The Art of Business: Tax Deduction Fever

Eric J. Adams

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This is the column I hate to write because it means it’s the time to figure taxes, reconcile 1099s, find receipts, and evenings spent mired in Quicken cursing myself for not keeping a neater check register. Of course, I don’t actually do my taxes; despite a college education and a functional IQ, I couldn’t figure out IRS tax forms anymore than I could calculate the rate of motion for a lunar landing module.

And so I would never propose to offer tax tips unless they came from the IRS itself or professional tax preparers whom I admire and respect, as is the case with these following tax tips. And I do so only with the caveat that you regard these as mere suggestions to be discussed with the accountant/tax filer in your life. It’s enough that I keep myself out of prison.

That said, here is a compilation of tax saving ideas, changes, and strategies for the self-employed and small business owner.

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 $30,000 or 15% of your compensation, whichever is smaller, with compensation generally being limited to $170,000. The maximum deduction is 15% of all your compensation (excluding SEP contributions).
• 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 2002, 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. You have the legal right to account for every deduction you can take legally like, for example, Section 179 deductions. This section allows a full and immediate deduction (up to a $25,000) for assets purchased and put into service during the tax year — computers, printers, cameras, furniture, and more. 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.Also, as of 2002, you can carry back Net Operating Losses (NOL) as far as five years. Before this year, the carry back period was limited to either two or three years.3. If you’re an employer, consider these new deductions. Now in effect for the 2002 tax year, new deductions include:
  • Employer-provided childcare credit: If you’re a bona fide business owner, you can claim a credit up to $150,000 for the cost of building, operating, or contracting out qualifying childcare services for employees. The credit is limited to 25 percent of total childcare expenditures and 10 percent of childcare resource and referral expenditures, as long as all employees are eligible to participate.
  • Employer-provided retirement advice:The value of qualifying retirement planning assistance (advice or other information) 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. In 2002, both undergraduate and graduate school courses are covered for the first time.
  • Employer-provided adoption assistance: The amount of qualifying adoption assistance from employer to employee excluded from the employee’s wages has doubled from $5,000 for 2001 to $10,000 for 2002 and subsequent years.

  4. 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.”

  5. Get professional help. There’s simply no reason to do otherwise. A skilled CPA is aware of tax rules and deductions that only an expert could know. Even if you like to pore over IRS documents, you’ll be sure to miss something.. You will likely find that the few hundred dollars you spend for top-notch assistance pays for itself many times over in the form of tax savings — and the cost of professional advice itself is often tax-deductible.

  For more information from the belly of the beast itself, visit www.irs.gov. Grab forms, instructions, publications and notices from https://www.irs.ustreas.gov/formspubs/index.html or move your operation to Bermuda and free yourself of the hassle altogether.