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 company. For example, buying a computer for your office would qualify as an ordinary and necessary business expense. Some standard types of company-related deductions include:
- General and administrative expenses;
- Company related travel;
- Automobile expenses;
- Company-related entertainment; and
- Employee benefits.
The standard business deductions are covered in full detail in Section 162 of the Internal Revenue Code.
What Am I Not Allowed to Deduct as a Business Expense?
The law specifically prohibits you from deducting a few things as a work-expense. 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;
- Personal expenses;
- Capital expenses; and
- Expenses used to figure out cost of goods sold.
If I Use My Car for My Business, How Much of that Expense Can I Write Off?
Generally, you may deduct using your vehicle for work by using either the standard mileage method or the actual expense method. The standard mileage method allows you to deduct a predetermined amount per mile you drive. The rate is determined by the IRS, and changes every year. In contrast, the actual expense method allows you to deduct the actual costs you incur each year to operate your car. Your deductible costs include: gas; oil; repairs; maintenance; license fees; insurance; tolls; and car washes.
While this may seem more appealing, the actual expense method requires extensive recordkeeping. You must be able to substantiate 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, you must multiply the vehicle expenses by the percentage of miles driven for work/company purposes to find the amount you can deduct.
Can I Claim a Deduction for Business-Related Entertainment?
You may deduct 50% of the expenses you incur entertaining clients or customers for company purposes. Qualified business entertainment includes 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 you put on for your employees and their families, such as a party or picnic, is 100% deductible.
If I Work In My Home, Can I Take the Home-Office Tax Deduction?
If you use part of your home for your corporation 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 and renters. This deduction often allows you 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 if you work part time at home and your primary office is elsewhere. In addition, you may need to substantiate that the area you claim for your office is not used for personal use.
If I Want to Start My Own Company 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 company expenses organized and in a safe place. Separate the documents by category, for example: auto expenses; rent; utilities; advertising; travel; and entertainment.
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 company 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.