Taxes

How to be up-to-date when you file for '08

SBOCTeam — Wed, 04 Mar 2009 01:38:00 GMT

Here are some helpful tips to ensure that your small business doesn't leave money on the table this tax season

By Reed Richardson
The past year has seen a number of changes to the tax code that could significantly affect small businesses and start-ups. Here's a rundown of the major tax updates and additions for filing your 2008 taxes.

Section 179 Expensing: In an effort to reward businesses that invested in expansion and infrastructure last year, the federal government more than doubled the maximum allowable Section 179 expense deduction on business property to $250,000 in 2008, up from $122,000 in 2007. Likewise, the annual Section 179 investment limit, or phaseout threshold, jumped from $510,000 in 2007 to $800,000 for last year. These qualifying depreciable assets-which include everything from large-scale production machinery to more modest items like laptop computers-are detailed on IRS publication 946 (http://www.irs.gov/publications/p946/index.html) and must have been placed into service during the 2008 calendar year. The upshot of this generous rule change is that small businesses will be able to ditch the IRS's multi-year depreciation schedules on many qualified purchases from last year and simply write off the entire cost immediately. And when coupled with more generous bonus first-year depreciation rules (see below), these new Section 179 rules translate into an even greater tax windfall for small businesses.

Bonus First-Year Depreciation: For the 2008 tax year, businesses are also allowed to write off up to half of a newly purchased asset's cost in the first year of its use. So, for example, if a small business spent $300,000 on office equipment last year, it would be able to claim $150,000 in depreciated value on that equipment in 2008 as well. But to really maximize its tax savings, a small business owner would be smart to first take the full Section 179 deduction (mentioned above) on this office equipment-reducing the equipment's taxable value down to a mere $50,000-and then add on the first-year 50% bonus depreciation, which would leave just $25,000 in taxable value to depreciate over the coming years.

Vehicle Depreciation: The total deduction for each passenger car and truck or van placed into service by your business in 2008 is $2,960 and $3,160, respectively. This figure includes the Section 179 expense deduction. Both of these numbers represent a $100 decrease from 2007. Keep in mind that these deductions will be less if the vehicles are not used exclusively in service of your small business.

Net Operating Loss (NOL) Carryback: As part of the $787 billion recovery package recently passed by Congress and signed by President Obama, businesses with annual gross revenues of under $15 million can shift any 2008 losses back five years. This change-the normal carryback limit is two years-allows struggling start-ups and small businesses to even out their receipts over a greater amount of time. For instance, a business that lost $500,000 in 2008 might shift that balance back across the tax years of 2005, 2006, and 2007; years that it made profits of $50,000, $150,000, and $300,000, respectively. By amending its tax returns through NOL carryback to now show no profits for those three years, that small business could generate some much needed capital in the form of tax refunds for those three years. Some caveats, however: An overwhelmed IRS is likely to take months, if not longer, to process and send out these refunds (for an expedited refund, file IRS Form 1139: http://www.irs.gov/pub/irs-pdf/f1139.pdf). Also, note that NOL carrybacks are only available to small businesses formed as C-corporations.

Mileage, Transportation, and Business Travel Deductions: For the first half of 2008, the standard business mileage deduction increased to 50.5 cents per mile. To account for the high cost of gasoline during the first half of the year, the IRS-albeit belatedly-raised the rate to 58.5 cents per mile for the final six months of the year. As before, the cost of parking and tolls are still deductible.

In another change for 2008, businesses are allowed pay up to $220 per month, tax-free, for employee parking. The rate on tax-free public transit passes for employees also increased slightly in 2008, to $115 a month from $110 in 2007.

And finally, the IRS also relaxed its rules regarding business meals. Previously, you could generally expense only 50% of business-related meal expenses. However, starting in 2008, the IRS now allows deductions of up to 80% of meal costs when traveling away from home and as long as the meals take place during or right before or after business "hours of service."

