Start tallying the write-offs that are frequently missed by small-business owners and the list grows fast. There are no reliable statistics on just how much money is left on the table, but tax experts agree that many small businesses overpay by thousands of dollars.
"When you get a visit from the IRS, they always say they are trying to make sure the tax payment is correct. I'll tell you this, I've never seen an agent give anything back," says Gerald Louviere, a tax partner in the Dallas office of PricewaterhouseCoopers.
Which means you should take every single write-off you're due -- and what's available may surprise you. Here's a classic example: Small companies frequently miscategorize the cost of business-trip hotel stays as entertainment (50% deductible) rather than lodging (100%). The feds are only too happy to hang on to this windfall.
Linda Rey, 41, is co-owner of Rey Insurance, a broker based in Sleepy Hollow, N.Y. The firm had $700,000 in revenues in 2007, and profits are growing at an average annual rate of 10%. Part of this success Rey attributes to savvy accounting advice. She and her partners (who also happen to be family members) hold a monthly dinner at a restaurant, which they treat as an offsite strategic planning meeting (100% deductible) rather than a business meal with a client (50%). Even with coffee and Dunkin' Donuts for the Friday morning meeting, she always takes the full 100% deduction, while many companies wrongly file this under meals and take half.
"I pay careful attention," says Rey. "Otherwise you end up giving a lot of money away."
Esoteric-sounding write-offs are especially likely to get overlooked. Don't let their eye-glazing names fool you; often these tax breaks can deliver serious money. Do you manufacture a product in the U.S.? You may be eligible for the Domestic Production Activities Deduction. This write-off, introduced as part of the American Jobs Creation Act of 2004, is designed to reward companies that use U.S. labor. The maximum benefit is a 6% deduction on net income, though it rises to 9% in 2010. One caveat for small-business owners: The deduction cannot exceed 50% of the W-2 wages a company pays in a given year.
Manufacturers routinely take the domestic-production deduction, but the definition of production is sufficiently broad to cover some unlikely enterprises. For example, an architecture firm that designs a U.S. building might well be able to take the write-off. Ditto, the general contractor that executes the project. Software companies, farms and other agricultural businesses, and various mining operations are also eligible.
The domestic-production break is what's known as a zero-cash deduction, a particularly valuable type. With an ordinary deduction you have to spend money -- buy a drill press or take a client to dinner, say -- to take a write-off. To claim the domestic-production write-off, all you have to do is, well, make stuff in the U.S. (or even partly in the U.S. to qualify for a partial deduction). There's no particular "event" to trigger the deduction, which is why it tends to get missed, says Steve Hurok, tax director of BDO Seidman in Woodbridge, N.J.