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Keep more of what you earn: Small business tax checklist

Money Management

Monthly financial advice
from the MACPA

For release: March 2005

Running a successful small business takes time, talent and a little tax-know how. Here are some tax tips, brought to you by the Maryland Association of CPAs, that can prevent you from overlooking valuable deductions and assist you in managing the tax liability for your small business.

  • Health insurance: On 2004 tax returns, self-employed taxpayers can deduct 100 percent of their health insurance costs.
  • Retirement plans: The rules governing eligibility, contribution limits and deadlines vary depending on whether you have an IRA, SEP or Keogh. But one thing is certain: Contributing to a qualified retirement plan is a great way to reduce your tax bill and save for your future.
  • Business use of car: If you use your car for business, you can deduct expenses proportionate to your business use. One option is to maintain records of your actual expenses, such as gas, oil, repairs, insurance and depreciation. Or you can use the IRS's standard mileage rate, which is 37.5 cents per business mile for 2004. Parking and tolls are fully deductible regardless of which method you choose.
  • Family employees: Self-employed business owners can reduce their overall income tax liability by hiring their children to help out. For 2004, your child could have earned up to $4,850, tax-free. Hiring your child shifts income from a higher to a lower tax bracket, and the salary gets deducted as a business expense, as long as the work done by your child is bona fide.
  • Section 179 expensing deduction: When you buy new or used computers, copiers, software, office furniture or other business property, you can deduct 100 percent of the cost in the year it is placed in service rather than depreciating it over a number of years. For 2004, the expensing deduction is set at $102,000 (adjusted for inflation) and phases out dollar for dollar when total purchases for the year exceed $410,000.
  • Bonus depreciation deduction: If you purchased assets in 2004 that exceed the expensing deduction, you may be able to take a bonus first year depreciation deduction of 50 percent of the remaining costs of new property put in service before Jan. 1, 2005. The remaining cost is subject to the regular depreciation schedule.
  • Travel and meal expenses: The cost of travel by plane, train or auto and your lodging is 100 percent deductible as long as the travel was related to business. You also may deduct 50 percent of the cost of your meals while traveling.
  • Business expenses: Ordinary and necessary business expenses can be deducted. Deductible expenses include advertising and promotion, bank service fees, office supplies, interest on business credit cards and loans, subscriptions for magazines and journals related to your profession, postage, uniforms or special work clothing, and more.
  • Home office: To deduct expenses related to a home office, you must prove that the home office was (1) used exclusively and on a regular basis either as a place of business to meet with clients in the normal course of business, or (2) it is used for management and administrative activities of your business and you have no other fixed location where you can do a substantial amount of such administrative work.
  • Good records: Keeping well-organized and accurate records will simplify the task of preparing your tax return and protect your deductions should your return be subject to an audit.
  • Professional advice: Many small businesses pay more taxes than necessary, often as a result of missed deductions and lack of awareness about tax law changes. A CPA can help your small business make the most of all the available tax benefits.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.