By Dana Dratch • Bankrate.com
Small-business tax rule No. 1: Don't mess with the IRS.
But that doesn't mean you should cheat yourself. Take every legal
deduction you can. Here are a dozen that even savvy small-business
owners and entrepreneurs sometimes forget:
The deductible dozen:
Travel, meals, entertainment and gifts
Software and subscriptions
1. Home office
Concerned that claiming a home-office deduction is tantamount to
sending an engraved invitation to an Internal Revenue Service auditor?
Don't be, says Jan Zobel, author of "Minding Her Own Business: The
Self-Employed Woman's Guide to Taxes and Recordkeeping."
"I don't agree that chances of getting audited are greater with a
home-office deduction," says Zobel, a San Francisco Bay-area tax
expert, who specializes in serving the self-employed. The key is that
you use the term "home office" the same way the IRS does. The tax
agency says it must be a space devoted to your business and absolutely
nothing else. Deducting the den that houses the family computer and
serves as a guest bedroom won't fly with Uncle Sam.
"If you only have one computer and you have a child over four, the IRS
is going to be pretty certain that the child is using the computer,"
says Zobel. "And the burden of proof is on you."
The deduction, however, isn't limited to a full room. Your home office
can be part of a room. Just how much of the space is deductible?
Measure your work area and divide by the square footage of your home.
That percentage is the fraction of your home-related business expenses
-- rent, mortgage, insurance, electricity, etc.-- that you can claim.
2. Office supplies
Even if you don't take the home-office deduction, you can deduct the
business supplies you buy. Hang onto those receipts, because these
expenditures will offset your taxable business income.
When your office supplies are more than just pens and paper, you have
another tax-cutting opportunity.
Office-furniture acquisitions provide a couple of choices. Deduct 100
percent of the cost in the year of the purchase or deduct a portion of
the expense over seven years, also known as depreciation.
To take the whole cost in one tax year you'll use the Section 179
deduction (named for the part of the tax code where the law appears).
Recent tax-law changes have made this deduction even more attractive.
For the 2007 tax year, a business owner can expense up to $125,000.
The news is even better for the 2008 tax year. The economic stimulus
bill enacted in February increased the Section 179 amount for this tax
year to $250,000.
If you choose instead to depreciate the desks and filing cabinets, you
can't simply split the cost into equal portions over the depreciation
period. Instead, you must use an IRS chart to make separate
calculations each year.
Which is better for you? Anticipate the times that your business will
need these deductions the most. Both options are reported on IRS Form
4. Other equipment
Items such as computers, copiers, fax machines and scanners also are
tax deductible. As with furniture, you can take 100 percent up front
or depreciate (this time over five years).
5. Software and subscriptions
The recently increased Section 179 provides another tax break in this
area of business expenses. Previously, a company had to depreciate the
cost of computer software over three years. Now, off-the-shelf
software a business buys can be fully expensed in the year purchased.
The rules for deducting business and industry-related magazine
subscriptions weren't changed. You can continue to take the total
costs as a full deduction in the year spent.
If you drive for business, the IRS wants to give you some of your
money back. But Uncle Sam loves documentation, so keep a notebook in
your vehicle to record the date, mileage, tolls, parking costs and the
purpose of your trip.
At the end of the year, you have two choices. You can total the
mileage and add in the tolls and parking to calculate your deduction.
Once you have your mileage total, multiply it by 48.5 cents for your
2007 deduction. For 2008 business tax purposes, the rate goes to 50.5
cents a mile.
Or you can measure your business usage against your personal driving
and deduct that portion of your auto-related expenses, says Zobel.
Remember to include gas, repairs and insurance.
If you are leasing, include those payments. If you are buying the car,
factor in the interest on your loan and depreciation on your vehicle.
And if your company's office is at your house, you get a bit more of a
break. You can deduct the entire business-related mileage, from the
minute you pull out of the driveway until you return home, says Gary
W. Carter, author of "J.K. Lasser's Taxes Made Easy for Your
Home-Based Business: The Ultimate Tax Handbook for the Self-employed."
If your business is not home-based, your mileage meter starts at your
first business-related destination and ends at your last. You can't
include the drive to and from home, says Carter, a CPA and professor
at the University of Minnesota. In this case, try to schedule several
business appointments on the same day to allow you to take the mileage
between stops as a tax write-off.
7. Travel, meals, entertainment and gifts
Good news, small-business travelers. You might as well stay in a nice
hotel, because the entire cost is tax deductible. Likewise, the cost
of travel -- air, rail or auto -- is 100 percent deductible, as are
costs associated with life on the road (dry cleaning, rental cars and
tipping the bellboy).
The only exception is eating out. You can deduct only 50 percent of
your meals while traveling. So stay at the Ritz and eat at Wendy's.
Once you get home, your on-the-job meals aren't deductible -- unless
you bring along a client to talk business. In this case, you might
consider splurging on a fancier meal because then you can write off
half such work-related dining costs.
The 50-percent deduction limit applies to most other client
entertainment expenses, too. But a direct gift to a client or employee
is 100 percent deductible, says Zobel, up to $25 per person per year.
8. Insurance premiums
Self-employed and paying your own health insurance premiums? These
costs are 100 percent deductible.
This break primarily benefits proprietorships, but there are limits.
The deduction can't be more than your business' net profit. And it's
not allowed if you were eligible for other health care coverage,
including that offered by your employed spouse's medical plan.
Did your spouse work for you last year? Then, says Carter says, you
can get the full medical premiums deduction on your return. As an
employee, your spouse's premiums are 100 percent deductible; if you
and the children were on her policy as dependents, so are those costs.
Two caveats: 1) Your spouse's employment must be real, not in name
only, and you must offer coverage equally to any other employees. 2)
Failure to meet these requirements could result in a lawsuit, an audit
You also can include some of the premiums you pay for long-term care
insurance for yourself, your spouse or dependents.
9. Retirement contributions
Are you self-employed and saving for your own retirement with a
SEP-IRA or Keogh? Don't forget to deduct your contribution on your
personal income tax return.
10. Social Security
The bad news: If you're self-employed or starting a small business,
you have to pay double the Social Security contributions you would as
an employee. That's because federal law requires the employer pay half
and the employee pay half. Self-employed workers are both, meaning the
total will equal 15.3 percent of your net profits.
The good news: You can deduct half of the contribution on your 1040.
11. Telephone charges
You can deduct the cost of the business calls that you make for
business from home. When your bill comes in, circle the
business-related calls, total them up and keep a copy. At the end of
the year, tally your 12 bills and deduct 100 percent.
The IRS assumes that you will have a phone in your house anyway, so
Zobel cautions that regular fees and charges don't count toward your
deduction. But if you have a second line installed and use it only for
business, all of these charges are deductible.
12. Child labor
"It's always good to employ your kids," says Carter. Depending upon
how much you paid them, they might be able to avoid income taxes.
Plus, there is no Social Security tax when you hire your child who is
17 or younger and you can deduct the salary as a business expense.
This break is available, however, only if you operate as a sole
proprietor or as a partnership in which you and your spouse are the
only partners. If your business runs as a corporation, then it, not
you, are considered the employer and the corporation is not relieved
of the tax liabilities.
Make the money go even further. Have your child contribute to a Roth
IRA, says Carter. Not only have you gotten a nice tax deduction from
the salary and trained your youngster to save, you've also help
establish a nest egg for his or her future.
Mark Williams, Broker, ABR, Realtor
Howard and Williams LLC.
5321 Old Middleton Road
Madison WI, 53705