Big Tax Breaks for Small Businesses

As tax time nears, contracting businesses are eager to take advantage of write-offs. Fortunately, there are plenty of ways to reduce your tax bill by taking deductions. Yet you don’t want to push your write-offs too far, or your business could face an audit or other penalties from the IRS. Adhere to the following advice on write-offs from tax experts who specialize in small-business strategies.

A domestic policy that’s useful. If you took part in a project that used U.S.-manufactured items, you may qualify for a 6 percent deduction, thanks to a law introduced in 2005. “Most construction contracts will qualify for this deduction,” says Don Bowman, a specialist in small business financial matters and partner at Phoenix, Ariz.-based firm B2BCFO. “However, this area is very complex, and the deduction’s amount should be overseen by a small business CPA, to assure that the deduction is calculated accurately.”

Giving gives back. Charitable contributions are a great source of write-offs. “Contributions can result in considerable tax savings but there are caveats to be aware of,” says Gregg Benson, a tax attorney with Hale Lane, a Reno, Nev.-based law firm. Generally, no more than 50 percent of a taxpayer’s adjusted gross income can be considered as contributions to charitable organizations, such as public charities, schools, colleges, hospitals and medical research.

Benson advises small business owners to report charitable deductions as business expenses. Even so, not all small business owners can report gifts to charities as business expense under § 162 of the tax code, says Benson. “However, a payment could be deducted as a business expense is it related to the taxpayer’s business and it was made with the reasonable expectation of a financial benefit.”

Pay now, Save later. You can reduce taxable income by paying off expenses now that you’d normally pay throughout the year. “A taxpayer can ‘pay’ expenses with a credit card and the timing of the deduction for tax purposes is based on the date the expense is ‘charged’ and not when the credit card bill is paid,” Bowman says. “This helps the small business owner get the deduction for 2007.”

Major capital items, such as building equipment, machinery or computers, may qualify for large write-offs. “The maximum limit is $125,000,” Bowman says. “The expenditure for the item or items purchased must be paid for in 2007 and the taxpayer must have taxable income to be able to take the deduction.” Again, a CPA can verify whether the item qualifies for such a deduction.

Property matters. If you own real estate that’s used for your business, consider legally separating that ownership from the business. In the process, the effective tax rate on that property could be reduced from 44.75 percent to 15 percent, says James A. Smith, a Dallas-based certified public accountant. “It also protects the property from business liability and enables the owner to sell the business without selling the real estate,” he says.

Little things add up. Hanley says that many small business owners overlook smaller write-offs that can make a big difference. Did you give a favored customer a nice bottle of wine for Christmas? Do you routinely provide five or six current magazines in your office waiting area? If so, you may have valuable write-offs that you may not be documenting. Hanley urges owners to comb their homes and offices for potential write-offs, such as clothing, office supplies, subscriptions and even interest paid on credit cards for business expenses.

Working from home. If your contracting business is home-based, there may be several deductions you can take. How much depends on the expenses that go into the home, such as utilities, repairs and maintenance, as well as acquisition costs to account for depreciation. But be careful. “The IRS requirements for deducting such expenses are strict,” Smith says. As with many write-off decisions, he advises business owners to seek professional advice before taking advantage of such a write-off. In fact, many experts advise small business owners to avoid this potentially risky write-off altogether.

“While you may save several hundred dollars every year you claim this deduction, doing so will expose your tax return to an extremely high audit risk,” Hanley says.  Similarly, Hanley advises independent contractors to be careful not to claim 100 percent of certain deductions that are of mixed-use. For example, if you use the same car for business that you drive you use drive your kids to school, don’t deduct 100 percent of the expenses related to that vehicle, he says.