Ten
Tax Deductions Small Business Owners Shouldn't
Overlook
March 3, 2004
1) Auto Expenses. If you use your car in your
business, you may be able to depreciate the costs of
owning it and deduct the cost of operating and
maintaining it. There are two methods for claiming
business-related automobile expenses. You may deduct
the business portion of actual expenses you incur,
such as the cost of gas and oil, insurance, license
and registration fees, repairs, tires, tolls, and
parking. Or you can keep track of the business miles
you drive, and multiply your total by the IRS
standard mileage rate (36 cents per mile in 2003 and
37.5 cents per mile in 2004).
2) Home Office. To qualify for a home office
deduction, you must use your home office on both an
exclusive and regular basis as your principal place
of business or as a place of business to meet with
clients. If you qualify, you may deduct depreciation
allocated to your business use of the area in your
home and other indirect expenses of operating your
home office. You may also claim this deduction if
your home office is the only place for conducting
the administrative or management activities of your
business or if only minimal administrative work is
done outside your home office.
3) Business Travel, Meals and Entertainment
Expenses. When you travel for business, you can
deduct the cost of plane fare, taxis, lodging, and
50 percent of meals and entertainment costs. Other
expenses qualify as well, such as the cost of dry
cleaning, telephone calls, and computer rental fees.
When you entertain present or prospective customers,
you may deduct 50 percent of the related cost if it
is "directly related" to the business and
business is discussed, or "associated
with" the business and the entertainment takes
place immediately before or after a business
discussion.
4) Expensing Deduction. For tax years beginning in
2003, 2004 and 2005, small business owners can elect
to immediately deduct 100 percent of the cost of
qualified business property up to $100,000, instead
of depreciating it over several years. Keep in mind
that this "Section 179" allowance is
phased out on a dollar-for-dollar basis when
qualifying assets costing over $400,000 are placed
in service in any one of the years. In addition, if
the business has a loss in the current year, the
deduction is disallowed and carried forward to the
next year.
5) Bonus Depreciation - The new tax law increase the
first year depreciation allowance from 30 percent to
50 percent. Small business owners can take an
immediate deduction of 50 percent of cost of
property place in service after May 5, 2003 (30
percent prior to May 5th). Unlike the Section 179
deduction, there is no phase-out on the cost of the
property and can be claimed if the business has a
net operating loss.
6) Health Insurance Premiums. Self-employed
individuals can now deduct as an adjustment to gross
income, 100 percent of health insurance premiums.
7) Bad Debts. You may also claim a deduction for a
business debt related to accounts or notes
receivable if you included the amount owed in your
gross income for the year you are claiming the
deduction, or in a prior year. If you use the cash
basis method of accounting, you cannot claim a bad
debt deduction if someone fails to pay you for your
services.
8) Retirement Plan Contributions. Putting funds in a
retirement plan such as a Keogh or a SEP plan
reduces your taxable income and helps to ensure a
secure retirement. If you've already set up a Keogh
retirement plan in 2003 or prior years, to qualify
for a deduction in 2003 you must make your
contribution at any time up to the due date of your
return, including any extensions. If you missed the
deadline for setting up a Keogh plan, consider a
Simplified Employee Pension (SEP) Plan. You have
until April 15 or the date you file your return with
a proper extension to set up and make a deductible
contribution to a SEP.
9) Interest Payments. If you use credit to finance
business purchases, the interest and carrying
charges are fully tax-deductible. This shouldn't be
incentive to get into debt, but can help to offset
the cost of loans you may need to grow your
business.
10) Tax Credits. There are several tax credits
available to small business:
Employment
Credit - Employers are entitled to a credit equal to
20 percent of the first $ 15,000 of wages paid year
to each full or part-time employee located in an
empowerment zone. ($ 3,000 credit per employee) 15
percent credit on the first $ 15,000 paid to an
employee located in a "renewal community
zone".
Small Employer Pension Plan Startup Cost Credit -
The purpose is to encourage small businesses to
establish and maintain retirement savings accounts
for their employees. The credit is $500 each year
for three years for costs incurred to establish the
plan.
Disabled Access Credit - Credit for expenditures
incurred to make a business accessible to disable
individuals. The amount of the credit is 50 percent
of expenditures up to $10,250.
Non-recognition of Capital Gain on Rollover of
Empowerment Zone Investments - An election is
available that allows the rollover of capital gain
from the sale of a qualified empowerment zone asset
acquired after December 31, 2000 and before January
1, 2010 and held for more than 1 year if another
qualified empowerment zone asset is purchased in the
same zone within 60 days. The gain is deferred until
the sale of the replacement property by reducing its
basis by the unrecognized gain.
Energy Investment Credit - A credit equal to 10% of
the basis of the energy property placed in service.
It includes equipment that produces, distributes or
uses energy derived from geothermal power.
It's important to get organized and keep good
records in order to substantiate your expenses and
deductions in the event of an IRS audit.
Source: The Entrepreneurial Services Practice of
Rothstein Kass-Certified Public Accountants (www.rkco.com).
Source: HispanicBusiness.com
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