Small Business Tax Deductions
Small business tax deductions play an important role in lowering your taxable profit. This means that at the end of the year you will have more money in your pocket. It is to you advantage to take every legal deduction you can. Some business owners fail to take all their tax deductions because they are afraid to be selected for a tax audit. Not taking every deduction means less money to attract more clients or expand business operations.
Organization and good record keeping are essential to obtaining all your deductions and withstanding an IRS tax audit. Some common small business tax deductions include:
Expenses to start up or expand your business – When you start a business, treat all eligible costs you incur before you begin operating the business as capital expenditures which are a part of your basis in the business. Generally, you recover costs for particular assets through depreciation deductions. But, you generally cannot recover other costs until you sell the business or otherwise go out of business. In certain instances you may make an election to amortize or deduct these expenses in the first year. Failing to make the election is one of the biggest mistakes you can make.
Auto expenses – If you use your car in your business and you use it only for that purpose you may deduct the entire cost of operation (there are some limits). But, if you use the car for both business and personal purposes, you may deduct only the cost of its business use. Business purpose involves commuting from your place of business to another work site. It does not include commuting from your home to the office. But, if you have a home office and you travel from there to a client to conduct business then it is tax deductible.
Business assets – Businesses can deduct certain asset purchases as if they were operating expenses. Within the annual limit, a business may buy assets and deduct the costs in full – as long as the assets are placed in service in that same year. For example, you can buy new computers on December 31 and as long you start using the equipment that day you can write off 100% of the cost that year.
Bad debts – At some time or other you may get stiffed by one deadbeat client. If you sold goods you can take a bad debt deduction. You can only deduct your cost for the goods not the lost profits. On the other hand, if you are a professional you can’t deduct the value of the services performed that weren’t paid for. Remember a bad debt is only deductible if the income has been declared.