Look for more tax advice from Jeffrey Parker in our upcoming Law & Tax Resource Center.
Before April 15th, it is important to work with your accounting team to identify tax deductions that will lower your tax liability. For instance, your out-of-town trip last year to work on a long-term project with a new client may have cost you a fortune, but there are deductions you can elect for those costs. Being tax savvy and carefully reviewing your business expenses from 2004 can make a big difference in what you may owe or receive from Uncle Sam. Fortunately, there are a number of old, revised, new and extended tax deductions that may lower taxable income and translate into greater tax savings.
- Business Start-Up Costs and Organizational Costs: Business start-up costs and organizational costs of corporations and partnerships paid or incurred after October 22, 2004, can be deducted up to $5,000. This is phased-out when start-up costs reach $50,000. When this happens, the amount of start-up costs are amortized over a period of 180 months. Also, the amortization period for certain business start-up costs and organizational costs paid or incurred after October 22, 2004, has been increased to 15 years.
- Business Travel, Meals and Entertainment Expenses: When you travel for business, you can deduct the cost of plane fare, taxis, lodging and 50% of meals and entertainment costs. Other expenses qualify as well, such as the cost of dry cleaning, costs for shipping product samples/displays for your business trip, telephone calls and computer rental fees. When you entertain present or prospective customers, you may deduct 50% of the related cost if it is "directly related" to the business and business is discussed or "associated with" the business and the entertainment takes place immediately before or after a business discussion.
- Tsunami Relief Contributions: If your company made a cash contribution on or before January 31, 2005 to a qualified charity raising money for victims of 2004 Southeast Asia Tsunami disaster, your business can take an immediate tax break as an itemized deduction on your 2004 tax return. You can also take this as an itemized deduction on your individual 2004 return for any personal cash contributions you made to a qualified Tsunami relief charity. Check www.usaid.gov for a list of qualified charities.
- Home Office: To qualify for a home office deduction, you must use your home office on both an exclusive and regular basis as your principal place of business or as a place of business to meet with clients. If you qualify, you may deduct depreciation allocated to your business use of the area in your home and other indirect expenses of operating your home office. You may also claim this deduction if your home office is the only place for conducting the administrative or management activities of your business or if only minimal administrative work is done outside your home office.
- Bad Debts: You may also claim a deduction for a business debt related to accounts or notes receivable if you included the amount owed in your gross income for the year you are claiming the deduction, or in a prior year. Also, you must write-off the bad debts in the year you are claiming the deduction. If you use the cash basis method of accounting, you cannot claim a bad debt deduction if someone fails to pay you for your services.
- Depreciable Property Deduction: Small business taxpayers are permitted to deduct up to $102,000 of the cost of qualifying property purchased and placed in service in 2004. Please note that passenger vehicles such as sports utility vehicles under 6,000 pounds are not eligible to be expensed and passenger vehicles between 6,000 and 14,000 pounds can be expensed up to $25,000. Additionally, taxpayers are permitted to make or revoke an election on an amended return for those taxable years without the consent of the Commissioner.
- Health Insurance Premiums: If you are self-employed, you can deduct as an adjustment to gross income, 100% of health insurance premiums for yourself, your spouse and your dependents as a business expense, subject to certain requirements.
- Casualty losses in a Presidentially Declared Disaster Area: Unfortunately, last year was a busy year for natural disasters. Casualty losses are generally deductible only in the year the casualty occurred. However, if you have a deductible loss from a disaster in a Presidentially declared disaster area, you can choose to deduct that loss on your tax return for the year immediately preceding the year of the casualty. If you have already filed your return for the preceding year, the loss may be claimed in the preceding year by filing an amended return, Form 1120X for corporations. The election to deduct a 2004 disaster loss on your 2003 return must be made on or before the due date (without extensions) of the 2004 return. You can revoke this choice within 90 days after making it by returning to the IRS any refund or credit you received from making the choice. If you revoke your choice before receiving a refund, you must return the refund within 30 days after receiving it for the revocation to be effective.
- Interest Payments: If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. This shouldn’t be incentive to get into debt, but can help to offset the cost of loans you may need to grow your business.
