The Key 27 Words Describing What You Can Deduct
BUSINESS OWNERS PAY CLOSE ATTENTION TO THE FOLLOWING KEY TWENTY-SEVEN (27) WORDS DESCRIBING WHAT YOU CAN DEDUCT FOR YOUR BUSINESS AND EMPLOYEE BUSINESS EXPENSES:
The 27 words are found at the start of the Internal Revenue Code Section 162. Trade or business expenses.
(2) In general
“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business…..”
Note: The key words are: “Ordinary and Necessary”
An ordinary expense is one that is common and accepted in the taxpayer’s field of business, trade, or profession.
A necessary expense is one that is helpful and appropriate to the taxpayer’s business.
However expenses are not deductible to the extent they are lavish or extravagant.
Remember this: Everything you do, everywhere you go, and everyone you meet can be related to your business.
You can’t afford to ignore my advice if you have a small business.
You can’t afford to ignore this advice if you own a small business
For the last 28 years I have worked with small businesses to reduce their taxes and prepare their tax returns. In other words I do tax planning and tax preparation for a living. My clients are one person businesses, mom and pop businesses, full time businesses, part-time businesses, home based businesses, and businesses with many employees and multiple locations. They are the very fabric of today’s economic society.
But regardless the size or type of business that you operate, if you do not understand another word I say, understand this: “It is not what you earn that matters, it is what you get to keep that counts!!!”
In pursuing the dream of lower taxes, it is never necessary to resort to tax cheating, risky loopholes, or even to question the legality of the tax system. There is a big difference between cheating, risky loopholes, and tax reduction strategies.
Tax cheating is understating your income or claiming tax deductions for assets that you don’t own or expenditures that you never made.
Risky loopholes, on the other hand, are gray, mostly untested areas of the tax law that allow you to claim “default deductions” that Congress and the IRS probably would have ruled against had they had the foresight to see the possibilities. Since a specific “no” does not exist, you create a loophole by saying, “yes” to a perhaps a risky deduction.
On the other hand, there are hundreds of government mandated legal tax reduction strategies and deductions. I will teach you many of those legal tax reduction strategies and deductions that you can implement immediately.
Owning a operating your own business is what I call the “last of the great American tax shelters”. There are hundreds of government mandated legal tax reduction strategies.
The question of legality and morality of tax deductions was settled once and for all over 40 years ago by the United States Court of Appeals in an opinion written by Judge Learned Hand.
“Anyone may so arrange his affairs that his taxes shall be low as possible. He is not bound to choose a pattern that will best pay the treasury. No one owes any public duty to pay more than the law demands.”
This decision should govern both your tax plan and your tax attitude.
Rearranging and designing your affairs to create tax deductions where you had none before is the one of the big keys to paying less taxes, legally, ethically and morally.
Think about this, most people spend all they earn anyway, so why not spend the money in a legal, ethical and moral fashion in order to obtain a tax deduction. “Everything is cheaper when you get to deduct it.”
“It is not what you earn that matters, it is what you get to keep that counts!”
Please note: There is not “one” big tax deduction in the sky that will reduce your taxes like you want; it is through the use of combinations of tax strategies that taxes are reduced.
How to choose a tax preparer
Selecting a tax preparer is a very important task. But how do you know if you have made the right choice?
I recommend that you give the tax preparer the Tax Factor test.
Fees- Are the tax preparation fees fair and reasonable?
Availability – Will the tax preparer have time for me and my schedule?
Communication – Can the tax preparer communicate to me in plain English, so that I too can understand?
Timeliness - Will you prepare my tax return in a timely manner and make me aware of tax deadlines?
Openness – Will you be open to my point of view and concerns and listen to me?
Results – Not all tax preparers get the same result. Does the tax preparer have my best interests in mind and work with me to obtain the best results?
Year-End Tax Strategy-Stop Collecting Income
Most small business taxpayers are “cash-basis” taxpayers, meaning you report income in the year you receive it. This simple strategy is great for the cash-basis taxpayer and is easy.
Want to pay less tax this year? Collect less income this year. Stop sending bills to your customers, clients, or patients until after December 31.
FAQs for Section 179 Deduction
What is the Section 179 Deduction?
