Figuring your small business tax deductions is another component of your small business success. Section 162 of the IRS tax code states that a business expense must be “ordinary and necessary” in order to be a small business tax deduction.
The problem is that Uncle Sam does not quite spell out what “ordinary and necessary” means…so…you have to just use your common sense and ask yourself…is the expense I’m trying to deduct…“ordinary and necessary” to my small business?
For example, office equipment and supplies are clearly deductible in all most all types of small businesses. However, dinner at a fancy restaurant may be a small business tax deduction for a financial consultant meeting their client, but would probably not be deductible for say a house painter, auto mechanic, or even someone like me who designs and builds my own websites.
Now if I was to start building them for other small business owners in my area…dinner with a client could become a small business tax deduction for me. Here are a list of the most common basic tax deductions for a small business.
- Auto Expenses (Mileage)
Anywhere you drive for your business, you can claim a business tax deduction. For example, if you go to the store to buy paperclips for your small business, you can deduct the mileage from your place of business and back.
Just make sure and keep a notebook or mileage log in your vehicle to record the date, mileage, tolls, parking cost, destination, and the purpose of your trip. See more on maintaining a mileage log sheet that meets tax code requirements.
- Home Office Expenses
The IRS isn’t as hard on this deduction as they used to be.
In years past, claiming a home office deduction could almost guarantee you a visit from one of those nice auditors, but…if you have an area you regularly use in your home dedicate exclusively to your business…this can be a good very deduction. It is based on a percentage of your home expenses.
Effective for the 2013 tax year and beyond, the IRS has announced a simplified method for claiming a home office deduction.
The new optional deduction is capped at $1500 per year based on $5 a square foot for up to 300 square foot…but it will be a lot simpler to calculate and claim than the method we use now.
- Rent, Utilities, Repairs, and Maintenance
If you have a separate structure or building you operate your business out of, you can deduct a hundred percent of these costs.
- Office Supplies
Save all your receipts for these….they can really add up. This is the most common small business deduction.
- Office Furniture
You can either deduct the full cost in the year of your purchase with a section 179 deduction or depreciate the cost out over an IRS specified time. Both methods are reported on IRS Form 4562. Instructions for form 4562.
- Computer Software
You can now fully deduct off-the-shelf software with a section 179 deduction.
The interest and carrying charges are fully tax-deductible if you use credit to make business purchases. You can also deduct the interest expense on a personal loan if you can show that 100 percent of the proceeds were used for your business.
- Advertising and Promotion
Business cards, yellow page ads, newspaper ads, etc. are all fully tax-deductible. Promotional costs such as sponsoring a little league team are also tax-deductible…as long as you can show a connection between your business and the sponsorship like naming the team after your business or listing your business name in the program.
Any property or equipment that the business purchased last year can be entirely written off in most cases up to $500,000 using the IRS 179 deduction.
- Business Related Books and Magazines
- Dues and Memberships for Trade Associations
- Legal and Professional Fees
- Bank fees on business accounts
- Telephone charges
If you have a home based business you can’t deduct your basic phone service, but if you have a second line installed that is devoted exclusively for your business…you can deduct all charges associated with that second line. Also, circle all long distance calls associated with your business on your home phone bill and keep in your filing system as they are all deductible.
- Website fees
- Total Salaries and Wages
- Travel, Meals, Entertainment, and Gifts
This is a very nice deduction! You can deduct the entire cost of a hotel room, travel, tips, dry cleaning, etc. when you travel on business-related trips.You can deduct only 50 percent of your meals though. The 50 percent deduction limit applies to most client entertainment expense too. However, a direct gift (up to $25 per person) to a client or employee is 100 percent deductible. Tip: Always make a note of the specific business purpose on your receipt or bill such as “Lunch with Joe Brown of ABC Consulting to discuss contract”.
Note: The IRS audits more small businesses owners than any other group of income tax filers. One way to get that dreaded “audit” notice is for your finances to be significantly different than the nations’ average.