November 2009 Archives

November 19, 2009

Section 179--A Small Business Owner's Best Friend (at Taxtime)

If you learn only one number in the tax code, it should be Section 179. This humble piece of the tax code is one of the greatest tax boons ever for small business owners. Section 179 doesn't increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset's useful life--which can be up to 39 years. To qualify, the property must be long-term, tangible personal property that you purchase and then use in your business over 50% of the time.
In an effort to jumpstart the economy, the Section 179 limit was increased to a whopping $250,000 for 2009 (from $128,000 in 2007). It is scheduled to go back down to $133,000 in 2010 and then $25,000 in 2011. So if you're planning on purchasing more than $25,000 of eligible property for your business and want to deduct the cost in one year, you should make your purchase before 2011.

See Deduct It! by Stephen Fishman (Nolo) for more information on small business tax deductions.

November 17, 2009

Facebook -- The New Essential Marketing Tool

More and more businesses are using Facebook to market and promote their business. As reported in a recent New York Times article "How to Market Your Business With Facebook," there are 300 million people on Facebook--a vast audience of potential consumers. By creating a Facebook Page, small businesses can build their own online communities of fans and customers through targeted marketing that reaches those most likely to be interested in their product or services.

Clara Shih, author of "The Facebook Era" (Pearson Education, 2009) recommends that businesses start small and have a clear objective in mind--for example, getting more customers in the door. Then create a strategy to accomplish that goal. The owner of a cupcake bakery called Sprinkles increased its fan base and store traffic by posting a password on its Facebook page every day that could be used to redeem a free cupcake at the store. A simple, focused, and effective strategy.

Some other basic rules from the experts: Don't use Facebook just to market and push your product or services. Create a site that is inviting to users, reflects personality, and is interactive. Liven it up with news, useful information, and promotions--and keep it current. Also, be sure to listen to your users so you can see how you are doing and what changes you may want to consider based on the feedback you get from your online fans.

November 9, 2009

Top IRS Audit Concerns

Most small businesses have at least some concern about the possibility of facing an IRS audit. You may be wondering how the IRS decides to audit, how likely it is that you'll be audited, and what you can do to avoid being one of the unlucky ones. Let's take a look at some of the things that are most likely to draw the attention of the IRS. That way you can take steps to avoid that unwanted attention--or come out of an audit unscathed if you find yourself in the government's crosshairs.
When auditing small business owners, the IRS is most concerned about whether you have done one of the following:
 Underreported your income. Unlike employees who have their taxes withheld, business owners who are not employees have no withholding--and many opportunities to underreport how much they earned, particularly if they run a cash business.
• Claimed tax deductions to which you were not entitled. For example, you claimed that nondeductible personal expenses, such as a personal vacation, were deductible business expenses.
• Properly documented the amount of your deductions. If you don't have the proper records to back up the amount of a deduction, the IRS may reduce it, either entirely or in part. Lack of documentation is the main reason small business owners lose deductions when they get audited.
• Taken business deductions for a hobby. If you continually lose money, or you are involved in a fun activity such as art, photo¬graphy, crafts, or writing and don't earn profits every year, the auditor may question whether you are really in business. If the IRS claims you are engaged in a hobby, you could lose every single deduction for the activity.

For more information on this and other small business tax deductions issues, see Deduct It, by Stephen Fishman.

November 5, 2009

Top Tax Deductions For Your Small Business

When you're totaling up your business's expenses at the end of the year, don't overlook these valuable business deductions. Remember, the more tax deductions your business can legitimately take, the lower its taxable profit will be. It's that simple. But you need to know what is -- and isn't -- deductible, and pay careful attention to IRS rules. Here are some of the more common deductible business expenses that you won't want to miss.
1. Expenses of Going Into Business. The costs of getting a business started are capital expenses, $5,000 of which you may deduct the first year you're in business; any remainder must be deducted in equal amounts over the next 15 years.
2. Equipment Purchases. Under Section 179 of the Internal Revenue Code, you can fully deduct up to $250,000 of certain business equipment you purchase in 2009 (subject to a phase-out if you spend more than $800,000). There is also a first-year bonus depreciation deduction in effect for 2009 which allows you to depreciate 50% of the adjusted basis of qualified property purchased during the year. Take advantage of these tremendous tax savings if you can--the Section 179 deduction is scheduled to go down to $133,000 in 2010 and bonus deduction expires at the end of the year.  
3. Auto Expenses. If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
4. Business Entertaining. If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost.
5. Travel. When you travel for business, you can deduct many expenses, including the cost of plane fare, taxis, lodging, meals, telephone calls, faxes, and tips.
6. Legal and Professional Fees. Fees that you pay to lawyers, tax professionals, or consultants generally can be deducted in the year incurred. However, if the work clearly relates to future years, they must be deducted over the life of the benefit you receive.
7. Bad Debts. If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells. If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay.
8. Interest. If you use credit to finance business purchases, the interest and carrying charges are fully tax deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
9. Taxes. Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
10. Advertising and Promotion. The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business.
See Deduct It! by Stephen Fishman (Nolo) for more information on tax deductions for your small business.