smbuals l iness
ness, think about including a pleasure portion. If
more than half of your time is devoted to business,
you may deduct transportation costs (plane, car
rental, gas) and any business-related costs (meals
for entertaining clients). The point is to take advantage of all potential deductions.
Employ your kids. You can put your children to
work, pay them $4,850 apiece and reduce taxable
income by that amount. They pay no taxes because
Getting the most their income is below the single exemption allowance.
Furthermore, if the children are under 18 and your
from your after-tax dollars business isn’t incorporated, you don’t have to pay
Social Security or Medicare taxes on their salaries.
By Howard Scott
SAVVY BUSINESS OWNERS know that “after-tax”
dollars—those that are left after expenses and taxes
are deducted from revenue—pack more punch
than pretax dollars. They understand that maximizing after-tax dollars means taking advantage of
every tax-reducing strategy. And that means doing
some advance planning.
What’s new for
Vehicle mileage is up
from 37. 5 cents per mile
to 40. 5 cents per mile
from January 1 to August
31, and 48. 5 cents per
mile from September 1 to
The health insurance
deduction for self-employed
individuals is up to 100
percent from 70 percent
IRAs are up from $3,000
(plus $500 catch-up for
those over 50) to $4,000
(plus $500 catch-up for
those over 50).
A new 401(k) Roth is
available to small-business
owners. Take $14,000
(plus $4,000 catch-up for
those over 50) out of profit
and put it into a Roth.
Seek out other expenses. Have you bought any
business books this year? Do magazine subscriptions
help you communicate with clients? Have you taken
any courses that influence your management style?
Do you pay association and professional organization
fees that enlarge your customer base? Do you use the
Internet at home for business? Have you made any
business donations? Is your cell phone primarily for
work? Do you give gifts to clients? (Gifts that cost less
than $25 are deductible.) Do you incur personal
grooming expenses because image is important?
Even if you have hired an accountant, he or she
doesn’t understand your business as you do. Also, the
accountant might be conservative, which often
translates into a reluctance to implement new strategies. Therefore, it’s up to you to know your options.
Set up a home office. What used to be a red flag
for the IRS is fast becoming a common practice.
This change is in part due to the trend of workers
doing more work at home as well as the 2001
revamped definition of home office.
Here are several aggressive strategies to consider.
Claim the full Section 179. Depreciation is a
write-off of capital purchases over the life of the
equipment. Generally, depreciation is written off in
five or seven years, depending on the item. However,
Section 179 allows you to write off $105,000 of capital purchases every year.
Buy a $10,000 machine and take the full
$10,000 in expenses, instead of just $2,000. Sure,
you will lose the $2,000 deductions for the next four
years, but who knows what next year might bring?
The old rule said a home office had to be a principal place of business, and there was no other place
to do the work. The new rule says that if you do significant administrative work regularly and exclusively at a designated space in your house, even
though you have an office at your workplace, then
your home office is your principal place of business
and you can take a home office deduction.
Maximize your tax-deferred retirement.
How much? If you use 15 percent of your
house’s square footage, you can deduct 15 percent of
mortgage interest, property taxes, insurance, repairs,
maintenance and depreciation.
These days there are many options—traditional
IRA, Roth IRA, SEP, SIMPLE, Keogh and 401(k)s
for sole proprietorships or partnerships—to choose
from. While an IRA allows a maximum deduction
of $4,000 this year (plus $500 catch-up if you’re over
50), the SEP allows you to save 25 percent of profits,
up to $42,000. Putting 25 percent of profits into a
SEP is like increasing after-tax dollars by 33 percent. The Costco Connection
Plan to maximize your after-tax dollars now. C
Howard Scott is a longtime writer and tax preparer
specializing in small businesses. He has published
more than 1,700 magazine articles and three books.
Combine pleasure with business travel. If Costco offers two software programs from Intuit to help you file taxes: Turbo Tax
you do any vacation traveling, consider including a Deluxe and Turbo Tax Premier. New features this year include the “It’s Deductible”
portion for business. Also, if you go away for busi- program and a state income tax option.