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Commonly Missed Deductions

Posted by SBC Team in Taxes and Payroll on Jan 30, 2008 11:26:00 AM
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).

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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.

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