As a sole proprietor, it*s wise to familiarize yourself with some key deductions that may reduce your tax bill for 2004. Small-business consultants generally recommend that you hire an accountant to prepare your tax returns, payroll, and financial statements. But you should also meet with your accountant well before the year-end rush to discuss such matters as tax planning, and record-keeping for tax deductions.
Seven common small business tax deductions:
1. Employee Benefit Plans – You may deduct contributions to employee benefit plans (such as health insurance plans and retirement plans). Depending on your circumstances the maximum contribution that you may deduct per employee in a qualified retirement plan can go up to:
$100,000 or more For a Defined Benefit Plan
$44,000 For a 401(k) plan
$41,000 For a SEP-IRA or Keogh
2. Automobile Expenses- You can elect to deduct the actual expenses incurred (including gas, oil, tires, repairs, insurance, depreciation, and rent or lease payments) for the business-related portion of your car or truck expenses, or simply take the 2004 standard mileage rate of 37.5 cents per business mile.
3. Taxes – You may deduct Social Security and Medicaid taxes paid to match required withholdings on employee wages, federal unemployment taxes, sales taxes, and real estate or personal property taxes paid on business assets.
4. Home Office – Depending on whether you use your home or another real estate for business purposes, you may deduct some or all of any mortgage interest paid, as well as some or all of the maintenance and repair expenses associated with the property. The cost of utilities and business supplies associated with business use are also deductible.
5. Depreciation – Depreciation may be taken on passenger cars, equipment used for entertainment or recreational purposes (i.e., photographic equipment, cell phones, and computers), as long as these items are used solely for the business.
6. Professional Fees – You can deduct professional fees, such as those paid to a lawyer or accountant.
7. Meals and Entertainment – You may deduct 50 percent of meal and entertainment expenses directly associated with the conduct of your business.
Remember to keep on file the records and documentation necessary to substantiate all of your deductions.