Brilliant deductions - tax deductions

Entrepreneur, April, 1996

It's april 1, and all of a sudden you're thinking taxes--what you should have done and what you can do to cut down on the bite the tax man will take this year.

Ideally, homebased entrepreneurs should have devised a tax plan for 1995 in 1994. However, all is not lost. There are still ways you can cut your 1995 taxes, according to Ward Bukofsky, chairman of the individual taxation committee of the American Institute of Certified Public Accountants (AICPA).

One key tax-reducing strategy is establishing a simplified employee pension (SEP). "The SEP can be set up as late as April 15, 1996, and still be effective for the 1995 tax year as long as you make the deduction by April 15," explains Bukofsky. You can contribute up to 15 percent of your net profit for the year.

There are also a number of other deductions to consider. "The first thing you need to look at is whether you qualify for or want to qualify for the home office deduction," says Bukofsky, who is also managing partner of Beverly Hills, California, CPA firm Braverman, Codron & Co.

"Among the advantages for renters who operate a business out of their home is that it entitles them to deduct a percentage of the rent as a business expense," says Bukofsky. "For the person who owns, it allows you to deduct a part of all the expenses related to holding and maintaining a home that otherwise would not be deductible." These include major repairs and maintenance. But before you start rubbing your hands together gleefully, be aware that the IRS has pretty stringent guidelines on home office deductions.

The main requirements, says Bukofsky, are that the home office must be the principal place of business and must be the location from which the bulk of revenue is generated. Also, a specific area of the home must be used exclusively for business.

In addition to the home office deduction, Bukofsky says, Section 179 of the IRS code allows you to write off up to $17,500 of the cost of equipment used solely for business in the year you buy it instead of having to depreciate it. "But you have to be able to show that the equipment is really used just for business, not for the kids to play games on," he adds.

As a self-employed entrepreneur, you can also deduct up to 30 percent of the cost of health insurance for you and your family, even if you don't itemize, says Bukfosky. (States vary, so check.)

Try these tax-reducing tips and start planning today for next year. . . so Uncle Sam will get a lot less from you tomorrow.