03/ 28/ 2007
by Kay Bell
You implemented your major tax-saving strategies months ago. But even in April, you still have time to make tax-smart moves. These five pre-filing steps could help keep your business' taxes as low as possible.
1. Take the telephone tax refund
Last year, the Internal Revenue Service stopped collecting the federal excise tax on long-distance telephone calls. Even better, it decided to give back the taxes it had collected between March 1, 2003, and July 31, 2006. But while individual filers have the option to collect a standard, fixed refund amount, businesses must do a bit more work to get back their overpaid taxes.
Business taxpayers can either tally up their actual expenses using information from the phone bills during the 41-month rebate period, or they can use a simplified method for calculating the telephone tax refund. The simplified method devised by the IRS requires a business owner to review just two 2006 phone bills: the April one, which was the last month the excise tax was created, and the September one, the first bill without the tax.
Details on both the simplified and actual expenses methods for claiming the phone tax refund can be found on Form 8913 and its instructions. Businesses must file the form to claim the refund.
2. Double-check your deductions
With Congress pressuring the IRS to increase collections, the agency plans to pay closer attention to Schedule C filers. In fact, it already is. IRS statistics for 2005 returns, the latest complete data gathered, show that business returns were three times more likely to be audited than individual filings. But when you have your deduction ducks in a row, auditors can look all they want without you worrying.
Be sure to report all your income. Don't deduct any personal expenses on your Schedule C. If you claimed a home office deduction, make sure the residential space was used exclusively for work. Collect your records documenting business use of your automobile.
And although the IRS might be scrutinizing business returns more closely, don't let that stop you from taking legitimate tax breaks. Be sure to check out the business-related income adjustments allowed at the bottom of page one of Form 1040. They include contributions to medical savings accounts, half of self-employment Social Security and Medicare taxes, health-insurance premiums and retirement plan contributions.
3. Start or add to your retirement account
Of course, you can't deduct your retirement plan contributions if you don't have a plan. While most business pension plans must be established during the applicable tax year, there is still time to open and contribute to a SEP-IRA. The deadline for this type of retirement plan is the return due date (April 17 this year) or by any filing extension you obtain. If you have already filed for the year, you cannot open a new account.
4. Consider expensing, instead of depreciating
If you bought business equipment in 2006, rather than depreciate it over the item's business life, consider claiming it as a Section 179 expense. This provision of the tax code allows business owners to deduct up to $108,000 in new business equipment that was put into use during the 2006 tax year. There are some restrictions, but in many cases Section 179 expensing rather than depreciating will provide a business with nice, immediate tax savings.
5. Get organized
True, it's a bit late in the process for last-minute restructuring of your tax and business finances. You should have done this earlier in the year, or better yet, last year while you were incurring your business expenses.
Now, however, is the perfect time to set up or refine your record-keeping system for 2007 and beyond.
As you work on your current return, it's clear where organizational gaps caused filing problems. Don't let it happen again. Talk with your bookkeeper or accountant and establish a record-keeping system that will make future tax filing easier. The effort should save your business some money, too.
