Twenty Great Tax Tips for Entrepreneurs
Take control of taxes instead of having taxes take control of you. Here are twenty great tax tips for all you amazing small business owners who drive progress and economic growth.
Thad Dortmunder is a great father, a good husband and the most successful entrepreneur in his large family.
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Unfortunately, Thad is also the king of tax procrastination.
Although he never misses a client appointment, scheduled conference calls, meetings with employees or any other important business event, Thad has always waited until late February or early March before he tackled his taxes. Then he always had to search all over his messy office, inside his cramped desk drawers and even in the backseat of his van to find the receipts, mileage logs, bills and other documents he needed to file his taxes.
But last April, after years of last minute finishes at tax time, Thad finally saw the light. And although he claims he has never seen a procrastination method he didn't like, he vowed this year he'd be different. And already he has gathered his receipts, pulled his invoices and snagged his mileage logs from the backseat—and it's not even Halloween yet.
If you have a Thad in your life or if you're a Dortmunder yourself, use these 20 tips to get an early start on tax season and catch some great tax savings with deductions you can still take this year. (For your convenience, we also offer a handy PDF of this checklist that you can download and print.)
Business Credit Cards
- If you have a credit card that is used strictly for business, don't forget to deduct the annual fee and interest expenses on your taxes.
- Section 179 of the tax code has been changed and that change may allow you to buy a new SUV for your business. For IRS purposes, a vehicle that weighs more than 6,000 pounds is considered a truck. Many current SUVs and vans qualify. If the SUV will be used for business purposes at least half of the time, you may be able to deduct the entire purchase price for this year. To find out which vehicles the IRS considers to be trucks, check out the IRS Web site.
- Whether you drive an SUV or gas-saving compact, you can take a standard mileage deduction for all of your business travel. This year, it's 37.5 cents a mile.
- Don't forget to also deduct the tolls and parking fees for each of your business trips.
- You can also get a tax break by donating your old car to a charity. Go online, find IRS Form 8283, fill it out and file it. But be careful: Although you are allowed to deduct the fair market value for your car, the IRS has been very critical of these numbers. You may want to get a copy of the Blue Book value of your car or several car advertisements to prove that your car was worth the amount you listed.
- If possible, have end-of-the-year payments from clients sent to you in January 2005. That income would then be part of the next tax year. Of course, if you have any doubts about getting paid, always bill as soon as possible.
Employ Your Children
- According to the IRS, you can hire your underage children to work for you if you are a sole proprietor or run a partnership with your spouse. Children under 18 don't have to pay Social Security taxes or unemployment taxes if they make less than $5,000 per year. As a business owner, you get a deduction, and your children don't have to pay taxes. Even those who run their businesses as corporations can qualify, but they have to pay all the appropriate employment taxes. For the exact amount your children can earn, go to the IRS Web site.
Holiday Cards and Gifts
- Holiday cards that you mail to clients are a business deduction, as well as a reasonable part of any marketing strategy. The price of the cards themselves and the postage is all deductible. In most cases, gifts to clients or customers are deductible, too. Depending on your company, there is a yearly limit for what can be spent on client gifts. So before you order that half pound of caviar to be overnighted to your best client, check with the IRS Web site.
- Experts agree that you can deduct most of the expenses that relate directly to your home office, such as cleaning and painting fees and separate telephone lines for your business.
- You can also claim a deduction for a percentage of the indirect costs of running your office. These include such things as property taxes, association fees, rent, security services, insurance, etc. The tricky bit is figuring out exactly how much to deduct. Most people do this using square footage. Figure out the size of your home office and the square footage of your whole house. Then decide what percentage of the whole house your office takes up and deduct that percentage of the fees. The average is 10 to 20 percent.
- If your home office takes up more than 20 percent of your total square footage, you might want to take a picture of your office and keep it in your files. If the IRS decided to audit you, the picture could come in handy.
- Your office doesn't have to be a separate room according to the IRS. As long as the space is specifically designated for business, you can use pretty much any area of your home.
- In most cases, your regular homeowner's policy won't cover your home office. To make sure that everything in your home office is covered, talk to your insurance agent and take out a special rider. As with many other office expenses, it's deductible.
Medical Savings Accounts (MSAs)
- In general, it's best to use all the money in your Medical Savings Account (MSA) before the end of the year. Funds don't rollover to the new year, so you're likely to lose anything you leave after December 31.
Office Supplies and Equipment
- Office supplies are almost always deductible, so go ahead and buy those glow-in-the-dark Post-It® brand sticky notes you've been drooling over. The general IRS rule is that if you bought the items with cash this year (checks and business credit cards count as cash in this case) and you wouldn't have bought them if you hadn't been in business, they count. Business supplies include everything from advertising to business cards and educational seminars to membership in your local chapter of the Loyal Order of Water Buffaloes.
- Many small businesses and sole proprietors can now benefit from a change to the tax law's Section 179. Office furniture, software and other business equipment (see also Business Vehicles in this article) can now be deducted up to $102,000 for this year. To find out which business items the IRS considers as qualified business property, check out the IRS Web site.
Paying the IRS
- Even if you can't pay the IRS, you still have to file a tax return. But if you can't pay them by April 15, you can always get an extension until August 15. Just go online, find IRS Form 4868 and file it. Without an extension, you will be required to pay a five percent fee to the IRS because you didn't file your return on time.
- If you still can't pay by the time the extension has expired, you can set up a payment plan. Go online, find IRS Form 9465 and file it. Usually, you are allowed to set your own terms so long as your tax bill is less than $10,000 and you plan to pay it back in fewer than three years. The IRS will charge you a one-time fee and interest, of course, but its rate is quite low (.83 percent) compared to bank rates.
- Contributing to a retirement account can almost always save you money in taxes. SEP retirement accounts for sole proprietors and other self-employed folks can be set up even just before your 2004 taxes are due, and the money you pay toward your retirement will decrease your tax hit.
- Don't forget that the cost of professional tax preparation for your business is also deductible as a business expense.
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