November 2004

ABCs of Accounting: Tax Review

It’s time once again to begin your end of year tax review. Although this is something that comes along each holiday season, it’s usually not accompanied by the typical joyful holiday feelings. For most small businesses, dealing with federal income taxes can be an overwhelming experience.

You may not realize it, but one of the best places to start looking for possible deductions and for information to help you with your taxes is the IRS. They have a very good Web site at www.irs.gov with some publications to help you stay on top of things. You can also download forms with instructions for free.

Some key publications that you might need to review are the following:

Publication 334, Tax Guide for Small Business
Publication 463, Travel, Entertainment, Gift, and Car Expenses
Publication 505, Tax Withholding and Estimated Tax
Publication 533, Self-Employment Tax
Publication 587, Business Use of Your Home

Below are some tips related to the costs for the use of your car (Publication 463), and the Home Office Deduction (Publication 587), since these items are common to most small-business owners and are often overlooked.

The business use of your vehicle would be a deductible expense related to your business. There are two basic methods for determining the amount of the deduction, the actual expense method and the standard mileage rate. Under the actual expense method, total expenses related to the operation of the vehicle are accumulated. These expenses include gas, oil, insurance, repair and maintenance, depreciation, registration fee, etc. The total expenses are then multiplied by the total business percentage of total miles driven. The number of miles is typically substantiated by the maintenance of a detailed mileage log of all miles driven during the tax year. The result is the total deductible expense for the business use of the vehicle. Personal usage of the vehicle is never deductible.

The second method is called the standard mileage rate method and is the most common and easiest. Under this method you are not required to keep receipts for the actual cost of operating the vehicle. The total business miles driven, as determined by the log noted above is multiplied by the standard rate allowed by the IRS, 37.5 cents for 2004.

Under either method, you will still need a detailed log of business and personal mileage. So one key for now would be to start keeping a log of all of the miles that you drive in the car and note whether it is for business or personal use. You also need to understand “commute” miles. The mileage to and from your first work site is considered commute miles and is defined as personal and therefore, not deductible. That said, if you drive 10 miles each way to your office and then back home, those miles are going to be commute miles and not deductible. A trick here is to make sure that you can qualify for a home office deduction if possible. If you have a home office and claim the home office deduction, then the first trip is to your office, which is home, and the trip from your home office to the next work site, 10 miles away, is no longer commute miles and is now deductible. This is a hidden benefit of the home office deduction.

To enjoy this benefit, you have to know whether or not you qualify for the Home Office Deduction. If you use a portion of your home “regularly” and “exclusively” for business, then you would qualify for the home office deduction. The costs associated with maintaining that portion of your home would be deductible and would include utility expenses. The amount that would be deductible would be the percentage of the space used for business compared to the overall space of the home. Therefore, if you have an office used regularly and exclusively for business that was 200 square feet and your total house was 2000 square feet, then the percentage would be 10 percent (200 divided by 2000). That means 10 percent of the costs of maintaining your home would be deductible as a business expense. The deductible expenses are reported on Form 8829, which is attached to your tax return.

As women entrepreneurs, we have busy demanding lives. But one of the ways that we can maximize how much we earn for our efforts is to take full advantage of all deductible expenses allowed by the IRS Code. If you invest a little time, you can realize a large return. And what could be a better holiday present than that?