How Small Business Taxes Work


Small-business Deductions

Let's say you buy a new computer for your home office. Can you deduct the entire price when figuring your taxable income for the year?

If you're a small business, you can. While large businesses typically have to deduct the cost of new equipment over time, in the form of depreciation, a small business has the option of deducting the whole cost immediately using "first-year expensing" [source: Weltman].

In general, small businesses can "expense" everything large businesses can – office supplies, software, business travel, working lunches, company vehicles, rented office space, mileage driven to a job site ... All or some of these costs can be deducted when calculating taxable income. Small businesses might find some other deductions, too, like individual-health-insurance premiums, or a portion of their self-employment taxes [source: Dratch].

The deduction that really trips up many small-business owners is the home-office expense. It can be tricky, because you can only deduct what's solely for business use [source: Dratch]. For instance, if you live in a 1,000-square-foot (93-square-meter) home, and the room that is your office is approximately 100 square feet (9.3 square meters), you can deduct 10 percent of your mortgage payment and utility bills as a business expense. If, however, that room doubles as a den, you'll need to reduce that percentage to account for the space used for den-type activities [source: Dratch]. If you use your cell phone to make both business and personal calls, you'll need to calculate what percentage of your calls are business-related if you want to take a business-phone deduction. Same goes for your Internet connection.

And that new computer you bought for your home office? You can actually only expense the entire cost if you use it entirely for business.

Ultimately, small business owners should be cautious -- but not shy. There's no reason to give the IRS more than it's entitled to, and you don't need an accounting department to take advantage of business tax benefits. Rather than skip a deduction or credit because you're not sure, call an accountant. You'll likely end up saving more in taxes than you pay for the advice. Back when I was a sole proprietorship, I paid $80 to find out I'd be saving three grand a year if I were an S corp.

And now, I can pay someone to do my business taxes for me.

Author's Note: How Small Business Taxes Work

Now I know why God invented CPAs. Researching and writing this article was a study in minutiae, maybes and a mind-boggling variety of definitions. But this article is a review of the basics, so I ultimately went with the simplest and most widely applicable explanations of terms, requirements and distinctions between business structures. But readers beware: Every business is different, and even small differences can affect filing requirements, eligibility for credits and legitimacy of deductions. So proceed with care, and when in doubt, talk to a pro. (Or better yet, pay one to do your taxes. I do. It's wonderful.)

Related Articles

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