Tax Tips

Tax-Saving Tips for Small Business Owners
By James Dascenzo

 

Retiring-mindedness. Funding a retirement plan is one of the best strategies small business owners can use to lower taxable income. Money contributed to a qualified retirement plan is tax-deductible and grows tax-deferred until it is withdrawn. A Keogh, SEP, or SIMPLE plan allows you to put away more on a tax deductible basis than you can under an Individual Retirement Account. But remember that unlike IRAs, which can be opened until the date you file your return, a Keogh plan needs to be opened before year-end, and the deadline for setting up and contributing to a SEP plan is the due date for your return, including extensions.

Expensed expenses. Normally, the cost of capital equipment -- equipment that has a useful life of more than one year -- must be deducted over a number of years, with one major exception: Businesses that purchase new business equipment can elect to deduct immediately up to $19,000 worth of equipment in 1999 rather than recovering its cost over a period of years through depreciation deductions. This deduction begins to be reduced dollar-for-dollar once the cost of business property placed in service during the tax year exceeds $200,000.

Charitable giving. As a sole proprietor or partner, you can make cash gifts to charity of up to 50 percent of your adjusted gross income (AGI) and of appreciated long-term capital-gain property up to 30 percent of AGI. What’s more, when you donate appreciated property, you not only get a deduction, but you also don’t owe any capital gains taxes. Another way to be charitable and earn a tax deduction is to donate excess inventory. The deduction for charitable contributions made by C corporations, though, is limited to 10 percent of modified taxable income.

Timing. Self-employed workers -- including employees with sideline businesses -- who use the cash method of accounting can cut their tax bills by accelerating expenses and deferring income. One way to defer income is to mail your invoices at the end of December so you won’t get paid until next year. On the expenses side, you may want to evaluate future equipment, furniture and office supply needs and consider purchasing those items before year-end.

Family employment. If you need to hire employees for your business, consider employing family members. Doing so allows you to shift income to individuals in lower tax brackets, as long as they provide bona fide services to the business. If your business is a sole proprietorship, payments for the services of your child under 18 also are not subject to Social Security taxes.

Bad debts. If your business uses the accrual method of accounting, you should review your outstanding accounts receivable to determine whether any of them are uncollectible. Under current law, each individual bad debt must be identified and deducted in the year in which it becomes partly or totally worthless. It’s a good idea to keep a paper trail showing that you took reasonable steps to collect the money due you.

Entertainment. Qualified business entertainment includes taking a client to dinner, a show or sports event or just inviting a few of your customers to your home for pizza. Tax law allows you to deduct 50 percent of meals and entertainment expenses that are business-related.

To qualify, you must be able to show that the expense directly preceded or followed a substantial, bona fide business discussion or that it is directly related to the active conduct of your trade or business. You must keep good records, which must include a receipt for any expenditure of $75 or more.

Holiday parties, picnics, and other social events you put on for your employees and their families are an exception to the 50-percent rule. Such events are 100 percent deductible.

The home office deduction. More people will qualify for the home-office deduction in 1999. Under previous law, unless you met with clients, customers, or patients on a regular basis in your home office, you could not claim the deduction. The new law drops this requirement and, generally, qualifies taxpayers who perform services outside the home for the home-office deduction as long as they use their offices for administrative or management activities.

Borrowing costs. When your business borrows funds, you can deduct 100 percent of business interest expenses. If you use a credit card for your business, you are eligible to deduct the business portion of credit-card fees and finance charges a well

Tax Tips for Small Business’ and Individual’s

Did You Start a Retirement Plan for Your Employees?

You may be eligible for a tax credit

A tax credit is available for new retirement plan qualified start-up costs. Qualified start-up costs are defined as expenses paid or incurred in connection with the establishment or administration of an eligible employer plan, or retirement-related education of employees with respect to the plan. The credit is 50% of qualifying costs, with an annual credit cap of $500. This credit is available only for the first three plan years of a new qualified plan. It is restricted to a business that in the preceding year, employed 100 or fewer employees with compensation of at least $5,000. Plans, which may include 401(k), SEP, or SIMPLE plans, must cover at least one non-highly compensated employee.

Section 179 Expensing

Tax law changes increase your options

There are new rules for §179 expensing that take effect in tax years beginning after December 31, 2002.

