Small-business owners can seize many opportunities to reduce their taxes, lower their expenses and invest in employees

and equipment this tax season. Regardless of whether you do taxes yourself or have someone else do them for you, its important to understand the credits, deductions and strategies you can use to help maximize your business tax advantages.

jump to a page Whats New for 2012 3 The Art of the Deduction 4 Preparing for Retirement 5 Planning Ahead 6 Bringing It All Together 7

What every Small Business owner Needs to Know For tax Season
tIp: The Dos and Donts of small business
1

taxes. Read More

Whats New for 2012

period of 20 years or fewer. The allowance is an additional deduction you can take after any Section 179 deduction. FUTA Tax: Small-business owners pay the Federal Unemployment Tax Act tax, which is used to provide unemployment benefits to workers who have lost their jobs. The tax owed is a percentage of the total annual pay per each employee, limited to $7,000 per employee. The FUTA tax rate was reduced from 6.2% to 6% as of July 1, 2011. Small-business owners also can receive a 5.4% credit against FUTA tax if they make payments to a state unemployment program. That credit can give small-business owners an effective FUTA tax rate of 0.6% in 2011. Startup Costs: Aspiring entrepreneurs can deduct up to $5,000 of startup expenses incurred in 2011. That deduction decreased from $10,000 in 2010. Small Business Health Insurance Credit: Small-business owners who pay at least half of their employees health insurance coverage may qualify for a credit for up to 35% of the premiums paid. However, determining whether your business is eligible can be difficult. The Internal Revenue Service has published an online guide to help smallbusiness owners figure out if they qualify. New Gross Receipts Information: The IRS now has more information on gross receipts from credit card processing companies and banks. Businesses conducting credit card, debit card or gift card transactions should be careful that the gross receipts they report to the IRS tracks closely with the data the agency has.
Do you use an accountant to complete your business taxes?

the art of the Deduction

even with all the changes in credits and deductions for 2011, small-business owners should take every legal deduction available. Sometimes the most common deductions for smallbusiness owners are overlooked.
Home Office: Generally, the amount you can deduct depends on the percentage of your home used for business. Measure your home office and divide by the square footage of your home. Use that percentage to calculate what portion of home-related costs, such as rent, utilities and insurance, you can claim as business expenses. The deduction for certain expenses will be limited if your gross income is less than your total business expenses. Insurance Premiums: Self-employed entrepreneurs who pay for their own medical, dental and qualifying long-term care insurance premiums can deduct 100% of the costs as long as the deduction is not more than the business net profit. Premiums for liability insurance and other coverages that are necessary for the business also are deductible. But premiums for life insurance policies where you are the beneficiary or loss-of-earnings and businessinterruption insurance are not deductible. Professional Fees: You can deduct fees you pay professionals for services related to your business so fees paid to attorneys for legal advice and to accountants for tax advice are deductible. However, fees paid to professionals when you acquire a business asset are added to the tax basis of your business and are not deductible. Auto Expenses: Keep good records of mileage, tolls and parking costs of your business travel. You have to choose between two methods of deducting auto expenses: You can take the standard mileage rate, which is calculated by the IRS roughly every six months, or deduct your actual expenses for auto-related items, which include gas, repairs and insurance.
Which software program do you use to prepare your business tax return?
I dont use a software program

60.7%
Yes. The accountant handles everything

Small-business owners face a changing landscape of credits and deductions. the health care reform law and the Small Business jobs act of 2010 provided many generous tax benefits, but some of them have changed for 2011. Here are the major changes:
Section 179 Expense Deduction: For 2011, small businesses can expense up to $500,000 of the first $2 million of property bought for use in a business. Such property includes computers, office equipment and vehicles. Generally, Section 179 expenses do not include land and investment property. But the Small Business Jobs Act extends the deduction to qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for 2011. Bonus Depreciation: Small-business owners can deduct the entire cost of property placed in service in 2011, but the property has to be new, not used. The deduction applies to office equipment, computer software and any tangible personal property with a recovery

35.8%
TurboTax

23%
No.

16.4

Travel, Meals, Gifts and Entertainment: As with auto expenses, it is important to keep detailed records that show travel, meals and entertainment are necessary for your business. To expense travel, you must be away from your regular place of business substantially longer than an ordinary days work and show that you need rest to meet the demands of your work while youre away. Travel expenses can include shipping costs for presentation materials, tolls and parking fees as well as taxi fares. Unlike travel expenses, you can deduct only half the cost of business meals. Business expenses you cant deduct include membership dues to athletic, dinner and social clubs, federal income tax payments, lobbying expenses and political contributions.banks. Businesses conducting credit card, debit card or gift card transactions should be careful that the gross receipts they report to the IRS tracks closely with the data the agency has.

