Tax Planning for Small Business Owners

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Tax Planning for Small Business Owners

• Amanda Hansen
• Laura Robins
• Holly Thomson

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Capitalized Cost or Deductible Expense ?

• Capitalized Cost permanent improvements or
  betterments made to increase the value of any
  property IRC 263(a)
• Deductible Expense ordinary and necessary
  expense paid or incurred during the taxable year
  in carrying on any trade or business IRC 162(a)

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Definitions

• Capitalized Costs are recorded as an asset on the
  balance sheet and depreciated over the useful
  life
• Ordinary Expense common and accepted in your
  field of business
• Necessary Expense helpful and appropriate for
  your business

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Examples of Capital Expenditures

• Costs to acquire buildings, machinery and
  equipment, furniture and fixtures, and similar
  property.
• Replacing a roof on a building
• Additions to a structure
• Remodeling
• Landscaping
• Improvements which add to the value of the
  building
• Architect's fees
• Costs incurred to build it yourself

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Examples of Deductible Expenses

• Business bad debt
• Car and truck expenses
• Depreciation
• Routine repairs and maintenance costs
• Employees pay
• Interest on business debt
• Legal and professional fees
• Contributions to retirements plans
• Health insurance premiums
• One-half of self-employment tax
• State or local personal property tax or
  registration fees
• Business travel expenses
• 50 of meals and entertainment
• Home office

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Examples of Nondeductible Expenses

• Bribes and kickbacks
• Demolitions expenses or losses
• Dues to business, social, athletic, luncheon,
  sporting, airline, and hotel clubs
• Lobbying expenses
• Penalties or fines
• Political contributions
• Repairs that add to property value or life

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What Property Can Be Depreciated?

• It must be property you own
• It must be used in business or held to produce
  income
• It must have a useful life that extends
  substantially beyond the year it is placed in
  service
• It must be something that has a determinable
  useful life
• It must not be excepted property

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Depreciable Lives

• 3 year software
• 5 year automobiles, computers,
• 7 year office furniture and equipment,
  other property
• 27.5 year residential real property
• 39 year nonresidential real property

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Using Depreciation Tables
6,000 x 24.49 1,469.40
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Section 179 Depreciation

• Asset cost deducted in year placed in service
• Tangible personal property used in trade or
  business
• Dollar limits
• 24,000 in 2002
• 25,000 in 2003
• Reduced dollar limit for costs exceeding 200,000
• Recapture if business use drops below 50

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Special Depreciation Allowance

• Property acquired after Sept. 10, 2001 and before
  Sept. 11, 2004
• Property placed in service after Sept. 10, 2001
  and before Jan. 1, 2005
• Qualified property
• Original use
• No real property
• Additional deduction of 30 of basis

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Deducting Health Insurance Premiums

• Deduct health insurance costs you pay for self,
  spouse, and dependents
• In 2002, 70 expenses deductible
• In 2003, 100 expenses deductible
• Cannot include actual medical expenses
• Cannot deduct if net loss on Schedule C
• Can only take deductions for months you and
  spouse not eligible for employer plan

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Deducting Car Expenses

• If you use your vehicle for both business and
  personal purposes, you must divide your expenses
  between business and personal use.
• You can choose to expense based on a standard
  mileage rate (36.5 cents/mile) or your actual
  expenses.
• Actual expenses is an irrevocable election

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Actual Car Expenses
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Daily Business Mileage Expense Log
Source - IRS Publication 463 Travel,
Entertainment, Gift, and Car Expenses
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When are Meals Entertainment Expenses
Deductible?

• You can deduct ordinary and necessary expenses to
  entertain a client, customer, or employee if the
  expenses meet the directly-related test or the
  associated test
• Subject to 50 limit

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Travel Expenses

• Must meet two conditions
• Business duties require you to be away for longer
  than an ordinary days work
• You need sleep or rest to meet the demands of
  your work while away from home

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Deductible Travel Expenses

• Transportation
• Baggage and shipping
• Tolls and parking fees
• Rental car
• Meals and overnight lodging (subject to 50)

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Home Office Deduction

• Must use a certain portion of your home both
  regularly and exclusively for business
• Your home office must be your principal place of
  business

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Calculating Home Office Deduction

• Go through your records
• Determine your offices share of home expenses
• Determine direct expenses of the home office
• Calculate your offices share of the depreciation
  on your home
• Categorize and total your home office expenses
• Deduction is limited to business net income

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Moving Expenses

• Closely related to start of work
• Incurred within 1 year from date began work at
  new location
• New home must be closer than the former home to
  the new job
• Time test
• Employees work fulltime 39 weeks during first
  12 months in new area
• Self-employed work fulltime same as employees
  AND for a total of at least 78 weeks during the
  first 24 months

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• Distance test New job is at least 50 miles
  farther from former home than old job was from
  former home

IRS Publication 521 Moving Expenses
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Deductible Moving Expenses

• Moving household goods and personal effects
• Traveling (including lodging but not meals) to
  your new home
• Must be reasonable
• Expenses for yourself and members of your family

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Where to Get More Information

• www.turbotax.com
• www.irs.gov
• www.toolkit.cch.com