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Small Business Tax Planning

You can legally maximize your business tax deduction. Small business tax planning can help you reach your goal of financial independence. You must know the best ways to deduct business operating expenses and planning accordingly. Everyone knows that you need to spend money to make money. But, that does not mean that the IRS will allow every business expense. Indeed, many business expenses are disallowed because of poor documentation or planning. Yes, you can spend time reading the Internal Revenue Code (“IRC”) to figure out what the rules are for various business tax deductions. But, no IRC exists in a vacuum. One rule may intertwine with others to great a totally different tax deduction amount. Indeed the IRC have a million rules telling exactly how and when you can and can’t deduct things.

Current or future year expense?

Most money you spend on your business is deductible in the current tax year. But, the IRC says that some costs must be spread into the future. Future year expenses are known as capital expenditures. A capital expense is a cost that is part of your investment in your business. These costs will provide benefits to your business beyond the current year. Thus, their costs are spread out to match their useful life. Capital expenses are considered assets in your business. There are three types of costs:

  • Business start-up costs
  • Business assets
  • Improvements

Do I need a tax attorney?

It depends. If your business has straightforward transactions then you may not need a tax attorney. But, if you are planning on doing construction, have a fair number of assets, or will need to do repairs on assets then probably yes. A tax attorney can help you calculate the tax deduction for trickier items, such as a repair to an existing asset. You may immediately think that it is currently deductible. But, if the repair adds to the asset’s value, adapts the asset to a different use etc. then you may need to capitalize the expense.

Ordinary and Necessary

To be deductible, the business expense has to be for a legitimate business purpose. When you have transaction receipts you need to reference the business purpose or else the IRS may disallow the deduction. In addition, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your business. A necessary expense is one that is helpful and appropriate for your business. Your commonsense can guide you in making the initial determination. Depending on the dollar value of the expense you may need to determine whether or not to seek that advice of a tax attorney. A tax attorney may be helpful in deciding the grey areas. For example, figuring out is $100 lunches and dinners are typical for your profession based on the fees earned from potential clients.