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Small Business Tax Deduction

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If you are running a small business, then you need to know all the heads under which you can claim business tax deductions. These could go a long way in drastically reducing the total amount of tax you pay at yearend. According to the Code 162 of the Internal Revenue Service, all ordinary and necessary expenses that are paid or incurred for carrying out any trade or business are claimable as deductions during the taxable year.

Speaking on broad terms, these expenses could include rents, salaries and allowances paid to the employees, traveling expenses, entertainment expenses and such overheads. Though these are all ordinary and necessary expenses, all of them may not be deductible. The IRS has its own parameters to judge what ordinary and necessary expenses are. According to them, the expenses should be fanciful or exorbitantly large. The expenses should be commensurate with the circumstances under which they are made. Also any personal expenses would not count towards business tax deductions. Showing such expenses as business tax deductions could land the taxpayer in a soup.

Contrary to what the tax-saving pundits say, it is not a very good idea to make payments to relatives and show them as business expenses. The tax auditors scrutinize such expenses under a microscope. If you do not have justifiable cause to make the payment to your relative, do not do it.

But, all the expenses that are made directly for conducting the business are claimable. These include the expenses incurred on the transport or on the vehicles themselves in running the business. There are two ways to claim vehicle tax deduction. The first is the standard mileage method I which the sum is deducted by per mile formula which is devised by the IRS itself. The second method is the actual expense method in which the actual costs incurred in operating the vehicle are deducted. Depreciation charges and gas and maintenance bills can be shown here.

If you need to entertain clients on a regular basis, then it can be shown for deductions. About half of the entire expenses incurred in entertaining clients could be claimed. This could include expenses like throwing parties for your clients, taking them to restaurants, concerts, movies or even for inviting them over. Needless to say, there should be some proof that the meeting was for business purposes and not plainly for pleasure. Each bill needs to be shown, and the purpose of the meeting written on each of them.

It is a good business habit to file and keep records of all expenses incurred during the course of the year. These could be claimed as deductions when the assessment time comes. Your everyday expenses to keep the business going like rent, stationery, maintenance and electricity bills could be shown in such expenses.

Make a habit of filing your expenses in different folders so that they are easily accessible at the end of the year. Also keep these records after the tax is paid, because they could be needed for verification at any point of time.

Small Business Tax Deduction

The formula is pretty simple: your small business must pay taxes on what's left of your revenues after you have deducted all your expenses. That said, it would seem to make sense to claim the maximum allowable number and amount of deductions in order to reduce your tax liability. Luckily, the IRS gives you lots of choices as to tax deductions that you can legally claim.

Here are some deductions that you should think about when doing your business tax planning.

Here's some allowable tax deductions that you don't want to miss.

1. Deductions for Start-up Costs

In your first year of small business, you are allowed to write off as much as $5,000 in start-up costs. In addition you can write off an additional $5,000 in organizational costs. Not only that: you also have the option of spread out expenses not deducted in the first year over a period of 15 years, beginning with when you opened your business. Eligible costs include things like market research, company advertising, training of your employees, travel for business, legal advice and other costs. Consult your tax professional for more details.

2. Deductions for Education

First stop: IRS Publication 970, ?Business Deductions for Work-Related Education.? For the most part, you can write off expenses related to your employees? education if the courses relate to their jobs.

In other words, if the course helps them keep pace with the marketplace demands (or improve their skills) or if they need the course to actually keep their existing jobs, then the expense may be a legitimate deduction. The bad news is that you can't take a write-off on any expense related to training in a new, unrelated field. A couple of other things to remember: You can also claim a write-off if you are self-employed. Deductions also include the cost of getting to and from the classes. Consult your tax professional for more details.

3. Deductions for Vehicles

Be careful here: the rules for deducting automobile expenses are pretty detailed and the Feds pay close attention to anyone claiming these deductions. So, for starters, keep clear and concise records. You can deduct expenses two ways:

The first option is to claim a deduction by counting how many miles you drove while on business. Currently, you can claim a deduction of 44.5 cents per mile. Check to make sure that is the current amount, as it does change occasionally. The other option is to track your total expenses incurred on things like gasoline, repairs and maintenance.

Remember: keep good records. If you're using your own personal vehicle for your small business, make sure you separate the times you use it for business from the times you do not. Include dates, destinations, purpose of the travel, etc. Read IRS Publication 463 for more info. And here's an important point: if your employees use a business vehicle while running personal errands, for example, you have have to show this as income to them on their W-2.

A couple of other things to remember: If you bought a new (or previously owned) car, you can take a write-off. You'll have to decide if it's better to take it in one single deduction or spread out over a period of time through depreciation. And if that car is a hybrid, you might be eligible for a tax credit. Read IRS Publication 8910 for more details. As always, consult your tax professional for more details.

4. Deductions for Equipment

You have the ability to take a write-off for small business equipment purchases. The write-off can be pretty large ? in 2006 it amounted to over $100 thousand. And the equipment can be used; the only requirement is that you use it at least half the time for your company. Allowable equipment includes things like computer hardware, machinery, office furniture, automobiles and other related equipment.

Make sure you read a current copy of IRS Form 4562 before planning your tax strategy on this point. If you decide you are not going to claim this write-off immediately, you can spread it out over a period of years by claiming depreciation on that equipment. Consult your tax professional for more details.

5. Deductions for Entertainment

The IRS definition of entertainment is pretty flexible. Generally speaking, if you attend a business meeting, for example, and you are not reimbursed for the expenses, you're allowed to write off up to half the entertainment expense. They do caution you that the ?entertainment? must be in a business context. This means if you go to a seminar or conference, that's OK. Also, the entertainment should come immediately before or after the meeting. You get a break if you are self-employed; then, the 50 percent deduction cut-off does not pertain to you. Consult your tax professional for more details.

In Conclusion

The Internal Revenue Service is pretty generous in offering your business a whole range of tax write-offs. Just make sure you talk to your tax attorney or CPA to get the most current rules and regulations before you begin planning.

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