Administrative Tips

Throughout your business operation, events will occur that significantly affect your business. There are a variety of strategies you can use to conquer your tax burden and increase your business profitability including:

• File all payroll tax documents on time. Payroll documents include Form 941 and Form 940.
• Learn and use all applicable IRS procedures, forms, filing, and payment guidelines regarding payroll. As a business owner, you are required to prepare and file certain mandatory IRS tax forms, as well as numerous state and local government forms and documents. Some of these forms may include:
• Form SS-4 (Federal). Otherwise known as the Employer Identification Number (EIN) application, you need this form to obtain the number for your business. The form includes asking for the type of business you are operating, your address, form of business organization (corporation, partnership, etc.), and other information. The EIN is the number you will use while filing your business returns. Individuals have Social Security numbers (sole proprietors) while all other business entities have EINs.
• Form 941. Whenever you have employees, you are required to file quarterly payroll returns with the IRS. This form summarizes the total amount of dollars your business withheld from your employees’ pay. It also includes the employer matching portion.
• Form 940. File this form reporting federal unemployment taxes due.
• Federal income tax returns. Filed annually, at the end of the taxable year, these forms might include a Schedule C (if your business is a sole proprietorship) attached to your 1040 tax form. Or, if you operate a partnership, Form 1065 will be used as your tax return. Corporations use Form 1120-C. Have these blank forms on hand so you will not be scrambling at tax preparation time.

The best way for you to support any tax deduction for your business and to comply with any IRS requests for information is to properly document everything. Maintain a full and accurate documentation for every tax deduction your business takes. This increases the chances for you successfully justifying the business tax deduction in question. Here are some helpful tips to follow:

• The burden of proof is on you, no one else. Be prepared to make your case.
• Keep your records current.
• Stay organized.
• Obtain and use a business credit card or use a personal card exclusively for business use
• Keep your financial records for seven years to enable you to prove any business tax deduction to which you are entitled

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Calculation of Home Office Usage Expenses

Most expenses related to the business use of your home are limited to the percentage of your home used for business. To find the business percentage, compare the size of the part of your home that you use for the business to your whole house.You can use any reasonable method to determine the business percentage. Two of the more commonly used methods are known as the area method and the number of rooms method.

For the area method: divide the area used for business by the total area of your home. As an example: Say your office is 240 square feet. Your home is 1200 square feet. 240 divided by 1200 equals 20%. Hence, your business percentage is 20%.

For the number of rooms method: divide the number of rooms used for business by the total number of rooms in your home. You can use this method if the rooms in your home are all about the same size. As an example: An artist uses one room as her art studio. Her house has 10 rooms, all about the same size. She is allowed to take a deduction for the business use of her home. Her business usage is 10%.

Now let's look at the types of expenses. There are a few types of expenses related to using your home for business.

1. Direct expenses. Direct expenses are also known as business expenses related to the business activity in the home, but not to the use of the home itself, are deductible in full on schedule C. In other words, they are 100% deductible. Examples of some of these direct business expenses include: Advertising, business taxes, car and truck expenses, salaries, supplies, professional services (accounting, attorney, consultant), office expenses, entertainment, real estate, retirement plan contributions, marketing, business insurance, payroll taxes, equipment, furniture & fixtures, bank service charges, utilities, telephone, postage, freight, printing, repairs and maintenance, and travel.
2. Indirect expenses. If you qualify to claim business use of the home expenses, you can use the business part of these expenses to figure your business use of the home deduction.Examples of indirect expenses include home mortgage interest and real property taxes on your home, homeowners insurance, general home repair. These may be subject to the deduction limit. A good example is painting or repairs only in the area used for business. It is important to note that expenses from the parts of your home not used for business are not deductible. Examples of these expenses include lawn care and painting a room not used for business.
3. Deduction Limits : If your gross income from the business, operated or managed from your home equals or exceeds your total business expenses you can deduct all your business expenses. You can deduct only as much as your business income. The overall home deduction cannot be greater than the profit generated by your home-based business. These expenses are limited to the gross income from the business use of your home minus the following, ordinary and necessary business expenses, and the business part of your mortgage interest, real estate taxes and casualty losses.

You must keep records that provide the information needed to figure your deductions for the business use of your home. Keep all cancelled checks, receipts, invoices, and other evidence of expenses for the deductions you claim.

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Expenses For Small Business Ownership

Travel and vacations can qualify in whole or in part as deductible business expenses. Make your equipment, furniture, and fixtures tax deductible. You can do this by doing the following:

1. Convert personal assets into business deductions by using them in your business.
2. Purchase and place into service equipment, furniture, and/or fixtures to make them tax deductible during the current tax year.
3. Expense purchases of smaller dollar amounts. For instance, purchase a chair for $75. If your expense policy states that all purchases under $100 are to be expensed, there you have it. The asset is expensed and does not show up as an asset on the books. This both saves taxes and decreases the bottom line.
4. Take advantage of the special 50 percent bonus depreciation allowance. This is for new property acquired and placed into service after May 2003.

