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If the adjustments required by section 481 (a) and
Regulation 1.481-1 are attributable to a change
in method of accounting initiated by the taxpayer,
the amount of such adjustments, to the extent
such amount does not exceed the net amount
which would have been required if the change
had been made in the first taxable year, shall be
taken into account by the taxpayer in computing
taxable income in the manner provided in section
481 (b) (4) (B) and paragraph (b) of this section.
—Internal Revenue Code
Well as through this world I've rambled
I've seen lots of funny men.
Some will rob you with a six-gun
And some with a fountain pen.
—Woody Guthrie, "Pretty Boy Floyd"
Relax. Tax law isn't easy, but this book is.
This book will not try to explain how to prepare a tax return. This book will not have you struggling with tax forms. This book will not drag you through the confusing, contradictory, confounding world of tax law.
This book will let you know about hundreds of tax deductions that are available to every small business, every home business, every self-employed individual, every independent contractor, full-time or part-time.
A CPA by the name of George Brown, who was interviewed in a business magazine, made a statement that has stuck with me for several years and that inspired this book: "You get a raiseevery time you can legitimately avoid paying a tax on something." Every tax deduction you find will save you money on your federal income taxes, on your state income taxes, on your self employment taxes, on local income taxes, and on any other business taxes based on net profit.
If you really like the challenge of preparing your own tax return, I encourage you to do it. And if you don't want to struggle with tax forms, leave that miserable job to your tax accountant. Either way, you owe it to yourself to find every tax deduction you can.
Who Is This Book For?
This book is for anyone working for himself or herself. This includes sole proprietors, partners in partnerships, members of limited liability companies (LLCs), and people who own their own corporations.
This book is for shopkeepers, repair people, manufacturers, trades people, freelancers, professionals, independent contractors, outside contractors, subcontractors, general contractors, entrepreneurs, consultants, artists, craftspeople, direct marketers, network marketers, multi-level marketers, free agents, sales reps, inventors, employers, moonlighters, home businesses, full-time, part-time, sideline, you name it. Unless you are on someone else's payroll as an employee, you are in business for yourself. You are entitled to all the business deductions in this book.
This book is also for anyone who gets a 1099-MISC form, the IRS's "Miscellaneous Income" form that businesses must give to individuals who are doing contract work but are not on the payroll as an employee.
This book is not for employees: people on the payroll of an employer, having taxes deducted from their paychecks, getting a W-2 statement at year end. (If you are an employee/owner of your own corporation, this book is for you).
This book is not for investors, people making money in the stock market or commodities trading, people earning their money from rental income or loans or interest or dividends, people earning what the IRS calls "passive" income. This book is for people who invest in their own businesses, but not for people who invest in other people's businesses.
How to Use This Book to Your Best Advantage
Be forewarned. This guide does not provide complete information on all federal tax laws nor was it intended to. There are already enough publications available that do just that, and they are not easy to read either.
This guide does list every business tax deduction I have encountered in twenty years of tax practice, consulting, writing, teaching, and running my own businesses. I let you know what the deductions are, and whether they apply to you and your business.
Tax laws are precise, and I've tried to make this book as precise as possible, but without making it so confusing and complicated that it becomes unreadable—like most of the tax guides on the market. I've tried to accomplish this task with a three step system:
Step One: For each tax deduction, I define the terminology (and not in IRS Code. Sections, accountant's jargon, or other forms of Advanced Sanskrit), and I explain the basic laws. These laws apply to most businesses, most of the time. "Most" is the key word. There may be exceptions.
Step Two: If there are exceptions to the laws, or complications, or special situations for some businesses, I alert you to these fun details and explain them in general, but without bogging you down in confusing or complicated tax law.
Step Three: If necessary, I refer you to one of the free IRS publications that have the fine-print details of the laws. You can then do your own research (which really isn't all that difficult if you take it one deduction at a time), or you can ask your accountant about the details. Either way, you now know that there may be yet another tax savings worth looking into.
Also understand that the wording in tax law is important. The words have very specific meanings. Don't read more into the laws than what is explained here, don't read between the lines, don't make assumptions, as you can easily wind up making assumptions that are inaccurate.
