Tax Guide for Small Businesses

Deductible Small Business Expenses

Tax deductions are the icing on the cake for small businesses.
Tax deductions are the icing on the cake for small businesses.
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The tax code offers a ton of deductions to small business owners. Just about every conceivable expense is tax-deductible if you can prove it relates to the running of your business. Whatever you do, don't forget the first rule of business deductions: Save your receipts!

If you run a business that involves buying or making goods to sell, then your first step is to calculate something called cost of goods sold. Essentially, this covers all of the expenses involved in manufacturing or buying goods wholesale and selling them retail. When you subtract the cost of goods sold from gross revenue (income), you get a figure called gross profit. This is your taxable income. Here's where the real deducting begins.

The following are some of the most common and lucrative business tax deductions [source: IRS]:

  • Employee pay: If you have employees, you can deduct all salary and wages paid during the tax year.
  • Taxes: Certain federal and state taxes on business income are deductible, including employment taxes if you have employees and half of the self-employment tax if you're self-employed.
  • Depreciation: Business equipment, vehicles, machinery and tools are tax deductible, but not all at once. The IRS depreciation tables allow you to deduct a percentage of the cost of business equipment over the usable life of the product, so you will take the deduction over a number of years.
  • Car and truck expenses: Using the standard mileage deduction, you can deduct the cost of local travel for your business, such as delivering products to stores. Sadly, commuting doesn't count.
  • Travel expenses: These are expenses incurred for traveling overnight away from home for business, such as meetings with clients or professional conventions.
  • Meals and entertainment: You can deduct up to 50 percent of the cost of meals, sporting event tickets or golf outings if the express purpose is for entertaining current or potential business clients.
  • Home office: You can deduct expenses related to a portion of your home — percentage of mortgage/rent, Internet/phone service, office supplies — if it's used exclusively and regularly for business.

For a full list of potential business deductions, read the "business expenses" section of IRS Publication 334: Tax Guide for Small Businesses. Depending on the nature of your business, you also may be eligible for certain general business tax credits, including credits for driving an alternative-fuel vehicle or helping to manufacture low-income or energy-efficient housing.

To wrap up our tax guide for small businesses, let's talk about who is required to pay employment taxes and self-employment taxes.