Michael Goldman & Associates, L.L.C. - Consulting
& CPA Services
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How to get more tax deductions
The best tax shelter in America is a business of your
own. Owning a business allows you to legitimately convert many of your
personal expenses into tax deductions. The
least complicated way to do this is to have your own business and file Schedule
C along with your individual tax return. You
do not need to set up a corporation, partnership, or LLC to operate your own
business; you may establish multiple businesses for different purposes; and you
may have other employment while you are operating your business. To be deductible, your business expenses must be ordinary
and necessary (reasonable) for similar type businesses, paid or incurred during
the taxable year, and connected with the conduct of the trade or business.
You must have a profit motive involved, but do not necessarily need a
profit to make your business expenses deductible.
Look at every dollar you spend - if it can enhance your profitability in
any way, it is probably deductible. Deductions for business expenses are more valuable than
itemized deductions, because they are “above the line”.
This means that they are a part of the calculation of Adjusted Gross
Income, a critical number on your tax return. The government uses Adjusted
Gross Income to set thresholds for limiting many of the tax reduction
strategies available to individuals. Schedule
C deductions are not subject to all the limitations or phase-outs that your
itemized deductions are. Potential deductions for your business include automobile
expenses, depreciation on equipment such as cars and computers that are used in
your business, bad debts, travel and entertainment costs, gifts, education,
lease payments for business assets (computers, furniture, equipment, etc.),
advertising, commissions and business fees, interest, legal and professional
services (including professional tax preparation), supplies, telephone, Internet
service, postage, subscriptions, charity, auto and liability insurance, and
certain taxes paid. Membership dues may or may not be deductable, depending on
your circumstances. Your business is allowed to hire family members for tax
shifting and other strategies. Careful
planning can reap major benefits. For
example, as long as the primary purpose of a trip is business, you can deduct
travel expenses to and from the business destination no matter what else you do
on that trip. If a family member is
a bona fide employee of your business and travels with you for a bona fide
business purpose, their cost is also deductible. The most significant conversion of personal expense into
deductible expense occurs when you use your home for your business.
If you regularly use one or more rooms in your exclusively as your
principle place of business, as a place to meet with clients or customers in the
normal course of your business, or to store business goods, it may qualify for a
home office deduction. Note that
these criteria need only be satisfied for one of your businesses, not all of
them. Potential deductions include
a portion of your repairs and improvements, real estate tax, mortgage interest,
rent, phone, casualty losses, utilities, services (trash removal, cleaning
services, pesticide, etc.), insurance, security systems, and depreciation. Self-employed individuals are eligible for a broad array of
retirement plans such as KEOGHs, SEPs, and IRAs that may be used to generate
additional tax savings and benefits. Depending on the types of plans involved,
these may be available even if you have a plan at a job you currently hold. Special rules apply to other potentially deductible items
such as your personal health insurance, capital assets, and business start-up
costs. Other potential traps to be
wary of are self-employment taxes, proper classification of workers as employees
or independent contractors, passive loss rules, and estimated quarterly tax
payments. © Michael Goldman 2001 For more information, please go to www.michaelgoldman.com Editorial material in these newsletters is intended to be informative, and should not be construed as advice. For advice on any specific matter, please consult your financial or legal adviser.
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