It's simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. And in addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a small cost, or a combination business trip and vacation. It all depends on paying careful attention to IRS rules on just what is, and isn't, deductible.
When you're toting up your business's expenses at the end of the year, don't overlook these 14 common business deductions.
Operating a car is expensive. The good news is that if you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
There are two methods of claiming expenses: You can either keep track of and deduct all of your actual business-related expenses, or you can deduct a certain amount for each mile driven (the "standard mileage amount," which is 44.5 cents per mile in 2006) plus all business-related tolls and parking fees.
As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle. However, you must use the standard mileage rate if you have claimed accelerated depreciation deductions in previous years, such as Section 179 depreciation. (For more on Section 179, see "New Equipment," below.)
If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business, and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
Once you're running a business, expenses such as advertising, utilities, office supplies, and repairs can be deducted as current business expenses. But not so before you open your doors for business. The costs of getting a business started are capital expenses, which must be deducted over the first five years you are in business.
You can deduct education expenses if they are related to your current business, trade, or occupation, but you must follow strict rules. The expense must be to maintain or improve skills required in your present employment, or be required by your employer or as a legal requirement of your job. The cost of education that qualifies you for a new job isn't deductible.
Fees that you pay lawyers, tax professionals, or consultants generally can be deducted in the year incurred. But if the work clearly relates to future years, they must be deducted over the life of the benefit.
Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.
If someone stiffs your business, the bad debt may or may not be deductible -- it depends on the kind of product your business sells.
If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If, however, your business provides services, no deduction is allowed for time you devoted to a client or customer who doesn't pay. The rationale behind this rule is that it would be too easy for businesses to inflate bills and claim large deductions for bad debts.
If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost if it is either:
When you travel for business, you can deduct many expenses, including the cost of plane fare, costs of operating your car, taxis, lodging, meals, shipping business materials, clothes cleaning, telephone calls, faxes, and tips.
What about combining business and pleasure? It's okay, as long as business is the primary purpose of the trip. But if you take your family along, you can deduct only your own expenses, just as if you had traveled alone.
Some small businesses can write off the full cost of some assets in the year they buy them, rather than "capitalizing" them -- deducting their cost over a number of years. Section 179 of the Internal Revenue Code allows you to deduct up to $105,000 in 2005 and $108,000 in 2006 (subject to a phase-out if you placed more than $430,000 of equipment in service in any one year). Some assets don't qualify for this Section 179 deduction, including real estate, inventory bought for resale and property bought from a close relative.
If you move because of your business or job, you may be able to deduct certain moving costs that would otherwise be nondeductible personal living expenses. To qualify, you must have moved in connection with your business (or job, if you're an employee of your own corporation or someone else's business). The new workplace must be at least 50 miles farther from your old home than your old workplace was. (Technically, moving expenses aren't business expenses; there's a special place to list them on your Form 1040 tax return.)
As a general rule, software bought for business use must be depreciated over a 36-month period. But there are some important exceptions:
If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.
Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
The cost of ordinary advertising of your goods or services -- business cards, yellow page ads, and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort.
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