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Tax Tips for Small Business Owners

March 18, 2009 · 4 comments

Today’s post is courtesy of guest author, Sheryl Schuff. You can find out more about Sheryl by checking out her interview as part of my Getting To Know You Tuesday series.

Thanks to Kelly for inviting me over to share this space with a guest post for her readers.

I’ll be discussing some frequently misunderstood topics and overlooked deductions.

If your business files a corporate or partnership return

Your return was due March 16th. If you filed an extension, remember that it’s only an extension of time to file your paperwork, not an extension of time to pay any tax that might be due.

If you file as an S corp or a partnership, you don’t pay any taxes with your return; it’s considered an “information return.” But you might actually qualify for an income tax refund even if you had no tax due. My favorite example of this (and one that is often missed) is the credit for Federal tax paid on fuels.

For example, say you run a lawn mowing and landscaping service. Some of the gasoline you buy is for your vehicles, but some (possibly a lot) is to power your mowers and other equipment that is used off-road. You’re entitled to a tax credit for the off highway business use.

The credit this year is 18.4 cents per gallon. You need to file Form 4136 to get this credit and (as with all tax deductions and credits) you must have proper documentation for proof. If you don’t have the required receipts for this year, make sure to start keeping them for next year.

The price you pay at the pump for all of your gasoline includes Federal tax. The easiest way to keep track of off-road use is to get two fuel receipts every time you fill up. Fill your car or truck first, stop the pump, and pay for that gas. Start over, fill the gas cans you have with you that you’ll use later to fill your mowers, trimmers, hedgers, etc. That second receipt is the one you’ll be able to use to claim the fuel tax credit.

The deductibility of health insurance premiums can be a confusing subject for S corp owners. If you own more than 2% of the stock in an S corp (which you probably do if it’s your company), then the corporation can NOT deduct as a business expense the cost of health insurance premiums it pays for you.

Wait, don’t shoot, I’m just the messenger. Sorry if this is news to you, but it’s the law. What can you do about it?

You’re allowed to include the cost of the health insurance premiums on line 29 (self-employed health insurance deduction) of your individual Form 1040 as an adjustment for adjusted gross income. The amount should have been reported to you on your W-2. Of course, you would have had to tell your payroll service what the amount was in order for them to include it.

Another thing you might want to do is consider becoming a C corporation. The reason I suggest this is that a C corp is allowed to set up what’s called a Section 105 medical reimbursement plan. Under such a plan, the corporation can deduct as a business expense the amount of health insurance premiums and medical expenses it pays on your behalf or reimburses you for. These amounts are not income to you.

This is potentially a huge benefit for you, because it means that you could make all your medical expenses deductible, regardless of your adjusted gross income. You wouldn’t have to wait until they were greater than 7.5 % of AGI to include them on Schedule A (itemized deductions) of your 1040.

This kind of plan has to be offered to all full-time employees, so it’s usually most attractive when the only employees are you and your spouse.

There are many other factors that should be analyzed before making a decision to file taxes as a C corp, so be sure to get professional help before making your choice.

If you’re a sole proprietor or single member LLC and file Schedule C

In certain circumstances, you, too, can set up a Section 105 medical reimbursement plan. If you as the business owner can hire your spouse (for legitimate work), then your business can pay for health insurance premiums and reimburse medical expenses to your spouse and deduct the amounts as business expenses. You can be covered as a dependent on your spouse’s policy and your expenses can be deducted also. You can include your children’s medical expenses, too, (as dependents) even if they don’t work in the business.

You can’t do this if you’re not married. You can still take the self-employed health insurance deduction on line 29, but you can’t have a Section 105 plan.

Wait. All is not lost. Don’t pull the trigger. Read what I wrote above and think about incorporating. Consider all the facts of your situation and get help before you decide.

If you work from home, you might qualify for the home office deduction. Contrary to popular opinion, there is no proof that taking this deduction increases your chances for an audit. If you qualify and have adequate documentation, why worry?

I’ve written about this subject more extensively here: http://sherylschuff.com/blog/taxes/home-office-deduction-chance-of-audit/

A deduction that is commonly misunderstood by many home-based business owners concerns telephone expenses. You can not deduct the cost of basic monthly residential service for the first (or only) landline telephone at your residence. This is true even if the landline is used 100% for business.

If you pay for business service (not residential) then the monthly fee is deductible.

Any business related long distance charges (that you can prove) and any additional services that are for business use (such as caller ID, call waiting, three way calling, and voice mail) are deductible.

Two related notes for all business owners (and those thinking about getting started): If you recently started your business after losing a “regular” job, you might qualify for a 35% credit on COBRA health insurance. And if you live in Delaware, Maine, Maryland, New Jersey, New York, Oregon, or Pennsylvania you might qualify for special unemployment compensation programs for new business startups.

Hope this article has helped you and that you save a bundle on your taxes this year. If you have questions, please leave a comment and if it’s OK with Kelly, I’ll do my best to get you an answer. (Psst, from Kelly: it is!)

Sheryl’s disclaimer: The information presented here is not to be considered tax advice and is not a substitute for services in the areas of tax planning and/or preparation performed by a professional who is familiar with the details of your particular situation. This material is intended to be educational and I encourage you to discuss it with your team of personal financial advisors.

Thanks Sheryl, for sharing! If you want to read more about Sheryl, be sure and visit her blog.

{ 4 comments… read them below or add one }

1 David Maples March 18, 2009 at 11:06 pm

Just wanted to drop you a line. The IRS changed the rules with the reimbursement of Health Care Premiums in 2008. The old limitation no longer applies. It is found in IRS publication called Notice 2008-01

You can find the official publication here.

http://www.irs.gov/pub/irs-drop/n-08-01.pdf

-David

2 Joe March 19, 2009 at 3:38 am

Nice post! Excellent tips and advice.

3 Kelly March 19, 2009 at 8:22 am

Thanks David, I’ll let Sheryl know!

4 Sheryl Schuff, CPA March 23, 2009 at 9:03 pm

David,

Thanks for your comment and the link to the IRS material. You are a savvy, well-informed business owner or you have a great tax accountant…maybe both!

You are correct that an S corp can now deduct as a business expense the cost of health insurance premiums it pays (or reimburses) for a more than 2% shareholder and I apologize for my misstatement. It must, however, be reported as additional W-2 wages and, as I said, the business owner can deduct it as an adjustment for adjusted gross income.

Sheryl

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