Every tax filing season, many small businesses end up paying the government more than required. Some don’t take advantage of all the deductions they are entitled to. Some haven’t kept up with tax law changes.
Tax professionals say there are two main reasons why small businesses get tripped up: fear of an audit and ignorance.
Stephen Fishman, an attorney and author of “Deduct It! Lower Your Small Business Taxes,” says the specter of an Internal Revenue Service audit stops many small business owners from claiming a home-office deduction, even when they qualify and could save a substantial amount.
Fishman noted that years ago, claiming that you worked out of your home was one of those red flags that caught the eye of the IRS. But now, he said of small business owners, “they may not be aware the law is more liberal” since changes were made in 1999, Fishman said.
What does tend to trigger an audit, or, more commonly, questions about an individual item on a return, are deductions that seem abnormally high. Accountants and tax attorneys say that as long as you have the paperwork to back up the claims you make on your tax forms, you shouldn’t run into problems. You’ll be on safe ground if you either have your return prepared by a professional or reviewed by one if you’ve compiled it yourself.
Ignorance can cost a small business plenty of money, since many business owners just don’t know what the law states. Fishman said owners tend to overlook a deduction tailored for them known as the Section 179 deduction. This allows small businesses to deduct up-front rather than depreciate the cost of certain equipment bought and put into service during the tax year. There’s a change in the deduction for the 2005 tax year; it rose to $105,000 from $102,000 in 2004.
There are other adjustments to the tax law each year, and business owners need to keep up with them. You can get a quick overview of them in IRS Publication 334, Tax Guide for Small Business. You can download a copy of it and other IRS publications and forms from the agency’s Web site, www.irs.gov.
Another change for the 2005 tax year is an adjustment in the standard mileage rate used to deduct the cost of using a vehicle for business purposes. Because the price of gasoline soared in the last few months of the year, the IRS has set up a two-tier deduction for 2005. Businesses can deduct 40.5 cents for each business mile driven before Sept. 1, and 48.5 cents for business miles driven after Aug. 31 and before Jan. 1 of this year. (But beware: The deduction was lowered to 44.5 cents for this year.)
Many small businesses will be able to take advantage of the domestic production activities deduction, which grew out of the American Jobs Creation Act of 2004. The deduction gives a tax break to a variety of companies with at least one employee.
On its Web site, the IRS defines qualifying production activities as “manufacturing, producing, growing, and extracting tangible personal property, computer software, and sound recordings, and the construction and substantial renovation of real property including infrastructure.”
“They don’t necessarily have to be a manufacturer. It can even apply to engineering firms – it’s that broad of a definition,” said Jeffrey Berdahl, a certified public accountant with Berdahl &Co. in Center Valley, Pa.
But tax professionals describe the regulations governing the domestic production activities deduction as complicated, and suggest that small businesses hoping to take advantage of it consult with a tax adviser.
“It’s a relatively difficult form to go through,” Berdahl said.
Joyce Rosenberg writes weekly about small business for the Associated Press.
Tax tips for small businesses
Many small business owners shy away from the home-office tax deduction to avoid an IRS audit. Don’t. You could get a good tax break.
Have your return prepared by a professional. That way, you’ll get what you are entitled to deduct.
Educate yourself also. Go to www.irs.gov and download a copy of IRS Publication 334, Tax Guide for Small Business.
There’s a two-tier deduction this year for mileage because gas prices soared in the last few months of 2005.
Tax tips for small businesses
Many small business owners shy away from the home-office deduction to avoid an audit. Don’t. You could get a good tax break.
Have your return prepared by a professional. That way you’ll get what you’re entitled to deduct.
Educate yourself also. Go to www.irs.gov and download a copy of IRS Publication 334, Tax Guide for Small Business.
Know that there’s a two-tier deduction this year for mileage because gas prices soared for the last few months of 2005.
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