The Art of Business: Good News and Bad from the Tax Man
The clock is quickly expiring on the 2004 tax year, and, as always, December is a good time to make a few strategic moves to lower your tax burden. Here are a few new IRS regulations (and a few venerable ones) worth considering as the year comes to a close.
Here are a few changes put in place for the 2004 tax year.
1. Easy filing. The Internal Revenue Service this year has increased the expense threshold for those small business owners who want to forego the hassle of itemizing profits and expenses on the dreaded Schedule C.
If you have business expenses of $5,000 or less (up from $2,500 last year) you can file Form 1040, Schedule C-EZ. But read instructions carefully to ensure that you qualify; there are a number of restrictions, including use of your home as a business deduction.
2. Self-employment tax. The maximum net self-employment earnings subject to the social security part of the self-employment tax increases has increased to $87,900 for 2004. Here's a nifty online calculator to help you estimate your self employment liability.
3. Standard mileage rate available for small fleets. Beginning in 2004, the business standard mileage rate can be applied to as many as four vehicles that you own or lease and use simultaneously. Keep your auto log up to date and log everything. Every 266 business miles traveled equals a $100 tax deduction.
4. Donated vehicles. Effective January 1, 2005, vehicles donated to non-profit organizations will fall under new and stricter rules. So if you're planning to donate a vehicle for the tax break, do so before December 31.
5. Extended deductions. A few tax breaks that were set to expire at year's end have been extended. Most noteworthy is the $1,000 child credit that will remain in effect through 2010.
6. Sales tax deductions. If you itemize your expenses, you can now choose to itemize state sales tax paid or state income tax paid or withheld. Obviously, choose which ever is greater.
Good Ol' Stand-bys
In addition to these new regulations, here are a few tips that may help you reduce your tax liability.
1. Set up or increase contributions to retirement plans. The three types of retirement vehicles recognized by the Internal Revenue Service are SEPs (Simplified Employee Pensions), SIMPLEs (Savings Incentive Match Plan for Employees of Small Employers), and Qualified Plans (sometimes called Keogh or HR 10 plans).
- SEPs: This is the only one of the plans that can be started after the tax year for which a deduction will be claimed. SEP accounts can be established at any time up to the due date of your tax return, including time for extensions. Likewise, contributions to an existing SEP can be made until the return due date. The maximum contribution for SEPs is the lesser of $41,000 (up a meager $1,000 from last year) or 25% of your compensation (the same as 2003) whichever is smaller.
- SEP-IRA: If you are self-employed and contribute to your own SEP-IRA, your contributions as your own employer are essentially limited to a maximum of 20 percent of net earnings (instead of 25 percent of compensation). This is because special rules apply when determining your maximum deduction for your contributions. However, you can still make elective deferrals and catch-up contributions to get you to the contribution limit for the year.
- SIMPLEs: If you set up a SIMPLE any time between January 1 and October 1 of the calendar year for which the return is being filed, you may make matching contributions until the due date of your employer's return, including extensions. If you did not set up the SIMPLE during the prescribed time frames, no deduction is allowed until the following year.
- Qualified Plans: If you didn't have a plan in place by the end 2004, no deduction is allowed. But if you have an established "defined contribution plan," you can make contribution until the due date of your employer's return (again, including extensions).
2. Review your business equipment deductions. You have the legal right to account for every deduction you can take legally. Big-ticket purchases, such as computers, printers, cameras and video equipment can quickly help you reduce your take tax load, but don't forget these typical deductions, as well:
- Professional dues and subscriptions;
- Casualty and theft losses;
- Coffee and beverage service;
- Amounts paid to non-employees (consultants, contractors, etc.);
- Internet Service Provider fees;
- Parking garage and meter fees;
- Phone calls made away from the office, including cell phone usage;
- Rental car gasoline purchases;
- Net Operating Losses (NOL): You can carry back net operating losses as far as five years. Until last year, the carry back period was limited to either two or three years.
3. Check employer deductions. If you're an employer, consider these recently added deductions including:
- Employer-provided childcare credit: If you provide day care facilities and services for your employees, you can receive a tax credit of 25% of the qualified expenses you paid for employee day care and 10% of qualified expenses you paid for day care resource and referral services. This credit is limited to $150,000 each year.
- Special employment credit: There is a tax credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates. Check with your accountant for details.
- Employer-provided retirement advice: The value of qualifying retirement planning assistance (advice or other information) from provided for employees is now tax deductible as long as the assistance is available to all employees.
- Employer-provided education assistance: The value of qualifying educational assistance provided for employees now tax deductible as well, up to a limit of $5,250.
- Both undergraduate and graduate school courses are covered.
4. Don't over look these additional deductions:
- Travel. You may deduct up to 50 percent of the cost of meals and/or entertainment, or "an amount that is reasonable in the circumstances, whichever is less." Combining business and personal travel is allowable, but if the Internal Revenue Service questions you, make sure you have all the right deductible answers. Substantiate the business reason for the trip: Letters or memos detailing the appointment, meeting notes and receipts of any business entertaining will help. When it comes to writing off the actual transportation costs, it generally will bolster your tax claim if you can work in a bit more business than pleasure on the trip. And unless your spouse and kids are legitimate employees of your firm, their expenses can't be deducted.
- Auto. The 2004 standard mileage rate is 37.5 cents per business mile. If you drive an old clunker, this deduction is a veritable cash cow; 10,000 miles on the road means a deduction of $3,750, not a pad single line-item deduction.
- Conventions. You can deduct the cost of attending two conventions or conferences a year as a business expense, as long as the conventions you attend are directly related to your business. If the cost of the convention doesn't include the cost of meals, then the general rule applies, and you may deduct up to 50 percent of their cost. If the cost of the convention does include the cost of meals, beverages, and/or entertainment, and these aren't shown separately on your bill, then calculate the cost of these by subtracting $50 for each day these are supplied from the total amount of the convention cost.
- Work done by a spouse or child. If you're going to deduct your family employee as a business expense, you must meet these requirements:
- pay the spouse or child a salary,
- pay the same amount of salary that you would pay someone else to do the job,
- pay a salary that is reasonable for the child's age,
- and the spouse or child must be doing work that is necessary for earning business or professional income.
- Earned Income Credit. If your income is blow a certain level you can claim an earned income credit. The IRS estimates that more than 15 million workers may qualify for this pay increase. To see if you qualify, check out this table, courtesy of H&R Block.
Don't Take Our Word for It
Get professional help. A skilled CPA is aware of tax rules and deductions that only an expert could know. The few hundred dollars you spend for top-notch assistance pays for itself many times over in the form of tax savings and peace of mind-- and the cost of professional advice itself is often tax-deductible.
Read more by Eric J. Adams.