Payroll Taxes: While the self-employment tax rate and Social Security tax rate for employers remained unchanged from 2007, the maximum amount susceptible to taxation for both of these was raised from $97,500 to $102,000. Also, the federal unemployment tax rate (FUTA), previously set to decrease to 6.0% after 2007, was instead kept at 6.2% for the 2008 calendar year.
Health Insurance Deductions: The eligibility limits and employer contribution amounts for company-sponsored high deductibility health plans (HDHPs) and health savings accounts (HSAs) increased slightly in 2008.

For qualifying HDHPs, the only tax change last year involved a $200 increase on the limit of annual out-of-pocket expenses for family coverage (from $11,000 in 2007 to $11,200 in 2008). The minimum annual deductibles for self-only and family HDHP coverage ($1,100 and $2,220, respectively) as well as the maximum out-of-pocket expenses for self-only coverage ($5,600) remained unchanged.

And for small businesses with HSAs, the maximum employer contribution amounts per employee all went up. For those employees with individual HSAs, the employer contribution limit was raised to $2,900 ($3,800 for individuals age 55 or older) and for those employees that have families enrolled as well, the annual employer limit was increased to $5,800 ($6,700 for those employees aged 55 or older).

Expired Tax Benefits: In 2008, some common tax programs were no longer allowed, including tax credits for increasing research and development and the deduction for environmental cleanup costs. For a full list of expired tax benefits, check out the IRS web page: http://www.irs.gov/publications/p553/ch02.html#d0e2384

What to keep in mind as you work in '09

SBOCTeam — Wed, 04 Mar 2009 01:36:00 GMT

Take advantage of this year's tax changes to help your small business today

By Reed Richardson

This year, the tax code has undergone a number of changes that could offer substantial benefits come filing season next spring. But to take full advantage, savvy small business owners should start incorporating these new rules into their day-to-day business practices right now.

Section 179 Expensing: If you missed out-or couldn't afford-to make large capital investments for your business in 2008, you still have the chance to do so in 2009 while enjoying the more generous Section 179 deduction enacted last year. This deduction, which covers depreciable assets like manufacturing equipment or office computers and furniture, was raised from $122,000 to $250,000 in 2008 and will continue at the same level for 2009. Section 179 deductions are only available in the same tax year that the claimed assets were placed into service. It does not matter, however, whether they were financed in part or in total. Similarly, the Section 179 total annual threshold on all depreciable assets increased to $800,000 annually for the 2008 tax year, will also remain in effect for 2009.

Implications: For small businesses projecting a profit for 2009, Section 179 deductions can be a smart way to re-invest in their business, lessen their potential tax bill come next spring, and prevent greater erosion of asset value to inflation over a long depreciation schedule. Companies that will end up losing money in 2009 would be better off skipping the Section 179 deduction and sticking with the normal depreciation schedule, however. So, a wise strategy might involve waiting until later in the year-when a small business owner has a better sense of whether or not their company will finish 2009 in the red or the black-to purchase new production equipment or finance an expansion. Also note that a small business can wait until filing its tax return in March 2010 before declaring whether or not it will take the deduction.

Bonus First-Year Depreciation: Similar to Section 179, this deduction applies to depreciable assets. The bonus first-year deduction, raised to 50% of an asset's total cost in 2008, was continued for qualified purchases made in 2009. This tax break, much like the more generous Section 179 deduction, is intended to spur business re-investment and expansion.

Implications: When coupled with the Section 179 deduction and regular depreciation allowances, this more robust bonus first-year depreciation deduction means savvy small businesses could make some substantial investments in 2009 and still keep their tax liability relatively low. On qualified purchases of up to $250,000, a small business could choose to deduct the entire amount in 2009. And for more expensive investments, like, say, a new, $750,000 production line, which would ordinarily be depreciated over 15 years, the potential tax writeoff from combining Section 179, bonus first-year, and normal depreciation deductions could equal nearly three quarters of the total-$550,000 ($250,000-Section 179 + $250,000-Bonus 50% first-year depreciation + $50,000-Ordinary 1/15^th^ depreciation).

Estimated Taxes: The recently passed stimulus package also has a new provision that allows small business owners (and employees) to withhold more of their individual estimated taxes this year. According to the new rule, individuals who have an adjusted gross income of under $500,000 and who draw more than half of their income from a business with an average of fewer than 500 employees can enjoy a through-year 10% cut in their estimated tax payments.

