Small-business owners: Don't forget these tax deductions as you rush to file

By Andrea Coombes, MarketWatch
Apr 12, 2007

SAN FRANCISCO (MarketWatch) -- Just like other taxpayers, many small-business owners are coming down to the tax-filing wire, but they have a slew of additional deductions and credits they don't want to miss.

As small-business owners work on their returns the first place to find deductions is the business checkbook. Seeing what you've paid over the year reminds you about deductible expenses you might have forgotten.

But not all tax perks show up that way, said Keith Hall, a Dallas-based certified public accountant and national tax adviser with the National Association for the Self-Employed.

"The easiest deductions to miss are those that don't show up in the checkbook," he said.

But first: If you haven't completed your return, it makes sense to consider filing an extension. Of course, even if you get an extension, the IRS requires payment by the April 17 - Tuesday deadline.

"If you have time to do it correctly, do the calculations. You'll know exactly what you owe. You can pay that with your return on April 17," Hall said. "Then the headaches are over. It's behind you ... and then you can move on to the other 5,000 things you have to do in running your business."

NASE, a trade group, offers a step-by-step guide to Schedule C, plus e-mailed answers to tax questions, even to nonmembers, on its Web site. Go to the Web site and look under "business resources."

If you don't have time to file an accurate return by April 17, get an extension, Hall said. But, he said, "even if you're going to file an extension, the best thing to do is go through the process, make a list of the items that you're missing or unsure about so you can have a to-do list of information."

Close to home
So, which deductions won't be found by going through your business checkbook? The home-office deduction, for one, Hall said.

"If a small business owner operates their business out of their home, then there's probably a deduction there. If they're only looking in their business checkbook, they're going to miss it," Hall said.

Not all home offices will qualify. If you use a space regularly and exclusively for business, you might have a deduction on your hands.

"The two key words are regular and exclusive," Hall said. "The regular part most people don't have a problem with. The exclusive part is more difficult. It does indeed mean exclusive."

Still, exclusive does not mean an entirely separate room - the home-office space can be part of another room, as long as the specific area is solely for the use of the business.

"Make sure the kids don't play video games there. Make sure the baby crib is not also the desk," Hall said. See this IRS page for more information.

"Even if you don't have a home-office deduction for last year, now's the time to do a little advance planning for next year and find a way to set aside some piece of your home as an exclusive home office, so next year you'll have that deduction," Hall said.

Driving deduction
Another easy-to-miss deduction: The deduction for the business use of your car.
"Most small businesses don't have a unique vehicle that they can allocate just for their business. They're taking the kids to school but at the same time they go to the post office, Office Depot, they call on a couple of clients," Hall said.
"That expense may not show up in their business checkbook. If you don't pay attention to the fact that you do use that car for business, you can lose some money."

But taking that deduction requires some record-keeping, he said. "You're going to need a log to support the business miles versus the personal miles," he said. "From time to time, write down the miles you drive for business." See this IRS page for more information.

Retirement-plan contributions
This might be a good time consider your future retirement, Hall said. Businesses can choose among a variety of retirement plans, but only the Simplified Employee Pension plan, or SEP, has a particularly appealing characteristic around this time of year. Unlike other plans, a business owner can create a SEP now and count the money contributed as a deduction on his or her 2006 tax form.

And, if you file an extension, you have until your new filing date to create and fund a SEP. That means, if you file an extension, "you've got six months to save the money and make the contribution," Hall said.

"Many people think it's complicated. They think, 'I'm a small business, I can't set up some complicated retirement plan,' but the fact is a SEP plan is as easy to open as a bank account," Hall said.

"Go to your local bank or a brokerage house ... sign a few forms, give them a check, and your business has a SEP," he said. "Not only have you invested in your own future, but you save money at tax time."

Still, setting up a retirement plan is serious business, so do some research to assess which type of plan is the right one for you.

Domestic production activities
If you employ one or more people and your company produces goods, there's a chance you're eligible for the domestic production activities deduction, a relatively new tax perk.

For example, sole proprietors who are in the homebuilding business are one possible beneficiary, said Steven Hurok, a tax director in the Woodbridge, N.J. office of BDO Seidman.

"Let's assume you're a homebuilder. That's a typical sole proprietor activity. Guess what? You're in a domestic production activity business. If you're making money, you might be entitled to this deduction," Hurok said.

To claim the deduction, you do need to employ others. "It's not just for being self-employed," he said. "It's a job-creation incentive."

Still, this deduction can be complex to figure, and it's not "a huge amount of dollars," he said. "If you're paying a tax rate of 33%, this would reduce it potentially down to 32% ... It's not a home run. It might buy you some ice cream."
Go to this IRS page for more information.

Telephone excise tax refund
There's been a lot of news this year about how individuals can take the telephone excise tax refund, but some small-business owners may overlook that it applies to their business telephone costs as well.

The IRS created a simplified method for business owners to use in calculating this refund, so proprietors can avoid the task of figuring their excise tax on each phone bill going back a few years (the refund applies to telephone bills paid in a 41-month period).

However, business owners still need to know their total telephone bill costs for that period (individual taxpayers can take a standard refund amount to avoid all that figuring). See this IRS page for more information.

"If I had to pick one (tax perk) that's going to be the most overlooked item, it's going to be that one," Hurok said. "But then again, you're talking about, say, 2% of your phone bills. How much is that?"

Still, he added, "if you're a big phone user, it's a big calculation."

Source: Marketwatch