Small Business Tax FAQ

Questions:

• 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 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?

Answer:

What is the difference between current and capital expenses?

Current expenses can be deducted from your business's total income in the year you incur them. They include the everyday costs of keeping your business going, such as office supplies, rent, and electricity.

Expenditures for things that will help generate revenue in future years -- a desk, a copier, or a car, for example -- are called capital expenses and must be written off over their useful life. Usually that period is three, five, or seven years, according to IRS rules. (See Nolo's article Current vs. Capital Expenses for more information.)

There is one important exception to this rule, called the Section 179 deduction, which may let you fully deduct capital expenses in the year you incur them. For more information on Section 179 of the IRC, see below, If I buy a new computer system this year, do I have to deduct the cost over a five-year period? There is also a bonus depreciation for property placed in service in 2013 and 2012. This special deduction allows taxpayers to depreciate 50% of the adjusted basis of qualified property during the first year the property is placed in service.