Tax Tips for Small Business Owners

Overlooking key tax-reduction opportunities can cost you money.

It’s tax season again, and nobody wants to shell out more than their fair share to the government or miss an opportunity to boost the amount of their return. Unfortunately, many small business owners fail to take advantage of provisions that could result in substantial tax savings.

“For tax purposes, businesses under $500 million are normally considered small businesses and thus tax deductions can be quite substantial,” says Steve Hurok, tax director at BDO Seidman, LLP. “Yet there are still many small business owners who are not aware of the deductions and incentives they are eligible for that can make a significant difference in their financials.”

Indeed the rules of the game are constantly changing from one year to the next. With nearly 1 million tax provisions, it’s difficult for even the most astute business owner to stay apprised of all of the Internal Revenue Service’s deductions and credits.

Here’s an examination of many new, improved and often-overlooked deductions and credits that are applicable to small business owners. Even if you aren’t able to take advantage of each one, it’s important to adopt the same strategy used by large corporations by strategically planning ahead and initiating actions to obtain the greatest tax efficiency.

Domestic production activities deduction
“The largest missed deduction by small businesses is the domestic production activities deduction (Section 199),” says Kira Brucker, CPA, Nazelrod & Associates, a Baltimore, MD-based financial services firm. This deduction applies to businesses engaged in construction, engineering, or architectural services; film production; or the lease, rental, or sale of equipment manufactured in the United States.

“This deduction includes extensive calculations, so many taxpayers are afraid to take it because it seems too complicated,” says Brucker. “It’s quite a loss because the tax savings can be significant.” In 2007, the deduction increased from 3 percent to 6 percent of qualifying business net income from domestic production activities, which can translate into substantial savings. Brucker points to one client, a software development company, that’s able to take about a $10,000 deduction in 2007, which saves the owner over $3,500 in actual tax dollars. “Even if you failed to take the deduction in previous years, it may be worth amending the return to claim this deduction.”

The alternative simplified credit
According to the SBA, U.S. small businesses produce 13 times more patents per employee than large firms. The “alternative simplified credit” was added to the mix of available research and development tax credits starting in 2007 to encourage businesses to increase the amount they spend on research and experimental activities. “The new credit may be the best option for start-ups because it can be figured without reference to a base amount and it’s not limited by gross receipts,” says Hurok.

Going green may mean saving green
Numerous business tax credits have been implemented for buying hybrid vehicles, and for improving the energy efficiency of commercial buildings. Hurok suggests checking out your local state comptroller website or speaking to your accountant to determine which state tax incentives may be available for your business.

Children as employees
If you hired your teen children it was probably a wise business decision. You can get a healthy deduction for their salary. Because children are typically in a low tax bracket, Hurok suggests having them put up to $4,000 in a ROTH IRA each year they are employed. This keeps the money in the family and may further reduce your income tax liability.

Increased Section 179 expense deduction
If you bought business equipment, the entire cost paid last year may be deductible. Section 179 of the Internal Revenue Code allows businesses to deduct items that would normally be depreciated over several years to be treated as expenses. This may include most equipment, machinery, vehicles, computers, and furniture. For 2007, the maximum amount of business eligible assets that can be deducted in full is $125,000, and the expensing deduction doesn't begin to phase out until eligible property placed in service during the year exceeds $500,000. “This means that many small businesses will be able to currently deduct most if not all their outlays for the fixed assets,” says Bradford Hall, CPA, managing director of Irvine, CA-based Hall & Company.

BIG FAT CAVEAT

Every business owner’s situation is different. The information that follows is from sources considered reliable, but as always, you must consult your tax advisor to ensure you are taking the correct actions for your circumstances.