Get Primed for Tax Season:

Qualifying Your Clients for Business Deductions

When Lance Armstrong won at the Tour de France he would reward himself with a week off from anything to do with cycling, just take a totally break from it. But once that week was up he would start preparing for the next year going through an extensive training regiment that would build his strength, stamina, and power for the next year.

Well, for us in the tax season our “week” is up and it’s time to start your regiment with getting your tax “strength, stamina and power” that you need for being a success with your tax practice. For any active activity, even in the business world, you are best served if you get yourself “in shape” before you are ready to run the “100 meter dash” in business. Here are a few tax calisthenics that you can start with.

Qualifying for Business Deductions
For the small business sector you may be looking to service you just may be the first tax professional they have dealt with. So to get them started on the right foot here’s the criteria to qualify an expense for a business deduction.

Your expenses must be:

• Ordinary and necessary — defined by the courts and the IRS as “reasonable and customary.”

• Paid or incurred during the taxable year.

• Connected with the conduct of a trade or business.

What is “reasonable and customary” hangs on what’s specific to your business and the local business “traditions”. So, deducting thousands for kiwi picking expenses when you live in Iowa probably won’t work. The expenses your client business incurs don’t have to necessarily be reasonable and customary to the business owner, but simply to your specific trade or industry. Even hobbies that can be related and proven that they have a profit motive can qualify as a deduction. Can anyone say the expense account for your golf game going to expand now that you can prove you do business on the green?
Focus on your profit-making motive. Remember that it’s not what your client pays in taxes that counts, but what your client keeps.

Retirement for Business 401K
In 2006, your client and their employees can contribute up to $15,000 to a 401(k) plan– $1,000 more than you could in 2005 and $2,000 more than in 2004. If they are 50 or older at the year’s end, an extra $4,000 in 2006. 401(k) accounts are funded generally by payroll deductions at the workplace.

Here are the new limits for other retirement plans:

SIMPLE Plans: The limit for SIMPLE retirement accounts, offered by smaller employers, is $10,000 since 2005. For 2006 the limit is adjusted for inflation. If the client is 50 or older by year’s end 2006, contribution to the Plan is set at an extra $2,500 limit.

Self-Employed Plans: For those classified as self-employed, the contribution limit to Keogh plans jumped to $42,000 in 2005, up $1,000 from 2004. The maximum contribution that self-employed workers can make to a Simplified Employee Pension (SEP) plan remains unchanged at the lesser of 25% of compensation or $42,000. (The 25% limit becomes 20% if you’re the owner of the business.)

Deductible IRA Limits Went Up in 2005
Starting in 2005, an individual can contribute up to $4,000 a year to an Individual Retirement Account. (If 50 or older, you can contribute an extra $500.) Whether you can deduct that contribution to the IRA depends on the individual’s income. Income levels are higher for workers seeking to make tax-deductible contributions to Individual Retirement Accounts.

If the company offers a retirement plan, a full deduction can be done if:

• The individual is single and their modified adjusted gross income is $50,000 a year or less.
• The individual is married and filing jointly and the adjusted gross income is $70,000 or less.

In 2005, the deduction is phased out between $50,000 and $60,000 for singles and between $70,000 and $80,000 for joint filers. Above those top levels, you cannot claim a deduction.

Fortunately, in 2006 the top limit for married couples filing jointly rises to $85,000.

Start getting yourself primed for the season that is just around the corner. When you prepare the right things, the right things tend to happen. The success of your business rests with you. Get all the “exercise” and training you and your employees need. Click here to get more acquainted with Universal’s Tax Certification Program.

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