Small businesses need all the help they can get, especially at tax time. One great thing about running your own company is being able to deduct the cost of doing business from your revenue each year. The IRS publishes guidelines about exactly what is and what is not allowed, and your tax professional can help you navigate specifics about the current year’s tax law. However, some deductions are always available to small businesses.
Ordinary and Necessary
The first thing to remember about claiming small business deductions is that the amounts you claim must be from the “ordinary and necessary” cost of doing business. The IRS is famously vague on exactly what constitutes ordinary and necessary. However, this vagueness is not intended to annoy and confuse taxpayers; it is a way of keeping things fair for businesses with unique needs and circumstances. Basically, an expense can be considered ordinary if it is a commonly accepted, standard expense for the type of business you run, and necessary if it is helpful and appropriate to the business. If any of the deductions you try to claim raise red flags and do not seem ordinary or necessary to the IRS, then you may find yourself in court, where you can explain and defend your position. The IRS does publish many regulations to help you decide whether or not your expenses qualify under these two tests, and your tax professional can give you guidance.
If you work from home, you may be able to deduct your home office expenses. To qualify, the area you use as an office must be used only for business, and not for any other purpose. However, it does not have to be an entire room. If you have a small area that is used exclusively for work within another room, you can add up the square footage of your work area and figure out the deduction that way. Once you know the area of your home office, calculate what percentage of your entire home it takes up and deduct a portion of your utilities and rent or mortgage accordingly. For example, if your home office constitutes five percent of your home’s total square footage, then you can deduct five percent of your rent or mortgage as a business expense. Calculate your business utility bills in the same way.
You do not have to take the home office deduction to claim office supplies. This category includes things like printer paper, pens, staples, envelopes and stamps. Although not classified as office supplies, you may also be able to deduct software purchases and subscriptions, as well as advertising costs such as web domain registration fees.
Mileage or Vehicle Expenses
If you use your car for business, be sure to keep good records. The IRS allows deductions for business-related use, calculated either by mileage or by actual expenses. If you choose to use the standard mileage deduction, you must keep a log of when you used your car for business, how many miles you drove and for what purpose. If you decide to calculate your actual expenses, you will need to keep even more detailed records about the cost of operating and maintaining your vehicle and then claim a deduction based on the percentage of time you used the car for business.
Furniture and Equipment
Office furniture, such as desks, lamps and so on, is deductible. The maximum allowed amount may vary from year to year, so check with your tax preparer. Business equipment, such as computers, copiers or specialty tools, may need to be depreciated over time and deducted over a number of years instead of in the year they were purchased.
Running a small business can get expensive. Be sure to take all of the deductions you qualify for so you do not end up paying more taxes than you owe.
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.