Sometimes what you don’t know can hurt you, at least when it comes to tax time.
As an experienced business owner or operator, it’s assumed that you’re working with a competent tax professional (and if you’re not, get on the phone and find one…now!).
But if your tax expert isn’t in the loop regarding every important investment, expenditure and purchase your business has made over the past year – or that you’re considering for the coming year – he or she can’t advise you as to how to maximize the tax benefits of those decisions.
Make sure you communicate with your tax pro year-round, to take advantage of tax code changes that can benefit your company. And as you’re planning your current return and your strategies for the coming year, take note of these notable business tax deductions.
Section 179 Deduction. This is a truly valuable opportunity for small businesses that have made, or that are considering, significant equipment or software purchases.
In a nutshell, Section 179 of the Internal Revenue Code allows your business to deduct the full price, up to $500,000, of qualifying equipment purchased or financed during the tax year. So if your business purchases new machinery for $80,000, for example, the entire amount can be deducted from your company’s gross income.
Historically, investments in equipment could be deducted through depreciation calculations over a number of years. Then, Congress passed Section 179 with the goal of increasing the amount of total investment made by small businesses.
Tip: Even if your company is leasing rather than purchasing equipment, you can still take full advantage of the Section 179 deduction. See your tax advisor for details.
Bad Business Debt Deduction. If a client has left you holding the bag, due to his going out of business, cash flow problems, or other reasons beyond his or your control, you can claim a deduction for the bad debt.
The IRS allows you to deduct unpaid receivables, as long as the income was expected to be received in the current tax year, or a previous one.
Tip: It is not always necessary for your company to sue for the bad business debt and prove it was uncollectable in order to qualify for the deduction. Evidence that legal action would likely be unsuccessful is normally sufficient.
Business Use of a Car or Truck. Most small businesses are actually pretty good with at this one, but it can’t hurt to review. To keep recordkeeping simple, you can use a standard mileage rate to value an employee’s personal use of a business-provided vehicle. That’s 55 ½ cents per mile for 2012.
Using a standard mileage rate means you don’t need to document actual amounts spent on fuel, normal maintenance, etc., but make sure you keep track of data like dates used, miles driven, and purpose of the various trips.
Contributions to Qualified Retirement Plans. Even though the 2012 tax year is finished, a contribution to your retirement plan can reduce your tax liability. If the plan was established by December 31, you have until the due date of your return (April 15th,or later, if you file for an extension) to make a contribution.
If you haven’t already established a plan, you have until your tax due date to set up a Simplified Employee Pension plan, or SEP IRA. Contributions are deductible, and limits for the 2012 tax year are $50,000, or 25% of compensation, whichever is less.
Let MP Star Financial help you manage your cash flow more effectively. Call for more information. (800) 833-3765, extension 150.