Tax season is underway, and small-business owners should be making a concerted effort to claim the deductions they are entitled to for tax year 2003. Not sure where those elusive deductions might be lurking? In an effort to help out, the Entrepreneurial Services Practice of Rothstein Kass, certified public accountants, offers its Top 10 tax deductions. Don't forget -- it's important to be organized and keep good records in order to substantiate your expenses and deductions in the event of an IRS audit.
1. Tax Credits. Are you aware of the many tax credits available to small businesses? If not, look into whether your company might qualify for some of these:
The Employment Credit allows employers to a credit equal to 20% of the first $15,000 of wages paid to each full- or part-time employee located in an empowerment zone ($3,000 credit per employee) or 15% credit on the first $15,000 paid to an employee located in a "renewal community zone." IRS Publication 954 defines empowerment and renewal community zones (you must have Acrobat reader to view the file).
If your business is located in a qualified empowerment zone, or you've bought and sold property in an empowerment zone, here's a nifty one: Non-Recognition of Capital Gain on Rollover of Empowerment Zone Investments. An election is available that allows the rollover of capital gain from the sale of a qualified empowerment zone asset that is acquired after Dec. 31, 2000 and before Jan. 1, 2010, and held for more than one year -- if another qualified empowerment zone asset is purchased in the same zone within 60 days. The gain is deferred until the sale of the replacement property by reducing its basis by the unrecognized gain.
The Small Employer Pension Plan Startup Cost Credit. A wordy title for a program designed to encourage small businesses to establish and maintain retirement savings accounts for their employees. If you've done this, you are entitled to a credit of $500 each year for three years for the costs you incurred to establish the plan.
The Disabled Access Credit allows a credit of 50% of expenditures up to $10,250 for work done to make your business accessible to the disabled.
2. Interest Payments. If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. Don't use this fact as an excuse to get into debt unnecessarily, but the credit can help offset the cost of growing your business.
3. Bad Debts. You may also claim a deduction for a business debt related to accounts or notes receivable -- if you include the amount owed in your gross income for the year you are claiming the deduction, or in a prior year. If you use the "cash basis" method of accounting, you cannot claim a bad debt deduction if someone fails to pay you for your services.
4. Retirement Plan Contributions. Putting money in a retirement plan (such as a Keogh or a Simplified Employee Pension plan) reduces your taxable income and helps ensure your secure retirement. If you've already set up a Keogh retirement plan in 2003 or prior years, to qualify for a deduction in 2003 you must make your contribution at any time up to the due date of your return, including any extensions. If you missed the deadline for setting up a Keogh plan, consider setting up a SEP. You have until April 15, or the date you file your return with a proper extension, to set up and make a deductible contribution to a SEP.
5. Auto Expenses. If you use your car for business, you may be able to depreciate the costs of owning it and deduct the cost of operating and maintaining it. There are two methods for claiming business-related automobile expenses: You may deduct the business portion of actual expenses you incur, such as the cost of gas and oil, insurance, license and registration fees, repairs, tires, tolls, and parking; or you can keep track of the business miles you drive, and multiply your total by the IRS standard rate of 36 cents per mile in 2003 and 37.5 cents per mile in 2004.
6. Home Office. To qualify for a home-office deduction, you must use it on both an exclusive and regular basis as your principal place of business or as a place of business to meet with clients. You may also claim this deduction if your home office is the only place for conducting the administrative or management activities of your business or if only minimal administrative work is done outside your home office. If you qualify, you may deduct depreciation allocated to the area of your home you use for business and other indirect expenses of operating your home office.
7. Business Travel, Meals and Entertainment Expenses. You can deduct plane fares, taxis, lodging, and 50% of meals and entertainment costs. Other expenses qualify as well, such as the cost of dry cleaning, telephone calls, and computer-rental fees. When you entertain present or prospective customers, you may deduct 50% of the tab if it is "directly related" to the business and business is discussed, or "associated with" the business and the entertainment takes place immediately before or after a business discussion.
8. Expensing Deduction. For tax years beginning in 2003, 2004, and 2005, small-business owners can elect to immediately deduct 100% of the cost of qualified business property up to $100,000, instead of depreciating it over several years, as has been done in past years. Keep in mind that this "Section 179" allowance is phased out on a dollar-for-dollar basis when qualifying assets costing over $400,000 are placed in service in any one of the years. In addition, if your business has a loss in the current year, the deduction is disallowed and carried forward to the next year.
9. Bonus Depreciation. The new tax law increases the first-year depreciation allowance from 30% to 50%. Small business owners can take an immediate deduction of 50% of the cost of property placed in service after May 5, 2003 (30% prior to May 5). Unlike the Section 179 deduction, there is no phase-out on the cost of the property and this depreciation can be claimed even if the business has a net operating loss for the year.
10. Health Insurance Premiums. Self-employed individuals can now deduct 100% of health-insurance premiums as gross-income adjustment.