Most small-business owners rely on an accountant or other experienced tax advisor to prepare returns. There’s no denying that tax laws have become so complicated that you need an expert to navigate the tax code.
Nevertheless, it still pays to know the basics when it comes to deductions and record-keeping and document retention requirements. Remember, while a professional’s service can relieve you of much of the paperwork, it does not release you from all responsibility.
Here are few things small business owners should keep in mind as they finalize their tax returns this year.
Deduct, deduct, deduct
Make sure you don’t miss out on valuable business expense deductions. The complexity of the tax code comes in part from the fact that Congress appreciates that business taxation offers more than just revenue. The tax code can also stimulate the economy by encouraging businesses to invest and expand. This is where business deductions come into play.
There are a number of expenses that you might be entitled to deduct. Make sure you take advantage of all that apply to your business. Common deductions include salaries, taxes and licenses, legal, accounting and other professional expenses, interest on business debt, advertising, rent, utilities, business cards and stationary, charitable contributions, Internet and e-mail services, postage, and bank fees. More complicated deductions include the following:
- Travel – All expenses incurred during business travel are deductible; deductible expenses will include costs related to transportation, baggage and shipping, lodging and meals, dry cleaning and laundry, business calls, rental fees and tips.
- Entertainment – Most businesses are entitled to deduct 50 percent of entertainment expenses. Use a standard appointment calendar to log all deductible entertainment expenses.
- Meals – Meals can be deducted for travel or business-entertainment purposes. Meal deductions are normally limited to 50 percent of the cost.
- Capital assets – Business property that will last more than one year is a capital asset. You can deduct capital assets by either depreciating or expensing the assets under Section 179 of the Internal Revenue Code.
- "Catch-up" depreciation – IRS regulations allow a "catch-up" election for unclaimed depreciation and amortization in the year of sale effective for years ending on or after Dec. 30, 2003.
Health Insurance – Corporations can deduct health insurance as an ordinary and necessary business expense. - Automobile – Deductions can be calculated by using the IRS’s standard mileage rate or the actual operating expenses related to your business.
- Retirement plans – To qualify as a participant in a tax-deductible retirement plan funded by your business, you must have earned income each tax year in which you wish to participate.
You should consult with your tax advisor to learn more about these and other deductions that your business might be eligible to claim.
Document, document, document
It pays, literally, to keep good records. The IRS requires that your books show your gross income, as well as deductions and credits. Therefore, maintain a detailed and organized record of your business transactions and supporting documentation.
When it comes to deducting automobile expenses, Larry Hyatt, of Larry Hyatt & Associates, PLLC in Brentwood, Tenn., recommends that businesses utilize the actual expense method and maintain a daily expense log.
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Maintaining a daily log of your expenses is ideal," says Hyatt, "since it cuts down on the time you may later have to spend sorting through your receipts and organizing your expenses. The alternative is to maintain a mileage log. If miles traveled in a particular vehicle are more than 51 percent for business during a given year, then you are allowed to deduct 48.5 cents per mile without maintaining receipts.
You are required to maintain a mileage log showing a business purpose for each of your trips."
How long do you need to keep these tax records? Bill Rys, NFIB tax counsel, advises businesses to keep general tax records for six years and to keep records related to a capital expenditure for six years after the expenditure is fully expensed. Additionally, federal tax returns should be kept permanently.
Elizabeth Milito is senior executive counsel of the National Federation of Independent Business (NFIB) Small Business Legal Center, nonprofit organization created to protect the rights of America’s small-business owners by providing advisory material on legal issues and by ensuring that the voice of small business is heard in the nation’s courts. The National Federation of Independent Business is the nation’s leading small business association, with offices in Washington, D.C., and all 50 state capitals.
