Small Business Taxes FAQ
Answers to common tax questions on tax deductions for small businesses.
What is -- and isn't -- a tax deductible business expense?
If I use my car for business, how much of that expense can I write off?
Can I claim a deduction for business-related entertainment?
What is the difference between current and capital expenses?
If I buy a new computer system this year, do I have to deduct the cost over a five-year period?
I am planning a trip to a trade show. Can I take my family along for a vacation and still deduct the expenses?
I work in my home part time. Can I take the home office tax deduction?
» I want to start my own small business. What do I have to do to keep out of trouble with the IRS?
Does incorporating a small business start-up offer tax breaks?
Is it safe and sensible for me to keep my own books and file my own tax returns?
I am hiring people to help out with a big job coming up. Are they considered independent contractors or new employees?
I want to start my own small business. What do I have to do to keep out of trouble with the IRS?
Start by learning a new set of "3 Rs": record keeping, record keeping, and (you guessed it) record keeping. IRS studies show that poor records -- not dishonesty -- cause most small business owners to fail to comply with their tax reporting obligations and to lose at audits, with resulting fines and penalties.
Even if you hire someone to keep your records, you need to know how to supervise him or her -- because if your bookkeeper goofs up, you are responsible. Consider using a computer to keep your records if you aren't already in the electronic age.
Keep all receipts and canceled checks for business expenses, and keep them organized and in a safe place. Separate the documents by category, such as:
- auto expenses
- rent
- utilities
- advertising
- travel
- entertainment, and
- professional fees.
Put your documents into individual folders or envelopes. If you are ever audited (and small businesses are about three times more likely to be audited than individuals), the IRS is most likely to zero in on business deductions for car expenses and travel and entertainment expenses. Furthermore, the burden will be on you -- not the IRS -- to substantiate your deductions. If you're unsure how to get started or what documents you need to keep, see Tax Savvy for Small Business, by Fred Daily (Nolo), or consult a tax professional who is familiar with small business record keeping.
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