tax planning for small business owners amanda hansen laura robins holly thomson

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Tax Planning for Tax Planning for Small Business Owners 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

Where to Get More InformationWhere to Get More Information

www.turbotax.comwww.irs.govwww.toolkit.cch.com