35.8%
Other

14.6%
H&R Block at Home/ TaxCut

6.2%
TaxACT

6.2%
TaxSlayer

1.1%
Taxbrain

Yes, the accountant helps with some parts

.4%

Poll of readers from SmartBrief on SmallBusiness, SmartBrief on Entrepreneurs, and SmartBrief on Main Street

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preparing for Retirement

What category accounts for the largest portion of your deductions?
Equipment
19.9%

planning ahead
the Bush-era tax cuts expire at the end of the year. unless Congress passes legislation to extend the lower rate, the long-term capital gains tax rate will increase to 20% from the current 15%. This makes it an
Job Creation Act of 2010 changed the rules governing federal estate taxes, gift taxes and generation-skipping transfer taxes, but those changes end this year. For 2012, the federal estate tax exemption will be $5.12 million and the estate tax rate for estates valued over this amount will be 35%. The same rate and limits apply to federal gift and generation-skipping transfer taxes.
Compared with last year, do you expect the amount of business deductions you take to increase, decrease or stay the same?

A Self-Employed 401(k) has the most generous contribution limits among the three accounts but is only appropriate for businesses with no employees other than a spouse. You can contribute up to 25% of compensation, up to the annual maximum of $49,000 for 2011 and $50,000 in 2012. The plan also allows for salary deferrals up to $16,500 in 2011 and $17,000 in 2012 and catch-up contributions up to $5,500 for 2011 and 2012 if you are 50 or older.

Insurance
19.9%

Other
18.8%

Transportation
9.9%

Travel & Entertainment

7.3%

Small-business owners have until april 17 this year to make retirement plan contributions to reduce their 2011 taxes. Its one of the few things small-business owners can do after the year ends to help with tax filling season, says Dustin Stamper, manager of grant thorntons Washington National tax office.
But more than half of small-business owners might not have a retirement plan that fits their needs, according to a recent survey by Fidelity Investments. The survey found that small-business owners did not understand the contribution limits, tax filing requirements or funding rules of their retirement accounts. Most small-business owners use one of three types of retirement accounts, depending on the size and complexity of their businesses: A SEP-IRA is primarily used by sole proprietors. Small-business owners can contribute $49,000 for 2011, or 25% of their salary, whichever amount is smaller. In 2012, the contribution limit rises to $50,000. Only an employer can contribute to a SEP-IRA.

I dont know
6.8%

A SIMPLE IRA is for businesses with 100 or fewer employees. The plan is funded by taxdeductible employer contributions and pretax employee contributions. But small-business owners are required to match each participants contributions dollar-for-dollar, up to 3% of compensation but no more than $11,500 if the investor is younger than 50 and $14,000 if the investor is 50 or older. A small-business owner can reduce the employers match to as little as 1% of each participants compensation for any two years in a five-year period. All three retirement accounts offer taxdeferred growth potential, the ability to deduct employer contributions as an expense and a tax credit of up to $500 for certain expenses incurred while starting and maintaining the plan for the first three years. When picking the retirement plan that is right for you and your small business, Fidelity suggests asking yourself three questions: Do you have or expect to have any common-law employees? Do you want your employees to be able to contribute their own money to their retirement plan? Whats a higher priority maximizing contributions or keeping plan administration simple?

ideal time for small-business owners to consider selling a business or shifting the timeframe of deferred compensation to take advantage of the lower tax rates this year. These are things that take planning, says Greg Rosica, a tax partner at Ernst & Young. You cant flip a switch and accomplish them. Small-business owners should take time now to prepare. The Bush-era tax cuts expire at the end of the year. Unless Congress passes legislation to extend the lower rate, the long-term capital gains tax rate will increase to 20% from the current 15%. This makes it an ideal time for small-business owners to consider selling a business or shifting the timeframe of deferred compensation to take advantage of the lower tax rates this year. These are things that take planning, says Greg Rosica, a tax partner at Ernst & Young. You cant flip a switch and accomplish them. Small-business owners should take time now to prepare.

As tax rates are expected to rise in 2013 and beyond, you should consider converting your traditional IRA to a Roth IRA, Rosica says. With a Roth IRA, you pay taxes on the contributions but withdraw money from the account tax-free. In a traditional IRA, you dont pay taxes on your contributions, but your withdrawals are taxed. So if you think income tax rates are going to rise for your tax bracket, it might make sense to do a Roth conversion. You will have to pay taxes on any money you convert to a Roth IRA. Determining whether this move will save you money can be difficult to figure out, Bankrate offers a Roth conversion calculator to help you decide whether this move is right for you.