Implication: Paying just 90%-rather than the full amount-of estimated taxes during the year frees up more capital for small business owners and employees. Of course, deferring full payment of estimated taxes may mean those individuals will end up with a larger tax liability come spring 2010. But for many entrepreneurs, this change could provide much needed cash flow now, with the hope that by the time they have to file their 2009 taxes, an economic recovery will have finally begun.

Targeted Hiring Benefits: Also included in the president's February recovery package were two new work opportunity tax credits for employers. These credits, which top out at $2,400 per hired worker, are geared toward the hiring of two specific types of job candidates: "disconnected youth" (people ages 16 to 24 who haven't held a job or been attending school in the past six months) and unemployed veterans (Armed Services members, discharged or released within the past five years, who have also collected unemployment for at least one month during the past year).

Implications: For small businesses looking to perhaps add unskilled labor or first-line supervisors, these work opportunity tax credits may be a smart and financially savvy way to up your staff.

Small Business Stock Investment: Geared more toward investors than employers, the stimulus plan also relaxes tax rates on future capital gains of Section 1202 small business stock investments purchased between mid-February 2009 and Jan. 1, 2011. According to the new law, investors that purchase stock in qualified smaller companies (defined as certain C corporations with gross assets less than $50 million), and hold that stock for at least five years, can exclude up to 75% of their eventual gains from taxes. This represents a 25 percentage-point increase over the 2008 capital gains exclusion rate of 50%.

Implication: For small, incorporated businesses, this tax change could provide just enough of an incentive to lure in hesitant investors. Additionally, this new provision should be factored in when considering the best strategy to raise money-stock issue vs. equity stake-for your company in 2009.

S-Corporation Gains Taxes: Staring in 2009 and continuing through 2010, small businesses organized as S corporations will enjoy a shortened recognition period on built-in gains taxes. Normally 10 years, newly elected S corporations now will only be exposed to the top corporate tax rate on realized gains during their first seven years of existence.

Implication: For small companies currently organized as C corporations, IRS Section 1374, which originally closed a big tax loophole, has now been opened back up a bit to make re-forming as an S corporation more enticing. For small business owners looking to shed a more complicated corporate structure and convert to a more straightforward organizational and profit structure, 2009 and 2010 might offer a good opportunity to make the switch without having to pay steep financial penalties later on.

For more on the 2009 individual and business tax changes stemming from the February economic stimulus bill, try these websites: http://finance.senate.gov/press/Bpress/2009press/prb021209.pdf
http://www.journalofaccountancy.com/Web/SmallBusinessTaxBreaksinStimulusBill.htm

7 Tax Tips for the Self Employed

SBOCTeam — Wed, 04 Mar 2009 01:16:00 GMT

Being self-employed is a dream for many people. Who doesn't want to be his or her own boss? Of course, the downside of being the boss is the all responsibilities that come with the job. Unfortunately, calculating and paying taxes are part of those responsibilities.

By Christopher Freeburn
According to the Internal Revenue Service (IRS), you are considered self-employed "if you are in business for yourself, or carry on a trade or business as a sole proprietor or an independent contractor." The IRS requires self-employed individuals to pay a Self-Employment Tax, which assesses Social Security and Medicare taxes similar to those paid by employees and their firms. The IRS also requires self-employed people to pay estimated taxes as a substitute for the withholding taxes that are applied against employed person's salaries. These factors make complying with self-employment taxes rules somewhat more complicated than the rules that apply to the employed.

With that in mind, here are some tax tips for the self-employed:

1. Consult a CPA. Even if you are intent on doing everything yourself, it is better to seek outside help than make a mistake when preparing your taxes. An error on your tax returns can result in escalating fines and penalties from the IRS. Tax law is complicated, particularly when it comes to self-employment. To be certain you are in compliance with all relevant requirements, talk to a certified public accountant and review your situation. A CPA will be familiar with the federal, state and local tax laws that apply to you. Additionally, a CPA may be able to point out tax liabilities and deductions that you hadn't considered.

