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Sohodojo Advisory Board Member
Jim Schneider
The Taxman86 Speaks...
30 March 2000
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What is the Marriage Penalty?; Finding Startup Capital is not very easy; and The New Economy, startups and working 24/7/365

1. Senate Finance Committee meets to solve the Marriage Penalty.

It started with the Standard Deduction, then the House thought that the 15% Bracket should be expanded for married persons, and now the Senate Finance Committee Chairman, Senator Roth thinks the 28% Bracket should be expanded for married persons at a revised 10 Year Cost of over$250B.

This is now becoming serious stuff in that married persons will get, effective January 1, 2001 [the increased brackets are to be phased in] twice the taxable income that single persons get in the 15% and 28% brackets. To the extent the net earnings are coming from a single person, getting married will now become more attractive.

The President has agreed to an increase in the Standard Deduction which in effect discriminates against Home-based Business/Small Business Owners who itemized. The House Bill was criticized by the President as favoring the 'Rich' by expanding the 15% bracket and now the Senate is moving into the 28% bracket.

2. Where to find Startup Capital?

The articles on new startups seen daily in Newspapers, Magazines, and T.V. News Channels, with finding startup capital the number one issue. We believe that finding Startup Capital begins at home by incorporating and reducing your tax burden.

Assume Net Taxable Income of $100,000 that is going to hit your Schedule C, before taking personal deductions and personal exemptions [these may be phased out if your income is too high] which means Self-Employment Taxes of $15,000. Living costs that may be corporate perks of $30,000 taxable at 35% for another $10,500, and schooling costs of $20,000 at another $7000 or a total of $32,500 in annual taxes as a Sole Proprietorship vs. what may be the tax as an employee of a C Corporation.

Can $32,500 provide the working capital for most startups? We think it's a great beginning. (Here's a related LA Times article.)

3. Is the New Economy operating on 24/7/365 and if so what are tax consequences?

The New York Times tells us that the New Economy is now running at 24/7/365, with Wireless Internet becoming the norm rather than the exception. First it was beepers, then cell phones, now e-mails. What about Wireless in the Home for the Home-based Business?

Our spin on the above is that the IRS has lost the war on the issue of whether corporate employees are always on- call and as such the corporate perks are going to follow, including Meals and Lodging under IRC Section 119. The issue, as framed by the leading authorities, including the IRS's own regulations, is whether the Employee is on the 'business premises' of his employer.

Being on-call and conducting business 24/7/365 makes the 'business premises' a moving target, not just the office at work, if outside the home [most IRS Field Agents are now working from Home or are in the field--so they know the drill]. Is there a downside to the New Economy's 24/7/365? Some think so, but not the Taxman, he wants it all with progressive rates.

[Shareholders of startups who incorporate and become IRC Section 1202 Corporations may escape it all if they sell out and reinvest under IRC Section 1045. Here's the LA Times take on this developing opportunity.]

Jim Schneider, LL.M.

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