Tax Deductions for Small Business Owners
Tax tips and tax help to assist taxpayers by describing options
for tax reduction and tax cuts through lawful tax deductions.
Small business owners need all the tax help which is available. Tax deductions allow small business owners to keep more of what they earn. With a 35% marginal tax rate, the government is a silent partner who takes no risk and over one-third of the profits. Tax deductions are neither simple, straight forward, or intuitive. However, the effort to increase tax deductions is well worth the effort.
Tax Help Tip 1: Tax deductions reduce taxable income for small business owners but do not directly reduce federal income taxes. (Tax credits, such as low income housing investment tax credits, directly reduce federal income taxes) Both cash and non-cash tax deductions merit review.
Tax Help Tip 2: Cash disbursements can be expensed (used as a tax deduction in the current year) or depreciated (capitalized and depreciated or amortized over a period of years). Due to the judgment required to determine what should be capitalized, there is some discretion. For example, a local gang paints graffiti on a portion of the side of your building. You decide to repaint the entire side of the building instead of just the portion with graffiti. Is this a repair (can be used as a tax deduction) or should it be capitalized (and depreciated over time)? Some owners would elect to expense repainting the entire building. Business owners should seek counsel from their advisor regarding discretionary tax deductions.
Tax Help Tip 3: Real estate provides bountiful tax deductions for small business owners. Most real estate owners inadvertently understate depreciation and thus forego available tax deductions. The common practice is to simply separate land and long-life property (depreciated over 39 years for commercial property and 27.5 years for rental residential property). Real estate owners can typically increase depreciation by 50-100% in the first 5-7 years of ownership by utilizing cost segregation. Cost segregation can separate up to 130 items that can be depreciated over 5, 7, or 15 years (instead of 27.5-39 years). These short-life items typically comprise about 20-40% of the improvement cost basis. The increased depreciation increases tax deductions.
Cost segregation can be utilized for recently purchased or built properties and for properties owned for a period of years (1/1/87 or later). Long-term real estate owners can claim a one-time tax deduction windfall using catch-up depreciation.
Tax Help Tip 4: After a cost segregation study is prepared, the owner can “catch-up” previously under-reported depreciation (without filing any amended tax returns).
Tax Help Tip 5: Another source of “hidden” tax deductions is a careful review of your fixed asset schedule. Many fixed asset schedule include items which should have been expensed or which have been discarded (or should be thrown away). Misclassified items are another source of additional tax deduction. In some cases the depreciation life for an asset has been overstated through clerical error. A fixed asset audit typically generates meaningful tax deductions.
Other Tax Help Articles: Other non-cash sources of tax deductions are amortization, casualty losses, and charitable contributions, which are addressed in separate articles. Planning tax deductions requires a modest effort but the rewards are worth the effort. You work hard to serve your clients and earn a profit; don’t give more than is legally required to your silent partner.
Click here for a FREE preliminary analysis of income tax savings for your property.
Cost segregation produces tax deductions and reduces federal income taxes across the country and in every size market. Below are just a few examples of cities where cost segregation generates meaningful tax deductions.
City:
Memphis, TN
Baltimore, MD
Las Vegas, NV
Boston, MA
Miami, FL
New Orleans, LA
Atlanta, GA
Washington, DC
Phoenix, AZ
Houston, TX
Albuquerque, NM
Sacramento, CA
Sarasota, FL
Salt Lake City, UT
Albany, NY
Virginia Beach, VA
Oxnard, CA
New Haven, CT
Chicago, IL
Kansas City, MO
Buffalo, NY
Jackson, MS
Tucson, AZ
Raleigh, NC
Dayton, OH
Pittsburgh, PA
Scranton, PA
Jacksonville, TN
Portland, OR
Birmingham, AL
Cost segregation produces tax deductions for virtually all property types, including the following:
Property Type:
Veterinary clinic
Single-tenant retail
Auto dealer
Amusement park
Community shopping center
Convenience store
Airplane hangar
Research and development
Shopping mall
Office warehouse
Almost every industry, including the following, can generate cost-efficient tax deductions by using cost segregation.
Industry:
Arts, Entertainment, and Recreation
Frozen food manufacturing
Real estate lesser
Plastic and rubber products manufacturing
Warehousing and storage
Building supply dealers
Electronic and appliance stores
Food and beverage stores
Durable good wholesalers
Electrical component manufacturing
O’Connor & Associates is a national provider of commercial real estate consulting services including cost segregation studies, due diligence, commercial real estate appraisal, Lease Abstraction-,tax deduction, cost segregation, property tax, market research, estate taxes, Collin central appraisal district, Tips and Tricks for Appealing Your Property Taxes in Dento, denton county appraisal and Federal tax reduction. O’Connor appraisers have appraised over 100 types of real estate including auto service garages, service center warehouses, student housing, shopping malls, subsidized housing, commercial buildings, drugstores, office warehouses, racket clubs, office buildings, cold storage facilities, shopping centers, regional malls, strip shopping centers, used car lots, health spas, auto salvage yards and banks.
