Hidden Tax Tips for Entrepreneurs (Business Week)

Small Business Financing February 17, 2009, 4:43PM EST

Hidden Tax Tips for Entrepreneurs
Twenty-five tax deductions you may not have heard of—but should
By John Tozzi

Are you missing tax deductions you're entitled to? Small business owners, self-employed workers, and independent contractors can write off many legitimate business expenses immediately, reducing the amount of income on which they pay taxes. But if you overlook applicable deductions or fail to keep adequate records that will back up your write-offs during an audit, you give up opportunities to cut your tax bill.

The Schedule C tax form used by sole proprietors to report business profit or loss has 21 line items for business expenses—including such catch-all categories as "office expense," "supplies," and "other expenses." The tax forms for partnerships, LLCs, and S-corps are similarly broad. "It doesn't even begin to hint at all the things that a business can legitimately deduct," says Bernard Kamoroff, a certified public accountant and author of 422 Tax Deductions for Businesses & Self Employed Individuals. Don't expect your accountant to find all the deductions you qualify for—your accountant doesn't know your spending as intimately as you do.

Kamoroff says business owners can reduce their tax bills by deducting expenditures that the Internal Revenue Service doesn't explicitly outline, but are nonetheless legitimate business expenses. In general, a purchase must be "ordinary and necessary" in your trade to be deductible. Few of the often-overlooked write-offs on their own will cut your tax bill substantially, but in aggregate, they can be worth the time and effort to track and deduct them. "They're all nickel dime, but boy they can add up," Kamoroff says.

Vehicle Deductions Often Overlooked
There are a few big deductions that can significantly reduce your tax bill if you qualify. New investments of up to $250,000 in equipment, vehicles, or software can be written off immediately, rather than depreciated over future years, under the Section 179 deduction. If you have a home office that you use exclusively as your primary place of business, you can deduct costs for the business use of your home. And if you use your car or truck for business, you can deduct work-related expenses for gas, maintenance, insurance, and other costs, either using the IRS's standard mileage rate or by calculating the actual costs. The home office and vehicle deductions are two of the most overlooked write-offs, according to the National Association for the Self-Employed.

Small business owners who travel for business may also deduct some of their travel costs. Business-related meals and entertainment are only 50% deductible, although you can't write off expenses that are considered "lavish and extravagant." If your trip is exclusively for business, lodging and transportation costs are fully deductible. If the trip mixes business and personal matters, you may still be able to write off some business-related expenses.

Aside from big write-offs like travel or home-office deductions, plenty of other expenditures can save you money on taxes. If more than half your cell phone use is for business, you can deduct the cost of the business-related calls. Write off your Web hosting and domain name charges. And deduct the cost of business-related books, magazines, and newspaper subscriptions.

Meticulous Records a Must
The key to taking these small deductions is keeping track of your expenditures, so that you can show an auditor that your write-offs are truly business-related. "It is very important that they keep meticulous records, because the IRS is going to be pretty aggressive," says Chas Roy-Chowdhury, head of taxation for the Association of Chartered Certified Accountants. But business owners who take legitimate deductions, and have the receipts, invoices, or other records to back them up, can maximize their tax savings.

Tax Deductions You've Never Heard Of
Are you leaving tax savings on the table? Plenty of legitimate business expenses aren't spelled out by the Internal Revenue Service. It's up to you to find them—and keep records that will show they're reasonable if you get audited. Most "ordinary and necessary" business expenses can be deducted, says Bernard Kamoroff, a CPA and author of "422 Tax Deductions for Businesses & Self-Employed Individuals." Here are 25 write-offs Kamoroff identifies that you may qualify for without even knowing. When in doubt, check with your accountant to see if these apply to you.

ATM Fees, Credit-Card Fees, and Interest
You can deduct ATM fees, credit-card fees, and other bank charges incurred on your business accounts.

Category this deduction falls into: Office expenses; interest

Books, Magazines, and Newspapers
Business-related books and subscriptions to magazines, newspapers, and trade publications are deductible.

Category this deduction falls into: Office expenses

Business Cards
Deduct the cost of business cards for yourself and your employees.

Category this deduction falls into: Office expenses

Cell PhonesIf more than half of your cell-phone use is for business, you can deduct that proportion of the cost, up to the full amount if you have a dedicated cell phone for your company. But if you use your cell phone for business less than half the time, you can't deduct it.

