There's been plenty of good news recently for small business owners and for sole proprietors who file a Schedule C with their tax returns. However, many of the Bush tax cuts are currently slated to expire after a year or two, and so, it's crucial for entrepreneurs to consult with their tax professionals to leverage the tax breaks for 2004 and subsequent years while they still apply. There are many ways small business owners trip themselves up and miss out on legitimate deductions. Here are a couple of ideas on how to avoid the pitfalls:
Planning
Perhaps the most significant tax break for small businesses in the administration's recent overhaul allows entrepreneurs to claim big upfront deductions for business expenses - the limit on 2004 returns is $102,000.00. The good news is that this tax break, which was due to expire in 2005, has been extended for two more years until 2007 - courtesy of certain provisions contained in the Jobs Creation Act of 2004. The deduction limit will be adjusted for inflation for 2005 and future years. If you are planning any major purchases in the next few years, do it this year or in 2006.
Thorough Record Keeping
It is easy for self-employed people to cheat themselves out of legitimate deductions. Sometimes, the line between business and personal expenses is not clear-cut. This is especially true for entrepreneurs who ask family members - spouse, brother or sister -
for help with specific tasks like drafting a business plan or designing stationery. Just because they are related to you, doesn't mean a family member is not a legitimate business associate. Can you write-off that working lunch drafting new business plans with your brother? Most likely you can. What about your business mileage? What counts as business miles and what doesn't? The key here is to collect receipts as if everything you do is a possible business expense -- have some back-up for everything you spend -- and then get a professional opinion from your tax consultant. Keep detailed records of your income and all your expenses -- business meals, trips made, and the business miles you log-- and retain receipts for everything.
Professional Expertise
Don't be scared to file for legitimate deductions. Share information with your tax professional and give him or her the raw data needed to counsel you. Let your professional tax consultant guide you when it comes to determining what expenses fit the IRS' definition of "ordinary and necessary." Don't shortchange yourself by assuming the worst - keep receipts and explanatory notes, and let your tax consultant make the call. Think of it like this... it is the IRS' job to intimidate, and its your tax consultant's role to be undaunted by it, and to help you get every tax advantage you have earned.
