Top Five Overlooked Tax Deductions
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You work hard for your money. So why hand it over to the Internal Revenue Service when you don’t need to?
Many entrepreneurs overlook perfectly justifiable — and legal — tax deductions simply because they are unaware of them. So before the 2006 tax season begins, take the time to review the deductions to which you are fully entitled. To help you get started, here are the top five tax deductions that most small business owners often overlook:
- Equipment expensing | Buying computers, telephone systems, furniture or other equipment instead of leasing it entitles a business to write-off their cost, usually over a fixed number of years using depreciation. However, small businesses that are profitable can benefit from a so-called Sec. 179 deduction. This means a business can deduct up to $108,000 of cost for a single piece of equipment or in various items as long as equipment is placed in service before the end of the year. This deduction limit will rise to $112,000 in 2007.
- Commercial buildings that go green | New for 2006 is a deduction for commercial building owners whose buildings meet certain energy standards. The deduction is as much as $1.80 per square foot for buildings that achieve a 50 percent energy savings target.
- Domestic production activities | This deduction enables businesses to lop off 3 percent of their net profits from domestic production activities from their income — resulting in significant tax savings for owners without spending a single additional penny to receive the write-off.
- Accelerated depreciation for building components. | The cost of commercial buildings (exclusive of land) usually can be depreciated over 39 years using the straight line method (i.e., ratable depreciation). However, parts of the building that are not viewed as structurally integral can be separately depreciated over much shorter periods (typically five or seven years) using an accelerated depreciation method. The more rapid the write-off, the greater the up-front savings to the building owner due to the time value of money.
- Vehicle use | Business use of an owner’s personal car can be deducted using the IRS standard mileage rate (44.5¢ per mile in 2006) or the actual expenses related to this use. Dollar limits cap annual depreciation write-offs. Higher dollar limits apply to light trucks and vans.
SUVs weighing more than 6,000 pounds are not subject to the usual dollar limits on depreciation. The top limit on the Sec. 179 deduction for these vehicles is $25,000; additional cost can be depreciated under usual depreciation rules.
Barbara Weltman at Inc.com
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