• For 2003, taxpayers can expense up to $100,000 in property purchased for business use. This is an increase from the $24,000 limit allowed in 2002. You are allowed the full $100,000 even if you purchased equipment for your business on the last day of your tax year.

• The new law allows taxpayers to make or revoke a §179 expense election without first obtaining the consent of the IRS. The option to revoke the §179 expense election is irrevocable once it is made.

• For 2003 through 2005, off-the-shelf computer software is eligible for expensing under §179. This change allows you to write off the cost in one year as opposed to stretching your deduction over three years.

• Unless §179 is further amended for years after 2005, these new provisions will revert back to prior law for the 2006 tax year. This means that off-the-shelf computer software will no longer be eligible for expensing and taxpayers will no longer be able to revoke the §179 election without IRS consent.

The increase in the §179 expensing limits will allow you to write off most – if not all – of the cost of a new truck, van, or SUV you purchased for use in your business. In order to write off up to $100,000 of the cost, the vehicle must have a gross vehicle weight in excess of 6,000 pounds.

New Rules on Bonus Depreciation

The purchase of new business equipment saves you tax dollars

Thinking about buying new business equipment? Now is the time to do it.

• The additional 30% bonus depreciation allowed in 2002 increases to 50% for qualifying property placed in service after May 5, 2003, and before January 1, 2005. Qualifying property must be brand new property with a class life of 20 years or less. This effectively eliminates real estate from the definition of qualifying property.

• The new law increases the bonus depreciation amount that may be taken with respect to passenger automobiles from $4,600 to $7,650.

• The 30% bonus depreciation continues to apply to new property purchased between September 11, 2001, and May 6, 2003. However, you may elect out of the 50% bonus depreciation for any class of property and apply only the 30% bonus depreciation for property placed in service during the year.

• The bonus depreciation, whether 30% or 50%, is not an alternative minimum tax adjustment.

• The adjusted basis of property acquired in a like-kind exchange or involuntary conversion is also eligible for the additional first-year depreciation.

Deduction for Classroom Materials

Teachers get a break

Teachers, instructors, counselors, principals, and aides who work at least 900 hours during a school year in an elementary or secondary school can take a deduction on Form 1040, even if they do not use Schedule A to itemize their deductions. The deduction can be up to $250 of expenses for books, supplies, computer equipment (including software and services), and materials used in the classroom. Previously, these expenses were deductible only as a miscellaneous itemized deduction subject to the 2% of adjusted gross income limit. This deduction will not apply after 2003 unless Congress votes to extend this break.

Quik Tips

1) Double check the accuracy of the social security numbers for you, your spouse, and your dependents. Numbers that do not match the Social Security Administration’s database will result in rejected or delayed tax refunds.

2) You can claim the interest portion of a December mortgage payment mailed during the final days of the year, even if it doesn’t show up on the lender’s year-end statement. As long as the check was in the mail by December 31, you get a 2003 deduction, even if the check isn’t cashed until 2004.

3) If you took out a loan to make a contribution to your IRA, the interest is deductible as investment interest on Schedule A.

4) The costs for weight-loss programs can be deducted as a medical expense if the taxpayer is diagnosed by a physician as obese or suffers from some other ailment such as hypertension, where weight loss would relieve the medical condition.

5) For 2003 and 2004, the alternative minimum tax exemption amount is increased to $58,000 for married taxpayers and to $40,250 for unmarried taxpayers.

6) If a husband and wife file a joint return, their gambling winnings and losses are pooled so that the losses of one spouse are deductible against the winnings of the other, up to the amount of their combined winnings.

7) If you receive property in exchange for services you perform, you must include the property’s fair market value (FMV) in income. The amount you include in income becomes the basis of the property if you decide later to sell that property.

8) If you rented your vacation home for less than 15 days, the income you received is not taxable. However, the expenses related to the income are not deductible.

9) If your employer maintains a flexible spending plan that reimburses you for medical expenses, you may now get reimbursed for over-the-counter drugs. However, over-the-counter drugs are still not allowed as a medical expense deduction on Schedule A.

Pursuant to IRS Circular 230, MetLife is providing you with the following notification:
The information contained in this article is not intended to (and cannot) be used by anyone to avoid IRS penalties. This article supports promotion and marketing. You should seek advice based on your particular circumstances from an independent tax advisor.