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What Qualifies as a Tax-Deductible Business Expense?
Almost any expense that is ordinary, reasonable, and necessary and helps you to earn business income is deductible. The IRS has defined this as anything that is helpful and appropriate for your business. For example, buying a computer for your office would qualify as an ordinary and necessary business expense.
What Am I Not Allowed to Deduct as a Business Expense?
The law specifically prohibits you from deducting a few things as business expenses. Examples include:
- bribes paid to public officials
- traffic tickets
- your home telephone line
- clothing you wear on the job, unless it is a required uniform
If I Use My Car for My Business, How Much of that Expense Can I Write Off?
You are allowed to calculate your vehicle deduction by using the standard mileage method or the actual expense method. Record keeping is much simpler using the standard mileage method, where you use a pre-determined amount you can deduct per mile you drive. The rate is determined by the IRS, and changes every year.
Under the actual expense method, you deduct the actual costs you incur each year to operate your car. Your deductible costs include:
- license fees
- car washing
However, using the actual expense method can be difficult. If you use the car partly for personal use, you are required to multiply your actual expenses by your percentage of business use. But to use either method, make sure that you keep track of how much you use your car for business.
Can I Claim a Deduction for Business-Related Entertainment?
You are allowed to deduct 50% of the expenses you incur entertaining clients or customers for business purposes. Qualified business entertainment includes taking clients to a sporting event, for a meal, or even having them to your home for drinks.
A nice exception is that any social event that you put on for your employees and their families, such as a party or picnic, is 100% deductible.
If I Work In My Home Part Time, Can I Take the Home-Office Tax Deduction?
If you run a business out of your home, you are often allowed to claim a deduction of rental or mortgage costs. You may also be able to deduct related costs, such as utilities and remodeling. However, to claim any of these deductions there are strict requirements you must meet. For example, you will not qualify is you work part time at home and your primary office is elsewhere.
If I Want to Start My Own Business What Steps Should I Take to Avoid Trouble with the IRS?
The most important thing you can do is to keep good records. Even if you are planning to hire someone to keep your records, you need to know how to supervise that person. If they make a mistake, you are ultimately responsible.
Keep all receipts and canceled checks for business expenses organized and in a safe place. Separate the documents by category, for example:
- auto expenses
Do I Need a Lawyer to Help with My Small Business Taxes?
Unfortunately, small businesses are about three times more likely to be audited than individuals. If you are audited, the burden is on you to prove that you did nothing illegal. Consulting a good tax lawyer when you begin your small business will help you to ensure that every decision you are making is legal. If you are audited you should contact a small business accounting lawyer who will be able to advise you of your rights.
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Last Modified: 09-25-2015 02:37 PM PDT
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