January, 2007 Tax Newsletter

Small Business Tax Deduction Checklist

As the new year gets under way, what better time to devote this month’s Tax Newsletter to the more pleasant part of taxes and tax practice – deductions.  Knowing many of these at the start of the year may enable a business to better set up and categorize its tax accounting software to facilitate data entry throughout the year.

Salaries and wages – These are allowable if reasonable in amount and paid for services actually rendered.

Auto expenses – There are two permissible methods for taking the deduction, actual business miles driven or actual expenses related to business driving, including gas, oil, repairs, insurance, depreciation, lease payments, etc.

Home office – If you qualify for the deduction, determine the percentage of your home that is used for business.  You can then take that percentage of interest, taxes, insurance, utilities, repairs, etc.  (Note:  You can deduct 100% of the repairs that affect only the office).

Bank charges - Among these are service charges, check charges, and wire or overdraft fees.

Interest on business debt

Taxes – These include sales taxes on business purchases, the employer’s share of payroll taxes, real and personal property taxes on business property, excise taxes, and state income taxes

Ordinary and necessary costs of doing business - This list is almost limitless so long as the item is business related.  Office supplies and expense, rent or lease payments, postage and delivery, telephone, internet charges, advertising, dues, licenses and permits, cleaning and maintenance, building and equipment repairs, utilities, freight, marketing, promotion, conventions, travel, meals and entertainment (subject to IRS restrictions), and gifts (limited to $25 per donee annually) are several of the more common items.

Depreciation and amortization – These determinations and calculations are generally best handled by your tax professional.

Office furnishings, machinery, and equipment – While much, if not all, of this might qualify for deduction in the year of purchase, this determination is also probably best handled by your tax professional.

Business insurance – Liability, errors and omissions, employees’ health insurance, and worker’s compensation are the more usual types.

Professional fees – Legal and accounting, bookkeeping, architectural, and consulting are common.  Note, however, that sometimes these fees, particularly legal and architectural, may have to be capitalized and recovered through depreciation or amortization allowances.

Business-related education – Included in this category are workshops, seminars, and educational books, publications, and materials.

Business-related books and subscriptions

Retirement plan contributions – The amounts depend upon several factors including the type of plan and salaries of covered employees.  This area is highly complex so professional advice should be sought.

Moving and relocation expenses – This includes expenses involved with office relocation, such as boxing, movers, and unpacking and setting up at the new office.  It could also involve expenses paid to relocate employees, some or all of which might be deductible as salaries and wages of the employee(s) involved.

Contributions – If a regular corporation these are deductible within limitations.  For sole proprietors or pass-through entities, they are deductible on Schedule A of Form 1040, again within limitations.

Business casualty losses – This would include theft, embezzlement, and business property damage not covered by insurance.

Domestic production activities deduction – This was created by The American Jobs Creation Act of 2004.  Businesses can generally take a tax deduction of 3% from net income (6% from 2007 through 2009) if they manufacture or produce their products in the United States.  The calculations can be complex, so consult with your tax advisor.

While the above checklist may appear to be exhaustive, it is by no means intended to be so.  There are very likely many legitimate deductions that are not enumerated in the list.  Also, the items in the checklist are not listed in any particular order of importance.  I would suggest that if you are aware of any business-related expense that you are not certain is deductible, call your tax professional.  If you are not currently working with a tax professional, I would be happy to speak with you.