Family tax alert Featured

9:49am EDT July 22, 2002

Hiring family members can qualify family business owners for special tax savings.

Indeed, hiring family is an excellent way to save money on federal income taxes. A spouse who works for a family business but is not covered by a qualified retirement plan can contribute up to $2,000, or 100 percent of earned income, to an IRA. For immediate benefit, the spouse’s salary can be deducted, which creates an extra $2,000 of tax-free income for the family.

The long-term benefit is that this money will accrue tax-free as long as it remains in the IRA. If you put it into a Roth IRA, it’s not tax deductible, but it will grow tax-free and distributions will never be taxed.

You also can save on taxes by hiring family members who are minors, since income earned by your minor children is taxed at their rate, usually 15 percent or less. Your business will also get a deduction for their salary.

To stay out of trouble with the IRS, keep detailed records. For the working spouse, records must show the spouse actually did the work for which he or she was paid. For the working children, records must show that they did the work, it was necessary for the business, and if they hadn’t done it, the family would have had to hire someone.

The other deduction family business owners can take is the spouse’s expenses on business trips. Normally you can’t deduct such expenses, but if you can prove the spouse is essential to the purpose of the trip, the expenses are an allowable deduction.

Consider these examples of when a spouse’s presence would be necessary:

1) The owner is traveling to another country and doesn’t know the language and customs, but the spouse does.

2) The spouse is the secretary on the trip and is familiar with the technical details.

3) The client has requested the spouse’s presence.

Business owners also have been allowed this deduction when they showed they had an illness such as diabetes and the spouse was trained as the nurse; they proved the spouse wasn’t enthusiastic about the trip; or they proved their spouses had not participated in any type of tourist activity.

If this spousal deduction weren’t allowed, however, you still could deduct what it would have cost to travel alone. You may not be permitted to deduct the cost of a double-occupancy room, but you could deduct the cost of a single room.

On top of spousal deductions, you can save taxes with a company car. Drive the car until it’s fully depreciated, then switch it over for personal use without tax liability. The car won’t become taxable until it’s sold.

Overall, when owning a business, you’ll find it extremely worthwhile for financial reasons to hire family members. Utilization of simple tax strategies can ensure the financial rewards.

Louis P. Stanasolovich is president of Legend Financial Advisors Inc., a fee-only North Hills registered investment advisory firm that provides asset management and comprehensive financial planning services to individuals and businesses. Its Web address is www.legend-financial.com.