Mileage

Let's not overlook this basic expense. Did you drive to your rentals? Did you drive to the courthouse to research foreclosures? Did you drive around neighborhoods looking for vacant houses? Did you drive to the bank or title company to close transactions? Go back through your Day Timer for the year and figure out the mileage - it may astound you how many miles you actually drove!

The standard mileage deduction for 2002 is 36.5 cents per mile, or you can use the actual expense method (a bit of a pain to keep track of). As of tax year 1998, leased cars can now use the mileage method (in prior years you could not use the standard mileage allowance if you leased your car). Remember that miles driven from your home to work are not deductible, only miles driven from workplace to workplace (a good reason to have a "home" office).

Meals

Expenses for meals while entertaining clients or prospective clients are subject to the 50% limitation. However, meals "for the convenience the employer" (such as working late or through lunch) are fully deductible. Occasional meals off the business premises are also permissible under the same rules.

Do you have a home office? Did you order in a pizza while working late? Let your employer (your business corporation) pay for it! This is an important distinction - if your company provides meals for its eimployees while working late in the office, it is a 100% deduction, not 50%. Do you work at home? Can you bear eating at your desk (who doesn't when they are busy)? Be creative, keep good records and maximizer your bottom line!

Section 179

Few people take advantage of IRC Section 179. This provision of the Code allows you to expense rather than depreciation certain capital assets, such as computers, cell phones and other equipment. Thus you can fully deduct the cost of these items you purchased in 2002 rather than depreciate them over several years. The maximum in 2002 is $24,000. You cannot deduct these items to create a loss, but you can carry the unused expense forward to next year.

Education

Education is deductible if:

 

• To maintain or improve skills in your current job or business, or
   
• Required by your employer, or
   
• Required for your profession (such as continuing education requirements).

Attending a seminar to learn a new profession is not deductible, but if your company sent you to learn skills for use in your position with them, it is deductible. If you do not have a corporation, consider forming one (see below).

Planning for the Next Tax Year

You can't ask for a parachute after your jump out of an airplane. You can't buy life insurance after you die. Likewise, you can't plan for taxes after the tax year is over. An idea you should think about this year is setting up a "C" Corporation. A C corporation is a tax shelter that provides many benefits for the small business entrepreneur.

A C corporation can provide tax-free financial planning and income tax preparation help to employees. It can also set up a medical insurance and medical reimbursement plan for its shareholder/employees. The cost of medical and dental insurance premiums and deductibles can be paid by the corporation and fully deducted. The benefit is not taxable to the employee. To be tax-free, such benefits must be part of a written employee benefit plan and available to all employees, not just the owners. If you and your spouse are the only employees, is this a problem? Of course not!

C corporations can provide employees with group life insurance coverage and deduct the premium costs. Only group term life insurance qualifies. Death proceeds for beneficiaries are limited to $50,000 for each employee. If greater coverage is provided, the cost is still deductible to the corporation, but the cost of the additional coverage is taxable to the employee as income.

A C corporation shareholder can borrow up to $10,000 from the corporation, interest-free. The loan still must be documented, but the IRS will not impute interest. This is an ideal way to take out money without the "double-tax" issue (C corporation income is taxed at the corporate level, then again at the shareholder level, but only when dividends are distributed).

Finally, a C corporation can set up a profit sharing plan for its employees. The shareholder/employee of such a plan can actually borrow out of the plan. Properly utilized, this strategy can provide excellent opportunities for the real estate entrepreneur.]