Small Biz Deductions
As a business person you are interested in keeping the amount of money you must pay in income tax to an absolute minimum. One of the best ways is to make sure that you are deducting all of your business expenses from your reportable income. In the United States, businesses are taxed on their net income (profit). Net income is a business's gross receipts (all the money taken in over the course of a year) minus the business's cost of goods sold and business expenses. On this page we try to explain what businsess deduction are and how deductions are a part of running a profitable businesses.
Deductions are the costs associated with running a business which can be ``deducted" (hence the name) from the income your business reports to the IRS and state tax officials. When you or, better yet, your accountant fills out your business's annual tax forms, there will be a line for this kind of stuff, so do not spend months learning tax theory to find out how to claim deductions. All you really need to know is one rule.
Always keep receipts from every single purchase of any and all items or goods that are used for your business.
If you do this simple thing, you are 99% of the way to mastering this deduction thing. With a stack of good receipts showing time, date and amount of purchases, you can easily total up your deductible expenses at year's end and, if challenged, produce the receipts to support your figures. If you do not keep good records, and you do not have any receipts at year's end, do NOT try to take deductions for items which do not have an accompanying receipt. You blew it, Jack, and your inability to document the deductible expenses makes it very risky to go ahead and try to claim them anyway. (The IRS can get kind of nasty when people claim deductions even though there is no receipt to document them. And courts will back up the IRS in such cases.)
But if you are a good businessperson, and thus you do keep receipts from your purchases, then deductions will become part of your life. First off, remember that almost anything can be deductible. When deciding what to claim as a deduction, the question is not what was bought. The question that needs to be answered when deciding whether to deduct the cost of an item is why you bought the item. There are four general criteria you must satisfy before you can deduct the purchase price of an item as a business expense. To be deductible, an item must be:
- an ordinary business expense: an item is ordinary if it is normal, usual or customary and the kind of expense commonly incurred in a particular business.
- a necessary business expense: ``necessary" in this instance simply means ``helpful". If the item is reasonably helpful to your business, then it is considered ``necessary."
- directly connected with your business: in other words, hot tubs will not be deductible unless you run a massage parlor!
- reasonable in amount: basically, do not try to claim that a single ream of paper was $100.00 or anything silly like that. Deduct what the items costs, no more, no less.
Second, here is a list of typical expenses that are deducted by businesses:
- Costs associated with accounting: That's right, you can deduct those pesky accounting fees.
- Advertising: You know those flyers you made? Deduct the price. Business cards? Deduct that cost too. In fact, costs associated with your yellow pages, newspaper, magazine, and radio ads are all deductible, as are signs, billboards, and brochures. You can also deduct the cost of promotion items like refrigerator magnets and keychains.
- Bank Charges for business account: Safe deposit boxes, bank overdraft fees, and other incidental bank charges are all deductible.
- Bookkeeping costs: Costs associated with payroll services, which will do the payroll for your business for a fee, are something you can deduct.
- Internet access charges/on-line charges: If your business has a reason to be on the web, or if you need access to the web as part of your business, then deduct away!
- Computer supplies: Printer ink cartridges, RAM upgrades, etc.
- Continuing education costs/seminars: Note that if you incur education expenses as part of your existing business, these are deductible, but if you incur them as part of starting out on a new business or career, then you cannot. Sorry folks, but we do not make these rules.
- Delivery costs: The costs associated with shipping your product or delivering your service is deductible.
- Entertainment costs: A very tricky deduction! Talk to your accountant.
- Equipment: The cost of maintaining equipment used in your business, whether rented or purchased, may be deductible. (You should consult your accountant on this issue, this gets into the capital improvement versus business expense issue.)
- Facsimile costs: Yes, the cost of faxing is an expense.
- Insurance premiums: Insurance premiums for casualty, inventory, credit, business interruption, overhead payment, vehicle, employee medical, workers' compensation, state unemployment, liability (all different types), and even some types of life insurance on key employees (so long as you are not the beneficiary) are all possible deductions.
- Interest expenses: You know that money you owe the bank? The interest you pay can be deducted, so long as the proceeds from the bank loan were used for business purposes.
- Legal fees: Yes, legal fees arising from managing your business or producing or collecting income are all deductible.
- Licenses: Any license or regulatory fees paid to governments as part of your business are deductible.
- Office supplies: Those staplers, calendars, letter trays, paper reams, etc. are all deductible.
- Postage: Stamps are deductible. Keep your receipts.
- Rent: Yup, rental payments on your business site are deductible.
- Repairs and simple maintenance of business: Again, this is an area where you need to talk to an accountant to make sure you are not deducting a capital expense.
- Subscriptions: just like educational expenses, subscriptions to informative magazines are deductible.
- Travel: Now there are some very particular rules you must follow to get a deduction for travel expenses. So do not think that you are going to convince the IRS that three weeks in the Caribbean was a business trip unless you can prove it. Your accountant can help you sort through the rules, but generally speaking, if you have hotel receipts and car rental receipts from true business trips, you have a deduction. There are also many nondeductible expenses which become deducible when you are on the road (e.g., dry-cleaning), so talk to your accountant about what else you might be able to deduct besides meals, transportation costs, and hotel charges.
- Utilities: Let there be light! And deductions on its cost!
- Wages: Wages paid to employees are deductible. But you really need to consult an accountant if you have employees, do not try to do you own accounting!