- Research & Development Deductions: Typically expenditures for research and development ("R&D") are considered capital expenses. However, you can choose to deduct these expenditures as current business expenses. You can choose one of two methods of accounting for R&D expenditures. You may deduct your R&D expenditures in the tax year, in which you paid or incurred or you may amortize (deduct them in equal installments) such expenditures over a period of not less than 60 months. You must charge to a capital account any R&D expenditures that you do not deduct currently, nor defer and amortize. You may claim the R&D credit against tax for certain qualified R&D expenditures and combine the credit as one of the components of the general business credit. The R&D credit is a nonrefundable tax credit.
- Corporate Contributions of Computer Technology and Equipment: If you donated old computer equipment in 2004, you may be eligible for an increased deduction. The amount of the deduction is equal to the taxpayer basis in the donated property plus half of the amount of ordinary income that would have been realized if the property had been sold. The deduction may not exceed twice the taxpayer in the donated property. Originally scheduled to expire for tax years beginning after 2003, the increased deduction for donations of qualified computer equipment has been extended to contributions made during any tax year beginning before January 1, 2006.
- Disabled Access Credit: The IRS created this credit to help small businesses cover Americans with Disabilities Act of 1990 related eligible access expenditures. A business that for the previous tax year had either revenues of $1,000,000 or less, or 30 or fewer full-time workers may take advantage of this credit. The amount of the tax credit is equal to 50% of the eligible access expenditures in a year that exceed $250 but are not more than $10,250. Thus, the maximum allowable credit is $5,000. When the credits exceed the limitation in any year, the excess or unused amount may be carried back one year and forward 20 years. The credit can be used to cover a variety of expenditures including barrier removal, providing interpreters or providing or modifying equipment. However, the expenses must be associated with required adaptations to existing facilities. The credit is not available for costs of new construction.
- Self-Employment Expenses: If you are self-employed, you can deduct half of your self-employment tax. In 2004, the 12.4% OASDI (Social Security) part of the tax applies to self-employment earnings of up to $87,900. The 2.9% Medicare tax applies to all your self-employment income.
- Auto Expenses: If you use your car in your business, you may be able to depreciate the costs of owning it and deduct the cost of operating and maintaining it. There are two methods for claiming business-related automobile expenses. You may deduct the business portion of actual expenses you incur, such as the cost of gas and oil, insurance, license and registration fees, repairs, tires, tolls, and parking. Or you can keep track of the business miles you drive, and multiply your total by the IRS standard mileage rate (37.5 cents per mile in 2004).
- State Sales Taxes: Nearly 20 years ago, the 1986 Tax Reform Act did away with the tax provision that allowed taxpayers to take itemized deductions for both their state and local income taxes and their state and local sales taxes. Thanks to the American Jobs Creation Act of 2004, this deduction is back (effective January 1, 2004 through December 31, 2005), but only as an option to be taken instead of state and local income taxes. This will mostly benefit taxpayers in states with low- or no-income taxes. This particular deduction option makes timing big-ticket purchases important. It might also be beneficial to alternate between taking the sales tax and the state income tax deduction each year. Discuss what makes sense for your business with your CPA.
2005 Tax Planning Tip: Maintain Organized Financial Records
If you haven’t done so in the past, take the time this year to maintain good records, be organized and understand what is needed to efficiently prepare your business tax returns. You can reduce the cost of your professional fees significantly if your accountant doesn't have to spend his or her time sorting through receipts or correcting your books. And most importantly, consult with a CPA about how you can develop a tax planning strategy for your business that will position you to take advantage of tax provisions that might reduce your 2005 tax liability.
For information about the tax tips in this article, please visit www.irs.gov.
Jeff Parker is a principal with Rothstein Kass-Certified Public Accountants (www.rkco.com), one of the top 20 largest international accounting and consulting firms based in the U.S. He is a certified public accountant and attorney in New Jersey. Jeff advises closely-held entrepreneurial companies on business finance issues and taxation; in addition to, providing tax services for real estate companies, broker-dealers and high net worth clientele for the Firm's financial and entrepreneurial services practices. Jeff also assists clients with estate and gift tax matters.
Jeff is a member of the American Institute of Certified Public Accountants (AICPA), the New Jersey Society of Certified Public Accountants (NJSCPA), the American Bar Association (ABA), the New Jersey State Bar Association (NJSBA) and the National Organization of Office and Industrial Properties (NAIOP.)