Three Tax Breaks for Small Businesses

FIRST-YEAR EXPENSING. The Internal Revenue Code authorizes two ways for small businesses to write off of their outlays for such purchases of equipment as computers and file cabinets. One is the "standard" route — recovering the cost through depreciation deductions over a period of years. Or they can opt for the frequently-overlooked tactic of "expensing" and deduct a specified amount of equipment in the year of purchase, assuming that is more advantageous. Let’s say a self-employed person’s equipment purchases include $12,000 for computers, copiers, tape recorders and the like. Instead of depreciating them over five years, they can be immediately expensed under Code Section 179. A $12,000 write-off lowers taxes by $3,600 for an individual in a top federal and state bracket of 30%. In my experience advising small businesses, few need to concern themselves with the cap on the Section 179 deduction. For 2009, it is $250,000. The ceiling is indexed, that is, increased yearly to reflect inflation.  The paperwork for first-year expensing is straightforward. Businesses have to complete Form 4562 (Depreciation and Amortization). Self-employed individuals carry the Form 4562 deduction to, and enter it on, the line for "Depreciation and section 179 expense deduction" on the two-page Schedule C (Profit or Loss From Business), which is where they report receipts, along with equipment costs and other expenses, to arrive at a net profit or loss. Once that has been accomplished, Form 4562 and Schedule C are supposed to accompany Form 1040. PROFIT FROM PAYING YOUR KIDS. Can your children help out with some of the chores connected with your business? Then a savvy way to take care of their allowances or spending money — at the expense of the IRS — is to pay them wages for work they do on behalf of the business. This is a perfectly legal way to keep income in the family, while shifting some out of your higher bracket and into their lower bracket. A child’s standard deduction enables him or her to sidestep taxes on the first $5,700 of earnings for 2009, another one of those amounts that are indexed. The IRS allows this kind of business expense only if your children actually render services and you pay them reasonable wages. Code Section 3121(b)(3)(A) authorizes another break. You sidestep Social Security taxes on the wages you pay your children under the age of 18. To qualify for the exemption, you must operate as a sole proprietorship, meaning the lone owner of a full-time or part-time business that is not formed as a corporation or partnership, or do business as a husband-wife partnership. Put another way: No exemption for a family business that is incorporated or a partnership with a partner other than a spouse.   Another break for business owners is that write-offs for equipment purchases and wages save more than just income taxes. They also reduce self-employment taxes owed for 2009 on the first $106,800 of net (receipts minus expenses) earnings. HEALTH INSURANCE DEDUCTIONS FOR THE SELF-EMPLOYED. Medical expenses usually are allowable only to the extent that they exceed 7.5 percent of adjusted gross income, the figure on the last line of the first page of the 1040 form. But the law allows self-employed individuals to deduct 100 percent of what they spend on medical insurance premiums (including qualifying long-term care coverage) for themselves and their spouses and dependents. This deduction does not reduce self-employment income for purposes of calculating self-employment taxes. 2009-08-17T23:16:02Z

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three-tax-breaks-for-small-businesses

2009-08-18T11:08:58Z

2009-08-18T18:10:26Z

Three tax breaks that are often overlooked by owners of small businesses.

Three Tax Breaks for Small Businesses

2009-08-18T18:10:26Z