Small Business Tax Deduction Strategies

You’ve been warned: The IRS has developed a new “Audit Techniques Guide” for agents examining business consultants. It pinpoints several critical issues such as misclassification of independent contractor status, online bartering transactions and shifting of income to corporations.

The IRS has announced it intends to eliminate the simplified “high-low method” that can currently be used to substantiate business travel expenses for lodging, meals and incidentals.

The IRS recently announced an increase in the standard mileage rate for the second half of 2011. So taxpayers might discard all the additional records required to deduct actual driving expenses for a new vehicle and go with the IRS-approved shortcut. But don’t assume the standard rate method beats the actual expense method.

Q. We’re looking into “overhead insurance” for a small business in the event an owner gets sick. Is this tax-deductible?

After Congress allowed the federal excise taxes for airline travel to expire, it was widely believed that passengers who booked flights before July 23, 2011, for travel after July 22, 2011, would be entitled to refunds. However, the IRS has backpedaled now that the taxes have been reinstated, beginning Aug. 8, 2011.

The “kiddie tax” isn’t just for kids anymore. Due to recent tax law changes, investment income earned by a child may continue to trigger the additional tax well into his or her 20s. This can put a damper on traditional college savings techniques for children. To avoid the kiddie tax, establish a “minor’s trust,” also called a Section 2503(c) trust, for kids or grandkids.

Q. I donated $500 for a golf event that was split between a charity and a needy person. Can I deduct the entire $500?

Q. I converted my traditional IRA to a Roth on Jan. 6, 2010. Can I still undo the conversion?

Employers can reward top employees, including company owners, by awarding them incentive stock options. Generally, there’s no tax due when the company issues the ISOs or when the individual exercises the options. The IRS taxes the employee only when he or she finally sells the stock. Strategy: Keep the options for the required holding period. As a result, the IRS taxes any gain at long-term capital gain rates.

Got a great idea for a new business? It usually costs money to make money, so you’re likely to incur certain startup costs before the brainstorm starts producing a cash flow. Strategy: Make sure you’re open for business before the end of the year. That will entitle you to deduct your startup expenses on your 2011 return.