Thad Dortmunder is a great father, a good husband and the most successful
entrepreneur in his large family. Unfortunately, Thad is also the king of tax
procrastination.
Although he never misses a client appointment, scheduled conference calls,
meetings with employees or any other important business event, Thad has always
waited until late February or early March before he tackled his taxes. Then he
always had to search all over his messy office, inside his cramped desk drawers
and even in the backseat of his van to find the receipts, mileage logs, bills
and other documents he needed to file his taxes.
But last April, after years of last minute finishes at tax time, Thad finally
saw the light. And although he claims he has never seen a procrastination
method he didn’t like, he vowed this year he’d be different. And already he has
gathered his receipts, pulled his invoices and snagged his mileage logs from
the backseat—and it’s not even Halloween yet.
If you have a Thad in your life or if you’re a Dortmunder yourself, use these
20 tips to get an early start on tax season and catch some great tax savings
with deductions you can still take this year. (For your convenience, we also
offer a handy
PDF of this checklist that you can download and print.)
Business Credit Cards
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If you have a credit card that is used strictly for business, don’t forget to
deduct the annual fee and interest expenses on your taxes.
Business Vehicles
-
Section 179 of the tax code has been changed and that change may allow you to
buy a new SUV for your business. For IRS purposes, a vehicle that weighs more
than 6,000 pounds is considered a truck. Many current SUVs and vans qualify. If
the SUV will be used for business purposes at least half of the time, you may
be able to deduct the entire purchase price for this year. To find out which
vehicles the IRS considers to be trucks, check out the
IRS Web site.
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Whether you drive an SUV or gas-saving compact, you can take a standard mileage
deduction for all of your business travel. This year, it’s 37.5 cents a mile.
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Don’t forget to also deduct the tolls and parking fees for each of your
business trips.
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You can also get a tax break by donating your old car to a charity. Go online,
find IRS Form 8283, fill it out and file it. But be careful: Although you are
allowed to deduct the fair market value for your car, the IRS has been very
critical of these numbers. You may want to get a copy of the Blue Book value of
your car or several car advertisements to prove that your car was worth the
amount you listed.
Defer Income
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If possible, have end-of-the-year payments from clients sent to you in January
2005. That income would then be part of the next tax year. Of course, if you
have any doubts about getting paid, always bill as soon as possible.
Employ Your Children
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According to the IRS, you can hire your underage children to work for you if
you are a sole proprietor or run a partnership with your spouse. Children under
18 don’t have to pay Social Security taxes or unemployment taxes if they make
less than $5,000 per year. As a business owner, you get a deduction, and your
children don’t have to pay taxes. Even those who run their businesses as
corporations can qualify, but they have to pay all the appropriate employment
taxes. For the exact amount your children can earn, go to the
IRS Web site.
Holiday Cards and Gifts
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Holiday cards that you mail to clients are a business deduction, as well as a
reasonable part of any marketing strategy. The price of the cards themselves
and the postage is all deductible. In most cases, gifts to clients or customers
are deductible, too. Depending on your company, there is a yearly limit for
what can be spent on client gifts. So before you order that half pound of
caviar to be overnighted to your best client, check with the
IRS Web site.
Home Office
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Experts agree that you can deduct most of the expenses that relate directly to
your home office, such as cleaning and painting fees and separate telephone
lines for your business.
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You can also claim a deduction for a percentage of the indirect costs of
running your office. These include such things as property taxes, association
fees, rent, security services, insurance, etc. The tricky bit is figuring out
exactly how much to deduct. Most people do this using square footage. Figure
out the size of your home office and the square footage of your whole house.
Then decide what percentage of the whole house your office takes up and deduct
that percentage of the fees. The average is 10 to 20 percent.
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If your home office takes up more than 20 percent of your total square footage,
you might want to take a picture of your office and keep it in your files. If
the IRS decided to audit you, the picture could come in handy.
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Your office doesn’t have to be a separate room according to the IRS. As long as
the space is specifically designated for business, you can use pretty much any
area of your home.
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In most cases, your regular homeowner’s policy won’t cover your home office. To
make sure that everything in your home office is covered, talk to your
insurance agent and take out a special rider. As with many other office
expenses, it’s deductible.
Medical Savings Accounts (MSAs)
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In general, it’s best to use all the money in your Medical Savings Account
(MSA) before the end of the year. Funds don’t rollover to the new year, so
you’re likely to lose anything you leave after December 31.
Office Supplies and Equipment
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Office supplies are almost always deductible, so go ahead and buy those
glow-in-the-dark Post-It® brand sticky notes you’ve been drooling over. The
general IRS rule is that if you bought the items with cash this year (checks
and business credit cards count as cash in this case) and you wouldn’t have
bought them if you hadn’t been in business, they count. Business supplies
include everything from advertising to business cards and educational seminars
to membership in your local chapter of the Loyal Order of Water Buffaloes.
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Many small businesses and sole proprietors can now benefit from a change to the
tax law’s Section 179. Office furniture, software and other business equipment
(see also Business Vehicles in this article) can now be deducted up to $102,000
for this year. To find out which business items the IRS considers as qualified
business property, check out the IRS Web
site.
Paying the IRS
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Even if you can’t pay the IRS, you still have to file a tax return. But if you
can’t pay them by April 15, you can always get an extension until August 15.
Just go online, find IRS Form 4868 and file it. Without an extension, you will
be required to pay a five percent fee to the IRS because you didn’t file your
return on time.
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If you still can’t pay by the time the extension has expired, you can set up a
payment plan. Go online, find IRS Form 9465 and file it. Usually, you are
allowed to set your own terms so long as your tax bill is less than $10,000 and
you plan to pay it back in fewer than three years. The IRS will charge you a
one-time fee and interest, of course, but its rate is quite low (.83 percent)
compared to bank rates.
Retirement
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Contributing to a retirement account can almost always save you money in taxes.
SEP retirement accounts for sole proprietors and other self-employed folks can
be set up even just before your 2004 taxes are due, and the money you pay
toward your retirement will decrease your tax hit.
Tax Preparation
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Don’t forget that the cost of professional tax preparation for your business is
also deductible as a business expense.
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