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Old 03-12-2007, 10:12 PM
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Tax Checklist for Sole Proprietorships/Schedule-C Filers

1. Auto Expenses:
i. The standard mileage rate for determining your deduction for the business use of a car has increased to 44.5 cents per mile in 2006. Therefore, it is important to maintain a business log to claim the correct allowable mileage.

ii. It is important to keep a good vehicle log for business miles. CPA’s are now asking clients to produce these logs during the tax interviews. This would determine the business usage percentage to be used in (iv) below.

iii. Also, get in the habit of having these logs as part of your official permanent tax records, especially in case of an audit.

iv. Have actual expenses for the auto handy during the tax interview, these would be car insurance, gas and oil expenses, car repair expenses, along with the business % usage determined in (ii) above, and then let the CPA determine which method actual expenses or mileage method generates the greatest deduction.
2. Depreciation deduction:
i. For tax year 2006, don’t forget to elect this special IRS election to write-off new equipment and furniture purchased for use exclusively for business. This election is available provided the taxpayer has taxable income that exceeds the total amount written off as Section 179 deduction up to the allowable amount $108,000 for 2006.

ii. Don’t forget to capitalize and amortize organization and startup expenses in the year you start the business. An election is available to immediately to the extent of the first $5,000, certain conditions have to be met, however, and once again

Discuss with your Accountant to determine whether your taxable income meets that qualifications required in (I) and conditions are met in (ii).

Tip: You can start depreciating your fixed assets including taking a section 179 deduction the year they are placed in service, even if you operate on the cash basis and you do not pay for the assets until next year. In other words, if you paid via credit card at year-end it is considered purchased in 2006 rather on date you actually paid for these assets.

3. Health Insurance paid by self-employed taxpayer-schedule C filer’s.

If you are a self-employed taxpayer, that is a Schedule C filer, you are allowed to deduct 100% of the cost of the health insurance policy from your adjusted gross income. However, this will not result in saving in self-employment tax, nevertheless, the deduction will reduce your overall tax liability.

4. Don’t Forget to Deduct your Computer or Laptop used for Business:

If you use it for personal use, you cannot deduct 100% for business use. However, if you bought a new Computer or laptop in 2006, you can certainly elect s179 and write-off the entire cost of the computer (multiplied by % business). Also, don’t forget to deduct the DSL charges or high-speed dial up connection charges, your printer, your toner supplies, and any other anti-virus products or software used to maintain the computer.

5. Consider a pension contribution:
Make sure that you take advantage of making the maximum pension contribution available in 2006, to save on your regular taxes. However, for schedule C filer’s this pension contribution would not save self-employment taxes.

6. Don’t claim bad debts if you use the Cash Basis method of accounting:
The IRS specifically disallows the deduction of bad debts for taxpayers who utilize the cash basis method of accounting. However, if you use the accrual method of accounting this deduction is allowed.

7. Consider hiring your children:
If you own your business, you should consider hiring your children to work for your company or business. If they are under the age of 18, you may be hire your child to work in your own business and pay them up to $5,150, it will be a deduction for your you. And, you would not be required to file a tax return for them and even make an IRA contribution for them early in their life.

8. Meals and Entertainment Expenses:
In most cases, only 50% of your total business-related meals and entertainment expenses can be deducted for tax purposes. This is a particularly abused area of business expenses and most often expenses are deducted for personal meals. IRS is now scrutinizing this area closely, so prior to deducting for these ask yourself these crucial questions:
i. Are these expense incurred for business?
ii. Who are you taking out for Meals?
iii. Was business conducted either at the meals or subsequent to the meetings?
iv. Are your meals & entertainment expenses taken in 2006 reasonable for your type of
v. Examine the total and ask your CPA to determine if these expenses appear reasonable for your business?
9. 1096’s and 1099 Miscellaneous Report:
Don’t forget to mail out the Annual Transmittal Form 1096’s to the IRS. By law you are required to submit a 1099-Misc to the IRS for any individual who was paid more than $600 in 2006. Make sure you have the name, address and SSN for each individual who was paid these amounts. The accountant will mail out the required forms by the appropriate due dates.

10. Life Insurance Policies:
These are not deductible for tax purposes! No exceptions, and it is important to inform your CPA at tax time that the premium paid to Met Life or Prudential or any other insurance companies is not shop insurance or business insurance.

Find a CPA near you!

Ask TaxGuru Please refer to the legal disclaimer.

Last edited by TaxGuru : 11-24-2010 at 01:34 PM.

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