Small Business Tax Deductions
by
Attorney Frederick W. Daily
Understand how to reduce your business taxes by deducting your business expenses.
How tax savvy a businessperson you are has a great effect on how much money is in your pocket at the end of the year. You probably know that the tax code allows you to deduct costs of doing business from your gross income. What you are left with is your net business profit. This is the amount that gets taxed.
So knowing how to maximize your deductible business expenses lowers your taxable profit. To boot, you may enjoy a personal benefit from a business expenditure -- a nice car to drive, a combination business trip/vacation, a retirement savings plan.
However, to benefit from the business deductions available to you and avoid trouble with the IRS, you need to understand when an expense is (or isn't) deductible.
Ordinary and Necessary Expenses
The key to determining whether an expense is legitimate is found in Section 162 of the tax code, which states that a business expense must be "ordinary and necessary." Otherwise, it can't be deducted. Unfortunately, the tax code doesn't define either ordinary or necessary. Luckily, in many cases whether a business expense is ordinary and necessary is obvious. For instance, office equipment and supplies used in the business are clearly deductible.
Here are some other ways to determine if an expense is ordinary and necessary:
IRS publications and regulations. In some cases, such as travel expenses, the IRS provides specific instructions for determining whether or not an expense is ordinary and necessary. This is often done through IRS publications and regulations.
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