One of the key reasons for starting your own business is that it can provide an effective tax shelter. Many of the expenses that you incur during day to day operations can be deducted directly from your taxable income. Since there are many misconceptions regarding what can and can not be deducted, I thought that I would go over some of the common items that small businesses can write off.
The Tax Code
The tax code is a little bit vague which is why many people get themselves into trouble. A deductible business expense is defined as any expense that is ordinary and necessary for the business and not extravagant. The expense must also be primarily used for business and not for personal reasons. While it is up to you to interpret the above statement, its best to always error on being conservative. For example, if I owned a delivery business, I probably wouldn’t want to try and write off a Ferrari as the company car. For all of your expenses, use common sense and always be able to justify your deductions. Keep good documentation of all of your purchases.
Common Writeoffs for Small Businesses
While there are many items that you can deduct off of your taxes, I thought that I would just go over some of the big ticket items that will save you the most on your taxes. Depending on your business, some of these may not apply. Keep in mind that the list below is just that. Because some of the rules can get quite complicated, you can click on the link of each associated topic to get a more in depth explanation. Also keep in mind that I am not a tax professional and that you should consult your own accountant for the specific rules that may apply to you or the area that you live in.
- Deduct Your Vehicle – While it is possible to deduct your car or other vehicle, there are many rules regarding how to do this so you have to be careful. Click on the link to the left for more details..
- Deduct Your Home office – If you run your business out of your own home, you can deduct a portion of your rent if you lease. If you own your home, you can depreciate a portion of your house to defer your tax payments as well.
- Deduct Equipment and Supplies- This applies to any computer equipment that you might use, furniture, electronics or anything else that is used in your office.
- Deduct Entertainment and Meals – Did you know that you can deduct 50% of your meals and entertainment? As long as your entertainment expenses are directly related to your business and you discuss your business, it is fair game.
- Deduct Travel Expenses – While you are off meeting vendors or business partners, why not turn a business trip into a vacation and deduct this off of your taxes?
Now that you know the big ticket items that can be deducted at a very high level, keep in mind that there are many specific rules involving these deductions that I will go over in more depth. As you deduct expenses for your own business, it is important to not go overboard. In case you get audited, make sure you can adequately justify each and every expense that you are writing off.
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