02/ 11/ 2008
by Melany Klinck
Nobody wants to pay more taxes than they owe. Yet each year small-business owners miss out on legitimate deductions and tax credits that could save them thousands of dollars. Cash in on these often overlooked deductions and credits to see your tax savings mount.
1. Cash expenditures: Among the most commonly missed deductions are those for cash expenditures, says Eva Rosenberg, author of Small Business Taxes Made Easy (McGraw-Hill, 2004) and publisher of the popular tax advice site, TaxMama.com.
"People pay for a whole host of expenses with cash, where no receipt is ever provided--things like parking meters, pay phones, valets, tips, tools, newsstand purchases," Rosenberg says. "Track those, and they could add up to hundreds of dollars or more."
She recalls one client who was an entertainer on cruise ships. Like many sole proprietors, he had been lax about tracking his cash expenditures. When he started keeping careful records, he was stunned to discover his annual cash outlay added up to almost $10,000.
2. Hiring your children. Sole proprietors or husband-wife partnerships can hire their children under age 18, deduct their wages and pay no FICA taxes. Children's pay must be reasonable for the service performed. "Keep time cards and proof that they assisted you in the business," advises Rosenberg.
3. Buying a vehicle. If you buy an SUV over 6,000 pounds and use it for business at least 50 percent of the time, you may be able to deduct up to $25,000 of the cost the year you buy it. On the other hand, Schedule C filers who buy a hybrid for business (or pleasure) may qualify for a tax credit of up to $3,000.
4. Mileage. Even if you don't have a company car, the miles you drive for business reasons--to the post office, the supply store, a client's office, an association meeting, the bank--can add up to a hefty deduction. In 2007, the deduction was 48.5 cents per mile. Keep a log in your car. If you haven't kept good records, you may be able to create a mileage log using your calendar and your receipts.
5. Employee meals. Generally only 50 percent of business meals are deductible; however, if you provide meals for your employees at your worksite, they may be completely deductible. Examples include beverage service, food for business meetings and meals provided in an employee cafeteria.
6. Exercise equipment. "If an employer provides an exercise facility or gym equipment for use by all employees during reasonable hours, the employer may take a deduction for the costs," says Rosenberg. "Naturally, the costs would have to be depreciated."
7. Life insurance. Small businesses may provide tax-free insurance coverage of up to $50,000 for their employees, which is deductible as a business expense if it is available to all workers vested in the plan.
8. Health reimbursement accounts. Sole proprietors can provide spouses who are legitimately employed by the business with tax-deductible health insurance and reimbursement for co-pays, eyeglasses, dental work and other medical expenses. Better yet, a spouse's coverage may extend to the entire family, including the business owner. "This is a lucrative tax benefit and should be discussed with your tax professional so it is set up and administered properly," Rosenberg says.
9. Remodeling or building. If you improve accessibility as defined by the Americans With Disabilities Act, you may be able to deduct up to $15,000 of costs and receive a tax credit of up to $5,000. Qualifying expenses include building improvements (ramps, handrails, etc.), removal of transportation barriers, and special equipment, furniture, and communication materials.
10. Education. Business-related classes, seminars, conventions and audio products are deductible. So are subscriptions to business journals and other publications.
A final tip: The best thing you can do to save on taxes is to keep thorough records and consult your tax professional before taking any major financial steps, Rosenberg says.
"Too often, we're forced to try to fix bad decisions after the fact, which can be very costly."
