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The Top Ten Most Frequently Asked
Small Business Questions (1 of 3)

© by Fred W. Daily

1. If you could choose just one tax benefit of being in business for yourself, what would it be?

A. The best tax break of all for self-employed folks is tax deductible retirement plan contributions--to IRA, SEP, Keogh and 401Ks. You get a double tax benefit: a full dollar for dollar deduction in the year you put money into a retirement plan, and for years to come, earnings in the plan compound tax deferred. I know it takes a lot of discipline if you are in your 20's or 30's to put money into a retirement plan. But, the accumulation over 20 to 30 years can be astounding--several million dollars is not out of the question. Don’t pass up this tax bonanza for another minute, even if you can only make a small contribution.

2. I am starting a mail order company out of my condominium. I heard that you can no longer take a deduction for a home office, or that if you claim a home office, you will be audited. Is this true?

A. Absolutely no, to both questions! But, there are some things you must be aware of here. Home offices still provide great tax deduction possibilities--as long as the bulk of your work is done at home. However, if you perform most of your services or sell goods primarily at other locations, you may not be able to claim depreciation on your home office space or rent. The rules and tax forms for claiming these deductions are tricky. While having a home office probably increases your audit chances, it does so only slightly -- and then only if your home-based business loses money.

3. My consulting business is very profitable so I want to buy a number of items for it and get the quickest write-off of business equipment I can. How much can I deduct this year -- instead of having to take long-term depreciation deductions?

A. I have some good news for you. Congress increased the amount you can deduct in one year for business equipment purchases to $18,500, for 1998. So, you can write off a whole batch of stuff--from computers to drill presses--all in one year instead of having to take long term depreciation deductions. For instance, instead of taking deductions on a new $5,000 Mac or PC system over the tax code prescribed five years, you can take the whole $5,000 in 1998. You can even hold off until December 31st and get the deduction for the full year, as long as you set up and start using the system before ringing in the New Year. (Kicking out just one business letter is enough.) Note that the amount of deductions under this tax provision (IRC 179) is slated to increase in stages, to $25,000, in the years to come.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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