2. Keep good records. Good record keeping is more than simply a good business practice; it is a necessity when it comes to dealing with the IRS, which may demand to see every last detail of your income and expenses, particularly when you claim deductions on your tax return. If you are ever audited-and being self-employed makes that more likely-you will need to have every receipt and document to support your claims. Otherwise, fines and penalties will accrue. Get in the habit of saving everything, and develop a filing system that allows you to retrieve needed documents quickly.

3. Deduct the cost of medical insurance. Self-employed people can deduct up to 100% of medical insurance premiums paid for medical insurance for themselves, spouses, or dependents. Medical insurance costs are deducted directly from total income.

4. Deduct all business expenses. Every drop of toner you buy for your printers, reams of paper, shipping expenses, postage, software, pens and pads, and anything else you use for your business is an expense that can be deducted. Be sure to save every receipt to back up your claimed deduction. Also be sure that you can justify the claim that the items or services purchased were used directly for your business.

5. Increase expenses to lower taxable income. As the end of the year approaches, you can increase you deductions against this year's income by making business purchases now. Need another printer, or PC? Better desk or cushy new office chair? Buying it before the end of the year means whatever you spend can be deducted against this year's income taxes.

6. Contribute to your retirement. The options for self-employed people to save for retirement have never been better. If you haven't created a retirement plan for yourself, now is a good time. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against the current year's income. Note that most retirement plans have a contribution limit. Most local banks or financial institutions will be able to help create and maintain your preferred retirement vehicle.

7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or maintaining a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.

Economic Recovery Package: What�s In It for You?

SBOCTeam — Fri, 20 Feb 2009 22:35:00 GMT

by BigIdeas4Biz

The $787 billion American Recovery and Reinvestment Act of 2009, which was signed into law on February 17, 2009, is designed to spur the economy. It makes numerous tax changes for individuals and businesses. Since sole proprietors, independent contractors, LLC members, and other owners pay tax on their share of business income on their personal returns, business-related changes become highly personal!

Most of the changes run for only a short time-two years, one year, or less. Many of the changes have income caps, so check these limits carefully to see whether you qualify. Here is an overview of some key changes that could affect you.

Buying equipment
Upgrade your computers, office furniture, machinery or equipment and get tax breaks:

Deduct the cost up to $250,000 for equipment purchased placed in service by December 31, 2009 (called first-year expensing or the Section 179 deduction).
This applies to both new and pre-owned items. The deduction applies whether you finance the purchase in whole or in part. Caution: Opting to use this write-off only makes sense if you're profitable for the year. If you don't use first-year expensing, you simply depreciate the purchase price.
Claim 50% bonus depreciation for the cost of new property placed in service by December 31, 2009. This break can be combined with first-year expensing, as well as a regular depreciation allowance, to enable most or all of the cost of qualified purchases to be deducted this year.

If you purchase a new (not pre-owned) personal car or light truck after February 17, 2009, and before January 1, 2011 (even though you use it partially for business), you can deduct state and local sales and excise taxes, regardless of whether you itemize your other personal deductions. This break doesn't apply to leased vehicles. The deduction is limited to taxes on a sticker price up to $49,500. The deduction phases out for singles with adjusted gross income between $125,000 and $135,000 ($250,000 to $260,000 for joint filers).

Getting credits
A tax credit reduces your tax bill dollar for dollar; a tax deduction saves you an amount based on your tax bracket. For example, a $1,000 credit saves you $1,000 in taxes, while a $1,000 deduction only saves you $250 in taxes if you're in the 25% tax break. Some new tax credits of note:

American opportunity credit. Now may be a great time to complete your education. If you (your spouse or dependent) is in the first four years of college, claim a tax credit in 2009 and 2010 equal to 100% of the first $2,000 of tuition and other qualified expenses, plus 25% of the next $2,000, for a top credit of $2,500. The credit phases out for singles with adjusted gross income between $80,000 and $90,000 ($160,000 to $180,000 for joint filers).
Work opportunity credit. If you hire certain disadvantaged workers, you get a tax credit (usually 40% of first-year wages up to $6,000, for a top credit of $2,400 per eligible new employee). The new law expands the group of targeted workers that can qualify for 2009 and 2010 to include certain unemployed veterans and unemployed youth who lack education and certain basic skills
Business energy credits. Going to alternative energy can save you in utility costs as well as provide you with important tax breaks. There are several tax credits to encourage investments in renewable energy production and for other alternative energy investments for your business. Note: There are also credits for making energy improvements to your home.

