is current as of 10/1/2003
major objective for most people in business is to maximize the
return from their business venture. Cutting your taxes is one
way to help you achieve that goal. The following are federal tax
tips to consider for your business venture.
careful consideration to the legal form of doing business. The
tax and non-tax consequences of the form in which you do business
are significant. You may choose to operate as a sole proprietor,
a partnership, a corporation, an S corporation, a limited liability
company (LLC), or a limited liability partnership (LLP).
professional assistance before making your decision, and review
your chosen business form from time to time to see if it is still
"Section 1244" stock for a new business. If you're starting
a business and choose to operate as a corporation, investigate
the advantages of Section 1244 stock, also known as small business
are requirements that must be met, but if your stock qualifies
and your business later fails, you can deduct annually up to $100,000
of the loss against ordinary income ($50,000 on a single return).
If you sell the stock for a gain, 50% of the gain can be excluded.
you operate in corporate form, keep accurate and thorough minutes
for the corporation. The small effort this requires will
pay off handsomely if the IRS audits you. Minutes should document
transfer of funds or assets into or out of the corporation, officers'
salaries, shareholder dividends, officer and employee benefits,
and related-party transactions that might be scrutinized by the
your basis. If you operate your business as an S corporation,
partnership, LLC, or LLP, be sure that you have a large enough
tax basis to deduct any losses sustained by the company.
your spouse and children to work in your business. Wages
paid will be deductible by your company and taxable to the family
member. Your spouse's wages may provide the basis for making an
IRA contribution. Your child's earnings will probably fall in
a lower tax bracket than yours.
paid has to be reasonable for the services performed.
use the Internal Revenue Service as your broker. When
cash flow is tight, you may be tempted to pay your suppliers first
and payroll taxes to the IRS last. Late payment of payroll taxes
is subject to stiff penalties and interest. Pay the IRS first
and if you absolutely cannot, contact your local IRS office before
they contact you.
subject yourself to tax penalties by misclassifying an employee
as an independent contractor. The IRS is aware that employers
prefer to treat workers as independent contractors to avoid paying
fringe benefits and payroll taxes. If you are not absolutely sure
how to treat a given worker, contact your accountant or local
good records for all business travel, meal and entertainment expenses.
Travel that you do in conjunction with your business
is deductible, but most business-related meal and entertainment
expenses are only 50% deductible.
additional depreciation expense in the first year. New
property purchased after May 5, 2003 and before January 1, 2005
will be allowed a bonus first year depreciation amount of 50%.
The property must have a life of 20 years or less or be qualified
leasehold improvement property. If the new assets were acquired
between January 1, 2003 and May 4, 2003 , the bonus depreciation
amount is 30%.
equipment purchases carefully. If you purchase more than
40% of your equipment in the fourth quarter, mid quarter convention,
as opposed to half-year convention, will apply to all equipment
purchases for the year. The mid quarter convention will reduce
your depreciation deduction in the first year.
up to $100,000 for equipment acquired during the year. This
amount applies to tangible personal property, except business
cars, which is limited to $7,660 if the bonus depreciation is
taken, or $3,060 if the bonus depreciation is not taken. Also,
the $100,000 amount begins phasing out for equipment purchases
over $400,000 and applies to tax years 2003, 2004, and 2005.
repairs separate. Ordinary repairs and maintenance on
business equipment and buildings are deductible business expenses.
Improvements which materially add to the value of the property
or significantly prolong its useful life are capital improvements
and must be depreciated over a period of years.
a tax-free exchange. If you plan to sell a piece of business
property at a gain and replace it with other business property,
consider doing a section 1031 exchange. The current gain will
be deferred until you dispose of the new property.
health insurance premiums. If you're self-employed, you
can deduct, as a business expense, 100% of health insurance premiums
for you and your family.
your inventory at year-end. You are not permitted to
undervalue your inventory or to state a lower inventory than you
have. You are permitted, however, to write inventory down to a
reduced valuation which you can substantiate.
any obsolete inventory items and write them off. Check the rules
for disposing of such inventory.
miss business tax credits that are still available. These
include the small business pension start up cost credit, disabled
access credit, empowerment zone employment credit, alcohol fuel
credit, research and development credit, business energy investment
credit, and the targeted jobs credit.
establishing a retirement plan for your business. Options
include individual retirement accounts (IRAs), defined contribution
plans, or defined benefit plans. Tax advantages are that the employer
contributions are deductible, employee and employer contributions
are not taxed to the employee until distributed, and the money
in the retirement plan grows tax-free. Additionally, recent tax
law changes such as higher contribution limits, catch up rules
for employees aged 50 and over, the small business pension start
up cost credit, and the tax credit of low to moderate income individuals
who contribute to retirement plans offer tax advantages.
overlook an IRA to cut your current taxes and save for your retirement.
Many people still qualify for a fully deductible or partially
deductible IRA contribution. The IRA contribution limit for 2003
and 2004 is $3,000. For tax years 2005-2007 it is $4,000, and
for 2008 it is $5,000
establishing a Roth IRA. A Roth IRA differs from an IRA
in that the contributions are not deductible, but the earnings
grow tax-free making distributions nontaxable.
alternative minimum tax. Alternative minimum tax is a
separate tax calculation. For noncorporate taxpayers it is the
difference between tentative minimum tax and regular tax liabilities.
Prior to year-end, you should evaluate whether you are subject
to alternative minimum tax and take the necessary steps to either
eliminate or minimize the amount.
tax questions and information go to the IRS small business website.
The website address is http://www.irs.gov/smallbiz
material is provided for informational purposes only. It is not
to be construed as providing legal, accounting, or other professional
advice. As always, you should contact your accountant, attorney,
or local IRS office for assistance in identifying and implementing
the best strategies for you.