Tax Tips
3/1/06
Editor's Note: The information in this article is provided for educational and informational purposes only. This information is a
substitute for the advice of a qualified accountant and/or attorney. If you require tax advice, you should seek the services of a
qualified accountant and/or attorney familiar with your business and the laws of your state.
Taxes may not be a scintillating topic for entrepreneurs, but familiarity with the Internal Revenue Code can save money—
precious dollars that can be reinvested, says Mario Iezzoni, a FastTrac facilitator and certified business analyst at the University
of South Florida's Small Business Development Center.
Asset expensing. For starters, get acquainted with Section 179, a portion of the tax code that relates to the depreciation of
assets.
Section 179 permits business owners to completely write off many capital expenditures in the year these assets were
acquired—instead of depreciating the cost over several years. This includes computers, software, machinery, office furniture
and even certain vehicles like SUVs, providing they qualify as necessary expenses. If new assets exceed the Section 179
expense threshold, the remaining amount can be depreciated over an appropriate period. (For example, copiers, computers,
and telephone systems are depreciated over a five-year period, while desks and mobile phones are depreciated over a seven-
year period.)
The threshold on the Section 179 deduction was initially $10,000, but has been ratcheted up over the years. The maximum for
2006 is $108,000 for qualified property (although SUVs are capped at $25,000). Section 179 gives entrepreneurs more flexibility
and control over their tax liability. "If you have a big sale close at the end of the year, you could go shopping for needed
equipment to remove the profit and use the tax savings to help pay for the item," Iezzoni says.
The whole point of the tax savings is to encourage small business owners to reinvest in their companies and stimulate the
economy. "It's the money multiplier at work," Iezzoni explains.
Startup expenses. Entrepreneurs can write off up to $5,000 in startup costs in the tax year they launch a business. These costs
include market analysis, supplies, advertising, and educational classes like FastTrac—as long as the expense was incurred
before the business officially opened. Corporations can also deduct up to $5,000 in organizational costs, such as lawyer's fees
or state incorporation fees. If startup and organizational costs exceed $5,000, the remaining amount can be spread over a
fifteen-year period.
This is a significant change that occurred in 2005. Before then, the Internal Revenue Service (IRS) required startup and
organizational costs to be allocated over a five-year period.
"This immediately throws a $5,000 loss to your bottom line," Iezzoni explains. That can be particularly helpful for entrepreneurs
who may have redeemed a 401(k) plan, which carries a 10 percent penalty, or cashed in stock to fund their ventures.
Pay yourself. Until recently, small business owners could only put $20,000 toward a pension—and reduce their tax bill in the
process. Yet now the IRS allows $40,000 of profits to be socked away. This is especially good news for owners of service
companies, who usually run out of deductions quickly. After all, it's hard to justify buying a forklift or printing press when you own
an engineering consultancy, Iezzoni observes.
Consider an LLC. Limited liability partnerships have been around for nearly thirty years, but only recently become a hot
corporate structure. In 1992 only eighteen states allowed LLCs, compared to all fifty states today.
LLCs are advantageous for a number of reasons. For starters, they provide greater protection for owners. "An LLC doesn't
completely insulate individuals from liability, but it puts a legal argument between them and the entity that must be pierced,"
Iezzoni says.
What's more, there are some enticing tax benefits. "Like Gumby, an LLC is very flexible," Iezzoni says. Entrepreneurs can
initially elect to be taxed as sole proprietors. Then as their business grows, they can change their tax status to an S corporation,
which prevents them from paying 15.3 percent of profits toward Social Security and Medicare taxes. Owners of S corporations,
however, must pay themselves a fair-market-value wage before they can seize this tax advantage, Iezzoni adds.
Because of its flexibility, LLCs are especially good for entrepreneurs who launch businesses while they continue to work
somewhere else.
One caveat: LLC laws vary from state to state. Something that may apply to federal taxes might need to be handled differently
for state returns.
FastTrac Facilitator: Mario Iezzoni at miezzoni@coba.usf.edu. FastTrac Affiliate: Florida Small Business Development Center
at the University of South Florida in Tampa, Florida