Definition: Expenditures for business items that have no future life (such as
rent, utilities or wages) and are incurred in conducting normal
business activities which a business owner may deduct from gross
earned income for federal tax purposes
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.