Gaizer.com Tips for Business Start-ups

Managing all of the different aspects of your small business is a complicated and challenging task, and taxes are particularly difficult. An accounting professional can provide you with advice on what type of business entity you should form and what accounting software is best for your business. An account will also help you with your employer taxes and other tax issues. An accountant is an important partner in your business.  The following is for informational purposes only and is a compilation of information from different sources.

Business Start-Up Expenses

The capital you spend going into business—such as leasehold improvements, furniture, or office equipment—are considered “capital expenditures” and will be deducted over the first five-year period. The operating expenses are deducted as current business expenses. A way around this rule is if you expect to make an immediate profit; then you can delay payment of some bills until you are actually “in” business, or doing a small amount of business. If you expect to suffer losses during the first couple of years of operation, which is the case with most businesses, it may make sense to opt for the deduction over five years.

Tip: If you work full-time and have a business on the side, note that the IRS does not allow “hobby losses.” For example, if you have a coin business, you may not deduct a loss if you did not intend to make a profit.

Taxes

• Federal income tax paid on business income is not deductible. However, you can deduct state taxes from your federal return, but only as an itemized deduction.
• Sales tax is deductible as part of the cost of the items purchased during the course of doing business. The sales tax must be added to the cost basis of big-ticket items such as a vehicle. Furthermore, you cannot fully deduct the sales tax for the vehicle in the first year.
• Real estate tax is deductible, including assessments for repair and maintenance. If the assessment is for improvement, then it must be deducted for a set period of years.
• If you have a business that pays employment taxes, the share of the employer is deductible as a business expense. It does not apply to you if you are self-employed.
• Fuel and excise taxes are deductible business expenses.

Advertising and Promotion

The cost of advertising is deductible as a current expense; this may include everything from television, print, and radio ads to business cards and brochures. Promotions to foment business goodwill, such as sponsoring an event, are also deductible, but you will have to demonstrate how the event is directly connected to your business, perhaps by displaying advertising banners at the event.

New Equipment

You may be able to write off the full cost of new equipment during the current year, but more than likely you will have to capitalize it over a set number of years. This will depend on the value of the equipment when you purchase it as well as its period of use.

Note: The IRS is not particularly concerned with small personal expenses written off as a business expense. However, if you decide to deduct a home theater system or other questionable purchase, an auditor may realize what you are doing and reject the deduction while adding a penalty.

Lawyers, Accountants and Other Professionals

Any professional service for current benefit is deductible during the current year. If the work done for the project is for future years, then the deduction must be spread over the duration of the project.

Education Expenses

Education expenses are deductible if it is intended to improve or sustain the knowledge necessary to work on your business, or occupation, or if it is a legal requirement.

Moving Expenses

These expenses are deductible if you move for business reasons, and your new location is at least 50 miles apart from your current one.

TIP: If you are operating a home-based business, make sure that you maintain a separate space in the house for your business. The IRS only allows deductions for these expenses proportional to the space used. For example, if you have a 2000 square-foot space and you are using 1000 square feet for your office, you can only claim up to 50% of your total housing costs for a deduction.

Auto Expenses

There are two ways to deduct your auto expenses. You can use the “standard mileage” method or the “actual expense” method. The standard mileage method allows you to deduct 44.5 ¢ per mile (according to 2006 standards) and all parking fees and tolls, provided they are business related. The actual expense method allows you to claim the money you spent for repairs, gas, and depreciation. For a newer car, this may provide a larger deduction than the standard mileage method. If you use the car for both business and home use, then you need to multiply the expenses by the percentage used for business.

Tip: When filing returns like this one, remember that your lifestyle needs to match your tax return. If you are living like sultan and declaring income like a pauper, you open yourself up to an audit.

Insurance Premiums

If you are self-employed, the cost of your insurance is deductible. There are limitations, however. You cannot claim deductions that exceed your business net profit. Also, it is not offered to you if you were qualified to another medical plan. For example, if you are covered under a plan offered by your spouse’s employer you cannot claim a deduction.

Retirement

If you are self-employed and contributing to a retirement plan such as a SEP-IRA or a Keogh, you can deduct those expenses from your personal income.

Tip: When filing returns, show all documented information, names, and identification numbers exactly as they appear on government records. If any of the information does not match government records in the Social Security or IRS database, your paperwork will be sent to an error file. This can cause an assortment of other problems for your business

Travel

You can deduct the cost of travel as long as it is business related. This includes meals, accommodations, plane fare, and other expenses. If your trip involves both business and pleasure, it is still okay to deduct travel expenses as long as business was the primary reason for the trip. Keep all your receipts, particularly if you are in a cash-business, as an auditor would suspect you of diverting funds to your own pocket without declaring them on your returns. Also, document all your travel and entertainment expenses because, if audited, you will have to provide plausible explanations.

Business Entertainment

You can deduct 50% of the expenses incurred entertaining your clients; the only exception, where you can deduct 100% of the cost, is if you pay for a social event for your employees and their families.

Bad Debt Charges

As a rule, if you sell goods you can deduct the cost of these goods if you did not receive payment for them. It may seem unfair, but if your business provides services rather than goods, you will not be able to claim a deduction for a delinquent or deadbeat client. The rationale is that a service provider would be able to inflate bills and claim this deduction later.

Interest

Interest and carrying charges on loans, credit cards, or other forms of financing are deductible for business debt.

Software

Software must be depreciated over a 36-month period. You may be eligible to deduct the whole amount during the current year if you meet certain guidelines.

Tip: You can avoid raising red flags with the IRS when you spend a large or disproportionate amount for one item or service by breaking down the total into smaller components and providing good descriptions for each part.

Charitable Contributions

If you own an LLC, partnership, or S corporation, you can make a contribution from the company and pass on the deduction to your personal income taxes. Your company will claim the contribution if it is a C-corporation.

Note: If you have old equipment that is not fully depreciated, you can donate it and claim a tax benefit.