Patrick C. O’Connor has been president of O’Connor & Associates since 1983 and is a recipient of the prestigious MAI designation from the Appraisal Institute. He is also a registered senior property tax consultant in the state of Texas and has written numerous articles in state and national publications on reducing property taxes. He continues to set the standard in direction and quality of our appraisal products, adding services ranging from business valuations and business appraisals to cost segregation analysis for income tax reduction.
If you are a small business owner looking for cost cutting ideas here are ten tax planning ideas that may result in substantial tax savings. The following article highlights planning areas often missed by business owners. You should consult a qualified tax advisor to determine if any of these areas are appropriate for you and your business.
S Corporation: Set up an S Corporation to avoid self-employment tax on profits. If you conduct business as a sole proprietor, a partnership, or a limited liability company the first $106,800 of 2009 profits are subject to a self-employment tax rate of 15.3%. The profits in excess of $106,800 are subject to a Medicare tax rate of 2.9%. These self-employment tax rates are in addition to paying income tax on the profits. An S Corporation is not subject to self-employment tax on the profits earned. But you must take “reasonable” compensation as salary subject to F.I.C.A. Bad Debt Expense: A reserve for bad debts is not deductible, but you can write off accounts receivable in the year in which they become uncollectible. Be sure to take advantage of writing off all those uncollected accounts at year end.
If you used a collection agency, you can deduct a portion of the debt that will go to the collection agency as a fee (around 25%). You can write off that amount at the time you turn over the receivable to the agency. Medical Expense: For 2009, eligible self-employed individuals can deduct from gross income 100% of the amounts paid for health insurance coverage. The deduction is limited to net earned income from the business, less the deduction for 50% of the self-employment tax. Also, you cannot take the deduction for any month you were qualified to participate in an employer sponsored health plan.
If you conduct business as a corporation, set up a corporate medical reimbursement plan. Medical costs are generally personal expenses deductible only to the extent that they exceed 7.5% of your Adjusted Gross Income (AGI). However, medical reimbursement plans set up by C Corporations let you deduct all the medical costs you incur for yourself, your spouse, and dependents. These plans must cover all eligible employees. Equipment Expense: For 2009, Section 179 of the Tax Code lets companies deduct up to $133,000 of new equipment, subject to certain limits. (This limit is reduced by the amount by which the cost of section 179 property placed in service in the tax year exceeds $530,000.) Passenger vehicles are excluded from the expensing election. A passenger vehicle is defined as having a loaded gross vehicle weight of less than 6,000 pounds.
The tax code also allows an accelerated method to depreciate the remaining value of that equipment – it’s faster than the straight-line method of depreciation. Home Office Expense: Write off home-office expenses. You can take this deduction even if you use the space for administrative purposes, as long as there is no where else you can work. When you use one room in your six room home as an office, you can deduct one-sixth of your costs for utilities, security, homeowner’s insurance, etc. as well as all costs for the room such as carpeting. Although you can also claim the depreciation on your home used for home office, you should consult a qualified tax advisor prior to doing so to understand the impact it will have on the exclusion of gain when you sell your residence. Travel Expense: Deduct business trips by putting your spouse on the payroll. When spouses are on the payroll, even at low salaries, cost of business trips that include the spouse can be fully deducted. You should also be aware that putting your spouse on the payroll in 2009 will also double the amount of Social Security tax owed up to the first $106,800 of income. Hiring Children in the Family Business: Put your children on the company payroll. When you employ your children in the business, for 2009 you can pay them up to $5,350 in salary free from Federal tax. The “kiddie” tax doesn’t apply to wages, so children under age 18 get this tax break, too. Have your children put $4,000 into a Roth IRA, where it will compound tax-free over time. When the money is left in the account until they turn 59 ½, they will never have to pay out any tax or penalties on that money or its earnings.
If your business is not incorporated, and the children are under age 18, neither you, as employer, nor your children will owe Social Security or Medicare tax on their wages. Retirement Planning: Put more money away in your company retirement plan for yourself than for your employees. Business owners who are more than 20 years older that other company employees can set up a defined-benefit pension plan instead of a defined-contribution plan. Because they are funding a specific benefit (not putting away a percentage of salary) and have fewer years to do so, owners can contribute more to the plan for themselves than their employees. Claiming Business Losses: Make the most of business losses. If your company has a net operating loss in 2009, it can be carried back two years or carried forward up to 20 years to offset future profits. To get a refund, file an application on Form 1139 for corporations and Form 1045 for sole proprietorships. Most refunds are sent out by the IRS within two months. Education: Set up a company tuition-reimbursement plan to pay a child’s school cost. Businesses can set up plans that pay up to $5,250 in tuition per employee annually. Business owners’ children must work for the company, be older than age 21, own no company stock and cannot be claimed as a dependent on the owners’ tax returns.
