Editor's note: As a special feature for March, TheStreet.com offers an ongoing series on everything you need to know about taxes. Today is part 10.
April is a-comin', and along with rain showers and the ensuing greenery, the month should bring a flurry of Americans filing last-minute tax deductions and adjusting claims.
Often, small-business owners tend to overlook write-offs that are available to them. So that this doesn't happen to you, Mel Schwarz, a partner at the national tax office of Grant Thornton in Washington, D.C., has provided some quick tips to make sure entrepreneurs are getting all they should from their returns.
In addition, he also gives some insight into how small-business taxpayers can maximize their return for next year.
First, small establishments should take a look at the new IRC
Section 199 Domestic Production Activities Deduction, Schwarz says.
Under Section 199, businesses that produce goods in the U.S. are entitled to deduct 3% of money earned as a result of that production. For example, if an owner of a machine shop made a profit of $500,000 from merchandise produced in the U.S. last year, then that person is permitted to deduct $15,000 from his or her tax bill.
While there is no upper limit, the section 199 deduction cannot exceed 50% of the business employees' W-2 wages.
Although it requires a certain amount of effort to calculate the benefit, "there's really no reason why any small business shouldn't be doing it," Schwarz says.
This year, the deduction rate is slated to go to 6%, and up to 9% by 2010.
The deduction is carried out regardless of whether the merchandise was actually sold in the U.S. or exported. As long as the money is a result of you making the product in the U.S., you're good to go, Schwarz says.
Second, make sure to deduct the cost of all equipment purchases and for the future, figure out when it's more tax-beneficial for you to buy and when it's better to lease, Schwarz continues.
The Section 179 deduction states "a business can deduct the cost of equipment purchased for business use up to $108,000 in 2006." However, Schwarz warns that once a business has purchased more than $430,000 of equipment in service in 2006, for every dollar the owner has spent over that, he or she will lose the original $108,000 deductible amount on a dollar-by-dollar basis.
Therefore, a company like
wouldn't be able to do anything with this tax benefit, Schwarz says. "It is a provision for small businesses."
While in 2006 the maximum deductible for equipment purchases was $108,000, for 2007 it will be $112,000.
There's a lot more than the consideration of tax gains that goes into the decision to lease equipment vs. buying it, the tax specialist says. But generally, you want to take advantage of the Section 179 deduction if you can, partly because "in most cases the lease you've entered into is priced assuming that you're going to depreciate the property and not be able to expense it," he says.
"The market is thinking more in terms of the larger company that's going to be subject to the depreciation rules and that's how the lease price gets set," Schwarz explains. "But the smaller company, if it hasn't used all of the
Section 179 deduction, has the ability to potentially get a better tax deal through ownership."
Once an entrepreneur has gone over the deduction level, Schwarz believes it's better to look at the separate economics of leasing vs. purchasing.
Third, if you're going to be expanding or building your workplace, it's worth seeing whether you get any special incentives for using solar power or having an energy-efficient building, as stated in the Energy Policy Act of 2005, Schwarz says.
One problem with these rules is that they can be highly technical and complicated, and therefore, difficult to take advantage of. Schwarz recommends hiring architects and engineers who are familiar with or willing to take on more of the work in determining which benefits could be accessed.
Also, talk to homebuilding manufacturers. Manufactures tend to be more knowledgeable regarding which of their products can be incorporated into a building and qualify for this benefit.
Finally, take a look at a high-deductible health plan to take advantage of the new Health Savings Accounts
For a retirement plan, consider investing in the
Simplified Employee Pension plan. The beauty of the SEP plan, Schwarz explains, is that it has the highest contribution limit of any of the relatively simple plans. It is even "significantly higher" than 401(k) plans or traditional IRAs, he notes.
The burden for small-business taxpayers can be heavy. That's why owners should try to take full advantage of tax-benefit opportunities that are given to them and maximize their returns.
"One of the things you want to be looking at is how you can save on your taxes," Schwarz emphasizes. "Look for things the government wants you to do. If it wants you to produce things in the U.S. or build an energy-efficient building, and it's going to give you an incentive to do so, make sure you take the incentive."