Life is full of rules, especially at tax time. The government has created hundreds if not thousands of rules small business owners must follow if they expect the maximum advantage on their tax returns.

But it’s still not too late to get breaks for the 2010 tax year -- and not too early to think about 2011.

Asked to provide their best tips for tax season, several Memphis tax advisors among the Greater Memphis Chamber’s membership stressed preparation as being important. Be knowledgeable about what tax deductions and credits may be available and ask the right questions, they said. For instance, in screening new employees, ask: Is the person a veteran? Has he or she been unemployed the last 60 days? Is anyone at the employee’s address receiving food stamps? The answers can have bearing on a small business owner’s tax return.

Even if a tax credit has expired, the advisors say, Congress often renews them and back-dates eligibility. It will be harder to capture information on employees at a later date, so do it at the beginning.

“If you hire a person and you’re not screening for a tax credit, you’re doing yourself an injustice,” says John May with Tax Credit Services, LLC. “Most folks just grab the low-hanging fruit.”

Hiring a tax professional might be the ticket to maximizing tax advantages, but business owners still must feed the preparer the right information. Being familiar with these tax tips can begin the conversation and start saving you money.

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Take advantage of the health care tax credit.
An employer with fewer than 25 employees may be able to get a tax credit for up to 35 percent of the cost of the employees’ insurance premiums if certain salary requirements and other restrictions are met. “That’s a new one for 2010,” says Jason Whaley with Watkins Uiberall, a Memphis certified public accounting firm, in existence since 1971. “Anytime there’s something new like this, it’s easy to overlook.”

Defer income by funding a SEP retirement plan.
Employers can still establish -- and make 2010 contributions -- to company retirement plans until Tax Day using a Simplified Employee Pension plan, which does not have the start-up and operating costs of a conventional retirement plan. “Generally, you’re going to see a SEP in a small business,” Whaley says. “Ultimately, get the right retirement plan. Figure your goals and have a plan that suits that.”

Take the 100 percent depreciation bonus for capital investments.
The tax relief act, signed in December, created a 100 percent depreciation bonus for capital investments put into service between Sept. 8 and Dec. 31. Depreciation is an allowance made for a loss in the value of property, often due to age or wear. Instead of writing off a piece of property over an eight-year period, an employer can do so in the first year, Whaley says. The equipment must be new.

Count your children as employees (but only if they actually worked).
Children (particularly teenagers) who worked at a business you own can provide the family a tax benefit. Their wages may be counted as a deduction, and their salary can be directed to an IRA. Make sure you do not run afoul of any labor laws, and remember that depending on how the family business is organized, the child’s wages may or may not be subject to employment taxes. Documenting their contributions -- by clocking in or using time sheets, for example -- is paramount. “They have to be doing legitimate work,” says Danny Snow with Thompson Dunavant PLC. “Telling the IRS you put your 4-year-old to work probably isn’t going to work.”

Look to the home office deduction.
If you used your residence as your primary office space and segregated your work to a room or a cornered-off section of the house, you could qualify for the home office deduction. During tight economic times, many consultants and professionals in particular started working from home, Snow says, so more people now may be eligible. If the home is sold within two to three years, however, Snow says a taxpayer may pick up income on part of the sale and eliminate any earlier benefit with the home office deduction.

Get a tax credit for employees on food stamps.
Under the Work Opportunity Tax Credit, employers will find numerous credits available, especially in the food stamp category, says John May with Tax Credit Services, LLC. If a company hires someone on food stamps who meets the age requirement and participation timeline, the employer would probably qualify for an average of $2,400 per employee in federal tax credits. The credit may also apply if the food stamps are going to someone else within the employee’s household. “The whole logic behind it is if you help that physical address that address will come off government assistance,” May says.

Check employees’ addresses for ‘empowerment zones.’
Employers can get a tax credit of up to $3,000 for each employee living in an “empowerment zone,” May says, -- areas identified as highly distressed. Location-based credits were designed to help stimulate growth. “In its purest form, it truly is ‘trickle-down’ economics,” May says. “It truly is a process that works.”

Use an educational savings account in 2010 for tax savings later.
A Coverdell Education Savings Account generally allows anyone whose modified adjusted gross income is less than $110,000 ($220,000 for joint filers) to put aside up to $2,000 after taxes into an account for each child’s educational expenses. “It works identical to a Roth (IRA),” says Mark Sorgenfrei, vice president of Waddell & Associates, Inc. “Any growth pulled out is tax-free. By making that contribution in 2010, you will set yourself up for tax benefits in the future.”

Jeff Phillips and his wife, Erin, have been investing in a Coverdell since their first child, James, was born more than four years ago. They also have an account for their younger daughter, Leah. "All the distributions come out tax free," said Jeff Phillips, who works as a financial planner, "and I can invest it in mutual funds -- you can choose."

To create an account, visit a bank or other financial institution.

Think about 2011.
The biggest mistake employers make is that, by focusing so completely on the previous year, they miss opportunities to prepare for the coming tax year, says Perry Green, senior vice president at Waddell. (The company specializes in investment management and financial planning.) By looking ahead, employers can screen for tax credit eligibility, take advantage of new gift tax rules and create flexible spending account for employees’ childcare expenses, Green says.

Hire a professional.
Even professional tax preparers admit the U.S. Tax Code is a complicated set of rules that can easily confuse the smartest amateur. Congress makes rules and changes them, but the professional’s job is to stay informed. “The tax adviser is well positioned to help the owner plan for the future,” Green says. “Bring them in as a strategic partner. Let them help you figure out where you’re going.”

Related links:
www.taxcreditservices.com
www.waddellandassociates.com
www.thompsondunavant.com
www.wucpas.com