What makes the U.S. tax code so complex isn't the taxes themselves--it's the allowed deductions. There's a wide variety of deductions you can use to reduce the taxes you'll pay as your business grows. You'd be foolish not to take advantage of as many of them as you legally can. Here are some of the more important tax deductions your growing business may quality for:
Equipment purchases. If you buy equipment for your business, you can deduct a portion of the cost of that equipment in the year you placed the equipment in service. Under current law, the deduction can't exceed the taxable income derived from your business. There is also an absolute limit to the deduction for equipment purchase. Check with your tax professional to find out the limit for the current year.
Business expenses. Common expenses for running a business for which you can take a deduction include advertising, employee benefits, insurance, legal and professional services, telephone and utilities, rent, office supplies, wages, dues to professional associations, and subscriptions to business publications.
Auto expenses. For a car you own and use in your business, the IRS allows you to either deduct your actual business-related expenses or claim the standard mileage rate, which is a specified amount of money you can deduct for each business mile you drive. The IRS generally adjusts the rate each year. To calculate your deduction, multiply your business miles by the standard mileage rate for the year. For tax purposes, be sure to keep a log of your business miles, as well as the costs of business-related parking fees and tolls because you can deduct these expenses, too.
With the actual cost method of tracking expenses, the IRS allows you to deduct various other auto expenses, including depreciation, gas, insurance, cleaning, leasing fees, routine maintenance, tires and personal property taxes. If you use this method, keep records of your car's costs during the year and multiply those expenses by the percentage of total car mileage driven for business purposes.
While using the standard mileage rate is easier for record-keeping, you may receive a larger deduction using the actual cost method. If you qualify to use both methods, the IRS recommends figuring your deduction both ways to see which gives you a larger deduction. Just make sure you have kept detailed records to substantiate the actual cost method.
Meal and entertainment expenses. To deduct business meals and entertainment costs, you must discuss business during, immediately before or immediately after the event. Your deduction is limited to 50 percent of the cost of qualified expenses, and you must have receipts for any cost of $75 or more. If you have an individual entertainment expense of less than $75, you can record the necessary information in an expense account book and not worry about keeping receipts. Record the reason for the expense, amount spent, dates, locations, and people entertained.
Travel expenses. You can deduct ordinary and necessary travel expenses you incur while traveling on business. Your records should show the amount of each expense for items such as transportation, meals and lodging. Be sure to record the date of departure and return for each trip, the number of days you spent on business, the name of the city, and the business reason for the travel or the business benefits you expect to achieve. Keep track of your cleaning and laundry expenses while traveling because these are also deuctible.