requirements? Do I need
to spend more than 40 hrs/week in
my home office ? WHat about my car?
(iv) I have a kid under age 8, and
does it make sense to make him part
owner of the company or hire him as
an employee?
(v) What benefits can I offer employees
of my company (i.e., my family members)
? Can I offer them full medical expenses?
My wife has insurance from her current
employer, and she will be only part
time with my company. But she pays
things like deductibles and copay.
As part of my company charter/policy,
can I offer to cover ALL misc. medical
expenses?
This website:
says that while I can't deduct my
OWN expenses directly, I can offer
my employees and their spouses/dependents
full benefits!
(vi) WHat kind of corporation is best
? I am in San Jose, California.
S-corp or C-corp or some other?
Should I incorporate in CA or some
other state? (My home would be the
primary office)
Do I need permission from the city
to do this?
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Right now I don't have inordinate
amounts of cash to pay for legal/tax
attorneys or auditors. However, I
am willing to consult professionals
who are competent but do not charge
too much! referrals would be appreciated
too. For now, the web is my main consultant!
Answer:
One of my friends told me yesterday
that an S corp in CA - has to pay
a minimum state tax of $800 every
year! - Is that true for a Sole Proprietorship
also? You may have to register your
business,
get a business
license from the city/county, and
in some limited cases, even a sole-proprietor
would have some state licensing/registrations
to open up.
Is a Sole Prop a legal, formal
entity, where I have to - register
it with the state or something else
more - informal? Clearly a sole-proprietor
is more informal, but even then, depending
on the business
you conduct, you may have to register
that business
with the state. And - even a sole-proprietor
would have to get a business
license and meet all other business
related laws, codes and ordinances.
Is self employment tax something
bad that I need to - be concerned
about? SE tax can be a major
concern, but the full impact of the
SE tax isn't felt until you have profits
from the business.
Other than less liability, is there
any other advantage - to a corp?
I don't care about liability as much.
Factoring in the soon-to-be crackdown
on "S" corporate profits
-v- wages, there may not be any significant
tax advantages to forming a corporation.
And certainly none when it comes to
trying to escape the SE tax.
This $5000 startup cost that
I can expense immediately, - is it
really of any use if I think it will
be 2-3 years before - I start getting
revenue ? It gets expensed when
you ~start~ the business,
and that may be as late as when you
get your first customer.
Can someone recommend a good
tax professional - to speak to in
San Jose, CA ? Check the phone
book, or talk to friends, family,
business associates, suppliers, etc
to see who they recommend.
Try to find someone that has some
experience in your line of work. The
experiences they have can be invaluable
to you.
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