Category this deduction falls into: Office expenses

Child Care
If you offer employees child care, you can deduct the cost. You can offer employees up to $5,000 a year in dependent-care benefits that are excluded from their wages, tax-free to them and deductible for you. Employees may qualify for other dependent-care tax credits. For more, check the IRS guidelines.

Category this deduction falls into: Employee benefit programs


Cleaning Service
The cost of a cleaner or janitor to maintain your place of work is deductible.

Category this deduction falls into: Office expense


Coffee and Snacks
Write off what you pay to keep yourself and your staff caffeinated. Other small office snacks are deductible, but meals for yourself are not, and the cost of meals provided to employees can only be deducted if there's a business reason for having them eat at work.

Category this deduction falls into: Office expenses

Company Parties
Deduct the entire cost of a party where all employees are invited. Other business parties or events that are thrown to promote the business are considered entertainment, and are therefore 50% deductible.

Category this deduction falls into: Office expense, entertainment.

Disabled Access
Small businesses can get credits and deductions for the cost of making their place of business accessible to people with disabilities. For more information, see the IRS guide.


Domestic Production
Even nonmanufacturers may qualify for a break called the Domestic Production Activities Deduction. Firms including architects, engineers, software makers, and film producers all may be eligible for this deduction, which is equal to 6% of net income from domestic production activities. It maxes out at 50% of W-2 wages, however, so non-employer firms don't qualify. For more, see the IRS instructions.

Dues
Deduct membership fees in trade organizations, professional groups, and chambers of commerce. Portions of dues that are for political lobbying are not deductible, and dues for political clubs or recreational groups aren't business expenses and can't be deducted.

Category this deduction falls into: Other expenses

Garbage Pickup
If you pay to have your trash hauled, you can deduct the cost. Some manufacturers may have to add this to the cost of inventory.

Category this deduction falls into: Utilities


Greeting CardsGreeting cards to clients and prospects count as tax-deductible expenses.

Category this deduction falls into: Office expenses

Internet Access
You can deduct the cost of your Internet access, but if you use the connection for both business and personal purposes, you can only deduct the amount used for business.

Category this deduction falls into: Office expenses

Lists
If you buy or rent lists of e-mail addresses, mailing addresses, or phone numbers, you can write off the cost.

Category this deduction falls into: Advertising

Parking and Tolls
Business-related parking costs beyond what you pay to park at your regular place of work are deductible, as are tolls paid during business travel. Parking violations and other tickets are not.

Category this deduction falls into: Car and truck expenses

Postage and Mailing
Stamps, other mailing costs, and the cost of renting post-office boxes are deductible.

Category this deduction falls into: Office expenses


Research and Development
You can deduct the cost of developing new products or improving existing ones. For more on this, see this IRS article on R&D deductions.

Category this deduction falls into: Other expenses


Retirement Plans
Contributions to tax-deferred retirement plans such as IRAs or Self-Employed Pensions can reduce your tax bill, because that income won't be taxed until you withdraw it from the account. You can count contributions to these plans made through Apr. 15, 2009 for the 2008 tax year. You can also deduct contributions made to employee retirement plans. For more information, see the IRS instructio


Seminars, Classes, and Training
Education that improves your knowledge and skills in your current business is deductible, but training for an unrelated trade is not. Employers can fully deduct the cost of job-related education for their workers. Employers who pay for nonjob-related education for workers can write off up to $5,250 as part of a formal educational assistance program.

Category this deduction falls into: Other expenses, employee benefit programs


Shipping
If you pay for customers' shipping and handling on the goods you sell, you can deduct those costs.

Category this deduction falls into: Other expenses.


Software
The cost of software can be depreciated over three years or deducted immediately under the Section 179 expensing, which lets you write off up to $250,000 in capital expendiutures.

Category this deduction falls into: Office expenses or depreciation.


Tax Preparation
You can deduct what you pay a tax preparer for the business portion of your taxes.

Category this deduction falls into: Legal and professional services

Trade Shows
Write off the entrance fees for trade shows, conferences, and other industry meetings. Travel costs and meal expenses may be deductible under the rules for business travel.

Category this deduction falls into: Other expenses


Web site
Deduct your hosting fees and the cost of your domain name. You can generally deduct the cost of designing and setting up your Web site as well, although expensive Web sites may have to be depreciated over three years.

Category this deduction falls into: Advertising










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