TAX NEWS - JUNE 2010

Help Your Small Biz Save Big at Tax Time

by Brian Luskey -- The more tax deductions your business can rightfully claim, the lower its taxable earnings will be. So for contractors, knowing which of your business expenses are deductible can drastically affect your bottom line come tax time.

Learn the various write-offs that can help reduce your tax bill. But be careful; unreasonable or erroneous deductions could get your company flagged by the IRS, inviting an audit or financial penalties.

Let's take a look at some of the legitimate deductions you might want to claim:
 

American made

Many domestic construction contracts qualify for Section 199 of the Internal Revenue Code, a law that rewards contractors for performing construction work in the U.S. The statute states that a percentage of the profit from a "qualified production activity" can be deducted.

"Qualified production activities," as defined by the U.S. Department of the Treasury, include two services offered by contractors:

- "Construction or substantial renovation of real property in the United States, including residential and commercial buildings and infrastructure such as roads, power lines, water systems and communications facilities."

- "Engineering and architectural services performed in the United States and relating to construction of real property."

What's more, the deduction rises from 6 percent in 2009 to 9 percent in 2010. The rules for calculating your deduction are tricky, so consult a qualified CPA for help.


Legal and professional fees

When you hire that CPA for tax help — or when you hire lawyers and other professional consultants — the fees are tax deductible. The deduction for these services is typically taken when the tax bill is paid, but it can be spread out over several years if the life of the contract lasts that long.


Energy-efficient savings

While the majority of environmentally charged federal tax benefits affect the wallets of property owners rather than contractors, there is one exception: government buildings. The Commercial Building Tax Deduction, extended until the end of 2013, allows contractors to claim a large deduction if they are primarily responsible for working on an energy-efficient public property.
 

If you've secured a contract to build or update a new or existing school, community center, city hall or other government building — and you make improvements to cut heating and cooling energy expenditures in half — then you're likely eligible to deduct up to $1.80 per square foot of the building. Partial deductions worth up to 60 cents per square foot are available for constructing or renovating one of three chief building systems: the building envelope, lighting or heating and cooling systems.


Charge it

For tax purposes, your business expenses are deducted based on when a purchase is made, not when it is paid. That means you can charge up to $125,000 on your company plastic and have it count toward this year's taxes, although you won't pay that bill until next year. Of course, a deduction for expensive equipment or other capital expenses is only worth it if you have a large taxable income from which to deduct.


Auto expenses

If you use a personal vehicle for business or your business owns its own cars and trucks, there are certain expenses that you are eligible to deduct. The most commonly used method of claiming auto expenses is the "actual expense method," which requires you to track all your business-specific auto expenses. This means that you'll need to keep separate records for when your car is utilized for business versus personal use. One nice benefit to the actual expense method is that it allows you to deduct accelerated depreciation on your vehicle.
 

Sweat the small stuff

Smaller purchases may seem negligible but when it comes to calculating your deduction, routine business expenses can amass into a significant savings on your taxes. Business owners should always keep tabs on costs that qualify as business expenses. Here are some common deductions that many small business owners forget:

- educational expenses that are used to refine skills relevant to your business
- books, magazines, videotapes and CDs that relate to your profession
- office supplies
- postage
- holiday gifts under $25 for prized customers or employees
- business lunches or coffee and beverage service at meetings
- parking fees and taxi fares
- business association dues
- phone calls away from the workplace

A little research now could mean big returns come tax season.