Getting a tax refund
If 2008 was a difficult year for your business and you show a loss, you may be able to turn that into an immediate tax refund. Net operating losses (NOLs) for small businesses can be carried back and used to offset income in prior years. Usually, the carryback period is limited to two years. For NOLs in 2008, you can choose a three-, four-, or five-year carryback (the option only applies to businesses with gross revenue of $15 million or less).

If you have an NOL and want to use this carryback, you can obtain your tax refund by filing amended returns on IRS Form 1040X, Amended U.S. Individual Income Tax Return, for those years or by filing for a quick refund (individuals use IRS Form 1045, Application for Tentative Refund, which the IRS usually acts upon within 90 days of the filing of the form).

Paying estimated taxes
Usually, to escape underpayment penalties, estimated taxes must be at least 90% of the tax shown on your current year's return or 100% of the tax on your prior year's return. The current year return threshold rises to 110% if your adjusted gross income (AGI) in the prior year was more than $150,000 (or $75,000 if married filing separately).

For 2009, the first payment of which is due April 15, 2009, there will be no estimated tax penalties if tax payments for 2009 total at least 90% of your 2008 taxes. To rely on this reduced estimated tax payment requirement, your AGI in 2008 must have been $500,000 or less, and half of your income must be derived from a small business (defined here as 500 or fewer employees).

When figuring estimated taxes for 2009, take into account the new Making Work Pay credit if you're self-employed. The credit, which is the crown jewel of the new law, is $400 for singles or $800 for joint filers. The credit phases out for singles with AGI between $75,000 and $95,000 and for joint filers with AGI between $150,000 and $150,000. The credit is paid to employees by means of adjusting their payroll withholding; for self-employed people, reduce your estimated tax payments accordingly.

Preparing for payroll changes
If you have employees (including yourself), expect revised withholding tables for 2009 in late spring to reflect the Making Work Pay credit. These new tables will help you adjust employee take home pay to reflect the credit, which is retroactive to January 1, 2009.

Businesses with more than 20 employees and that offer COBRA health coverage will also have to adapt to new federal subsidy for involuntarily terminated workers after September 1, 2008, through the end of 2009. The federal government will pay 65% of COBRA premiums for these former employees and the payments will be made by means of a reduction in an employer's payroll taxes (with some credit to employers if the subsidy exceeds payroll taxes).

Seven Year-End Tax Tips

SBOCTeam — Tue, 02 Dec 2008 15:24:00 GMT

By Christopher Freeburn

The autumn leaves are falling, a chill is in the air, holidays are looming, and, for small business owners, it's a good time to think about ... taxes. While no one likes to ponder the intricacies and implications of the Internal Revenue Code, taking the time to do so toward the end of the year can save your business a considerable amount of money come tax time.

So what can you do now?

1. Lower Revenue. Since your tax bill will be calculated on the basis of how much income your company has made during the year, a good way of keeping that bill down is to defer the receipt of as many payments from customers as possible into January. If your business operates on the cash basis of accounting, this can be easily done by simply delaying the mailing of bills for end-of-year purchases until very late in December, or permitting other bills that are due to be paid in January. Not only does this allow you to lower the current year tax bill, but you get to keep the tax due on those funds in the bank, accruing interest, for a whole year. Additionally, your customers will appreciate the added time to pay their bills, especially around the holiday season.

Note, however, that this strategy only benefits you if you won't be entering a higher tax bracket in the coming year. If you estimate that your business will be operating in a higher tax bracket next year, deferring payments until next year may cost you more later. Also, if your business shows a loss for this year, it makes less sense to defer the payments, since doing so only increases the size of your loss for this year and will have no tax impact.

