3 Ways to Optimize Tax Deductions in 2010

  • AUTHOR: Barbara Weltman
  • DATE: 01/10/2010

There is much uncertainty about taxes for this year because Congress has not completed action on a number of measures that could impact 2010 taxes, including:       

  • Extensions for provisions that expired at the end of 2009
  • Estate tax rules to enable owners to do succession planning, and
  • Health care reform

With the uncertainty, what can you do?

Take action by taking advantage of existing tax breaks to cut your tax bill for 2010. Here are three ways to help:

1. Write Off Vehicle Expenses

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To deduct business use of a personal vehicle, you need to have good records of the business usage. This means tracking your odometer for business trips and noting the date and purpose of each trip. Start the year off right by jotting down your odometer reading and then adopt a recordkeeping system:

  • Use a logbook that you keep in the vehicle for this purpose (keep a pen or pencil handy for recording information).
  • Use technology to simplify recordkeeping. For example, consider using an iPhone app, called Tap2Track Mileage from Intuit, which allows you to e-mail your mileage logs as CSV text files so you can then add the other required information (e.g., date and purpose of the trip).

Having good records of vehicle usage will allow you to deduct either the actual costs of this usage (assuming you retain receipts for expenses) or the IRS standard mileage rate of 50¢ per mile in 2010.

2. Hire Wisely

As the economy improves, you may need to add people to your payroll. Who you hire can save you taxes. There is a special tax credit, called the work opportunity credit, that rewards you for hiring workers from certain disadvantaged groups. The credit in most cases is 40% of first-year wages up to $6,000 for a top credit per eligible worker of $2,400. There is no cap on the number of eligible workers you can hire. There are now a dozen such groups, including through 2010 only unemployed veterans and disconnected youth.

In order to claim the credit, you must submit to your workforce agency a request to have your new employee certified as being part of a targeted group for purposes of the credit. The employee must complete the first page of IRS Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit; you complete the rest and then submit it within 28 days of the hiring date to the state agency for certification. If you don’t act within this time, you lose the credit even though the worker would otherwise be an eligible employee.

3. Use the Domestic Production Activities Deduction

For business owners in certain U.S.-based industries, such as manufacturing, farming, mining, construction, engineering and architectural services on U.S. projects, film production, software development, or the sale or rental or sale of items manufactured, grown or extracted in the U.S. in significant part, a larger portion of revenues will effectively escape tax. This is because the domestic production activities deduction increases to 9% of net income (up from 6% in 2009).

This deduction is a no-cost write off; you get the deduction because of the nature of your business activities and not because of any expenditure you make. The deduction effectively reduces the top tax rate on businesses from 35% to 32%.

The rules for figuring this important deduction are complex and a number of limitations apply. The deduction cannot exceed the adjusted gross income for sole proprietors, partnerships, S corporations, or limited liability corporations or the taxable income for C corporations. Also, the deduction cannot exceed 50% of W-2 wages so, in order for owners of pass-through entities to claim the deduction, there must be sufficient W-2 wages paid by the business. The domestic production activities deduction may be limited or not apply at all at the state tax level. Alabama, for example, allows the deductions for corporations but not for individuals, such as owners of pass-through entities. Wisconsin bars the deduction for 2009 and later years.

Meet with your tax advisor to arrange your operations in the best way to optimize the deduction if it is relevant to your business activities. Find more details about this deduction in instructions to IRS Form 8903, Domestic Production Activities Deduction.

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