As a small business owner, you probably have a multitude of questions about tax rules and regulations. The realm of taxes is vast, and if you do not understand the basic concepts behind filing and deductions, you may be selected for auditing. This can have a hugely detrimental impact on your personal life, finances, and business, but by asking the right questions, you can easily avoid this. If you own your own business, take a look at the five most commonly asked tax questions below.
1. Are Entertainment Expenses Deductible?
For many small business owners, entertaining and regaling clients is a regular part of the job, and many of these entertainment expenses may be deductible. If you take a client out for dinner or invite some of your clients to a baseball game, you may be able to deduct up to 50 percent of the amount that you spent. In order to do this, you will need to maintain all of your receipts and documents to prove that the expenses were business related. If you provided entertainment for employees and their families, you may be able to deduct 100 percent of the expenses.
2. What Are Current and Capital Expenses?
Current expenses can be deducted from your total business income in the year that they are expended. These expenses include costs stemming from the everyday operation and maintenance of your business. Examples of these expenses include rent for your office space, office supplies, and any other applicable expenses. If your expenses will help you generate future revenue, such as a computer or a vehicle, they are classified as capital expenses. These expenses can only be written off over a period of 3, 5, or 7 years. There are exceptions to this rule, and a Section 179 deduction may allow you to deduct capital expenses in the year that they are expended.
3. What Is the Difference Between an Employee and an Independent Contractor?
There are distinct differences between employees and independent contractors, and if you cannot distinguish between the two, simply consider the way you treat them. If you will be in charge of telling the employees when, where, and how to perform their jobs or tasks, the IRS will classify them as employees. Your employees should only be treated as independent contractors if they offer their services to multiple employers or if they have their own business. It is important to understand worker categorization, and if you do not properly classify your employees, you may end up owing a substantial amount of money to the IRS.
4. Should I Keep My Own Books?
Keeping your own books can be a difficult task, and it is strongly recommended that you purchase a bookkeeping program. Many of these programs can be multifaceted and complex, so you may need to enroll in a course that will teach you how to properly use them. If you have doubts as to whether or not your program is sufficient, you should hire a professional bookkeeper to evaluate it for a short period of time. A professional bookkeeper can also help you select the right tax program if you are ready. If you do not feel comfortable doing your own taxes, you can simply take your books to an outside preparer.
5. Should I Incorporate a Small Business?
Incorporating your small business can be a great idea if your company is profitable and stable. Many corporations offer tax flexible benefits, but most small businesses do not have the revenue to adequately take advantage of these tax breaks. Small businesses do not have the option to leave funds inside of the business since the business has not yet generated a steady stream of profits. If you are interested in incorporating your business, you should be sure that your business is eligible for the accompanying tax benefits.
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