Home Archives March 2006 Make the most of deductions

Make the most of deductions

| Print |  Email
Wednesday, March 01, 2006


No doubt about it. Tax rules and terminology are confusing and when tax time comes, small-business owners want every possible deduction coming to them without running afoul of the IRS.

Fortunately, the IRS knows that business owners have to spend money in order to make money. The more deductible expenses you have, the less you pay in taxes.

The trick is in recognizing what’s a de-duction and what’s not — and in keeping the right records. Stakes are high, so you’ll want to get it right: IRS audits are way up. In fact, while IRS audits overall jumped 20% in 2005, audits of small incorporated businesses more than doubled.

Meanwhile, complicated, ever-changing rules are causing entrepreneurs to unnecessarily deliver too many of their hard-earned dollars to Uncle Sam.

“When you incur business expenses, you get tax deductions and save money on taxes,” says tax attorney Stephen Fishman. “But those deductions are only as good as the records you keep to back them up. Any expense you forget to deduct, or lose after an IRS audit because you can’t back it up, costs you dearly.” Each $100 in unclaimed deductions costs the average taxpayer another $43 in taxes.

Fishman says a basic record-keeping sys-tem should include a business checking account, appointment book, expense journal and support documents such as receipts. You’ll need to track income, and also inventory if you make or sell merchandise. And if your business has employees, you need complete payroll and payroll tax records.

Here are some of the prime categories for small business deductions:

1) Startup expenses: Some of these costs can be deducted immediately; others over 15
years. “However,” notes Fishman, “a special tax rule allows you to deduct up to $5,000 in startup expenses your first year in business.”
2) Business operating costs: These include all of the “ordinary and necessary” expenses you incur that are related directly to operating your business.
3) Hired help: This includes money you spend on independent contractors as well as employees. Be sure to follow IRS rules on who qualifies as an independent contractor.
4) Travel and entertainment: Tax laws recognize that business is often done at restaurants, on the golf course or elsewhere and allow you to deduct a portion (usually half) of “entertainment” costs. Costs for overnight business travel are also deductible, although the IRS looks closely at this area.
5) Vehicle expense: Local business-related travel costs are another valuable deduction. This includes business use of your car and can be claimed as a per-mile rate set by the IRS. Keep records — this is another red-flag area for auditors.
6) Retirement and medical deductions:  Contributions to qualified retirement plans are a terrific small business deduction. Plus, there are several ways to deduct the cost of health insurance premiums, depending on your business structure.
7) Inventory: This is tricky tax territory for small businesses. Inventory costs are not handled like other operating expenses. As Fishman, the tax attorney, notes, “A business may deduct only the cost of goods actually sold during a tax year — not the cost of its entire inventory.” Unsold items are considered an asset, not a write-off.

Other possible deductions include training costs, business gifts, association dues, advertising, bad debts, fees, licenses, insurance and interest on business loans.

— Daniel Kehrer, BizBest Media

 

More Articles

Buyer's Remorse

September 2014
Tuesday, August 26, 2014

Parents and students paying for college today are like homeowners who bought a house just before the housing bubble burst.


Read more...

Downtime

September 2014
Wednesday, August 27, 2014
BY JESSICA RIDGWAY

How State Representative Julie Parrish (House District 37) balances life between work and play.


Read more...

South Waterfront's revenge

News
Thursday, July 24, 2014
MoodyAveBY LINDA BAKER | OB EDITOR

Remember the naysayers?  Those who called the South Waterfront aerial tram a boondoggle?  Those who rejoiced at the massive sell off of luxury condos at the John Ross and Atwater Place?


Read more...

Podcast: Interview with Steve Balzac

Contributed Blogs
Tuesday, August 19, 2014

082014BalzacBY TOM COX | OB BLOGGER

Tom Cox interviews Steve Balzac, author of "Organizational Psychology for Managers."


Read more...

Video: The 100 Best Survey

News
Thursday, August 28, 2014

100-best-logo-2015 500pxw-1OB Research Editor Kim Moore shares some pointers about the 100 Best Companies to Work For survey.


Read more...

Startup or Grow Up?

September 2014
Tuesday, August 26, 2014
BY JON BELL

Startup culture is all the rage. Is there a downside?


Read more...

Portland rises

News
Monday, August 18, 2014

IMG 2551Portland is in the middle of another construction boom, with residential and office projects springing up downtown, in the Pearl and Old Town. OB Web Editor Jessica Ridgway documents the new wave.


Read more...
Oregon Business magazinetitle-sponsored-links-02
SPONSORED LINKS