A column on personal finance prepared by the Virginia Society of Certified Public Accountants
TOP TEN TAX DEDUCTIONS SMALL BUSINESS OWNERS CAN’T AFFORD TO OVERLOOK
(January 22, 2004) – The more legitimate tax deductions your business takes, the lower its taxable income – and that can translate into greater tax savings. Make 2004 the year you manage your taxes more effectively and claim the deductions you deserve. The Virginia Society of CPAs highlights 10 deductions that may help you offset some of the higher costs of running your business.
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. Legal and Professional Fees
Fees you pay lawyers, consultants, CPAs or other tax professionals generally can be deducted in the year incurred.
4. Business Meals and Entertainment Expenses
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.
5. Travel 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.
6. 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.
7. Health Insurance Premiums
Self-employed individuals can now deduct as an adjustment to gross income 100 percent of health insurance premiums.
8. 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.
9. 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.
10. 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.
CPAs say it’s important to keep good records in order to substantiate
your expenses and deductions in the event of an IRS audit.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
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