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How to Maximize Your After-tax Dollars in 2006
By: William J. Lynott
Posted: December 4, 2006, from the December 2006 issue of Skin Inc. magazine.
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Start searching now for those tax-reducing deductions that you may have missed last year. “Small-business owners often miss out on important tax deductions by waiting until the last minute,” says Paul Rich, CPA at the Siegel Rich division of Rothstein Kass in Roseland, New Jersey. “Among the tax benefits that are easy to overlook are tax credits on both federal and state tax returns. For example, a federal tax credit now can be claimed by eligible small businesses for pension plan start-up costs. This credit is designed to encourage businesses with fewer than 100 employees to establish and maintain retirement savings accounts for their employees. The credit equals 50% of the start-up costs incurred to create or maintain a new retirement plan.”
The pension plan tax credit is limited to $500 in any tax year. You may claim it for qualified costs incurred in each of three years, beginning with the tax year in which your plan becomes effective. You must use IRS Form 8881 to set up a new retirement plan. The procedure is rather complex, so it’s important to consult with your tax adviser before proceeding.
Deductions for travel, meals and entertainment also are among the often-missed tax-relief possibilities. “Most businesspeople do not keep adequate documentation for these expenses,” states Rich. “As a result, they lose out on deductions that could provide significant tax relief.”
Documentation for travel and entertainment expenses incurred during the year should include a description of the business purpose, as well as where and when you traveled or entertained. In the case of entertainment—such as a lunch or dinner, for example—your record should include the name of the person or persons entertained, as well as the nature of the business discussion. You should keep receipts for any travel/entertainment expense that are more than $25.
Put the kids to work. Do you have children? Are you giving them an allowance? By putting your children to work in your spa, you convert their personal allowances into deductible compensation. Wait … it gets better. If your kids are 18 years of age or younger and work for your unincorporated business, you don’t have to pay any Social Security or Medicare taxes on their earnings. “You can pay them $4,000 and then make Roth IRA contributions for them in the same amount,” explains CPA Robert S. Seltzer, of Beverly Hills, California. Because you are giving the children an allowance anyway, putting them to work in your business to perform even the simplest of chores allows Uncle Sam to help fund that expense.
Will you use your car for business this year? Whether you use your car for business regularly or only on rare occasions, you are entitled to deduct the costs of maintenance and operation when it is used for work-related purposes. There are two ways to calculate your auto expense deduction—either actual expenses or the standard mileage rate. Katz advises that you or your accountant figure out your auto deduction both ways, and then utilize the method that gives you the largest break.
When you calculate your deduction using actual expenses, you may include the business portion of all car-operating expenses, including depreciation, gas and oil, insurance, licenses, parking and registration fees, repairs, tires, tolls, and even garage rent. If you decide to use the easier standard mileage rate, keep in mind that the 2006 deduction was a flat 44.5 cents per business mile—the highest ever.
Combine pleasure trips with a bit of business. If you are planning any pleasure trips before the end of the year, consider the possibility of adding in some business. Can you visit a spa owner during your vacation to discuss management techniques? Any activity involving an attempt to improve your business skills should qualify for a partial deduction of your travel expenses.
If more than half of your time is devoted to business, you may deduct transportation costs, as well as all directly business-related expenses. However, if more than 50% of your time will be spent on pleasure, you cannot deduct the cost of transportation. If the trip is entirely for work-related purposes, such as attendance at a convention, all expenses may be chalked up to business.
Will you make charitable contributions in 2006? If you plan to make charitable contributions this year, consider donating long-term appreciated securities instead of cash. That way, you’ll receive a full fair market value deduction and pay no capital gains tax on the securities. Or sell depreciated securities for the tax loss, and give the cash to charity.