Most tax professionals advise their clients who own small businesses that they are much more likely to be audited by the Internal Revenue Service than anyone who is employed by another company. However, did you know that the figure actually is three times as likely?
With this in mind, it's time to take a refreshing look at the deductions small business owners can take--many of which they are not familiar with, and many, in fact, that tax preparers forgot about.
- Capital equipment: owners are encouraged to purchase as much equipment as they need up to the $20,000 maximum section 179 write-off. The maximum amount increases to $24,000 in 2001, so if owners want to wait until January 2001 to purchase equipment, they can get a larger deduction next year.
- Business Mileage: small business owners should watch this area closely to ensure they are keeping within the tax laws. Advise clients that they should keep a mileage log while using their car. In addition, remind them that they can deduct a portion of all interest on car loans, whether the car owner is using the standard mileage allowance or deducting the actual vehicle expenses.
- Medical Accounts: consider setting up accounts for medical and dependent care. Money can be withheld on a pre-tax basis.
- Home Office: the IRS has eased the rules on a home office so that even if the taxpayer spends most of the time out of the home office, the office still qualifies as a deduction as long as the room is used solely for the business and is the primary place where administrative work for the business is performed. A helpful tip, too, in case of audit, is to have the client take a photo of a home office to help illustrate to the IRS that the room was used just for the business.
Last, tax preparers are urged to look for even the smallest, hidden expenses for their clients that are perfectly acceptable deductions. An example would be the expenses incurred for a coffee pot, coffee and cream/sugar, if the taxpayer is a coffee drinker and uses the equipment in the business office.