tax planning for small business owners amanda hansen laura robins holly thomson
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Tax Planning for Tax Planning for Small Business OwnersSmall Business Owners
Amanda HansenLaura RobinsHolly Thomson
Capitalized Cost or Capitalized Cost or Deductible Expense ?Deductible Expense ?
Capitalized Cost – “permanent improvements or betterments made to increase the value of any property” IRC §263(a)
Deductible Expense – “ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business” IRC §162(a)
DefinitionsDefinitions
Capitalized Costs are recorded as an asset on the balance sheet and depreciated over the useful life
“Ordinary” Expense – common and accepted in your field of business
“Necessary” Expense – helpful and appropriate for your business
Examples of Capital ExpendituresExamples of Capital Expenditures Costs to acquire buildings, machinery and
equipment, furniture and fixtures, and similar property.
Replacing a roof on a building Additions to a structure Remodeling Landscaping Improvements which add to the value of the
building Architect's fees Costs incurred to build it yourself
Examples of Deductible ExpensesExamples of Deductible Expenses Business bad debt Car and truck expenses Depreciation Routine repairs and maintenance costs Employee’s pay Interest on business debt Legal and professional fees Contributions to retirements plans Health insurance premiums One-half of self-employment tax State or local personal property tax or registration fees Business travel expenses 50% of meals and entertainment Home office
Examples of Nondeductible Expenses Examples of Nondeductible Expenses
Bribes and kickbacksDemolitions expenses or lossesDues to business, social, athletic,
luncheon, sporting, airline, and hotel clubsLobbying expensesPenalties or finesPolitical contributionsRepairs that add to property value or life
What Property Can Be Depreciated?What Property Can Be Depreciated?
It must be property you ownIt must be used in business or held to produce
incomeIt must have a useful life that extends
substantially beyond the year it is placed in service
It must be something that has a determinable useful life
It must not be excepted property
Depreciable LivesDepreciable Lives
3 year: software5 year: automobiles, computers, 7 year: office furniture and
equipment, other property
27.5 year: residential real property
39 year: nonresidential real property
Using Depreciation TablesUsing Depreciation TablesDepreciation Rate for
Recovery Period
Year 3-Year 5-Year 7-Year
1 33.33% 20.00% 14.29%
2 44.45 32.00 24.49
3 14.81 19.20 17.49
4 7.41 11.52 12.49
5 11.52 8.93
6 5.76 8.92
7 8.93
8 4.46
$6,000 x 24.49% = $1,469.40
Section 179 DepreciationSection 179 Depreciation
Asset cost deducted in year placed in service Tangible personal property used in trade or
business Dollar limits:
– $24,000 in 2002
– $25,000 in 2003 Reduced dollar limit for costs exceeding
$200,000 Recapture if business use drops below 50%
Special Depreciation AllowanceSpecial Depreciation Allowance
Property acquired after Sept. 10, 2001 and before Sept. 11, 2004
Property placed in service after Sept. 10, 2001 and before Jan. 1, 2005
Qualified property– Original use– No real property
Additional deduction of 30% of basis
Deducting Health Insurance Deducting Health Insurance PremiumsPremiumsDeduct health insurance costs you pay for
self, spouse, and dependents– In 2002, 70% expenses deductible– In 2003, 100% expenses deductible
Cannot include actual medical expensesCannot deduct if net loss on Schedule CCan only take deductions for months you
and spouse not eligible for employer plan
Deducting Car ExpensesDeducting Car Expenses
If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use.
You can choose to expense based on a standard mileage rate (36.5 cents/mile) or your actual expenses.
Actual expenses is an irrevocable election
Actual Car ExpensesActual Car Expenses
Depreciation Lease payments Registration
Garage rent Licenses Repairs
Gas Oil Tires
Insurance Parking fees Tolls
Daily Business Mileage Expense Log
Source - IRS Publication 463: Travel, Entertainment, Gift, and Car Expenses
When are Meals & Entertainment When are Meals & Entertainment Expenses Deductible?Expenses Deductible?You can deduct ordinary and necessary
expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test
Subject to 50% limit
Travel ExpensesTravel Expenses
Must meet two conditions:– Business duties require you to be away for
longer than an ordinary days work– You need sleep or rest to meet the demands of
your work while away from home
Deductible Travel ExpensesDeductible Travel Expenses
TransportationBaggage and shippingTolls and parking feesRental carMeals and overnight lodging (subject to
50%)
Home Office DeductionHome Office Deduction
Must use a certain portion of your home both regularly and exclusively for business
Your home office must be your principal place of business
Calculating Home Office DeductionCalculating Home Office Deduction
Go through your recordsDetermine your office’s share of home
expensesDetermine direct expenses of the home
officeCalculate your office’s share of the
depreciation on your homeCategorize and total your home office
expensesDeduction is limited to business net income
Moving ExpensesMoving Expenses Closely related to start of work
– Incurred within 1 year from date began work at new location
– New home must be closer than the former home to the new job
Time test– Employees: work fulltime 39 weeks during first 12
months in new area– Self-employed: work fulltime same as employees
AND for a total of at least 78 weeks during the first 24 months
Distance test – New job is at least 50 miles farther from former home than old job was from former home
IRS Publication 521: Moving Expenses
Deductible Moving ExpensesDeductible Moving Expenses
Moving household goods and personal effects
Traveling (including lodging but not meals) to your new home
Must be reasonableExpenses for yourself and members of
your family