|
Take your deductions
|
 |
April 10, 2001: 6:48 a.m. ET
Documenting small business, home office expenses can reap savings
|
NEW YORK (CNNfn) - If you're one of those people who are still rifling through shoeboxes full of receipts and filing cabinets for insurance payments to take tax write-offs and deductions ... well, keep digging. There's still a few days left and those documents are essential to minimizing your tax payment.
That's right, said CPA Paul Hense, your documents are the key to getting your write-offs and deductions. If you can't support a deduction with proper justification, you are more likely to have a write-off questioned by the Internal Revenue Service.
If you ever thought that all the record-keeping involved in taking deductions simply isn't worth your time, Hense cautions otherwise.
"It can all add up to a substantial amount of money," said the Grand Rapids, Mich.-based CPA.
The laundry list of deductions
Not much has changed in terms of tax laws for the self-employed and small business owners from last year. The general rule for deductions, according to Gene Fairbrother of the National Association of the Self-Employed, is that anything that generates revenue for your venture can be written off.
Click here for more tax coverage on CNNfn
Be sure you have documents to justify the following write-offs:
- Car expenses. You can either take a standard mileage deduction of 32.5 cents per mile or write off car-related expenses, including maintenance and gasoline. It's up to you to figure out which amounts to more money.
- Home office expenses. Your home must be the place where you do most of your administrative and managerial functions for you to take a home office deduction. If it is, you calculate the square footage of your home and the square footage of the space within it that is devoted to running your company. If it is, for example, 10 percent, you can deduct 10 percent of all your home-related expenses, including utilities, homeowners' insurance, mortgage interest, and maintenance, as home office expenses.
- Business travel. There is no cap on the amount you spend on travel including hotels, rental cars and meals, but it had better be business-related.
- Insurance. If you have liability insurance for your company, it is deductible. You may deduct 60 percent of health insurance expenses.
- Office supplies. This includes everything you need to keep your home office operational, including paper, pencils, stamps and business cards.
- Phones. Cellular phones dedicated to business use are deductible. So are phones dedicated to business use. If you don't have a dedicated business line in the home, you cannot deduct basic service costs, but you can deduct business calls.
- Entertainment. You can deduct 50 percent of the cost of meals and other entertainment that is business-related.
- Professional associations. If you join the chamber of commerce or other professional association, you can deduct those fees.
 Office equipment that has a life of longer than one year -- such as desks, computers and photocopiers -- is depreciable. However, small business owners and self-employed people who want to take a larger deduction are allowed to do so for up to $20,000, up from $19,000 in 1999. That figure will increase to $24,000 in 2001.
Fairbrother has this advice for small business owners who are afraid of taking deductions out of fear they will trigger an audit or be penalized later.
"Be conservative and be real and take every deduction you legally can," he said.
One change of note on tax forms this year is that you can now authorize the IRS to discuss your return with the preparer who signed it. There is a box on the form, in the signature area, you may check that will allow the IRS to call your preparer to answer any questions that arise during the processing of your return.
Avoid triggering an audit
Hense recognizes there are things the IRS looks for in tax documents that will trigger an audit. So long as you can document your deductions and they are legitimate, he said, you should take them.
Among the things that Hense said may trigger audits are:
- Mathematical errors and omissions on your tax form. Double-check your work or your accountant's work.
- Failure to file. The IRS is particularly suspicious of high-income individuals who fail to file.
- Discrepancies. If your 1099s don't match your income, the IRS may pay you a visit. This can happen when someone pays you at the end of December one year, but you don't receive the payment until the following January.
- Certain jobs can raise suspicions. The IRS has been known to look closely at jobs that might also be hobbies, such as breeding animals or running a charter boat business. People have been known to try to get away with writing off their hobbies by saying, for example, their pleasure craft is a charter boat business. Make sure, if your business might fall into this category, you have all the proper licenses to prove yours is a legitimate venture.
- Travel and entertainment expenses. Certain professions require lots of travel, such as sales. But if you're a dentist, watch out how much travel and entertainment you try to deduct.
And, yes, the old belief that if you claim to be an independent contractor on your taxes you are more likely to get hit with an audit is still true, said Hense.
True independent contractors, who work for several people at once, probably don't need to be concerned. But the ones who are working full time at companies and receiving freelance pay, like the situation with Microsoft's full-time freelance labor, might. The reason? Freelancers get to take a lot more deductions than regular employees. Those deductions are not legitimate in the eyes of the IRS unless the person is a true freelancer.
Where's our tax break?
Small business owners and self-employed people are again waiting to find out if tax relief is on the way. Last year, a $35 billion tax relief package, expected to pass through Congress, was deferred at the last minute. This year they're hoping not to get shut out again.
Bills have been introduced in both houses that would provide many tax breaks that small business owners and the self-employed have been lobbying for including:
- 100 percent deductibility of health insurance costs for self-employed individuals
- Repeal of the Alternative Minimum Tax over five years
- Repeal of the federal unemployment surtax
- Permanent extension of the research and experimentation tax credit
- Increased deduction for business meal expenses.
The bills also include tax simplification provisions that would make filing taxes less burdensome for small business owners, and would increase the amount of new equipment self-employed people may deduct as an expense to $50,000 after 2001. 
|
|
|
|
|
 |
|
.
