02/ 11/ 2008
by Beth Milito
Education and organization are key to reaping tax savings
Most small-business owners rely on an accountant or other experienced tax adviser to prepare their tax returns. There's no denying that tax laws have become so complicated that you need an expert to help you navigate the tax code. Nevertheless, it still pays to know the basics when it comes to deductions, record-keeping and document retention requirements. Remember, while a professional's service can relieve you of much of the paperwork involved with your taxes, it does not release you from all responsibility.
Deduct This
Make sure you don't miss out on valuable business expense deductions. The complexity of the tax code comes in part from the fact that Congress appreciates that business taxation offers more than just revenue. The tax code can also stimulate the economy by encouraging businesses to invest and expand. This is where business deductions come into play.
There are a number of expenses that you might be entitled to deduct. Make sure you take advantage of all that apply to your business. Common deductions include salaries, taxes and licenses, legal, accounting and other professional expenses, interest on business debt, advertising, rent, utilities, business cards and stationery, charitable contributions, Internet and e-mail services, postage and bank fees. More complicated deductions include travel, entertainment, meals, capital assets, catch-up depreciation, health insurance, automobiles and retirement plans.
You should consult with your tax adviser to learn more about these and other deductions that your business might be eligible to claim.
Keep Track
It pays—literally—to keep good records. The IRS requires that your books show your gross income, as well as deductions and credits. Therefore, maintain a detailed and organized record of your business transactions and supporting documentation.
Larry Hyatt, of Larry Hyatt & Associates in Brentwood, Tenn., recommends that businesses utilize the actual expense method for automobile expenses and maintain a daily expense log.
"Maintaining a daily log of your expenses is ideal since it cuts down on the time you may have to spend sorting through your receipts and organizing your expenses," Hyatt says.
Also follow these basic record-keeping tips:
- Deposit all business receipts in a separate account.
- Avoid writing "cash" checks.
- Carefully record transactions you make with your business.
Hold On
How long do you need to keep these tax records? Bill Rys, NFIB tax counsel, advises businesses to keep general tax records for six years and to keep records related to a capital expenditure for six years after the expenditure is fully expensed. Additionally, federal tax returns should be kept permanently.
