Why Pay Uncle Sam More Than You Have To?

Proper Planning, Sound Advice Can Help Put Thousands of Dollars Back in Your Business

If you are the owner of a small business, it’s probably safe to say that tax management and planning are not your favorite aspects of running a business. But if you plan ahead and seek sound advice, you can keep more of your hard-earned income and pay Uncle Sam less.

Several "tax shelters" or tax-planning strategies are available that could help you put thousands of dollars back into your business. Many of these tax tips are not well-known, while others remain underutilized because many people don’t know how to fully use them to their advantage.

One easy place to start is to revisit capital expenditures or fixed assets carefully to ensure that you are not overlooking deductible expenses. Depreciation methods and lives vary depending on how an asset is categorized, so mistakes can result in loss deductions. If you are planning to buy or construct a new facility for your business, pay close attention to how costs are classified. While commercial buildings and their structural components are generally depreciable over 39 years, equipment, furniture, fixtures and other tangible assets can be written off more quickly. If, however, you make these substantial purchases during the last quarter of the year, your depreciation deduction may be limited. As always, consult your CPA.

A few other, less obvious, deductions should also be considered. The Section 179 deduction allows eligible businesses to deduct the full cost of annual asset acquisitions in lieu of depreciation. As much as $200,000. (If they exceed $200,000, other rules may apply.) The Section 179 deduction is also limited to the amount of taxable income from the taxpayer’s active trades or businesses.

Beyond looking at depreciation, consider a retirement plan as one of the most powerful tax shelters still available to business taxpayers. If you have a relatively small business may want to consider the SEP Plan (Simplified Employee Pension) after discussing strategies with your tax advisor.

Contributions to fund a SEP Plan are immediately tax-deductible, assuming you designate the fund appropriately when you establish it and consult with your CPA about calculating the amount of your contributions. Plan investment earnings are tax-deferred, and planned participants are—including owner/employees and self-employed individuals— do not have to pay income taxes on plan benefits until they receive distributions.

Other deductions related to your business may include automobiles and home-office related costs. If you use a space in your home exclusively and regularly for administrative and management activities of your business, you may be eligible for a home-office deduction. Chiropractors can claim deductions for business-related use of automobiles by using the standard mileage rate method or the actual expense method. The key is choosing the method that works best for you.

If you own and operate only one business vehicle, you should choose the method that yields the largest deduction. However, once you have claimed accelerated depreciation for a business car in prior years under the actual expense method, you can’t switch to the standard mileage rate method for a car in a subsequent year. The International Revenue Service now allows use of the standard mileage rate for a leased business car.

The standard mileage rate for business driving dropped to 31 cents per mile effective April 1, 1999. The rate for 2000 is 32.5 cents. If you use the standard mileage rate, you can separately deduct business parking fees and tolls, the business portion of state and local property taxes, and the business portion of the auto loan interest.

Like travel mileage, home-office furnishings are another expense that can be deducted from your overall taxes. In order to take the deduction, you must use an area of your home exclusively and regularly as your principle place of business where you meet or deal with clients. A separate, unattached structure that you use exclusively and regularly for administrative and management activities of you business, may be eligible for a home-office deduction. However, in order to take the deduction, you can’t have another location outside your home where you conduct substantiation administrative or management activities of the business.

Once you and your CPA have discussed and strategized you tax plans, think about one other important aspect of planning--keeping you tax records. Keep tax returns indefinitely and retain the supporting record for at least six years. In general, except for cases of fraud or substantial understatements of income, the IRS can only assess taxes within three years after the return was filed. For example, if you filed your 1996 individual tax return by its original due dates of April 15, 1997, the IRS would have until April 15, 2000, to assess a tax deficiency against you.

If you filed your return late, the IRS would have three years from the date you filed the return to assess a deficiency. The caveat to the three-year rule is that the assessment period is extended to six years if more than 25 percent of gross income is omitted from a return. In addition, the assessment period does not begin to run until a return is filed. Therefore, if the IRS claims that you never filed a return for a particular year, it can assess taxes for that year at any time, even beyond three to six years, unless you can prove that you filed.

Additionally, records that relate to any property may have to be kept even longer than other tax records. Keep in mind that the tax consequences of a transaction that occurs in one year may depend on what took place in earlier years. You should retain records that are measured from the year that the tax consequences actually occur.

The bottom line is this: to avoid paying more taxes than you need to, it is essential that you plan your tax strategy. Seek the advice and ongoing assistance of a certified public accountant who is a tax specialist. You may be amazed with the money you can save with proper planning and sound advice.

Anna Fink, CPA is a partner in the firm Ellis & Associates, CPAs, P.A. based in Baltimore.