Also note that simply not depositing a check received before the end of the year does not mean that you can defer that revenue to next year. The IRS requires you to include any checks received before December 31 as part of this year's revenue. Failing to do so could result in penalties if you are audited.

2. Make that major purchase. If you are considering a major purchase of business equipment, it's a good idea to do it now, so that the cost can be deducted from this year's taxes. As part of the Economic Stimulus Act of 2008, signed into law earlier this year, the limit on Section 179 deductions for business equipment purchases was raised from $125,000 to $250,000, and the total amount of equipment purchases that are deductible was raised from $500,000 to $800,000. Both used and new equipment qualify for the deduction and you are able to finance the purchase. But any new equipment acquired must be put into use by your business by December 31 to qualify for the deduction.

3. Increase Expenses. You can reduce your tax bill by increasing the amount and number of deductions you take for business expenses like office supplies and office furniture. You can increase the benefit by charging such expenses on your business credit card, which means that-if you make the purchase in December-you get to claim the deduction for this year's taxes, but won't have to pay the credit card bill until next year.

4. Pay Recurring Bills Now. The same applies to bills for business services, like rent, phone service, and equipment leases, which should be paid before the end of the year, even if not due until after December 31. Consider pre-paying for bills that you know you will need to pay anyway like rent. Such payments can be deducted against this year's taxes. Make sure that pre-payments made now won't complicate your cash flow in January.

5. Contribute to a Retirement Plan: If you don't have one, you really should, and this is the perfect time to set it up. Payments made to a retirement plan-401(k), IRA, KEOGH, or SEP plan-are deductible against this year's income. Most retirement plans have a contribution limit.

6. Consult a Tax Advisor. Tax law is complicated. Very few small business owners, outside of CPAs themselves, have the time or inclination to acquaint themselves with the IRS code and the yearly changes made by Congress. Instead of trying to work it all out yourself, you are better off consulting someone who has made business taxes his or her profession. A tax advisor can make certain that your business is not only in compliance with all the relevant tax codes, but is taking advantage of every allowable deduction.

7. Consider the home office deduction. Do you conduct business out of any part of your home? Many small business owners have at least one room devoted to some aspect of their business, whether it is keeping shipping materials in the garage, or a bedroom that has been converted into an office or filing storage space. With so many small businesses operating partially or completely out of people's homes, the IRS allows small business owners to deduct a portion of rent, mortgage payments, utilities, and maintenance for qualifying home offices. The IRS has fairly stringent tests for such deductions, however, and it is advisable to consult a CPA about your particular situation to make certain it qualifies.

Five Tax Filing Mistakes To Avoid

SBOCTeam — Thu, 20 Mar 2008 14:45:00 GMT

By Barbara Weltman

One of the least fun things about running a business is filing your annual income tax return and paying what's owed. As you embark on this task, don't make mistakes that can lead to needlessly overpaying your taxes or, even worse, becoming the target of an IRS audit.

1. Recognize your vulnerability. There is a $345 billion tax gap the spread between what the government actually collects and what it thinks it should be collecting. Much of this, in the IRS's view, is attributable to sole proprietors who underreport their income or overstate their deductions. Be prepared: Report your income correctly (for example, report all income that has been reported to you on Form 1099-MISC) and keep great records to back up any deductions you claim.

2. Classify your workers properly. Another hot issue for the IRS is making sure that businesses treat workers as employees, rather than as independent contractors, if sufficient control is exercised over the workers. If you have the right to tell a worker when, where, and how the work is to be done, likely he's your employee and you must pay employment taxes (e.g., withhold income tax and the employee share of FICA from his wages, pay the employer share of FICA, and pay federal and state unemployment taxes). You can't simply label a worker an independent contractor if the situation makes him an employee. If the IRS finds out that you've misclassified a worker, you can owe substantial back taxes and penalties.