You can use employee stock ownership plans to avoid paying taxes. When you turn over 100 percent of the company’s stock to an ESOP (Employee Stock Option Plan), the ESOP pays no taxes on the company’s profits. You will own less of the company, however.

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Fringe Benefits

Fringe benefits are generally defined as items a business provides owners and employees beyond their wages and bonuses. Fringe benefits help business owners save taxes. The benefit may be any of the following:

Totally tax-free to the recipient. Tax-free fringe benefits are popular since you do not add to your taxable income when you take a the benefit. You get something of value without paying any tax on it. For example, if an employer provides medical insurance, the employees pay no tax on the value of the coverage. In order for a fringe benefit to be totally tax-free it must meet all of the following requirements:

• The tax code must specifically exclude it. Otherwise, it will be taxable.
• It may have to be in writing. An unwritten policy probably will not satisfy the tax law. Certain types of fringes-such as 401(k) plans-must be set out in a document that conforms with tax law rules.
• It must have an indefinite life. A benefit plan cannot expire next year, or for most any other reason.

Partly tax-free to the recipient. If an employee uses a company-provided car partially for personal use, some of the value of the car may be included in the employee’s income. Travel and lodging are examples of partly tax-free to the recipient. When you travel for business, your business can deduct your lodging costs (if the trip was for primarily for business purposes). Your business can deduct only half of your travel meal costs, though. It is presumed you would have paid for meals if you had stayed home instead of traveled (not deductible).

Tax-deferred (not taxed until a later date). In this case, an employee receives an option to buy company stock at a below-market price. No tax may be due until the stock is sold.

Fully taxable to the recipient in the year provided. Here, the value of a group disability insurance policy may be taxable to the recipient. However, such benefits may nevertheless be desirable if an owner or employee can get something cheaper than if they had to buy it on their own. Cafeteria Plans are an example of a fully taxable benefit to the employee. A business may offer employees an option of taking cash instead of fringe benefits through a “cafeteria” (or flexible benefit) plan. If the employee accepts cash instead of applying it to a qualifying fringe benefit (such as group term life insurance, health, accident and disability, and/or dependent care assistance), the cash is table income to the employee.

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Home Office Deductions

Many small business owners maintain a home office. A home-based office can help ease the tax burden (and provide tax savings) of home ownership. You may qualify for a home office tax deduction if certain criteria are met:

• Your form of business organization must be anything but corporate in nature. Hence, sole proprietors, LLC, limited partnership, and a partnership all qualify for a home office.
• You must use a separate area of your home (or a separate unattached structure) only for your business. This area can be a room or other separately identifiable space. The space, however, does not need to be marked off by a permanent partition. You must use a specific area of your home for business on a continuing basis.
• The business section of the home must be the principal place of business. You must use it exclusively and regularly for administrative or management activities of your trade or business. Administrative activities include billing customers, record keeping, ordering supplies, setting appointments, and forwarding orders or writing reports. And, you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

Note that you can have more than one business location, including your home, for a single business. If you do, and your home office does not qualify as your principal place of business based on the previous two conditions, you should determine your principal place of business as follows:

1. Evaluate relative importance of the activities performed at each location.
2. If the relative importance factor does not determine your principal place of business, you can consider the time spent at each location. A place where you meet with patients, clients, or customers in the normal course of your business. To ease IRS worries, keep a log of the clients and customers you meet with at your home-based business. Note the client name, date, and time of each meeting. Save these books for at least three years.

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Tax Free Benefits

There are many tax-free benefits that a small business owner can take to help ease the tax burden. The benefits are paid out of pretax dollars. Since no tax has been paid on these dollars, there are more of the dollars to spend. You get the best of both worlds by benefiting both your family and you while also benefiting your business. Some of the more important tax-free owner benefits are as follows:

Athletic facilities. If the facilities are on property owned or leased by the employer and are used substantially by employees, their spouses, and dependent children – the fair market value of athletic facilities is tax-free. This includes gyms, swimming pools, golf courses, and tennis courts. In order to qualify for tax-free treatment, the facilities must be open to all employees on a nondiscriminatory basis.

Health insurance deduction. If self-employed, health insurance premiums are completely deductible to the individual.

Educational assistance plans. Depending on the year involved, an exclusion amount applies to employer-financed undergraduate courses. The business must adopt a written Educational Assistance Plan (EAP) in order to provide this benefit. An EAP can cover tuition, books and supplies. Direct payments to an institution or reimbursements are tax-free to the employee.

