Tax Checklist for Sole Proprietorships/Schedule-C Filers

1. Auto Expenses:

i. The standard mileage rate for determining your deduction for the business use of a car has increased to 44.5 cents per mile in 2006. Therefore, it is important to maintain a business log to claim the correct allowable mileage.

ii. It is important to keep a good vehicle log for business miles. CPA’s are now asking clients to produce these logs during the tax interviews. This would determine the business usage percentage to be used in (iv) below.

iii. Also, get in the habit of having these logs as part of your official permanent tax records, especially in case of an audit.

iv. Have actual expenses for the auto handy during the tax interview, these would be car insurance, gas and oil expenses, car repair expenses, along with the business % usage determined in (ii) above, and then let the CPA determine which method actual expenses or mileage method generates the greatest deduction.

2. Depreciation deduction:

i. For tax year 2006, don’t forget to elect this special IRS election to write-off new equipment and furniture purchased for use exclusively for business. This election is available provided the taxpayer has taxable income that exceeds the total amount written off as Section 179 deduction up to the allowable amount $108,000 for 2006.

ii. Don’t forget to capitalize and amortize organization and startup expenses in the year you start the business. An election is available to immediately to the extent of the first $5,000, certain conditions have to be met, however, and once again

Discuss with your Accountant to determine whether your taxable income meets that qualifications required in (I) and conditions are met in (ii).

Tip: You can start depreciating your fixed assets including taking a section 179 deduction the year they are placed in service, even if you operate on the cash basis and you do not pay for the assets until next year. In other words, if you paid via credit card at year-end it is considered purchased in 2006 rather on date you actually paid for these assets.

3. Health Insurance paid by self-employed taxpayer-schedule C filer’s.
If you are a self-employed taxpayer, that is a Schedule C filer, you are allowed to deduct 100% of the cost of the health insurance policy from your adjusted gross income. However, this will not result in saving in self-employment tax, nevertheless, the deduction will reduce your overall tax liability.

4. Don’t Forget to Deduct your Computer or Laptop used for Business:
If you use it for personal use, you cannot deduct 100% for business use. However, if you bought a new Computer or laptop in 2006, you can certainly elect s179 and write-off the entire cost of the computer (multiplied by % business). Also, don’t forget to deduct the DSL charges or high-speed dial up connection charges, your printer, your toner supplies, and any other anti-virus products or software used to maintain the computer.

5. Consider a pension contribution:
Make sure that you take advantage of making the maximum pension contribution available in 2006, to save on your regular taxes. However, for schedule C filer’s this pension contribution would not save self-employment taxes.

For more of the checklist, click here. What do you think?