Structure
The structure of your business determines how your business income is taxed. If you are planning to start a business, consider your options carefully to determine whether a C Corporation, S Corporation, partnership, Limited Liability Company or sole proprietorship is best for you. While small businesses often start out as sole proprietorships or partnerships, many owners eventually explore the transition to another entity. If you're already in business, it makes sense to periodically review your business structure to determine if it's still the best option for you.
Expensing deduction
Typically, when a business buys property that has a useful life of more than one year, the cost must be depreciated over the life of the asset. But under Section 179 expensing, you can immediately elect to deduct 100 percent of the cost of up to $125,000 in new and used personal property put into service before the end of 2007. The portion of the cost not eligible for first year expensing is recovered by depreciation. The Section 179 allowance is phased out on a dollar-for-dollar basis when qualifying assets costing over $500,000 are placed in service during 2007. Also, the expensing deduction may not exceed net income from all your active businesses.
You should also know that the cost of computer software, which previously had to be depreciated, generally over 36 months, is now eligible for the expensing deduction.
Additional business strategies
If you're self-employed, in 2007, you can deduct 100 percent of amounts paid for health insurance for yourself, your spouse and your dependents. The amount is taken as an individual deduction from gross income to arrive at AGI. You can also deduct one half of your self-employment tax. Several of the strategies we've already discussed today apply to small businesses as well. I'm referring to deferring income and accelerating expenses, and to contributing to a retirement plan. But there are several other strategies you want to be aware of.
Do you have some debts you haven't been able to collect? A business bad debt is deductible by a cash-basis taxpayer only if an actual cash loss was incurred or if the amount deducted was included as income.
Be sure to make the most of your deductible expenses. Business-related auto expenses, travel, meals and entertainment costs, and interest expenses are all deductible. Just be sure to keep good records.
Article provided by the Massachusetts Society of Certified Public Accountants.
