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Is it fair to assume that we all know what an umbrella company is and why people use them? Well – in a word; no. Although umbrella companies are not a new phenomenon and have been around for many years; it is only since the 2007 budget and the subsequent legislation that they have really come to the fore. 

Gone are the days of the composite company; basically a limited company that you would be placed in as a shareholder with perhaps another 20 people. You would then claim minimum wage, and the rest of your take home pay would be in the form of dividends. These ceased in 2003 when the government introduced a tax-free allowance of £10k for small businesses, and single person limited companies were born.

Really, these single person companies were to all intents and purposes, the same as composite ones except that a single person owned all of the shares. These single person companies were very popular during this period. In fact so much so that new legislation was introduced in the 2007 budget in order to shut them down. These new laws saw the end of wage payments as dividends and the start of more complicated payment methods – the most widely used of which was the umbrella company.

With an umbrella company you will still pay PAYE tax as well as National Insurance, however, you are able to claim all legitimate business expenses. The main difference between this new form of company and the old composite companies and single person companies is that the umbrella company does not pay wages or salaries in the form of dividends, to do so would be illegal under the new legislation.

Finally – we should bear in that there are many other advantages to using umbrella companies that go beyond the mere financial; for example, they negate the need to be involved with running a spreadsheet, VAT returns, payroll matters, company accounts, taxation and so on. This in itself is a good enough reason for the majority of companies or individuals to use them.

The Internal Revenue Service expects that many people will attempt to evade their tax obligation via highly creative but less than legitimate tax write offs. Whether it is sperm contributions or some other less than savory “business” expense, do not expect such things to go undetected. Do not take these as examples, however marvel at the ingenuity – or laziness, or lunacy – that went into these crazy tries at tax write offs. Article resource – Bizarre tax deductions to brighten your tax day by MoneyBlogNewz.

Land never found

Dallas CPA Ken Sibley told Bankrate of one client – a minister – who attempted to claim travel and entertainment expenditures as tax deductions. Apparently, the minister was looking for real estate investment properties but never found his promised land after years of trying. This could not be considered business expenditure. It could have if anything were purchased.

He was charitable enough to marry her

Deducting wedding expenditures is a no-no, even under the category of business travel and entertainment expenditures. Massachusetts CPA explained that it is not business expenditure, even if clients are attended. And remember: your betrothed isn’t a charity, so you simply can’t count wedding expenses as charitable donations, either.

That’s a 30-year plan

New Jersey CPA Don Meyer spoke of the business manager of a famous entertainer who arranged for the purchase of a $2 million office building. The business manager was planning on deducting it as business expense in that tax year. The business manager was at a loss though since the complete expenditure would take over 30 years to recover. Even a suitcase full of money and an ominous admonition to “make it work” could not change the tax law.

Taxes for life

Business expenses are tax deductions at home. This doesn’t include pets for security though. The Internal Revenue Service is also not okay covering home security systems. The Hunter Group of Fair Lawn, N.J., explained this detail of the Internal Revenue Service. There was a woman that tried to claim her security system. She said she could not pay taxes if somebody killed her in it.

Do not try adult magazines

As long as you are a professional in the field, you are able to count dues and subscriptions for professional and trade publications for tax write offs. As long as the 2 percent floor rule, or 2 percent of your adjusted gross income, is followed, they can be put un miscellaneous write offs, Quizlaw explained. A Massachusetts CPA explained that a self-employed real estate agent attempting to get adult magazines written off should probably reconsider the business strategy. There was a prostitute client that Don Meyer had once. Declaring her income was essential to her. She said her job was in “public relations.”

Articles cited

Bankrate

bankrate.com/finance/taxes/10-craziest-tax-deductions-for-2011-1.aspx

IRS

irs.gov/businesses/small/article/0,,id=204169,00.html

Quizlaw

quizlaw.com/federal_income_tax/can_i_deduct_dues_and_subscrip.php