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6 tax-savvy moves for small business filers

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

The deadline for filing calendar year 2007 tax returns for corporations—generally, March 17, 2008—is right around the corner. With a little effort and a lot of savvy, you can maximize the tax benefits for your small business. Here are six prime examples:

1. Speed up equipment write-offs. Under Section 179 of the tax code,you can elect to “expense,” or currently deduct, up to $125,000 of equipment costs and other business assets placed in service in 2007. The limit was increased from $112,000 by the small business law enacted last year. (It increases to $128,000 for 2008.)

The Section 179 deduction can eliminate a multitude of sins. For instance, depreciation deductions under the Modified Accelerated Cost Recovery System (MACRS) are generally reduced if the cost of the assets placed in service during the last quarter—Oct. 1 through Dec. 31—exceeds 40% of the cost of the assets placed in service for the whole year. But assets expensed under Section 179 aren’t counted. Note: Other special rules apply to vehicles and other “listed property.”

Tip: Any excess above the $125,000 limit still is eligible for MACRS deductions.

2. Cash in on bonus deductions. Normally, you must deduct bonuses on your corporation’s tax return in the year that you pay them. However, an accrual-basis company operating on a calendar tax year still can deduct bonuses in 2007 so long as they are paid by March 17, 2008. This tax break is not affected by recent deferred compensation changes.

If you haven’t already done so, dole out bonuses now so you can deduct them on your company’s 2007 return.

Tip: The bonuses generally are taxable to employees in the year received—in this case, 2008—even if you deduct them on the corporation’s 2007 return.

3. Grease deductions for business travel. The standard mileage rate that business drivers can claim in 2007 is 48.5 cents per business mile (plus related tolls and parking fees).

Alternatively, if you’ve kept the necessary records, you may deduct your actual expenses if that will provide a bigger deduction. But you can’t switch from using the actual expense method in a prior year to the flat rate.

Tip: The IRS has boosted the standard mileage rate for 2008 to 50.5 cents per mile.

4. Take “extra” tax credits this year. Two key business tax credits were revived for 2007 with enhancements:
  • The percentages for the research credit were increased and an alternative simplified credit was added for 2007. The credit officially expired after Dec. 31, 2007, but expect it to be renewed again for 2008.
  • The Work Opportunity Tax Credit (WOTC) for hiring certain disadvantaged workers was broadened to include disabled veterans and more high-risk individuals. The revamped WOTC extends through Aug. 31, 2011.
Tip: Compute each credit separately and then claim it under the general business credit, including carry-backs and carry-forwards.

5. Drive a better tax bargain. Due to a 2004 tax law change, the Section 179 deduction for a heavy sport utility vehicle (SUV) is limited (see No. 1). But you still can deduct up to $25,000 for an SUV placed in service in 2007. In comparison, the maximum first-year MACRS deduction for most other vehicles placed in service in 2007 is only $3,060 under the “luxury car” rules ($3,260 for light trucks and vans).

Tip: Recently proposed legislation would eliminate the $25,000 deduction for SUVs, but thus far it remains intact.

6. Supersize home office deductions. If you’re self-employed and use part of your home exclusively as your principal place of business—or exclusively as a place to meet or deal with clients, customers or patients in the normal course of business—you’re entitled to deduct home office expenses. For example, you can claim a depreciation allowance plus write-offs for a portion of your home utilities, insurance, etc.

Base the business percentage on the home’s square footage or the number of rooms, whichever gives you a bigger deduction.

Tip: Attach Form 8829, Expenses for Business Use of Your Home, to your return. It’s available at www.irs.gov/pub/irs-pdf/f8829.pdf.

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