Small Business Tax Deduction

All ordinary and necessary expenses qualify for small business tax deduction

Small business tax deduction is a means to diminish the amount of tax you pay by deducting some of the expenditure you incur while running your business. This deduction, according to Code 162 of Internal Revenue Service is allowed for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Broadly, these expenses include traveling expenses, entertainment expenses, rentals and allowances paid to employees. However, the IRS has its own way to decide what constitutes ordinary and necessary expenditure. One important requirement is that your expenses should not be unreasonably large. Instead, they should be in direct proportion to the circumstances under which they are made. Also, you should never make the mistake of putting personal expense as business expense. You will be in deep trouble if you are caught.

Also, avoid making payments to relatives, even if they are bona fide businessmen. Tax auditors are extremely suspicious of any payments made to a business in which a family member has a direct or indirect commercial interest.

So, what are the expenses that qualify for tax deduction? The first is expenditure made on vehicles in running the business. The vehicle tax deduction can be determined in two ways. The first is the standard mileage method whereby the sum is deducted on the per mile formula devised by IRS. The second is the actual expense method under which you deduct the actual costs you have incurred in operating the vehicle. In this you can also include depreciations charges, plus your gas and maintenance bills.

The next big head is entertaining clients. It provides for 50 per cent deduction on total expenses incurred on entertaining clients. Eligible business entertainment consists of taking a client to a ball game, a concert, or dinner at a good restaurant, or just inviting a few of your customers over for a Sunday barbecue at your home. However, if you are audited, there must some verification that the entertainment expense was related to business. You must therefore file all bills carefully, mentioning the purpose of the bash against each bill.

You can also deduct current expenses that are incurred during the course of the year. These are the everyday expense that you incur to keep the business going, and include expenses like rent, office supplies, electricity etc.

It is important that you file all your bills carefully. Ideally you should have separate folders to keep bills pertaining to vehicle expenses, rent, utilities, advertising, travel, entertainment, and professional fees. All these are needed at the time of filing returns.

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