Maximize Your Business Deductions
If you own a business, being organized is very important. Channel your income and deductions into a single bank account, monitor it on a regular basis, and use a computer program or filing system to sort deductions into categories.
Plan your vehicle deduction.
If you own a large vehicle, you will most likely want to save all of your receipts for expenses to deduct actual costs. If your vehicle is smaller and more economical to run, you will want to use the standard mileage rate of 56.5¢ for 2013. In any event, log your business miles on a daily basis. The deduction for the business use of a vehicle can be substantial, and the proof is in the documentation.
Hire your kids.
For 2013 your child can earn up to $6,100 working in your business before any income tax needs to be paid on the earned income. This can be increased to $11,600 if a $5,500 traditional IRA is purchased. While your child earns tax-free income, you save tax dollars by deducting the wages paid. In the 25% tax bracket, for example, you save $2,900 in Federal tax plus $1,774 self-employment tax by paying a wage of $11,600 to your minor child. Be aware that the work the child does must be appropriate for the child's age and must actually be performed to make this a legitimate expense. For example, you could use the technology skills of your computer-savvy children to help in your business. Keep good records, have a signed employment agreement outlining the work performed, and track the payments into your child's bank account.
Hire your spouse.
You can set up a medical reimbursement plan under Code Section 105. Your spouse will get employer-paid insurance and medical expenses paid.
Employing your spouse will also enable you to deduct his or her travel expenses if you travel together for business.
The law enables you to reimburse up to $240 of parking at or near work, $240 in mass transit, or $20 to cover bicycle commuting per month for your employees on a pretax basis.
Need new equipment?
You can elect to expense all new (not used) equipment purchased in 2013 using 50% bonus depreciation. This will give you a more immediate tax savings than depreciation over a number of years. Because of the luxury auto vehicle rules, not all vehicles can be expensed all at once.
Use a home office.
If your home is the only location in which your business is conducted, set up an area exclusively used for business. You'll be able to deduct a percentage of your household expenses.
Set up a self-employed retirement plan.
Save money on your taxes and provide for your retirement at the same time by contributing to a pension plan. You can put up to 20% of your net income from self-employment each year in a SEP. The decision to contribute can be made as late as the due date of your tax return for the year. If you are a one person business, or are employing only your spouse, the SEP is great. If you have other employees, you will have to cover them at the same percentage as yourself.
You should consider the Simple IRA if you have employees. This plan needs to be set up by October to start it for any year. Employees can elect to put up to $12,000 ($14,500 if age 50 or over) each into the plan on a pretax basis. You must contribute 2% of all employees wages or 3% of contributing employees wages.
Make yourself aware of the manufacturers deduction.
Your business qualifies for the manufacturers deduction if you produce a qualified tangible product or are involved with domestic construction. The deduction is 9% of qualified domestic production for 2013, and might produce substantial tax savings. If your business does not have wages paid, consider hiring employees or incorporating and hiring yourself.
A word to the wise: The ideas outlined in this letter have been presented in general terms. Limitations and phase-outs may apply. To receive full benefit from these suggestions, and to remain in compliance with federal and state regulations, it might be a good idea to make a tax planning appointment.