Tax breaks for business filers
By Kay Bell • Bankrate.com

Tax breaks can mean big savings for small businesses. This includes sole proprietors who report business income on Schedule C and their individual 1040 tax forms.

Here are some ways business filers can shave a few dollars off their federal tax bills, from perennial tax breaks to new saving opportunities created by recent tax-law changes.

Writing off equipment expenses
Up to $24,000 of some business equipment you bought in 2002 can be written off immediately as a Section 179 expense. Using the Section 179 option is a lot less work, and a more immediate tax break, than depreciating the property.

Tax law changes enacted on March 9, 2002, give businesses in the area of Manhattan most damaged by the Sept. 11 attacks even more breaks, including larger Section 179 deductions. These companies are now part of the "New York Liberty Zone" and can expense up to $59,000 for 2002 and $60,000 for 2003 through 2006.

However, if you do depreciate some property, the March 9th Job Creation and Worker Assistance Act expands the options for business owners nationwide. You now can deduct a larger percentage of the equipment's cost -- 30 percent -- in the first year.

In addition, the first-year depreciation amount for automobiles used in a business is increased from $3,100 to $7,700. And speaking of autos used for company travel, you can claim 36.5 cents a mile as the standard mileage rate on your 2002 return. For 2003 driving, it drops to a flat 36 cents.

The new depreciation provisions apply to equipment purchased between Sept. 11, 2001, and Sept. 11, 2004. These are welcome tax breaks for most businesses, but not all, so check with your company's tax adviser.

And keep in mind that the depreciation changes affect federal taxes only. Many states have changed their laws to match up with the new U.S. tax code provisions, but not all. Check with your state's tax department. Links to each department can be found on the individual pages of Bankrate.com's state tax roundup.

Medical costs
Did you pay for health insurance for yourself and your family? You may be able to deduct 70 percent of these costs on your 2002 return. This break primarily benefits sole proprietors who normally couldn't meet the itemized medical expenses threshold.

Basically, you can claim this deduction if you were self-employed and made a profit, were a general partner (or a limited partner receiving guaranteed payments) in a business, or had a more than 2 percent stake in and received wages from an S corporation. The deduction is taken on Form 1040; if you itemize, include the remaining percentage of your premiums with other medical care expenses on Schedule A (subject to the 7.5 percent limit).

There are some limits. The deduction can't be more than your business' net profit. And it's not allowed if you were eligible for other health care coverage, including that offered by your employed spouse's medical plan.

The medical savings account (MSA) program, now called the Archer MSA after former Texas Congressman Bill Archer, also has been extended. This health care option makes employee health insurance more affordable for many businesses. Generally, contributions to MSAs by small-business employees and the self-employed are deductible and interest and other earnings accrue tax-free. Such accounts now may be opened through Dec. 31, 2003.

Retirement deductions
Money spent on a self-employed retirement plan also can save you tax dollars. Your contributions to a simplified employee pension (SEP) or SIMPLE retirement account generally are fully deductible. Recent tax law changes increased the cap on annual deductible contributions to a SEP to 25 percent of an individual's compensation and also give eligible small businesses a tax credit for retirement plan expenses for plans effective after Dec. 31, 2001.

As a self-employed worker, you also are responsible for paying the full 12.4 percent Social Security tax on up to $84,900 of your 2002 earnings. The taxable earnings amount increases in 2003 to $87,000. But you get half of these taxes back thanks to the deduction allowed on your 1040 form.

The Job Creation and Worker Assistance Act also gives businesses a bit more time to take advantage of deductions related to net operation loss. NOL can be "carried back" as a deduction from income from prior years to create a federal tax refund. Previously, business owners could carry back NOL for two years. Now, any NOL for tax years 2001 or 2002 can be carried back five years.

Fewer forms, more accounting options
This filing season, companies with less than $250,000 in total receipts and less than that same amount in assets will face less paperwork.

The IRS says these businesses no longer have to complete Schedules L, M-1 and M-2 of Form 1120, U.S. Corporation Income Tax Return; Parts III and IV if you use the shorter corporate return Form 1120-A; or Schedules L and M-1 of Form 1120S if you're an S corporation filer.

And small businesses that didn't take advantage of an earlier tax bookkeeping rule change, should re-examine their options now. Businesses must select an accounting method according to Internal Revenue Service guidelines. The most commonly used methods are cash or accrual, and each determines how and when to report income and expenses.

Generally, if you produce, purchase or sell merchandise in your business, you must keep an inventory and use the accrual method. IRS rules now allow some small operations that otherwise would have to use accrual accounting to adopt or switch to the cash bookkeeping system and not keep an inventory. In most cases, this option applies to companies with annual gross receipts of less than $1 million for the three previous tax years.

More direct IRS access
The IRS also has instituted a business-only hotline this tax season.

By calling (800) 829-4933 businesses can apply for a new employer identification number, order business forms, or get help on various business taxes and filing questions. The dedicated line contains company-specific topics, which should make it easier for business owners to negotiate than the general IRS customer service system they called previously.

If you want details on business tax rules and changes before calling, check out chapter 2 of IRS Publication 553, Highlights of 2002 Tax Changes or IRS Publication 334, Tax Guide for Small Business.

-- Updated: March 7, 2003