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

The short list: 4 companies engaged in a battle of the paddles

The Latest
Thursday, December 04, 2014
pingpongthumbBY JACOB PALMER | OB DIGITAL NEWS EDITOR

Nothing says startup culture like a ping pong table in the office, lounge or lobby.


Read more...

Corner Office: Sheree Arntson

January-Powerbook 2015
Saturday, December 13, 2014

Checking in with the managing director of Arnerich Massena.


Read more...

Editor's Letter: Power Play

January-Powerbook 2015
Thursday, December 11, 2014

There’s a fascinating article in the December issue of the Harvard Business Review about a profound power shift taking place in business and society. It’s a long read, but the gist revolves around the tension between “old power” and “new power” as a driver of transformation. Here’s an excerpt:

Old power works like a currency. It is held by few. Once gained, it is jealously guarded, and the powerful have a substantial store of it to spend. It is closed, inaccessible, and leader-driven. It downloads, and it captures.

New power operates differently, like a current. It is made by many. It is open, participatory, and peer-driven. It uploads, and it distributes. Like water or electricity, it’s most forceful when it surges. The goal with new power is not to hoard it but to channel it.

The authors, Henry Timms and Jeremy Heimans, don’t necessarily favor one form of power over another but merely outline how power is transitioning, and how companies can take advantage of these changes to strengthen their positions in the marketplace. 

Our Powerbook issue might be viewed as a case study in the new-power transition. This annual book of lists provides information on leading businesses, nonprofits and universities in the state. Most of the featured companies are entrenched power players now pursuing more flexible and less hierarchical approaches to doing business. Law firms, for example, are adopting new technologies and fee structures to make legal services more accessible and affordable.

This month we also take a look at a controversial new U.S. Securities and Exchange Commission rule requiring public companies to disclose the median pay of workers, as well as the ratio between CEO and median-worker pay. 

Part of the 2010 Dodd-Frank financial reform law, the rule will compel public companies to be more open about employee compensation, with the assumption that greater transparency will improve corporate performance and, perhaps, help address one of the major challenges of our time: income inequality.

New power is not only about strategy and tactics, the Harvard Business Review authors say. “The ultimate questions are ethical. The big question is whether new power can genuinely serve the common good and confront society’s most intractable problems.”

That sounds like a call to arms. Or a New Year’s resolution. Old power or new, the goals are the same: to be a force for positive change in the world. Happy 2015!

— Linda


Read more...

Corner Office: Steve Tatone

January-Powerbook 2015
Saturday, December 13, 2014

Seven tidbits about the president and CEO of AKT Group.


Read more...

OB Poll: Wineries and groceries

News
Friday, October 24, 2014

24-winethumbA majority of respondents agreed: Local vineyards should remain Oregon-owned and quality is the most important factor when determining where to eat or buy groceries.


Read more...

Corner Office: Marv LaPorte

January-Powerbook 2015
Saturday, December 13, 2014

The president of LaPorte & Associates lets us in on his day-to-day life.


Read more...

Justice for All

January-Powerbook 2015
Thursday, December 11, 2014
BY JESSICA RIDGWAY

Lawger upends the typical hourly based fee model by letting clients determine the cost.


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