“April is the Cruelest Month”
By Ronald I. Paltrowitz, Esq.
For small business owners who have just enjoyed the annual ritual of filing tax returns (and, perhaps, even having to pay some taxes), this may not be in the best time to discuss tax deductions. On the other hand, now may be the best time to begin your preparation for next year’s ritual. With this in mind, I would like to discuss a number of potential income reducing possibilities that many small business owners do not use to their fullest advantage.
Most business owners are aware that that they may take a deduction for the business use of their automobile. The easiest way to do this is to take the standard deduction. However, actually keeping track of mileage, parking fees and tolls for business use very often results in higher deductions. And don’t forget, you may also deduct a portion of your expenses for repairs, insurance, maintenance and depreciation.
Keep careful records of your expenditures for supplies and other purchases of furniture and/or equipment used in your business. The cost of these items may either be deducted in full or depreciated over time. Your accountant will know which choice is better.
Speaking of accountants, don’t forget that professional expenses are also deductible. But, be sure to differentiate startup expenses, which you may need to amortize, from expenses that you may fully deduct in the year incurred. If you wish to deduct the expenses you incurred to start your business, make sure that you make a thought out decision as to whether you wish to deduct these expenses all at once or amortize them over time. If you wish to amortize, you must attach your election to your tax return.
Many small business owners are afraid to deduct the costs associated with a legitimate home office. Don’t be. Just be sure that your home office is used exclusively for business. If it is, you can deduct a portion of rent or mortgage interest, insurance, taxes, utilities, and maintenance. You may also deduct any telephone or internet expenses that are attributable to your business.
Interest on business loans is deductible but not the repayment of principal. Make sure that any loans from family and friends are properly documented in writing with appropriate rates of interest and repayment provisions. Otherwise, they may be deemed to be gifts. Similarly, the premiums for your business, errors and omissions, and similar insurance policies are also deductible.
Unfortunately, many small business owners have clients or customers that don’t pay their bills. However, in order to deduct the amount of a bad debt, your business must be an accrual basis taxpayer and have already paid taxes on the amount of the bad debt in a prior year. Otherwise, the amount of the bad debt is not deductible.
If you would like to take deductions for entertainment and/or travel expenses, you’d best keep very accurate records of who you entertained or where you travelled and why. And don’t forget, only 50 percent of meals and entertainment costs are deductible.
And, finally, while getting a refund may seem like pennies from heaven, remember that you are only getting back your own money and that you have lent this money to the federal and, perhaps, state and local governments, interest free.
Over the years, I have been continuously amazed by the large number of smaller business owners who do not have line items in their yearly budgets for competent professional guidance from accountants, lawyers, and other experts whose expert advice could and would be of enormous help in successfully growing their businesses. Absent such advice, the other eleven months may be cruel, as well.
© 2011 Ronald I. Paltrowitz, Esq. Ronald I. Paltrowitz, acting as an outsourced general counsel for his clients, provides legal and business counseling to entrepreneurs and closely held enterprises in the areas of corporate and business law, real estate, intellectual property, and commercial litigation and arbitration. Mr. Paltrowitz is also Vice-President and General Counsel of the Manhattan Chamber of Commerce. This column is for your general information only and does not substitute for legal or accounting advice regarding your specific situation.