Wells Fargo Small Business Roundup

Are you still feeling frazzled by 2008 tax matters? If you’re proactive when it comes to taxes, you can help yourself to some valuable benefits. With some smart tax planning—beginning early in 2009—you can say goodbye to last-minute scrambles, and you might even put some extra money in your pocket.

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.

It’s not feasible to list all of the tax credits, because they’re extensive and typically narrowly defined. For more information on tax credits, see “Take Credit for Your Business” in this issue.

As an overview, here are some specific tax strategies, including both tax deductions and tax credits, which apply to most small businesses and go beyond common deductions, such as office supplies or business meals.

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 $250,000 annually for assets placed in service during the taxable year beginning in 2008.
Business taxpayers may qualify for a 50% special depreciation allowance on qualified assets purchased and placed in service after December 31, 2007, and before January 1, 2009—Specific examples are included at the IRS Economic Stimulus Q&As: Business page.
Higher depreciation limits for some business vehicles—Vehicles purchased for business purposes and placed into service during 2008 will receive a depreciation deduction up to $10,960, depending on the vehicle. For a truck or van that qualifies, the maximum amount available will be $11,160.
The 15-year straight-line cost recovery for qualified leasehold, restaurant and retail improvements—The 15-year write-off for qualified leasehold, restaurant and retail improvements is extended through 2009.
Deduct a portion of your home’s expenses for your home office—As an example, 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 interest, property taxes, insurance, utilities, repairs 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. (To learn more about home office use, see “The Right Way to Set Up Your Home Office” in this issue.)
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 was 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. (For more on HSAs, read “Are HSAs Becoming Mainstream?” in this issue.)
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. The IRS also raised the standard mileage deduction to 50.5 cents to accommodate the high cost of fuel for January 1 through June 30, 2008. The reimbursable rate was again raised to 58.5 cents per mile from July 1, 2008 to December 31, 2008. 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.