If the terminology is confusing or unclear, if you do not understand a word, a definition, or an explanation, it is important that you stop, and take the time to understand its meaning before using the information. If you don't fully understand the concepts, ask. Get help from your accountant. Misunderstanding tax law can lead to trouble.
I'd also like to give you a warning about getting help from the IRS. Although IRS publications are usually accurate and reliable, the same cannot always be said of tax information the IRS gives out over the phone or in person. The IRS people do, on occasion, give out totally incorrect information. Tax laws are vastly complicated and even the experts make mistakes. Do not rely on verbal information unless you can verify it. Ask the IRS person for a reference in one of their publications, and look it up.
Every deduction listed in this book includes an expense category. The expense category is a guide to help you fill out your tax return, to figure out what line on the tax return to post each deduction.
Schedule C, the business tax return for sole proprietors, lists only 22 categories of expense: 22 line items. The partnership tax return (Form 1065), the Limited Liability Company tax return (also using Form 1065), the C corporation tax return (Form 1120), and the S corporation tax return (1120-S) list a similar number of categories. And here we have 422 deductions to combine into 22 categories. Where do the 422 deductions go? What categories?
Some categories are obvious. Interest goes on the "Interest" line. Advertising goes on the "Advertising" line. Pencils go on the "Office expense" line. But where do you stick Education expenses? Freight? Decorating expenses? Alarm systems? You can use the "Expense category" designations in the book as a guide.
Keep in mind that these expense categories are only a guide. They are not law, not rigid. It is not critical which deductions go on which lines on the tax form. The IRS is not going to be upset if an expense that belongs on one line winds up on another. Even I'm not sure whether some deductions should be labeled "Office expense" or "Supplies" or something else. If you have a deduction you don't know where to put on the tax return, just pick a reasonable category and put it there.
It is a good idea to make a worksheet showing which expenses you combined for the tax return, and keep it with your copy of your return (no need to send it to the IRS). This will make things a lot easier should you ever face an audit, or if you need to check your figures later, or if you are just looking back a year later trying to figure out how to fill out the next year's tax return.
There is a line on the tax return called "Other expenses," and a large number of the deductions listed in this book list their expense category as "Other expenses." No other category seemed to fit the deductions. But if you have a category other than "Other expenses" that you feel is more appropriate, again, the category you pick is not critical. What is critical is that you take every deduction you are entitled to, regardless of where you put it on the tax return.
Any deductions you do include as part of "Other expenses" must be listed individually. Don't call these deductions "Other expenses"; call them what they actually are. Then list their total on the "Other expenses" line on the return. The tax return provides a separate area for listing the deductions that comprise "Other expenses."
Is Every Possible Tax Deduction Listed?
This list of 422 deductions is compiled from my studies of tax laws for over twenty years (somebody's got to do it, right?), my background as a C.P.A., my experience working directly with hundreds of different businesses of all types, and the generous feedback I've gotten from my readers and people who attend my seminars.
But still, I'd be a fool to say that I've listed every possible deduction there is. If you have a deduction not listed in this book, and if it meets the basic rules for all deductions (covered below), by all means take it. Or at least ask your accountant about it. And let me know about it too, will you? Maybe the next edition of this book will be called "423 Tax Deductions."
Isn't This What You Pay Your Accountant For?
Here is the most important piece of information in this book: You have to find these deductions yourself. Only you know the ins and outs of your own business. You cannot rely 100% on your bookkeeper, your accountant, your attorney, your software program, or the Internal Revenue Service.
Any experienced tax accountant will (or certainly should) know about every tax deduction listed in this book. But your accountant can't possibly take the time to ask you—and his or her 300 other tax clients—about every possible deduction you didn't know about or failed to include on your ledgers. The typical tax accountant may have several hundred tax clients, and during the three hectic months of "tax season" (January 15 to April 15), your accountant is preparing a dozen or maybe two dozen tax returns a day. The accountant most likely wants to take your year's totals, totals you yourself have summarized from your ledgers, enter them into the computer, push "Print," and collect his $250. Next.
If you are expecting an accountant to actually sit down with you, discuss tax deductions in detail, study your business and your ledgers, and find you savings, you should plan to do this well before the tax preparation time, and expect to pay about $100 an hour for this service. And even then, you really should not expect an accountant who does not work day to day in your business to be able to rattle off every possible tax deduction you may be entitled to.
