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Preparing
your taxes can seem like a daunting task. Dunton & Associates
knows what it takes to wade through the red tape.
Here are some tax facts that may
be indispensable in helping you get
your taxes in order.
Depreciation and the Section 179 Deduction
Writing Off Car Expenses
Meals and Entertainment Expenses not Subject to the 50% Rule
Home Offices and Selling Your Home
Retirement Plans
Hire Your Children
State Laws - Determining Method of Taxation
One of the Best Kept Secrets - Section 1031
Coordinating Section 179 Deductions
Depreciation and the Section 179 Deduction
Small business owners don’t need to learn the Internal Revenue Code by
section number, but it pays to remember at least one: IRC179, perhaps the best
small business tax break of all. IRC179 allows, but doesn’t require, a
business owner or C corporation to deduct the cost of business assets purchased
during the year and “placed in service” as current expenses. This
produces an immediate write-off of capital assets. The maximum section 179 deduction
you can elect for qualified property placed in service in 2004 is $102,000. This
limit is reduced by the amount by which the cost of section 179 property placed
in service during the tax year exceeds $410,000.
The 2003
Tax Act increases the special depreciation allowance from 30%
to 50% for certain
qualifying property. To qualify for
the 50% special depreciation allowance property must be
acquired after May 5, 2003, and placed in service prior
to January 1,
2005. The 30% rate still applies to qualifying property
acquired after September 10, 2001 and prior to May 6,
2003. To be qualifying
property, the original use of the property must begin with
the taxpayer after September 10, 2001, for the 30% rate
and after
May 5, 2003, for the 50% rate. “Original use” means
the first use to which the property is placed, whether
or not by the taxpayer. When the special depreciation allowance
is claimed,
the adjusted basis of the qualified property is then reduced
by the allowance before figuring the regular depreciation
deduction for the first year and all subsequent tax years.
Writing
Off Car Expenses
There are two different ways to calculate your car expenses
for tax purposes:
- the mileage method
- actual expense
method
Do the math before you pick a way to claim auto expenses. Usually,
the actual expense method results in higher tax deductions if
you own a late model car, because you can take a depreciation
deduction as well as claiming operating expenses. On the other
hand, the standard mileage method may be better if you drive
a lot of miles in a 50 mpg gas economy car or an older car. Generally,
you may switch back and forth between the standard mileage and
actual expense methods each year to get the greatest tax deductions.
However, if you use the mileage method the first year your auto
is placed in service, you are not allowed to take accelerated
depreciation deductions in any future years. If you switch, you
must take a straight line depreciation. If you qualify, figure
your deduction both ways each year and then choose.
Meals and Entertainment Expenses not Subject to the 50% Rule
Holiday parties and picnics for employees and their
families are recognized as morale builders. These affairs
are not subject to the regular entertainment rule and are
100% deductible. Don't overdo it though. Employee get-togethers
must
be infrequent and everyone at work must be invited in order
to be fully deductible. You do not need to discuss business at
these
types of parties.
Home Offices and Selling Your Home
Most homeowners know that the tax code allows you to defer tax
on the gain on the sale of your home as long as you acquire another
primary residence within 24 months. (IRC1034)
A home office creates a potential tax problem, however. If you
take depreciation deductions for a home office, when you sell
your home, the total of all of the deductions you have taken
in the past are potentially subject to income tax. Don't panic
-- there is a fairly easy way to avoid this. But first let's
see how it works.
The tax code strictly
says that home office depreciation deductions are taxed if
the home is still regularly and exclusively being
used for business at the time of the sale. However, there
is a well-recognized loophole: If the home office use is discontinued
prior to the sale, the home office is no longer being "regularly
and exclusively used" for business. No other tax code provision
requires you to pay tax on the deductions previously taken.
The tax basis in your home is reduced by the amount of the previous
deductions.
Don't claim depreciation in year of sale. Discontinue use of
the office for a respectable period of time prior to the sale.
Six months is a good general rule. In any event, no tax deduction
should be taken for depreciation on the home office in the year
of the sale.
Retirement Plans
Most small business owners are sole proprietors or partners,
although an increasing number are members of limited liability
companies (LLC's). Generally speaking, these types of businesses
can't contribute quite as much to retirement plans as corporations.
But for most small business folks who make under $100,000 per
year, this is not a drawback, and many excellent tax-advantaged
plan opportunities are available to them. On the other hand,
owners of fast-growing small businesses, weighing the advantages
of incorporating, should consider the greater retirement plan
benefits that C corporations can offer.
Unincorporated businesses can choose from three types of plans:
Individual Retirement Accounts (IRA's), Simplified Employee Pension
plans (SEP's) and Keoghs. A sole proprietorship, partnership or
LLC with employees can add the increasingly popular Deferred
Compensation plan, commonly called a 401(k) or Salary Reduction
plan, to its options.
Hire Your Children
If you operate an unincorporated business and have children
under age 18, then you should consider hiring your children to
work in your business. Your business will receive deductions,
saving you income as well as self-employment taxes. The wages
paid to your children (minors) are not subject to payroll taxes.
This may be a significant tax savings to you.
What if your kids are 18 or over? Are there any tax benefits
in hiring them? Perhaps, if they are in a lower marginal tax
bracket when compared to yours. You can still pay them a wage
and save taxes by shifting income from your tax bracket to theirs;
but they will be subject to payroll taxes, thus reducing the
overall tax savings.
Another plus in hiring your children is that they now have earned
income. Now that your child has earned income, they may set up
their own IRA's.
Some drawbacks to this tax strategy to remember is that there
may now be some tax due if the children have any dividends and
interest. Also, there may be some negative effects on college
financial aid if they have too much money in their own names.
Nonetheless, the tax benefits of hiring your children are generally
greater than any negative consequences.
State Laws - Determining Method of Taxation
State law determines the business entity's method of taxation.
An entity may be taxed for federal income tax purposes as a corporation
even though for state law purposes it is organized as some other
type of entity. Furthermore, state laws are not consistent.
One of the Best Kept Secrets - Section 1031
This section of the
Internal Revenue Code is often overlooked by most professionals
and the general public. Nonetheless, this
section provides that if you sell a piece of business or
investment property and purchase a similar piece of property
to replace
it within 180 days, then with proper tax planning it is
possible to defer your unrealized capital gains.
Coordinating Section 179 Deductions
As a shareholder in a subchapter
S corporation, partner in a partnership, or a member in a Limited
Liability Company, you
may receive an allocated share of the entity's Section
179 deduction. Since the deductions from these business entities
typically flow
down to the individual level (which may already have Section
179 from Schedule C) consider coordinating the Section
179 deductions to prevent exceeding the Section 179 dollar limit.
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