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As we hit the midway point of 1997, now is a good time to review your tax situation and make sure you're taking all the business deductions you have coming to you. Valid deductions can work wonders on your overall tax liability, so gather as many as you can.
Take into account any recent changes in your business as well as alterations to our convoluted tax laws. Perhaps you can take some deductions you weren't eligible to claim last year. Doing your homework now can really pay off when it comes time to settle up with the IRS.
"The tax laws provide many deductions for ordinary and necessary business expenses. But entrepreneurs have to be sure to keep good records and receipts that back up the business purpose of these deductions," explains Peter Pfister, a CPA with the accounting firm Curchin & Co. CPAs in Red Bank, New Jersey. Documentation is important because "if you have the misfortune of being audited and are unable to substantiate your deductions, the IRS is sure to deny them," Pfister cautions.
To claim deductions for travel expenses, for example, you must keep detailed records showing the amount of each separate expense for transportation, meals and lodging. You also should keep a record of the dates you left for and returned from each trip, the number of days you spent on business, the name of the city visited, and the business reason for the travel, says attorney Susan Jacksack, a small-business tax analyst with CCH Inc., a major provider of tax information in Riverwoods, Illinois.
Keep in mind that travel expenses must be "ordinary and necessary" for your line of work to be deductible. Lavish expenses won't hold up with the IRS. While deductions for business meals and entertainment expenses, whether you're on a business trip or not, are limited to 50 percent of the allowable amount, other business travel expenses are fully deductible.
If you go to a professional seminar or convention, be sure to document your trip in your travel log, again keeping all relevant credit card and other receipts. "Keep a copy of the seminar program and any certificate you might receive for attending," says Pfister. These expenses are deductible if you can show that you advanced the interests of your business by attending.
Establishing a paper trail of receipts is key, confirms John H. Gardner, senior manager in the Washington, DC, national tax office of KPMG Peat Marwick LLP. The IRS expects to see that what you list as a business expense is really business-related and not your own personal expense. This is easy to accomplish if you use a separate checking account and credit card for business expenses.
While the IRS has loosened up a little on its receipt-keeping requirements, don't take this to mean you don't have to substantiate your business expenses. Even though (effective with last year's return) receipts will be required only for expenses that exceed $75, up from $25, you are still required to keep a record of your expenses, such as the business purpose of the expense and the names of individuals you entertained or dined with.
Jacksack says you need to keep all documents supporting your deductions for at least three years after the date of the income tax return on which you claimed the deductions.
To make sure you're piling up those business deductions, here's a list of 10 that accountants say are sure to help lower your tax bill:
1. Save for the future and take a tax break by establishing a SIMPLE (Savings Incentive Match Plan for Employees) plan. This new type of pension plan is available to employers with 100 or fewer employees. Under a SIMPLE plan, you can set aside $6,000 a year and deduct that amount on your federal tax return. You can take advantage of a SIMPLE plan if you're a sole proprietor or if you have a partnership, subchapter S corporation, incorporated business or limited liability corporation.
Employees with at least $5,000 of income in any two preceding years are eligible to participate as long as their expected income for the current year also is $5,000 or more.
2. Make it a giving year. If your business holds stock or mutual fund shares, especially those that have appreciated in value, consider giving them to your favorite public charity instead of selling the assets and donating the after-tax proceeds. You can still deduct the current market value of the gift, but you'll avoid paying taxes on the profit.
3. Take a product sample deduction. If you have a home business that is the only fixed location of your retail or wholesale company and you are in the business of selling products, recent changes in the tax law allow you to take a deduction for the space in your home used to store product samples. In the past, the deduction was available only for inventory.
4. Make the expensing provision work for you. You can take a deduction for up to $18,000 in equipment purchases you place in service during 1997 rather than depreciating the cost over a longer time period. Remember, if your equipment purchases are over $200,000, the $18,000 limit is reduced dollar for dollar by the amount that exceeds $200,000.
5. Deduct the cost of health insurance premiums. If you are self-employed or a principal in a partnership, you may deduct 40 percent of your medical insurance premiums for yourself and your spouse and children in 1997.
There also is a way to deduct 100 percent of your health insurance premiums under Section 105 of the tax code. To qualify, you must employ your spouse and he or she must work at least 15 hours per week.
Under this strategy, you pay for your spouse's health insurance. The policy covers the employee's family, so you are covered as a dependent. As a self-employed person, you can deduct the cost of the policy as a business expense on Schedule C. Remember, however, that if health insurance is offered to a spouse-employee, it must be offered to other employees as well.
6. Zero in on car costs. Take the standard mileage rate deduction if you use your car for business. It is the easiest method to use, but there's a catch: The IRS won't let you use this method unless you used it the first year you put your car into use for business. For 1997, the rate is 31.5 cents. If you are self-employed, in addition to the standard mileage rate, you can add the cost of parking and tolls paid while driving for business.
7. Tally up deductions relating to your professional expenses. If you file a Schedule C as a self-employed individual, remember you can take deductions for the cost of subscriptions to business and professional publications, professional dues, supplies, rent for office space, assistants' salaries, and fees paid to a tax preparer for preparing your Schedule C.
8. Get all that's coming to you when traveling on business.Transportation, lodging and meal charges are not the only travel expenses you can deduct: Others include dry cleaning, fax machine charges, passport fees, taxi fares, telephone charges, and bagging and shipping charges.
9. Stay on top of losses. If you experienced a net operating loss in your profession or unincorporated business, you may be eligible for a refund. While this doesn't necessarily qualify as a deduction, it could put more money in your pocket. If you have a loss this year that exceeds your income, you can carry the excess back to 1994, 1995, or 1996 and then forward 15 years until it is used up. By carrying the loss back to prior years, you are entitled to a refund. If you prefer, you can carry the loss forward, especially if you think you will receive greater tax savings in the future by following this strategy.
10. Take advantage of the work opportunity credit in your hiring. The Targeted Jobs Tax Credit was replaced with a new credit, which you may claim for certain qualified workers you hire who start working after September 30, 1996, and before October 1, 1997. Some of the targeted employees who qualify include AFDC recipients, high-risk youths, qualifying veterans and food-stamp recipients.
These 10 steps will help you get a head start on amassing worthwhile business deductions. But you and your tax advisor are sure to uncover others that will apply to your specific tax situation and business. Just remember: When it comes to deductions, leave no stone unturned.
Joan Szabo is a writer in McLean, Virginia, who has reported on tax issues for more than 11 years.
CCH Inc., 2700 Lake Cook Rd., Riverwoods, IL 60015, email@example.com;
Curchin & Co. CPAs, 125 Half Mile Rd., Red Bank, NJ 07701, (908) 747-0500;
KPMG Peat Marwick LLP, 2001 M St. N.W., Washington, DC 20036, (202) 467-3870.