All too often, when business owners begin discussing tax planning, what they really end up referring to is the process of tax compliance. Tax compliance is the process of reporting your income to the Internal Revenue Service and, hopefully, accurately ensuring that your tax preparer takes advantage of all the deductions and credits you are entitled to.
“The effects of good tax planning can obviously be forgone without proper reporting and compliance,” says Craig Koop, director of implementation with International Profit Associates of Buffalo Grove, Ill. “It is extremely important to make sure that you are working with a competent tax professional on your tax preparation. It is his or her specialty to make sure that you take advantage of all that the tax code affords you as a taxpayer, and it’s is often well worth the additional investment in time and money to work with a competent tax preparer who has a good grasp of your business.”
Smart Business asked Koop to discuss some well known and little-known factors involved in planning your taxes.
What are some common pitfalls?
There are carryover items such as charitable contributions, capital losses and net operating losses that are being carried forward from a prior year.
Also, beware of disallowed Roth IRA contributions. If you are planning to contribute to a Roth IRA, make sure you are below the income limitations for such contributions.
What if there is a recent change in marital status?
If you are recently married or divorced, you should make sure that the name on your tax return matches the name registered with the Social Security Administration (SSA). Any mismatch can cause significant delays and inadvertently affect the size of your tax bill or refund amount. Marital status as of Dec. 31 will also control whether you file as single, married or head of household.
What about start-up expenses?
The expenses a business owner incurs before he opens his doors for business can be capitalized and written-off by the owner over a five-year period. Due to a change in the tax law in 2004, up to $5,000 of start-up expenditures can now be currently deducted.
Are auto expenses deductible?
If you use your car for business, or your business owns the vehicle, you can deduct a portion of the expenses related to driving and maintaining it. Essentially, you may either deduct the actual amount of business-related expenses, or you can deduct 44.5 cents per mile driven for business for 2006.
When is education considered a business expense?
The expense is deductible, as long as the education is related to your current business, trade or occupation, and the expense is incurred to maintain or improve your skills in your present employment, or is required by your employer, or is a legal requirement of your job. The cost of education to qualify you for a new job, however, is not deductible.
What are the rules associated with business entertainment expenses?
If you pick up the tab for entertaining current or prospective customers, 50 percent of the expense is deductible against your business income provided the expense is either ‘directly related’ to the business and business is discussed at the entertainment event, or the expense is ‘associated with’ the business, meaning the entertainment takes place immediately before or after the business discussion.
Can new equipment be depreciated?
The normal tax treatment associated with the cost of new assets is that the cost should be capitalized and written-off over the life of the asset. For new asset purchases, however, Section 179 of the Internal Revenue Code allows taxpayers the option in the year of purchase to write-off up to $108,000 in 2006.
Can software be deducted?
Software purchased in connection with your business must be amortized over a 36-month period. If the software has a useful life of less than one year, however, it may be fully deducted in the year of purchase.
The effects of good tax planning can obviously be forgone without proper reporting and compliance. It is extremely important to make sure that you are working with a competent tax professional on your tax preparation. He or she can make sure that you take advantage of all that the tax code affords you as a taxpayer, so it is often well worth the additional investment in time and money to work with a competent tax preparer who has a good grasp of your business.
CRAIG KOOP is the director of implementation with International Profit Associates of Buffalo Grove, Ill. IPA’s 1,800 employees offer consulting services to businesses throughout the 50 United States and Canada. Reach Koop at (847) 808-5590, [email protected] or www.ipa-iba.com.