by Karen Murphy, MostChoice.com Business-related deductions can be a rich source of tax savings. For a business owner, finding every legitimate deduction you have is one way to reduce your taxable income in the short run. However, there are a few things you should know before starting. A good first step in maximizing your deductions begins with a broad definition of your business. By doing this, you can broaden the range of expenses and activities associated with your business. To be deductible, a business expense must be both ordinary and necessary. Ordinary expenses are common and accepted expenses in your field of business. A necessary expense is one that is appropriate and helpful for your business. Expenses do not have to be indispensable to be considered necessary. In fact, anything you do that relates to your work, that stimulates or enhances your business, is a business expense and therefore deductible. Be mindful, however, that the IRS is very aware that taxpayers may be tempted to write off personal expenses as business expenses. If an expense is only partly for business, you must allocate it between the business and personal portion. Without adequate records, the practice of deducting business expenses is a risky endeavor. The IRS will expect you to be able to prove that an expense was, in fact, paid. If you have kept good records, proving your deductions won't be a problem. Red Flags If you're stretching the boundaries of acceptable deductions, be aware that not all deductions are worth taking. For instance, meals and entertainment deductions are almost always a target of audits, being one of the most abused of all deductions. Make sure you save each receipt with the name and company of your guests, the business purpose, the business relationship, why you consider it business, and the name and address of the place. Cash expenses without a receipt are often difficult to prove, but can add up to a large sum, especially if you are spending money on things such as tips, parking meters or pay phones. To be safe, keep a diary or an appointment book that denotes the amounts spent each day. If you use your car for business, be sure to keep good records to prove your total business mileage for the year. It's a good idea to keep a separate calendar for tracking mileage. Many experts advise that you steer clear of the office in home deduction, as it is most often a red flag for the IRS. This is especially true if you own your home and expect to sell it in the next couple of years. Also, using Form 8829 may increase your chances of being audited. To qualify to deduct office in home expenses, you must be meeting with clients, customers or business associates in your home. Or you must maintain storage for inventory in your home, or performing the majority of your work at home. Click here for more business deductions | Common Deductions Auto Expenses -- Costs of keeping your car on the road for business purposes can be deducted by figuring actual businesses-related expenses or by each business mile driven. Starting a Business -- Once you're running a business, expenses such as advertising, utilities, office supplies and repairs can be deducted as business expenses. However, the costs of getting a business started are capital expenses, which must be deducted over the first five years you are in business. Education -- You can deduct education expenses related to your current business if they are to maintain or improve skills required in your present employment. Education costs that qualify you for a new job aren't deductible. Business Entertaining -- You may deduct 50% of the cost of entertaining present or prospective customers if it is "directly related" to the business and business is discussed, or if it is "associated with" the business, and the entertainment takes place immediately before or after a business discussion. Travel -- Business travel deductions that include plane fare, operating your car, taxis, lodging, meals, shipping business materials, clothes cleaning, telephone calls, faxes and tips. Combining business and pleasure is fine as long as the business is the primary purpose and you deduct only your expenses. Legal and Professional Fees -- Fees you pay lawyers, tax professionals or consultants generally can be deducted in the year incurred. Bad Debts -- If your business sells goods, you can deduct the cost of goods that you sell but aren't paid for. If, however, your business provides services, no deduction is allowed. Interest -- When using credit or a personal loan to finance business purchases, the interest and carrying charges are fully deductible. Moving Expenses -- If your workplace moves more than 50 miles further from your home, you may be able to deduct certain moving costs. Software -- Software with a useful life of less than a year, can be deducted in the year you bought it. Software that comes with a computer, with a cost not separately stated, is depreciated over five years. If the cost is less than a certain set amount ($19,000 in 1999), you may deduct a whole computer system, including the bundled software, in the first year. Charitable Contributions -- A partnership, limited liability company or S corporation can make a charitable contribution that can be claimed on an individual tax return. A regular (C) corporation can deduct as a business expense the charitable contributions. Taxes -- Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax. Sales tax for day-to-day business-related items are deductible, however, sales tax on large business assets aren't all deductible in the year they are bought. Excise and fuel taxes are deductible expenses. The employer's share of employment taxes are deductible. Real estate tax on property used for business is deductible. Advertising and Promotion -- The cost of ordinary advertising of your goods or services is deductible as a current expense. Promotional costs that create business goodwill is also deductible. |
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