Wells Fargo Small Business Roundup

Are you still feeling frazzled by 2007 tax matters? If you're not reactive when it comes to taxes, you can help yourself to some valuable benefits. With some strategic tax planning—beginning early in 2008—you can say goodbye to last-minute scrambles, and you might even put some extra money in your pocket.

For example, do your 2008 plans include:

The IRS offers tax breaks for all of these activities, if you follow the specific regulations. Remember, you can reduce your tax bill in two ways: through tax deductions and tax credits. While tax credits can be somewhat restrictive, they are more advantageous. Deductions reduce the total amount on which you will be taxed, while credits are taken directly off the amount you owe.

The Small Business and Work Opportunity Tax Act of 2007 extended some tax credits that were set to expire, so you may need to review the new rules. This extension applies through August 2011.

It's not feasible to list all of the tax credits, because they're extensive and typically narrowly defined. For a quick check, read Business Tax Credits at the IRS site. If you see a tax credit that applies to your business, you can ask your accountant or tax professional about how to capitalize on it.

Write off the full amount of equipment purchased during a tax year. Typically, business equipment is depreciated over time, between five and seven years. Under Section 179, however, the IRS allows small businesses to write off the full amount of tangible equipment, such as computers, printers or office furniture, up to a maximum of $125,000 annually. (To learn more, read "Both Sides of Section 179," on the Wells Fargo Education site.)
Hire a qualifying disadvantaged worker and take a 40% tax credit on his or her wages. Qualifying workers are specifically defined, but they include rehabilitated criminals and certain economically challenged groups.
Deduct a portion of your home's expenses for your home office. If you use 200 square feet of your 2,000-square-foot home as an office, you can deduct 10%, or one-tenth in "tax-speak," of home-related expenses, such as your mortgage, property taxes, insurance and maintenance. You are also allowed depreciation. If your home cost $300,000, one-tenth is $30,000, which is the amount you are allowed to depreciate in equal portions over a 39-year period, so the annual amount is small, but it's still a savings.
Various energy-related efforts are also eligible for tax credits. You earn credits for constructing an energy-efficient building or for adding energy-efficient features, such as solar screens or a radiant panel roof. You also earn tax credits for purchasing energy-efficient appliances, if used for your business.
If you're in the market for a new car for work, you can earn tax credits for hybrids. The amount varies depending on the car. For example, you get a $3,000 tax credit for either a hybrid Ford Escape or Mercury Mariner. The full credit applies even if you use your car for both personal and business purposes. "Hybrid Cars and Alternative Fuel Vehicles" at the IRS site can tell you more about the credit and the cars and trucks that qualify. In addition to a tax credit, you may also deduct the applicable deprecation based on your actual business use.
Write off bad debts. All uncollectible debt must be for actual receivables and must be worthless. You can prove this by obtaining a formal letter from bankruptcy court, if your client filed bankruptcy. On a less formal basis, you can document your collection efforts to help prove your case.
You can also reduce your overall tax bill by establishing a health savings account (HSA). For 2008, the maximum allocation has increased to $2,900 for individuals and $5,800 for families. For taxpayers over 55, you can contribute an additional $900. To establish an HSA account, you must also meet the other qualifying requirements.
Defer taxes on current income by establishing a retirement account. For sole proprietors or businesses with a couple of employees, you have two options, SIMPLE or SEP plans. Each plan has specific limits that can change yearly.
Regularly tracking routine expenses helps you keep track of small costs that might be overlooked. For example, oil changes or other car maintenance may be deductible. In 2008, the IRS also raised the standard mileage deduction to $0.505 cents to accommodate the high cost of fuel. Other deductions that can be overlooked include continuing education, such as professional seminars; professional dues and licensing fees; parking fees; and petty cash expenses, such as coffee service or that bottle of aspirin you bought for the office.

In addition to preserving some tax credits, the 2007 Small Business Tax Act also simplified tax filing for some family businesses, such as a husband and wife who are organized as a partnership or joint venture. The tax act allows you to report your business activity on your personal return, which eliminates the need to file a partnership return.

Finally, you can lower your tax-related stress level by taking advantage of electronic filing (see the IRS e-file site for more information). It's easier for both you and your accountant, and you receive confirmation from the IRS that your return has been accepted. And, as always, check with your tax advisor early in the year to help plan out your strategies.

Thanks to Bryan B. Funk, CPA, Senior Tax Manager at Weaver and Tidwell, L.L.P.