Alan is managing partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading Bay Area CPA firm in the San Francisco Bay Area. Alan has more than 23 years of experience in public accounting, and works with some of the most successful venture capitalists in the world, helping to develop innovative financial strategies for business enterprises. Alan earned a B.S. in Accounting from Brigham Young University, and an MBA (Taxation) from California State University at Hayward.
The essential first step to be taken by a small business un regard to a tax inspection happens long before that small business is advised a tax enquiry is about to take place. That first step is to obtain and retain receipts and third party evidence for every sale and purchase and maintain accurate accounting records.
A solid system of bookkeeping accounts provides the basis to defend any tax investigation. The fact that any questions asked by the tax authority can be explained with real financial paperwork has the effect of giving the tax inspector confidence that the accounts and tax calculations are accurate.
Despite the best intentions of a small business the tax enquiry that small business faces is undoubtedly an investigation between a businessman naive in the thousands of statutes and taxation regulations against a professional tax inspector trained and experienced in where to find the loopholes. The match is akin to a schoolboy football team that has never played before taking on a professional side of league status who train and play every day.
The difficulty most small business has to deal with is apparently innocent questions from the tax inspector the answers to which cost the tax payer money. The tax inspector may ask numerous questions to which the tax payer does not necessarily have to answer or agree to. The solution is always to stick to the solid bookkeeping facts as shown in the accounting records.
Under UK law there is no regulation stating that a tax payer has to attend a meeting with the tax inspector. Meetings with tax inspectors can result in many questions being asked which increase the tax liability from lack of knowledge of the tax rules and sheer frustration by the small business to get the job done and over with. If called to a meeting a professional tax advisor or experienced accountant attending on behalf of the client or in place of the client is undoubtedly a better option.
If the small business accepts a meeting with the tax inspector it is important to prepare for the meeting correctly. Such preparation would involve reviewing all bookkeeping records prior to the meeting and arranging them in a reasonable order, double checking the accounts do not contain any obvious errors and also obtaining from the tax inspector prior to the meeting a detailed note of all areas to be discussed.
The tax inspector will often suggest a meeting at the business premises or the tax payer home. The tax inspector does not have a statutory right to enter the business premises and can do so only by invitation or warrant. The legislation regarding visits to business premises is to be changed from 2009.
Tax inspectors are observant and on visiting the premises will assimilate many areas to be investigated by simply looking around or idle chat with members of staff. When a tax inspector is invited to the home the general lifestyle of the tax payer would be assessed in relation to the profits declared.
There are many examples of how a tax inspection can determine the validity of the accounting records. This list is almost endless.
A visit to a public house might reveal catering sales which had not been declared. A takeaway retail outlet may have a large stock of cartons that subsequently could be checked against purchases and sales. Notices on walls in a reception area might indicate business success that would produce an area to be looked into.
Of course the honest tax payer has nothing to hide but nevertheless such visits can raise many awkward questions that take up time and effort to explain. Many hours of work can be spent producing evidence and discussions which could lead to further difficulties even when there ii nothing to hide.
When a tax inspector writes it is best not to ignore the letters but to respond quickly and factually. Answer questions directly and specifically without opening up further areas for discussion. Ignoring correspondence or avoiding questions leads to more problems than it is worth.
One feature of a tax investigation is to reach an area of the inspection where there is disagreement between the tax inspector and the business. In such circumstances the tax inspector may propose a solution and that solution is often not likely to be in the businesses best interests. When such proposals are made the negotiation skills of the tax payer or his advisor are paramount.
One area a tax inspector may make a suggestion is to adopt a financial solution based upon a model set of financial results. The business can agree to this proposal but does not have to unless the tax inspector can show reasonable deficiencies in the business financial records.
The tax inspector often ask questions when they have no statutory right to the information unless volunteered by the business. Questions may also be asked that are not specific to the current investigation.
Information requests outside of the scope of the tax investigation and personal records can be denied unless the request is reasonable and relevant to the enquiry. Care should be taken in casual conversations either before or after meetings or phone calls as these are times when the business or its staff may answer questions innocently but remember that those innocent chats are with a professional intent on examining every conceivable path to determine if the maximum tax liability has been generated.
The conclusion to the best advice when the prospect of a tax investigation is imminent is first of all to prepare solid accounting records, always respond quickly and specifically to the questions being raised. Keep the chats and answers accurate, specific and short and sweet and to the point.
If the business can afford it then engage a specialist firm of tax advisors to negotiate on behalf of the business. The best tax advisors are often either experienced tax accountants or former revenue employees who know the rules and can conduct the enquiry on behalf of the business in a professional manner.
Terry Cartwright, CEO DIY Accounting, a qualified accountant in the UK, designs Accounting Software on excel spreadsheets and Payroll Software for small to medium sized business providing a complete accounting solution and also supplies Company Formation packages for new limited liability companies
