By Karen E. Klein Q: Aside from the obvious daily costs of running my small business (travel, entertainment, office supplies), could you give me a list of some other tax breaks for which I might be eligible? I am maxed out on my 401(k) options.
-- M.E.R., Portage, Ind.
A: The tax deductions your small business can claim will depend at least in part upon your business structure. Status as a corporation, for example, enables you to claim certain deductions unavailable to a partnership or sole proprietorship, and vice versa. Since we don't know which kind of business entity you are running, we'll provide some general ideas to explore with your accountant.
Professional Fees: If you have paid a lawyer, CPA, or consultant for business advice, document preparation, or general consultation, you can most likely deduct the costs.
Automobile Expenses: Even if you use your car for some nonbusiness activities, you can deduct a portion of certain expenses related to driving and maintenance, says Gregg Wind, a CPA based in Marina del Rey, Calif. "It could be a case where 50% of the time, a vehicle is used for business, and 50% of the time it is used for personal endeavors," Wind says.
Costs that may qualify include gasoline, maintenance, repairs, insurance, interest on a loan along with related depreciation over five years (if you bought the car), or lease payments. "The expense is multiplied by the business-use percentage to determine what the deduction should be," Wind explains. "Alternatively, a standard rate of 37.5 cents per business-use mile for 2004 -- 40.5 cents per mile in 2005 -- may be used, if that yields a larger deduction."
Rent: If you rent an office for your business, you can subtract the cost. If you're running your company out of your home and employ a portion of the house exclusively for an office (rather than, say, a den or spare bedroom), you can deduct that portion. "For example, if someone rents a 1,200-square-foot apartment for $2,000 a month and uses a 240-square-foot bedroom exclusively as an office, 20% of the rent would be deductible," Wind says.
Printing: Don't forget that the money you've invested in printing up such items as business cards, brochures, and letterhead counts as a deductible business expense.
Retirement Plans: Even if you've maxed out on your 401(k) retirement plan, you can set up an additional account for your business. "Since the maximum retirement contribution that an individual can have annually is $41,000 beginning in 2004, there would be a spread between your 401(k) limit and the maximum," says Don Lucove, a CPA with Lucove, Say & Co. in Calabasas, Calif. "Accordingly, additional retirement plan funds could be set aside."
For example, you might establish a SEP-IRA (an IRA for the self-employed) if your business produces net income. The contribution you can make to that kind of account corresponds to a percentage of net income, and you can open one as late as Apr. 15 -- or Oct. 15 if you get an extension -- to fund the contribution.
Medical Reimbursement Plans: If you own a corporation, you can adopt a plan that reimburses your employees (including yourself) for medical expenses. Alternatively, you can institute a flexible spending plan that would do the same thing. "Discrimination is not permitted, so this benefit must be available to all employees," Lucove notes.
Family Employees: If your spouse is willing to participate in the business, you can put him or her on your payroll -- if he or she actually does work for the company, Lucove says. "That would increase your potential Social Security base calculation for retirement when that time is at hand," he says.
If you operate a sole proprietorship, consider hiring your teenage children as well. "This would shift taxable income to a lower bracket," Lucove says, because in a sole proprietorship, "there will be no Social Security or Medicare taxes for wages paid to children under age 18."
Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues