Tax time rates only slightly above death in national popularity — maybe that’s why so many avoid it like a plague. But taxes don’t have to be your enemy. And you should only fear them if you haven’t been keeping track of your expenses or deductions. In most cases, you are best off hiring a professional to help you. They’ll be able to maximize any opportunities for savings and point out things you might not have been aware of, for example:
1. The maximum federal tax rate on long-term capital gains is 15 percent.
2. If you bought a vehicle last year, the maximum first-year depreciation you can claim is $2,960. All interest and operating expenses also would be deductible. If you use this vehicle for personal use, it’s important to reduce the deduction by that percentage. This is one area that often arises during an audit.
3. Health insurance is typically not deductible through a business. However, if your business is set up as a proprietorship, it would be deductible. If you were able to fully use this deduction on your return, there would still be one other consideration: As a sole proprietor, you are getting the deduction after it has been subject to Social Security and Medicare tax. If you were to incorporate your business, the health insurance would then be deductible to the corporation and not subject to Social Security or Medicare to you or the corporation.
4. If you are accounting on an accrual basis for tax purposes, one way of potentially reducing your business profit is to be sure you are claiming all expenses for the 2005 year even if you didn’t pay for them until 2006.
Take a close look at checks written in January and February 2005. This two-month period may have many accrued expenses that were legal and legitimate deductions for 2004. As an example, many vendors cut off the month for their statements prior to the actual last calendar day of the month. This may mean that with some vendors you could have as many as seven to eight days of expenses not on the December books. There also may be accrued expenses that are not usually given to the accountant for financial statement preparation. Some examples of these expenses might be accrued worker’s compensation insurance, utilities, and telephone and advertising expenses, to name a few.
5. The higher your income tax bracket, the greater the likelihood of an audit. Let’s assume you are in a lower tax bracket and as a proprietor had a $20,000 loss. In an audit, if they found $20,000 of incorrect deductions or unreported income, you would still have zero tax. If, on the other hand, you were in a 25-percent tax bracket and they found the same $20,000, your increase in tax would be $5,000. It’s financially smarter for the government to pay closer attention to higher-income taxpayers. It’s important to be honest and truthful in how you report your taxes and to take every advantage the law allows you.
When it comes down to it, don’t be afraid of the IRS. Just do your homework, hire the appropriate help and above all, be honest.
