Are you getting ready to prepare your 2008 small business income tax returns? Here are three important changes you don't want to miss. Two of them put more money in your pocket; the third gives more money to Uncle Sam.
Mileage Rate Increase.
Here's a good one. If you use the Mileage Method to calculate your vehicle deduction, the IRS has done you a favor by increasing the mileage rate. In 2007, the rate was 48.5 cents per mile. Effective January 1, 2008, the rate was increased to 50.5 cents per mile. On July 1, 2008, the rate was increased again, to 58.5 cents per mile.
Because there are two rates for 2008, the most accurate way to calculate your mileage deduction is to do two calculations: January-June miles TIMES .505 PLUS July-December miles TIMES .585.
If you did a good job of tracking your mileage during the year, this calculation should be no problem. You just add up your mileage for the first six months; then do the same for your mileage for the last six months.
Section 179 Increase.
More good news. When it comes to deducting business equipment (aka "fixed assets" or "capital assets"), Section 179 is the small business owner's best friend. It allows you to forget about all those complicated depreciation rules and simply deduct 100% of the asset's cost in the year of purchase, just like your other operating expenses like office supplies, utilities, wages, etc.
There have always been several critical limitations and restrictions to the Section 179 expense deduction, so be sure to consult with your accountant or read up on it yourself (IRS Publication 946, "How To Depreciate Property", is a good place to start for free information on the topic). For example, there has always been a limit on the amount of the Section 179 deduction. The limit has been gradually increasing over the past several years, from $100,000 in 2003 to $125,000 in 2007. The 2008 limit is a whopping $250,000, so there's a pretty good chance you don't have to do depreciation on your return again this year.
Self-Employment Tax Increase.
This item is not so good. If your business is a sole proprietorship (i.e. you file Schedule C) and your profit is at least $400, you must pay the dreaded self-employment tax of 15.3% on that profit. This 15.3% tax is made up of two parts: social security tax of 12.4% and Medicare tax of 2.9%. You must pay the Medicare tax on all your profit, regardless of the amount. But there is a limit to the profit amount subject to the social security tax. In 2007, that limit was $97,500. In 2008, that limit increased to $102,000. (And just so you know, the 2009 limit has already been increased to $106,800).
These rules about the social security tax portion of the self-employment tax also apply to employee wages and salaries. If your business is a corporation and you are paid as an employee of the corporation, the amount of compensation subject to social security tax has also increased from $97,500 in 2007 to $102,000 in 2008 (and to $106,800 in 2009). So all business owners, regardless of entity type, are affected by this change, which in effect, is a tax increase.
Author Resource:-
Looking for more small business tax tips? For a free copy of the Special Report "How To Instantly Double Your Deductions", visit www.YouSaveOnTaxes.com. Wayne M. Davies is author of 3 ebooks on small business tax reduction strategies.
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