Starting a new business is an exciting endeavor, but it is one that should only be pursued after a lot of research and preparation – especially when it comes to taxes. Small businesses can easily find themselves in trouble if they do not fully understand and adhere to state and federal tax laws. On the flipside, business owners who understand tax laws are more likely to take advantage of applicable deductions and come out ahead of business owners who don’t know what deductions they can legally claim. For your information and education, here are several frequently asked questions about small business taxes.
1. Question: What Are Capital Expenses and Current Expenses?
Capital expenses are those that will help you generate future revenue for your business. When you purchase a piece of equipment that will be used to benefit your business for approximately three years or longer, then it can safely be considered a capital expense. Common examples of capital expenses include printers, machinery and other items with long useful lifespans.
Current expenses can be deducted from the total income of your business within the year that they are spent. Everyday costs that keep your business operating can typically be considered current expenses. Examples include office rent, stamps, notepads and other everyday items and expenses. In some cases, you may wish to take advantage of a 170 deduction, which makes it possible for you to write off capital expenses in the same year that the expense was incurred.
2. Question: What Is a Justifiable Small Business Tax Deductible Expense?
Practically any expense that is considered reasonable and necessary for your business is a justifiable tax deductible expense. The Internal Revenue Service (IRS) specifies that if an expense is determined to be “helpful and appropriate” for your business, then it can be considered necessary and reasonable. For example, a new copy machine, laptop or mailing materials will likely be considered necessary for small business operations, as long as they are used for business needs. If those same items are used for personal needs or are given away as gifts, they can no longer be considered business expenses and cannot be deducted.
There are some items that will never be considered tax-deductible for small businesses, including things like traffic tickets, public official bribes and anything else that cannot be deemed necessary or reasonable for business operations.
3. Question: If I Take My Family With Me on a Business Trip, Can I Deduct Our Expenses?
The answer to this question can be a little bit tricky. You are allowed to deduct some items from your trip, but only as much as you would normally deduct if your family were not with you. For example, if you and your family all stay in a single hotel room and drive to your business meeting or trade show in one vehicle, those costs are considered tax-deductible. However, if you take your family to a theme park once your business meeting is over or treat them to dinner, you cannot deduct those expenses. Any non-business costs that you incur during your stay cannot be deducted.
4. Question: How Do I Make Sure My Small Business Doesn’t Get in Trouble With the IRS?
The most important thing you can do to avoid getting in trouble with the IRS is to keep detailed records. When small business records are poorly kept, it could lead to tax return filing errors and eventual audits. Avoid this unpleasant problem by keeping all financial documents filed and organized, including:
• Utility bills
• Rent/mortgage bills
• Business entertainment expenses
• Utility bills
• Travel costs
• Licensing and other professional fees
• Advertising expenses
• Automobile costs
Keeping all of these documents well organized and easily accessible is one of the best ways to ensure that you pass an IRA audit.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.