A dozen deductions for your small business

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By Dana Dratch • Bankrate.com

Small-business tax rule No. 1: Don't mess with the IRS.

The Deductible Dozen

1. Home office

2. Office supplies

3. Furniture

4. Other equipment

5. Software and subscriptions

6. Mileage

7. Travel, meals, entertainment and gifts

8. Insurance premiums

9. Retirement contribution

10. Social Security

11. Telephone charges

12. Child labor

But that doesn't mean you should cheat yourself. Take every legal deduction you can. Here are a dozen that even savvy small-business owners and entrepreneurs sometimes forget:

1. Home office

Concerned that claiming a home-office deduction is tantamount to sending an engraved invitation to an Internal Revenue Service auditor? Don't be, says Jan Zobel, author of Minding Her Own Business: The Self-Employed Woman's Guide to Taxes and Recordkeeping.

"I don't agree that chances of getting audited are greater with a home-office deduction," says Zobel, a San Francisco Bay-area tax expert, who specializes in serving the self-employed. In her own practice, she has prepared more than 400 returns a year for the last 25 years. And while at least half of her clients claim a home-office deduction, only one home-based entrepreneur has been audited.

The key here is that you use the term "home office" the same way the IRS does. The tax agency says it must be a space devoted to your business and absolutely nothing else. Deducting the den that houses the family computer and serves as a guest bedroom won't fly with Uncle Sam.

"If you only have one computer and you have a child over four, the IRS is going to be pretty certain that the child is using the computer," says Zobel. "And the burden of proof is on you."

The deduction, however, isn't limited to a full room. Your home office can be part of a room. Just how much of the space is deductible? Measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses -- rent, mortgage, insurance, electricity, etc.-- that you can claim.

2. Office supplies

Even if you don't take the home-office deduction, you can deduct the business supplies you buy. Hang onto those receipts, because these expenditures will offset your taxable business income.

3. Furniture

When your office supplies are more than just pens and paper, you have another tax-cutting opportunity.

Office-furniture acquisitions provide a couple of choices. Deduct 100 percent of the cost in the year of the purchase or deduct a portion of the expense over seven years, also known as depreciation.

To take the whole cost in one tax year you'll use the Section 179 deduction (named for the part of the tax code where the law appears). Recent tax-law changes have made this deduction even more attractive. For the 2004 tax year, a business owner can expense up to $102,000.

If you choose instead to depreciate the desks and filing cabinets, you can't simply split the cost into equal portions over the depreciation period. Instead, you must use an IRS chart to make separate calculations each year.

Which is better for you? Anticipate the times that your business will need these deductions the most. Both options are reported on IRS Form 4562.

4. Other equipment

Items such as computers, copiers, fax machines and scanners also are tax deductible. As with furniture, you can take 100 percent up front or depreciate (this time over five years).

5. Software and subscriptions

The recently increased Section 179 provides another tax break in this area of business expenses. Previously, a company had to depreciate the cost of computer software over three years. Now, off-the-shelf software business buys can be fully expensed in the year purchased. As with the other expenses covered under this part of the tax code, the deductions are allowed for tax years 2004 and 2005.

The rules for deducting business and industry-related magazine subscriptions weren't changed. You can continue to take the total costs as a full deduction in the year spent.

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