As with any business, small businesses also have their share of tax issues and requirements. They must generally pay annual business taxes, sales taxes, property taxes, and various other tax requirements. However, the small businesses may also lend itself to various complexities that do not exist for other more conventional business types.
For instance, they may have certain tax breaks or preferential tax treatment available to them, depending on state and local business laws. They may also be associated with a number of tax deductions that may apply to them.
- What Qualifies as a Tax-Deductible Business Expense?
- What Am I Not Allowed to Deduct as a Business Expense?
- If I Use My Car for My Business, How Much of that Expense Can I Write Off?
- Can I Claim a Deduction for Business-Related Entertainment?
- If I Work In My Home, Can I Take the Home-Office Tax Deduction?
- If I Want to Start My Own Company What Steps Should I Take to Avoid Trouble with the IRS?
- Do I Need a Lawyer to Help with My Small Business Taxes?
Almost any business expense that is ordinary, reasonable, and necessary and helps to earn business income is deductible. The Internal Revenue Service (IRS) has defined this as anything that is helpful and appropriate for your particular company. For example, buying a work computer for a small business office would qualify as an ordinary and necessary business expense.
Some standard types of company-related deductions for small businesses may include:
- General and administrative expenses;
- Company-related travel;
- Automobile expenses (including repairs and maintenance of company vehicles);
- Company-related entertainment; and
- Employee benefits.
The standard business deductions are covered in full detail in Section 162 of the Internal Revenue Code. Again, the main guideline for deductions is that they be ordinary, necessary, and reasonable.
The law specifically prohibits you from deducting certain items as work-related expenses. Examples of these may include:
- Bribes paid to public officials;
- Traffic tickets;
- Your home telephone line;
- Clothing worn during work, unless it is a required uniform;
- Personal expenses;
- Capital expenses; and
- Expenses used to determine the cost of goods sold.
Generally speaking, any items that involve illegal activity (such as bribes paid to public officials) will not be deductible.
Generally, you may deduct vehicle-related work expenses by using either the standard mileage method or the actual expense method. The standard mileage method allows a person to deduct a predetermined amount per mile you drive for work purposes. The rate is calculated and determined by the IRS, and changes every year.
In contrast, the actual expense method allows you to deduct the actual monetary costs you incur each year to operate your car. Deductible costs include: gas; oil; repairs; maintenance; license fees; insurance; tolls; and car washes. Other costs such as painting or replacing a logo on a vehicle will depend on whether the cost was reasonable, necessary, and ordinary.
While this method may seem more appealing, the actual expense method requires more extensive recordkeeping. You must be able to prove and support all expenses incurred under this method, and therefore need to maintain proof of every expense you claim. In addition, if you use the vehicle partly for personal use it becomes complicated; you must multiply the vehicle expenses by the percentage of miles driven for work/company purposes to find the amount you can deduct.
In general, you may deduct 50% of the expenses you incur for the purpose of entertaining clients or customers for company purposes. Business entertainment that qualifies for deductions may include a wide variety of activities, including: taking clients to a sporting event, a meal, or even having clients to your home for drinks.
A nice exception is that any social event that the small business puts on for its employees and their families, such as a party or picnic, is 100% deductible.
If you use part of your home for your small business operations, you may be able to deduct expenses for the business use of your home. This applies to all types of homes and is available to both homeowners as well as renters. This deduction often allows you to claim a deduction of rental or mortgage costs. You may also be able to deduct other related property costs, such as utilities and remodeling.
However, there are strict requirements you must meet in order to claim these types of small business tax deductions. For example, you will not qualify for the deductions if you work part time at home and your primary office is elsewhere. In addition, you may need to prove that the area you claim for your office is not used for personal use.
The most important thing to do is to keep good business records. Even if you are planning to hire someone to keep your records, you need to know how to supervise that person and their work product. If they make a mistake, you may be ultimately responsible.
Small businesses should keep all receipts and canceled checks for company expenses organized and in a safe place. Separate the documents according to category, for example: auto expenses; rent; utilities; advertising; travel; and entertainment. This will make it easier to sort out the expenses in the long run.
Unfortunately, small businesses are typically about three times more likely to be audited than individuals. If you are audited, then the burden is on you to prove that you did nothing illegal or in violation of tax laws.
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 immediately, who will be able to advise you of your rights.