3. Don't overlook deductions to which you're entitled. Most of your expenses in running a business are deductible, but you may need special records and/or receipts to claim them. For example, taking a customer to lunch is deductible (up to 50% of the bill), but you need a receipt and a written record in a diary, expense account statement, etc. showing the name of the customer, where and when you ate, and what you discussed. If you were profitable, you can shelter income in a qualified retirement plan. The contribution is deductible up to set limits (e.g., a maximum of $45,000 for contributions to a profit sharing plan or Simplified Employee Pension, or SEP, in 2007), earnings grow on a tax-deferred basis, and you create a retirement nest egg for your future. Even if you didn't set up a plan for 2007, you have until the extended due date of your return to set up and fund an SEP. Factor in the cost of covering employees, where applicable. If you made, constructed, grew, or extracted something in the U.S., you may be eligible for a special deduction, called the domestic production activities deduction. For 2007, this is 6% of your net income from a qualified activity, which can mean substantial savings for you.

4. Don't overlook tax credits. There is an array of tax credits you may claim to reduce your tax bill dollar for dollar
Examples:

If you started a qualified retirement plan, you can claim a credit of $500 per year for the first three years to offset the administrative startup costs (e.g., educating your employees about their participation in the plan).
If you conducted scientific research, you may qualify for a 20% tax credit for these research activities.
If you hired someone from certain targeted groups, such as a disabled veteran or long-time family assistance recipient, you can claim a credit for a portion of their wages.
If you purchased a hybrid vehicle, you may be entitled to a tax credit, the amount of which is fixed by the IRS. However, no credit is allowed for any Toyota or Lexus hybrid purchased after August 31, 2007.

5. Avoid tax penalties. What a waste of your hard earned money if you owe tax penalties that could easily have been avoided.

File your return on time or ask for an automatic six month filing extension by the due date of your return to avoid late filing penalties (which can be 25% or more if taxes are owed). However, a filing extension does not give you more time to pay what you owe. If you request an extension, be sure to pay as much as you can along with your extension to minimize or avoid late payment penalties.
Don't let your inability to pay your tax bill keep you from filing on time. If you file by the due date (including the extension), you won't owe late filing penalties. You can deal with your tax bill by requesting an installment agreement from the IRS (if you pay in full within 10 days, there's no interest or penalties). If you need more time, you can have up to three years if the balance is no more than $10,000 and you meet certain conditions you'll owe interest but the late payment penalties are cut from 0.5% per month to 0.25% per month. You can also charge your tax bill to a major credit card, but you'll pay a 2.49% convenience fee to the IRS approved processor, plus interest on any credit card balance you carry.
Don't fail to pay estimated tax if you need to. Business owners don't have tax withholding on their profits and can't wait until they file their returns to pay what they owe. For sole proprietors, for example, estimated tax must cover the income tax on net earnings from the business as well as "self employment tax" (to cover Social Security and Medicare taxes). Estimated tax is paid in four installments for the year: for 2008, these payments are due April 15, June 16, September 15, and January 15, 2009 (don't include your first installment with your 2007 income tax return).

Being smart about your company's taxes can have a significant impact on your financial bottom line. If you don't have the expertise to handle this on your own, or the time to use software for this purpose, be sure to consult with a tax advisor as soon as possible.

Barbara Weltman is one of the nation's leading authorities on small business. She is a contributing writer for Inc.com, PINK magazine and New York Enterprise Report, and is a sought after media commentator who has been featured in The New York Times, The Wall Street Journal, The Washington Post, Reuters, Forbes.com, Marketwatch.com, WABC-TV, Fox News, CNNRadio and CNBC.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

Commonly Missed Deductions

SBOCTeam — Wed, 30 Jan 2008 16:26:00 GMT

Don't Leave Money on the Table! Tax time is here, so make sure your small business is getting every dollar you deserve

By Reed Richardson

Every year, millions of small businesses give away billions of dollars to the U.S. government by failing to claim everything they should on their tax return. To ensure you don't make the same mistake, here are some of the most commonly overlooked tax deductions and credits.

Retirement Plans If your small business has a SEP IRA, SIMPLE IRA, or 401(k) retirement plan, you can deduct your employee contributions as well as your own personal contributions from your company's federal taxable income. Also, the IRS allows tax credits to cover the cost of starting up these retirement plans. (For example, a small business could be eligible to claim up to $500 a year in tax credits for the first three years after starting a SEP IRA.) For more on small business retirement plans, check out IRS Publication 560 (irs.gov/publications/p560/index.html).

