The Art of Business: Pay Less Taxes

Only a few weeks remain before the tax year closes (though some retirement contributions can be made through April). And as busy as December may be, it’s also an excellent time to look for ways to lower your tax bill. Here are tax tips and strategies from the IRS and tax professionals designed to help you pare down your tax bill.

1. Set up or increase contributions to retirement plans. The tax year may be over, but you can still reduce your taxes significantly up until midnight April 15 (and beyond with tax extensions) with last-minute contributions to business or personal retirement plans. The three types of retirement vehicles recognized by the Internal Revenue Service are SEPs (Simplified Employee Pensions), SIMPLEs (Savings Incentive Match Plan for Employees of Small Employers), and Qualified Plans (sometimes called Keogh or HR 10 plans).

SEPs: This is the only one of the plans that can be started after the tax year for which a deduction will be claimed. SEP accounts can be established at any time up to the due date of your tax return, including time for extensions. Likewise, contributions to an existing SEP can be made until the return due date. The maximum contribution for SEPs is $40,000 (up $10,000 from last year) or 25% of your compensation (up from 15%), whichever is smaller.
SIMPLEs: If you set up a SIMPLE any time between January 1 and October 1 of the calendar year for which the return is being filed, you may make matching contributions until the due date of your employer’s return, including extensions. If you did not set up the SIMPLE during the prescribed time frames, no deduction is allowed until the following year.
Qualified Plans: If you didn’t have a plan in place by the end 2003, no deduction is allowed. But if you have an established "defined contribution plan," you can make until the due date of your employer’s return (again, including extensions).

For more information on retirement plans and takes, check out the Forms and Publications Section of the IRS Web site. Once there, go to Publication 560, "Retirement Plans for Small Business."

2. Review your deductions. The 2003 tax cut bill increased the amount of new business equipment that can be fully written off in the first year to $100,000 (up from $25,000 last year), with some restrictions. The law also added a new optional bonus depreciation write-off of up to 50% of the purchase price for business assets. But taking the bonus depreciation can complicate bookkeeping for business in states that do not recognize the bonus federal depreciation. You have the legal right to account for every deduction you can take legally. Take, for example, Section 179 deductions. Because these are big-ticket nature items they can quickly help you reduce your take tax load.
But don’t stop with Section 179, other often-ignored deductions for the self-employed include:

Bank service charges;
Professional dues and subscriptions;
Casualty and theft losses;
Coffee and beverage service;
Amounts paid to non-employees (consultants, contractors, etc.);
Internet Service Provider fees;
Parking garage and meter fees;
Phone calls made away from the office;
Rental car gasoline purchases;
Net Operating Losses (NOL): You can carry back net operating losses as far as five years. Until last year, the carry back period was limited to either two or three years.

3. Check employer deductions. If you’re an employer, consider these recently added deductions including:

Employer-provided childcare credit: If you provide day care facilities and services for your employees, you can receive a tax credit of 25% of the qualified expenses you paid for employee day care and 10% of qualified expenses you paid for day care resource and referral services. This credit is limited to $150,000 each year.
Special employment credit: There is a tax credit for providing access to the disabled and a work opportunity credit for providing work for members of groups with special employment needs or higher unemployment rates. Check with your accountant for details.
Employer-provided retirement advice: The value of qualifying retirement planning assistance (advice or other information) from provided for employees is now tax deductible as long as the assistance is available to all employees.
Employer-provided education assistance: The value of qualifying educational assistance provided for employees now tax deductible as well, up to a limit of $5,250. Both undergraduate and graduate school courses are covered.
Employer-provided adoption assistance: The amount of qualifying adoption assistance from employer to employee excluded from the employee’s wages is $10,000 and subsequent years.

4. Don’t over look these additional deductions:

Travel. You may deduct up to 50 percent of the cost of meals and/or entertainment, or "an amount that is reasonable in the circumstances, whichever is less.”
Conventions. You can deduct the cost of attending two conventions or conferences a year as a business expense, as long as the conventions you attend are directly related to your business. If the cost of the convention doesn’t include the cost of meals, then the general rule applies, and you may deduct up to 50 percent of their cost. If the cost of the convention does include the cost of meals, beverages, and/or entertainment, and these aren’t shown separately on your bill, then calculate the cost of these by subtracting $50 for each day these are supplied from the total amount of the convention cost.
Work done by a spouse or child. If you’re going to deduct your family employee as a business expense, you must meet these requirements:
- pay the spouse or child a salary,
- pay the same amount of salary that you would pay someone else to do the job,
- pay a salary that is reasonable for the child’s age,
- and the spouse or child must be doing work that is necessary for earning business or professional income.
Earned Income Credit. If your income is blow a certain level you can claim an earned income credit. The IRS estimates that more than 15 million workers may qualify for this pay increase. In 2003, a single worker earning less than $29,666 or a married employee who files a files a joint return and expects combined income of no more than $30,666 may be eligible to receive the added tax credit money.

5. Don’t flip out over receipts. Another common misconception regarding the deductibility of expenses is that a receipt is necessary to prove each and every item, so pay phones and parking meters, for example, get missed because no receipt is generated. Although a formal receipt is not a bad thing at all, if you have records that corroborate the expense (such as an appointment book or calendar), don’t be afraid to take the deduction.

That’s why it’s a great idea to make a habit of recording all your business activities on a daily log. Many tax and legal disputes have been decided in favor of the person who kept the best records. More information on what can be deducted can be found in IRS Publication 535, "Business Expenses."

6. Get professional help. A skilled CPA is aware of tax rules and deductions that only an expert could know. The few hundred dollars you spend for top-notch assistance pays for itself many times over in the form of tax savings and peace of mind– and the cost of professional advice itself is often tax-deductible.

7. Get more information.
For more general information from the belly of the beast itself, visit www.irs.gov.

For more recent small business deductions and strategies see https://www.irs.gov/businesses/small/article/0,,id=106807,00.html.

Download instructions, publications and notices from https://www.irs.ustreas.gov/formspubs/index.html.

Read more by Eric J. Adams.