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Secure 7 sizzling summer tax breaks

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in Hiring,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

It's already Memorial Day, so summer is right around the corner. While you're enjoying the warmer weather, heat up your tax savings with some timely tax techniques. Here are seven ways to slash your tax bill midway through the year:

1. Mix business with pleasure. On business trips this summer, you can deduct your travel expenses—including air fare, lodging and 50 percent of meal costs for business days—as long as the trip's primary purpose is business-related. Tack on a few days of sightseeing or relaxation. Of course, you can't deduct any personal side trips or activities (or lodging and meals for nonbusiness days), but you can deduct all travel costs as long as you spend more time on business than pleasure.

Tip: If your spouse comes along, you typically can't deduct his or her travel expenses, unless he or she becomes an official employee. (See April 18 issue for five other good reasons to hire your spouse.)

2. Switch to the actual car-cost expensing method. Despite a spike in gas prices, this year's standard mileage rate for business driving remains 40.5 cents per mile (plus tolls and parking fees). The IRS won't adjust that number until 2006.

If you've been using the standard mileage rate this year, it's not too late to switch to the actual-expense method. Starting today, keep detailed records for specific costs of gasoline, oil, repairs and the like. That will create more paperwork but will likely generate a bigger write-off.

3. Shoot for tax breaks on the links. You can no longer claim top-dollar deductions for country club dues that you once could. But that doesn't mean you're completely shut out on the course. If you treat clients to a round of golf before or after a "substantial business discussion," you can write off 50 percent of the entertainment expenses. That includes greens fees, club rentals and even drinks and dinner afterward at the 19th hole.

Tip: If the clients are from out of town, you can earn the same write-off by holding the business discussion the day before or after your golf outing.

4. Fix up your vacation home. Do you rent out your vacation home when you're not using it? If your personal use of the vacation home exceeds the greater of 14 days or 10 percent of the time the home is rented out, your annual deduction for rental expenses is limited to the amount of your rental income. In other words, you can't claim an overall tax loss from the rental activity for the year.

But take note: Any day that you spend at the home making repairs or tidying up the place doesn't count as a "personal day."

5. Buy equipment for your business. If you acquire business equipment, your first-year depreciation deduction is generally based on half-year use, regardless of when you actually place the assets into service during the year. This is called the "half-year convention."

But be wary of this tax trap: If the cost of the depreciable assets (not including real estate) placed in service during the final quarter of the year exceeds 40 percent of the total annual cost, your deduction is computed under the generally less-favorable "midquarter convention."

Advice: If you operate on a calendar year and plan on making big equipment purchases later this year, avoid that tax trap by buying equipment this summer and putting it into service during the third quarter, i.e., by Sept. 30. Alternatively, you can expense some costs under Section 179.

6. Earn tax credit for hiring certain summer employees. Your business can claim a valuable Work Opportunity Tax Credit (WOTC) for certain "summer youth employees." Those are 16- and 17-year-olds who live in a federally cited "empowerment zone, enterprise community or renewal community."

The credit is equal to 40 percent of the first $3,000 paid to a qualified worker between May 1 and Sept. 15. For more details, see article on page 3.

7. Hire a relative to watch the kids. You can typically claim a dependent-care credit equal to 20 percent of your first $3,000 paid to care for your under-13 child so you can work. (For two or more children, the cap is 20 percent of $6,000.) The type of "care" that qualifies includes day care centers, nursery schools, summer day camps and even money paid to relatives for baby-sitting.

Tip: If your child serves as the babysitter, he or she must be under 19 or ineligible to be claimed as your dependent.

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