April 15 is only 10 weeks away. Here are some things to consider as a home-based business owner, while gathering up last year's receipts and documents.
(Note : I am not qualified to give tax advice. ALWAYS consult your own accounting professional before filing your income tax return.)
A Dozen Deductions for your Small Business
By Dana Dratch
Small-business tax rule number one: 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:
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. In her own practice, she has prepared more than 400 returns a year for the last 25 years. And while at least half of her clients claim a home-office deduction, only one home-based entrepreneur has been audited. The key here 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.
3. Furniture
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% of the cost in the year of the purchase or deduct a portion of the expense over 7 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). But keep in mind that there is a limit on how much you can claim this way. For 2001 taxes, it was $24,000. If you choose 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 4562.
4. Other equipment
Items such as computers, copiers, fax machines and scanners also are tax deductible. As with furniture, you can take 100% up front or depreciate (this time over 5 years).
5. Software and subscriptions
To the IRS, computer programs last for 3 years and you must depreciate the cost over that time frame. You cannot deduct the full cost of most software the year you buy it. There are some exceptions. Anti-virus software can be immediately deducted since it has such a short usage life. Ditto business and industry-related magazine subscriptions. In these cases, take the total costs as a full deduction in the year spent.
6. Mileage
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, multiply by 34.5 cents per mile, and add in the tolls and parking to calculate your deduction. 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.
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 bellman). 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% deduction limit applies to most other client entertainment expenses, too. But a direct gift to a client or employee is 100% deductible, says Zobel, up to $25 per person per year.
8. Insurance premiums
Self-employed and paying your own health insurance premiums? This year, 60% is tax deductible, says Carter. 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. You're also out of luck if you are a general partner in a partrnership, receive guaranteed payments as a limited partner or got wages from an S corporation. In these instances, you can't claim this deduction. But if you are eligible for this tax break, paying your own way medically will get easier. In 2002, notes Carter, entrepreneurs, small-business owners and the self-employed were able to deduct 70% of their medical premiums, and 100% in 2003. Don't want to wait? Carter says it's possible to fully deduct your medical premiums right now if you hire your spouse. As an employee, his or her premiums will be 100% deductible, and you and the children can be added to the policy as dependents. 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 or both.
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% 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%. The IRS assumes that you will have a phone in your house anyway, so Zobel cautions that regular fees and charges don't count towards your deduction. But if you have a second line installed and use it only for business, 100% of these costs are deductible.
12. Child labor
"It's always good to employ your kids," says Carter. You can pay them up to $4,550 this year before they have to pay any additional 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. 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.
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