Instead, spend a few hours with this book. Skim the alphabetical list of deductions, and spot the ones that may apply to you. And then, if needed, ask your accountant about them. Your accountant will be of much greater help, and much greater value, if you first go through these 422 deductions before seeing the accountant. By doing a little homework, you may significantly reduce the accounting fees.
The well known tax attorney Julian Block said it best: "The informed client gets the best advice."
Will Your Deductions Trigger An Audit?
Are you afraid to take certain deductions because you fear they may trigger an audit? Welcome to the club. There are thousands of small business people paying millions of dollars in taxes they don't owe, year after year, simply out of fear of being audited.
"Don't take the home office deduction, it'll guarantee an audit." What home business owner hasn't heard that? It is a myth. The home office deduction does not invite an audit. And the same applies to most tax deductions.
But, yes, there are a few tax deductions that are Red Flags, ones likely to bounce your return out of the computer, to put that nasty gleam in the eye of some IRS auditor, deductions that are likely to invite an audit, and, again yes, ones you may want to avoid—or at least be very careful about—when preparing your tax return.
Those few deductions that are likely to invite an audit are mentioned in this book. They include: Large travel and entertainment deductions, probably the most likely to generate suspicion. Deductions for expenses not typically associated with your type of business. Deductions for items of a personal or recreational nature. Any large deductions out of line with the amount of income you are reporting. (Although a home office deduction does not trigger an audit, a large home office deduction combined with a small income does increase your chances of being audited).
What will increase your odds of being audited are not so much the deductions, but other things on your tax return: A loss year after year. An occupation targeted by the IRS because of potential "abuse" (ease of cheating), particularly businesses that deal in cash (laundromats, cab drivers). Barter transactions. Major changes from year to year (you say you are a lawyer one year and a psychiatrist the next). Non-business items that are incorrect or out of line. Claiming your dog as a dependent. Telling the IRS that the income tax is unconstitutional.
If you discover from reading this book that you have a tax deduction that may cause you trouble, it is then up to you to decide how "aggressive" you want to be, or how safe you want to be, when claiming the tax deduction. I think this book will help you make those decisions. But I recommend you talk to your tax accountant about your concerns. Any good accountant should be able to help you stay within your comfort zone.
I think that is the real key: your comfort. No amount of money is worth destroying your peace of mind. No tax savings is worth high blood pressure. But short of a sleepless night of IRS worries, if you are entitled to a tax deduction, take it. The laws were written to allow these deductions. Congress and the IRS say, "Yes, take the deductions, you don't owe the tax." If the government in its wisdom is allowing a deduction, you in your wisdom should take it.
|A Treasure Hunt||7|
|Introduction to Tax Deductions|
|Who Is This Book For?||11|
|How to Use This Book to Your Best Advantage||12|
|Is Every Possible Tax Deduction Listed?||15|
|Isn't This What You Pay Your Accountant For?||15|
|Will Your Deductions Trigger an Audit?||16|
|When in Doubt, Deduct||17|
|Federal Versus State Laws||19|
|Amending Prior Years' Tax Returns||19|
|When Can You Take a Deduction?||20|
|Structuring Transactions to Your Best Advantage||21|
|Equipment, Supplies and Inventory Owned Before Going Into|
|Partners In Partnerships||24|
|Owners of Corporations||24|
|Members of Limited Liability Companies (LLCs)||24|
|Home Based Businesses||24|
|Self Employed Individuals||26|
|Employer and Employee||27|
|What Is a Tax Deduction?||27|
|Tax Write Off||28|
|Personal Versus Business||28|
|Tax Credits Versus Tax Deductions||30|
|The Four Basic Rules: All Expenses||33|
|Rule 1: Business Related||33|
|Method of Payment||34|
|Rule 2: Ordinary Expenses||35|
|Rule 3: Necessary Expenses||35|
|Rule 4: Not "Lavish or Extravagant"||35|
|422 Tax Deductions||37|
|422 Deductions, A-Z (Listed Alphabetically)||39|
|How to Keep Up To Date|
|The Annual Update Sheet||217|