Unless you get a kick out of standing in line at the post office at midnight on April 15, turn off the TV, cancel some social engagements and get busy on your tax return. Tax professionals say that while there are a few changes affecting small-business owners this year and last, bigger changes are on the way. "Congress has set up 10 years of tax professional heaven," says Paul Gada, a tax attorney who edited the CCH Business Owner's Toolkit Tax Guide 2002. "There are 400-plus amendments with changes being phased in over the next 10 years affecting estate planning, IRAs, child tax credits and dependent care credits."
Despite all the upcoming changes, Gada says current congressional support for reducing the personal income tax is positive, "because it translates directly into some savings in the business owner's pocket." Here are some tips to consider while working on your 2001 tax return and developing a tax strategy for 2002:
- Don't be a slob. Organizing your business-related receipts and company financial records will save you time and money. There's no excuse not to use bookkeeping software that tracks and categorizes dollars coming in and going out of your business. If you don't have a good program, buy one. Review the quarterly spending reports many business credit card companies issue to make sure you deduct all legitimate business expenses. Review phone bills, utility bills, rent invoices and receipts from office supply stores to compile all your expenses. Remember, under Section 179 of the tax code, you can deduct $24,000 worth of office equipment and supplies purchased last year, so I hope you went shopping before December 31, 2001.
- Double-check your arithmetic and make sure you enter the right information on the right lines of your return. "Carefully go through the form and pause on each item," advises Gada. Verify that you've included your kids' Social Security numbers, and sign the return wherever indicated. "You want to avoid a second look by the IRS, so make sure you have included all relevant information."
- Don't forget to fund your IRA or SEP-IRA. Too many
taxpayers forget to write a check to their retirement accounts
before April 15. You can help your employees establish a SEP-IRA
(simplified employee pension individual retirement account) so they
can deposit 15 percent of gross income, up to $35,000. "The
business owner's maximum contribution is the net earnings of
the business, minus the deduction for one-half the self-employment
tax, multiplied by a percentage that is somewhat lower than the
percentage to used to compute the employee's
contribution," explains Gada. Check with your tax advisor for
If you are 50 or older, you can contribute $500 more to your IRA in 2002. This so-called "catch-up contribution" affects millions of baby boomers.
- Balance out your investment gains and losses because the new five-year holding period goes into effect in 2002. If you hold an investment for five years, the maximum capital gains tax drops from 20 percent to 18 percent. If your losses are greater than $3,000 (the most you can deduct for losses in one year), you can deduct the remaining amount next year.
- Review your assets to determine what can be depreciated. To qualify for depreciation, Gada writes in his book that an asset has to be used in a business or trade; have a finite period of usefulness that is longer than one year and "wears out, decays, gets used up, becomes obsolete or loses value from natural causes." You cannot depreciate land or improvements made to property, including clearing, planting or landscaping.
- If you work at home, you can deduct the portion of your homeowner's or renter's insurance used to cover your business. You can also deduct a portion of utility payments, repairs or cleaning services. If you are claiming the home office deduction, fill out Form 8829, Expenses for Business Use of Your Home, and attach it to your Schedule C.
- You can't deduct the value of your donated time, but you can deduct the out-of-pocket expenses related to working with a charity. You can deduct 14 cents per mile, or the actual cost of gas and oil if you drive your car to do your charitable work. Remember, donations to political groups or candidates running for office and dues paid to your country club are not deductible.
Gada's final piece of advice: "Claim all income and take all deductions you qualify for."
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Jane Applegate is a syndicated columnist and the author of 201 Great Ideas for Your Small Business. For a free copy of her "Business Owner's Check Up," send your name and address to Check Up, P.O. Box 768, Pelham NY 10803 or e-mail it to email@example.com.