Sales Taxes If you're a sole proprietor and you only file an individual tax return, you should check the IRS's handy sales tax deduction calculator (http://apps.irs.gov/app/stdc/) before filing. If your small business is incorporated and files a separate tax return, however, you can deduct all sales tax you paid on business property and equipment on Schedules C or F (or E if it involves rental property). In fact, you should treat sales tax in the same manner as you would the rest of that same purchase. So, if a business expense is deductible, so too is the sales tax, and if a purchase involves property or equipment that is depreciable, the cost of the sales tax is also subject to depreciation. Also, any foreign point of sale taxes paid by your small business, such as the European Union's VAT (Value Added Tax), can be tax deductible as well.

Insurance Generally, the premiums you pay on most kinds of insurance for your company are deductible as business expenses. This includes fire, accident, and theft insurance as well as liability, worker's compensation, and malpractice insurance premiums.

Home Office Deduction As a small business owner, it's probably quite common for you to chase the kids off of your home computer so you can run the occasional sales report or P/L statement. And if this sounds familiar, you have, unfortunately, just disqualified yourself from the home office deduction. That's because it is only available to self employed people who meet a "regular and exclusive" test. In other words, you can't mix your business and personal life in your home office even if your home office's use is 99% business and 1% personal and still claim the deduction.
In fact, a September 2006 IRS circular noted that because of the frequent misinterpretation of the home office deduction "compliance is a concern," and that it will be "focusing enforcement efforts, including examinations, on these issues." So, consider yourself warned: If you take the home office deduction, you stand a higher chance of getting audited. (For a quick guide to figuring out if you really do qualify, see page 4 of IRS Publication 587 here: www.irs.gov/pub/irspdf/p587.pdf).
To calculate your home office deduction you must first find the business percentage of your house. (Dividing the square footage of your office by the total area of your home is one way to do this, dividing the number of rooms used for your business by the total number of rooms in your home is another.) Once you've figured out the business percentage you can apply it to general expenses associated with your entire home, such as property taxes and mortgage interest or rent, as well as expenses specific to just your home office, like additional insurance, security systems, repairs, and utilities (like a second, work-only phone line). To see a sample of what a home office deduction for a self employed individual or sole proprietor looks like when filled out, take a look at page 23 of IRS publication 587.

Bad debts and business write offs Unpaid customer accounts that will be written off as worthless debts as well as any documented losses due to theft or fraud (not already covered by insurance) are deductible, but only if the revenue was at one time included in your business's gross income. However, cash based businesses that never recorded the sale or service as income in the first place are not eligible to take this deduction.

Bank fees and finance charges Many of these business costs are deductible from both sides of the transaction equation buyer and seller. So, not only can you typically deduct fees and interest charges on your own business credit cards, you can also deduct service fees charged by the bank for accepting your customer's credit cards.

Advertising A big one that should never be overlooked, as almost all advertising and promotional expenses, even the cost of printing up your business cards or sponsoring a local Little League team, can be deductible.

Mileage deduction For the 2007 tax year, the standard mileage deduction for business related driving rose four cents to 48.5 cents per mile. Keep in mind, this deduction is only available to companies with four or fewer vehicles. One other note, while the standard mileage deduction covers most car-related costs, parking fees and tolls as well as finance charges and insurance premiums on business-owned vehicle loans can be listed as separate deductions.

Upfront Depreciation Commonly known as Section 179 deductions, this provision in the tax code allows small businesses to claim a maximum deduction of up to $125,000 on depreciable property purchased for the business in 2007. Qualified property for this deduction typically includes machinery and equipment, furniture and fixtures, as well as most storage facilities.

Tax Preparation Fees Ironically, the cost of hiring an accountant or tax preparer as well as the cost of purchasing tax preparation software is an often overlooked deductible expense. Don't make that mistake.

Mailing Costs Postage, postal meter rental fees, and shipping costs that your small business pays are tax deductible.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.