58.2%
Stay the same

Home Office
5.8%

Office Supplies
5.8%

Software
2.6%

Politicians from both parties agree that corporate tax rates should be lower, but debate over the details might be little more than talk until after the presidential election. The Obama administration has proposed dropping the top corporate tax rate to 28% from 35%. The Republican presidential candidates have proposed lowering corporate tax rates even further.
Its not all rosy in 2012. Some of the tax benefits enjoyed in 2011 will be reduced this year. For 2012, the Section 179 Expense deductions $500,000 and $2 million 2011 limits will fall to $139,000 and $560,000. And small-business owners will only be able to deduct half the cost of property placed in service in 2012 under the Bonus Depreciation allowance.

19.3%
Increase

16%
Decrease

Meals
2.1%

Furniture
1%

Poll of readers from SmartBrief on SmallBusiness, SmartBrief on Entrepreneurs, and SmartBrief on Main Street

Estate tax rates in 2012 also create a favorable environment for small-business owners to conduct succession planning. The Tax Relief, Unemployment Insurance Reauthorization, and

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Bringing it all together

tax season can be tough. the IRS has increased the time it spends auditing small businesses by 30%, according to a report from Syracuse universitys transactional Records access Clearinghouse.
The average small business spends up 255 hours and $2.3 million on federal tax complaince, according to a 2011 survey done by the IBM Global Business Services, IRS NHQ Office Research and Quantria Strategies. In total, small businesses spent an estimated 1.8 billion hours and $16 billion to prepare their taxes last year.

But you dont have to go it alone. Many of you use accountants and attorneys to advise you on your tax situation. Nearly 90% of small-business owners use a tax practioner or accountant, according to estimates by the National Small Business Association, and only 4% small-business owners prepare tax returns themselves. Even if you rely on a tax pro to handle the heavy lifting, there are also several excellent online forums that can help you decipher complicated tax questions for free: Check out the IRSs Small Business and Self Employed Tax Center. The Small Business Administration provides a detailed online guide for tax-recordkeeping strategies.

about american express opeN

American Express OPEN is the leading payment card issuer for small businesses in the United States. We help small business owners run and grow their businesses with Charge and Credit Cards that deliver purchasing power, flexibility, rewards, and savings on business services. Small business owners also get access to an expanded lineup of partners, and online tools and services designed to help them improve profitability. Small business owners can choose from a range of Cards with spending capacity built for business. We provide innovative payment options, cash flow management tools, and cost reduction solutions. American Express OPEN also powers OPEN Forum, an online community, which lets small business owners exchange insights, get advice from experts, and build connections to help drive success. On OPEN Forum, small business owners can find a wealth of resources from articles, videos, and discussions to online crash courses, white papers, and infographics all focused

on business growth. Visit OPEN Forum to find insights from some of the leading voices in small business today to help answer common tax-related questions and help clarify the filing process. Learn more about American Express OPEN at open.com.

Small Business tax Resources from opeN Forum

Get more insight on small business taxes from experts at OPEN Forum, including: Start 2012 Off Right With 5 Tax-Wise To-Dos Timely Tax Tips For Small Business Owners Decoding the New Tax Rules for Merchants 10 Essential Online Resources for Preparing Your Small Business Taxes Tax Law Changes For 2012: What You Need To Know

Twenty-nine percent of small-business owners said federal taxes and 18% said state taxes were the most significant challenge to the growth and survival of their businesses, according to the National Small Business Associations 2011 Small Business Taxation Survey. Thirty-seven percent of small-business owners indentified the financial cost of tax preparation as the biggest burden imposed by the federal tax code while 17% said constantly changing rules were the top source of their tax headaches.

Nolo supplies an updated compendium of tax law. 360 Degrees on Taxes, which is sponsored by the American Institute of Certified Public Accountants, offers free tax resources, tips, FAQs and checklists from CPAs.

Tax answers by H&R Block addresses many common tax questions.

about SmartBrief
SmartBrief is the leading online publisher of targeted business news and information in a wide variety of markets. The companys mission is to give its 4.5 million readers a competitive edge by providing relevant, timely and reliable information. Learn more about SmartBrief on Entrepreneurs, SmartBrief on Main Street, and SmartBrief on Small Business.

tIp: Find more tax insights, advice and tips in Business Taxes: Decoded
on OPEN Forum
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