Group term life insurance. Premiums paid by employers are not taxed if the policy coverage is $50,000 or less. This applies to corporations only.

Employer-provided child care expense. A tax credit is not available to employers who provide child care for their employees. The credit equals the sum of 25 percent of the qualified child care expenditures, plus 10 percent of the qualified child care resource and referral expenditures. The maximum annual credit per employer is $150,000 as of 2005.

Adoption benefits. When an employer pays a third party or reimburses an employee for qualified adoption expenses they are generally tax-free up to a limit of $10,160 per adoption.

Child or dependent care plans. When an employer has a written, nondiscriminatory plan for providing or reimbursing day care services, the value of these services is tax-free up to a limit of $5,000 per year. Married filing separately persons has a $2,500 exclusion. Expenses are excludable if they would qualify for the dependent care credit. Employees must report employer-provided benefits on their individual tax return to calculate the tax-free exclusion. However, tax-free benefits reduce eligibility for the dependent care tax credit.

Product and service discounts. If the employer does not incur additional costs in providing the products or services to employees, the discounts on company products and services are tax-free.

Meals provided on site. Meals are 100% deductible to the business and tax-free to the employee is given “for the convenience of the employer”.

Long term care coverage. When a small business has an employer-provided long-term care coverage that pays benefits in the event the employee becomes chronically ill, the employee is not taxed on the benefits.

Health and accident coverage. Contributions or insurance premiums made by the employer to health, hospitalization, or accident plans that cover employees, their spouses, or their dependents are not taxable to the employee.

Gifts and Rewards. Gifts to employees (under $25 per year, per recipient) are nontaxable. This $25 limit applies to all business entities. Hence, the free Thanksgiving turkey for employees is probably tax-free and deductible to the owner.

Achievement Awards. Business can give a “qualified award” of up to $1,600 each year tax-free: gift certificates, watches, etc. The awards have the following stipulations:

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Travel & Trade Shows

To be tax-deductible, the trade show's primary purpose must be business. Travel for political, investment,or social conventions cannot be tax-deducted as a business expense. Be sure to keep a copy of programs and workbooks from trade shows. Also, keep all your receipts from your expenses in case the IRS audits you. You can never document enough.

Use your common sense and your mixed-purpose travel will pass tax muster. For instance, if you are a plumber, an exotic trip to Fiji to learn about pipe insulation just won’t cut it. If, on the other hand, you are an accountant attending the forensic accounting seminar in Las Vegas you're in good shape.

Here are some special tax code rules for business meetings, trade shows, and conventions:

In the United States. If you travel to a trade show within the U.S., your expenses are deductible to the business. As long as you go straight there and come back as soon as the show is over, you will have no problem obtaining the deduction.

In the rest of North America. If your trade show attendance is in Canada, Mexico, Puerto Rico, or most of the Caribbean Islands, travel is tax-free to the recipient. Expenses may be business deductions ONLY if you stay away no longer than a week and spend at least 75% of your time on business. Keep a log of how your time is spent in case an auditor knocks on your door.

Outside North America. Travel outside North America is deductible only if you can prove a valid business necessity for the trip.

On cruise ships. What a nice place for a seminar! The entire cruise is tax-free and 100% deductible if all of the following conditions are met:

• There is a bona fide business-related program on board.
• The majority of the days are spent in program attendance.
• The ship is registered in the U.S.
• The ship stops only at U.S. ports (or U.S. possessions).
• The trip costs less than $2,000.

Other travel-related expenses include: Taxi, commuter bus, and airport limousine, baggage and shipping, car, business portion, cleaning incurred while traveling on business trips, business calls, renting computers, printing, etc.

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Your Car As A Business Expense

Costs associated with the business use of your car are divided between local transportation and overnight travel. The rules are as follows:

Deduct local transportation expenses.

• Visiting clients or customers
• Going to a business meeting away from your regular workplace
• Traveling from one workplace to another within the city or general area that is your tax home
• Traveling from your home to a temporary workplace when you have one or more regular places of work within your tax home. This includes the costs of traveling overnight away from your tax home.

Convert a portion of your car to business use.

The standard mileage rate has depreciation built into it. The actual rate is determined by the IRS. You cannot choose both the standard rate and actual expenses in your calculation. You cannot use the standard mileage rate if you operate two or more cars (for business) at the same time.

The actual costs include:

• Garage rent
• Gas
• Insurance
• Licenses
• Oil
• Parking fees
• Registration fees
• Repairs
• Tires and tolls
• Cost of the car: Recover its cost by deducting depreciation expense, if you own the car.
  If you lease, recover its cost by deducting its monthly lease payments

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