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If you are a small business owner, you already know that you will pay a tax on what’s left of your income after you’ve booked your expenses. So it’s logical to make sure you have booked as many legal expenses as you can. That way your net income (and your resulting taxes) will be as small as possible. The IRS allows you a pretty wide range of small business tax deductions.

Here is a list of them. Check to see if you have included these in your tax planning.

1. Deductions for Start-up Costs

In your first year of small business, you are allowed to write off as much as $5,000 in start-up costs. In addition you can write off an additional $5,000 in organizational costs. Not only that: you also have the option of spread out expenses not deducted in the first year over a period of 15 years, beginning with when you opened your business. Eligible costs include things like market research, company advertising, training of your employees, travel for business, legal advice and other costs. Consult your tax professional for more details.

2. Deductions for Education

First stop: IRS Publication 970, “Business Deductions for Work-Related Education.” For the most part, you can write off expenses related to your employees’ education if the courses relate to their jobs.

In other words, if the course helps them keep pace with the marketplace demands (or improve their skills) or if they need the course to actually keep their existing jobs, then the expense may be a legitimate deduction. The bad news is that you can’t take a write-off on any expense related to training in a new, unrelated field. A couple of other things to remember: You can also claim a write-off if you are self-employed. Deductions also include the cost of getting to and from the classes. Consult your tax professional for more details.

3. Vehicle Deductions

You’ll want to proceed with some caution when it comes to claiming these deductions. This is because the rules are pretty specific and the IRS looks carefully at any business that claims them. Tip #1: keep detailed logs and diaries of your expenses. You can use either one of these two different methods when calculating your deductions:

Option One: count your vehicle’s business mileage and then claim a deduction of 44.5 cents per mile. If you plan on doing this, make sure you know the correct rate, as it does change from time to time.

Option Two: write down all your business’ out-of-pocket vehicle expenses such as how much you paid for gas, as well as repairs and maintenance.

Remember: keep good records. If you’re using your own personal vehicle for your small business, make sure you separate the times you use it for business from the times you do not. Include dates, destinations, purpose of the travel, etc. Read IRS Publication 463 for more info. And here’s an important point: if your employees use a business vehicle while running personal errands, for example, you have have to show this as income to them on their W-2.

A couple of other things to remember: If you bought a new (or previously owned) car, you can take a write-off. You’ll have to decide if it’s better to take it in one single deduction or spread out over a period of time through depreciation. And if that car is a hybrid, you might be eligible for a tax credit. Read IRS Publication 8910 for more details. As always, consult your tax professional for more details.

4. Write-offs for Business Equipment

If you purchased business equipment, new or used, you can claim a business deduction. Amounts up to $100 thousand are allowable. Just make sure you can show that at least 50% of the time, the equipment was used for business-related activities. Allowable equipment includes cars, office furniture, hardware for your computers, and business machinery.

Make sure you read a current copy of IRS Form 4562 before planning your tax strategy on this point. If you decide you are not going to claim this write-off immediately, you can spread it out over a period of years by claiming depreciation on that equipment. Consult your tax professional for more details.

5. Deductions for Entertainment

The IRS definition of entertainment is pretty flexible. Generally speaking, if you attend a business meeting, for example, and you are not reimbursed for the expenses, you’re allowed to write off up to half the entertainment expense. They do caution you that the “entertainment” must be in a business context. This means if you go to a seminar or conference, that’s OK. Also, the entertainment should come immediately before or after the meeting. You get a break if you are self-employed; then, the 50 percent deduction cut-off does not pertain to you. Consult your tax professional for more details.

Summary

The IRS provides you with lots of possible ways to reduce your small business taxes via tax write-offs. Talk to your tax professionals to get the most up-to-date information.

© 2007 Ara Rubyan. This work is licensed under a Creative Commons Attribution-No Derivative Works 3.0 License. You have permission to use it if you include the resource information below.

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