Section 179 of the IRS Tax Code allows a small business to deduct, for the current tax year, the full purchase price of financed or leased equipment that qualifies for the deduction. The equipment purchased or leased must be within the specified dollar limits of Section 179, and the equipment must be placed into service in the same tax year that the deduction is being taken (for tax year 2010, this means the equipment must be put into service between 01/01/2010 and 12/31/2010).
What impact did the 'Economic Stimulus Act of 2008' have on the Section 179 Deduction?
The 'Economic Stimulus Act of 2008' generously increased the limits of the Section 179 Deduction. The previous limits were $125,000 for the deduction and the total amount of equipment purchased or leased for the year had to be less then $500,000. The Stimulus Act of 2008 increased the deduction limit to $250,000, and now the total equipment purchased or leased needs to be less then $800,000. It also added a one-time "bonus depreciation" on equipment that exceeded the $250,000 deduction limit. See this page for the details regarding 'Section 179 and the Economic Stimulus Act of 2008'.
What impact did the 'American Recovery and Reinvestment Act of 2009' have on the Section 179 Deduction?
The 'American Recovery and Reinvestment Act of 2009' simply extends the above enhanced Section 179 incentives established for 2008 through December 31, 2009.
The 'Hiring Incentives to Restore Employment Act of 2010' continues to keep the maximum Section 179 tax deduction at $250,000 subject to a dollar-for-dollar phase-out limit beginning at $800,000 for the tax year 2010. Please note, the 'Hire Act of 2010' does not extend the "bonus depreciation" in the 'Economic Stimulus Act of 2008' described above.
Absolutely. In fact, this can be a very effective strategy, as the deduction you take may actually exceed the total loan or lease payments you make for the year. See this page for more information on equipment leasing and Section 179.
How do I know if the property I am purchasing or leasing qualifies for the Section 179 Deduction?
Most equipment that small businesses purchase or lease will qualify for the deduction. Please review the list of equipment that qualifies for the Section 179 Deduction.
What is the deduction limit for Section 179 Deductions?
After the 'Economic Stimulus Act of 2008' was passed, the new current deduction limit is $250,000 and the total amount of equipment purchased cannot exceed $800,000. These limits were set to return to "normal" for 2009 and 2010, but were extended until 12/31/2010 under the Recovery Act of 2009 and the HIRE Act of 2010 - so you may wish to take advantage of Section 179 now before the enhanced tax deductions expire.
Can I buy or lease a vehicle and take the Section 179 deduction?
It depends on the vehicle. Generally, the vehicle must have a gross vehicle weight (GVW) in excess of 6,000 lbs. Click here for more information regarding Section 179 and Vehicles.
Does the amount of equipment I purchase and lease in any one year matter?
Yes. The amount of equipment purchased and/or leased may not exceed $800,000 for 2010. Prior to the Stimulus Act of 2008, Recovery Act of 2009, and HIRE Act of 2010 the amount of equipment purchased or leased could not exceed $500,000. This makes Section 179 a true "small and medium" business deduction.
Does the date of my purchase have an impact on the Section 179 Deduction?
Yes. To qualify for the Section 179 deduction for the 2010 tax year, the equipment must be purchased or leased and placed into service between January 1, 2010 and December 31, 2010.
Flat Tax?
“If Congress were to pass a flat tax, you’d simply pay a fixed percentage of your income, and you wouldn’t fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax, you pathetic fool.” Dave Barry
What kind of records should I keep?
What kind of records should I keep? |
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Deduct Equipment Purchases-Utilizing Section 179
The new Hiring Incentives to Restore Employment (HIRE) Act gives the tax go-ahead to deduct $250,000 of qualified buiness assets placed in service in tax years beginning in 2010. This Houston CPA teaches how to maximize this deduction to your full advantage whether you use borrowed money to make the purchases or make the purchases at the end of the year.
Small businesses should fully grasp how to utilize this tax break to their fullest advantage. A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property is frequently referred to as section 179 property.
The $250,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $800,000
Business Entertainment-100% Deductible
Usually, business entertainment deductions are limited to 50% of the cost. But there are a few exceptions to this rule. For example, if you have a company event-such as a Fourth of July party-you can write off 100% of the expense as long as you invite your entire workforce.