If you are a small business owner looking for cost cutting ideas here are ten tax

planning ideas that may result in substantial tax savings.  The following article

highlights planning areas often missed by business owners.  You should consult

a qualified tax advisor to determine if any of these areas are appropriate for you

and your business.

• S Corporation:  Set up an S Corporation to avoid self-employment

tax on profits.  If you conduct business as a sole proprietor, a partnership,

or a limited liability company the first $87,900 of 2004 profits are subject to

a self employment tax rate of 15.3%.  The profits in excess of $87,900 are

subject to a Medicare tax rate of 2.9%. These self employment tax rates are in addition

to paying income tax on the profits.  An S Corporation is not subject to self

employment tax on the profits earned.

• Bad Debt Expense:  A reserve for bad debts is not deductible,

but you can write off accounts receivable in the year in which they become uncollectible. 

Be sure to take advantage of writing off all those uncollected accounts at year

end.

If you used a collection agency, you can deduct a portion of the debt that will

go to the collection agency as a fee (around 25%).  You can write off that

amount at the time you turn over the receivable to the agency.

• Medical Expense:  Beginning in 2003, eligible self employed

individuals can deduct from gross income 100% of the amounts paid for health insurance

coverage.   The deduction is limited to net earned income from the business. 

Also, you cannot take the deduction for any month you were qualified to participate

in an employer sponsored health plan.

If you conduct business as a corporation, set up a corporate medical reimbursement

plan.  Medical costs are generally personal expenses deductible only to the

extent that they exceed 7.5% of your Adjusted Gross Income (AGI).  However,

medical reimbursement plans set up by C Corporations let you deduct all the medical

costs you incur for yourself, your spouse, and dependents.   These plans must

cover all eligible employees.

• Equipment Expense:  For tax years 2003, 2004, and 2005 Section

179 of the Tax Code lets companies deduct up to $100,000 of new equipment, subject

to certain limits.  Passenger vehicles are excluded from the expensing election.

  A passenger vehicle is defined as having a loaded gross vehicle weight of

less than 6,000 pounds.

The tax code also allows an accelerated method to depreciate the remaining value

of that equipment – it’s faster than the straight-line method of depreciation.

• Home Office Expense:  Write off home-office expenses. 

You can take this deduction even if you use the space for administrative purposes,

as long as there is no where else you can work.  When you use one room in your

six room home as an office, you can deduct one-sixth of your costs for utilities,

security, homeowner’s insurance, etc. as well as all costs for the room such as

carpeting.  Although you can also claim the depreciation on your home used

for home office, you should consult a qualified tax advisor prior to doing so to

understand the impact it will have on the exclusion of gain when you sell your residence.

• Travel Expense:  Deduct business trips by putting your spouse

on the payroll.  When spouses are on the payroll, even at low salaries, cost

of business trips that include the spouse can be fully deducted.  You should

also be aware that putting your spouse on the payroll in 2004 will also double the

amount of Social Security tax owed up to the first $87,900 of income.

• Hiring Children in the Family Business:  Put your children

on the company payroll.  When you employ your children in the business, for

2004 you can pay them up to $4,850 in salary free from Federal tax.  The “kiddie”

tax doesn’t apply to wages, so children under age 14 get this tax break, too. 

Have your children put $2,000 into a Roth IRA, were it will compound tax-free over

time.  When the money is left in the account until they turn 59 ½, they will

never have to pay out any tax or penalties on that money or its earnings.

If your business is not incorporated, and the children are under age 18, neither

you, as employer, nor your children will owe Social Security or Medicare tax on

their wages.

• Retirement Planning:  Put more money away in your company

retirement plan for yourself than for your employees.  Business owners who

are more than 20 years older that other company employees can set up a defined-benefit

pension plan instead of a defined-contribution plan.  Because they are funding

a specific benefit (not putting away a percentage of salary) and have fewer years

to do so, owners can contribute more to the plan for themselves than their employees.

• Claiming Business Losses:  Make the most of business losses. 

If your company has a net operating loss in 2004, it can be carried back two years

or carried forward up to 20 years to offset future profits.  To get a refund,

file an application on Form 1139.  Most refunds are sent out by the IRS within

two months.

• Education:  Set up a company tuition-reimbursement plan to

pay a child’s school cost.  Businesses can set up plans that pay up to $5,250

in tuition per employee annually.  Business owners’ children must work for

the company, be older than age 21, own no company stock and cannot be claimed as

a dependent on the owners’ tax returns.