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:

Does incorporating a small business start-up offer tax breaks?

Keep in mind that most corporate tax benefits flow to profitable, established corporations, not to start-ups in their first few years. For example, corporations can offer more tax-flexible pension plans than sole proprietors or partnerships, but few start-ups have the cash flow needed to take advantage of these tax breaks.

Similarly, the ability to split income between a corporation and its owners -- thereby keeping some income in lower corporate tax brackets -- is effective only if the business is solidly profitable.

In addition, incorporating adds state fees, as well as legal and accounting charges. So unless you are sure that substantial profits will begin to roll in immediately, you may want to hold off incorporating your business.

For more on corporate taxation, see Nolo's article How Corporations Are Taxed.