How to Save Your Business Tax Dollars
Identify ordinary and necessary expenses., Keep receipts., Separate personal from business expenses., Claim deductions for business travel., Deduct for meals and entertainment., Claim an automobile deduction., Identify other common deductions., Make...
Step-by-Step Guide
-
Step 1: Identify ordinary and necessary expenses.
A business expense must be both ordinary and necessary to qualify for deduction.Analyze all business expenses to see if they qualify.
An expense is ordinary when it is common and accepted in your industry or trade.
For example, buying magazines to put in a waiting area is a common and accepted expense for dentists.
An expense is necessary when it is helpful and appropriate. “Necessary” does not mean indispensable.
For example, a dentist can run an office without magazines.
However, magazines are both appropriate and helpful. -
Step 2: Keep receipts.
If you get audited, you’ll need proof of the amount you spent.
The most convenient proof is a receipt that shows the expense, the date, and the amount paid.
If you don’t want to keep all your receipts in a big folder, then scan and organize them online.
Certain travel and entertainment deductions require receipts for any expense over $75.
It’s a good idea to get in the habit of keeping receipts for all expenses.
If it’s inconvenient to get a receipt, you can use bills, cancelled checks, or credit card transaction records.At a minimum, keep a log of expenses, listing the date, amount, and what you purchased. , It’s possible for an expense to be for both personal and business purposes.
For example, you might have gotten a personal loan for $5,000.
If you used $3,000 for the business and $2,000 for a vacation, you can deduct 60% of the loan as a business expense.For the sake of convenience, identify on the back of the receipt how much was for business purposes. , Expenses incurred for business travel are deductible.
However, the primary purpose of your trip must have been business, not pleasure.
If you mixed both, then separate out the business expenses.Also, if your family comes along with you, you cannot deduct their expenses.
Deduct the following expenses:air fare meals (50%) lodging taxis tips telephone calls and faxes dry cleaning , If you entertain a client, then you can take a deduction for 50% of the cost.However, you need to closely analyze these expenses because the IRS rules are a little complicated.
Generally, there must be substantial business discussions happening before, during, or after the meal or entertainment.
You can write off 100% of meals or entertainment offered for the benefit of your employees.Keep good notes on the bill or receipt.
For example, write something like, “Dinner with Andrew Axel of ABC Mattresses to discuss service contract.” , You can take a deduction if your business owns a car or if you use yours for business.
The IRS gives you two ways to calculate the amount:
Actual expenses.
This is the amount spent to keep the car on the road.
Save receipts for gas, repairs, etc.
Remember that you can't deduct the entire amount if you also use the car for personal reasons.
Accordingly, if you use the car half of the time for business, then you can only deduct half of your expenses.
Standard mileage rate method.
You add up the miles driven and then multiply it by the standard mileage rate. , So long as an expense is necessary and ordinary, you can deduct it.
Other common deductions include the following:employee pay insurance interest on business loans legal and professional fees office supplies postage promotion and publicity rent taxes , Generally, you can deduct the cost of buying equipment by claiming a depreciation allowance over several years.However, small businesses can claim the entire cost of the purchase in the year it is made.
This is a great way to drastically reduce your tax burden.
You can deduct up to $500,000 for the year you purchased the equipment.
This is ideal for large purchases of vehicles, computers, or other equipment. -
Step 3: Separate personal from business expenses.
-
Step 4: Claim deductions for business travel.
-
Step 5: Deduct for meals and entertainment.
-
Step 6: Claim an automobile deduction.
-
Step 7: Identify other common deductions.
-
Step 8: Make a large purchase of new equipment.
Detailed Guide
A business expense must be both ordinary and necessary to qualify for deduction.Analyze all business expenses to see if they qualify.
An expense is ordinary when it is common and accepted in your industry or trade.
For example, buying magazines to put in a waiting area is a common and accepted expense for dentists.
An expense is necessary when it is helpful and appropriate. “Necessary” does not mean indispensable.
For example, a dentist can run an office without magazines.
However, magazines are both appropriate and helpful.
If you get audited, you’ll need proof of the amount you spent.
The most convenient proof is a receipt that shows the expense, the date, and the amount paid.
If you don’t want to keep all your receipts in a big folder, then scan and organize them online.
Certain travel and entertainment deductions require receipts for any expense over $75.
It’s a good idea to get in the habit of keeping receipts for all expenses.
If it’s inconvenient to get a receipt, you can use bills, cancelled checks, or credit card transaction records.At a minimum, keep a log of expenses, listing the date, amount, and what you purchased. , It’s possible for an expense to be for both personal and business purposes.
For example, you might have gotten a personal loan for $5,000.
If you used $3,000 for the business and $2,000 for a vacation, you can deduct 60% of the loan as a business expense.For the sake of convenience, identify on the back of the receipt how much was for business purposes. , Expenses incurred for business travel are deductible.
However, the primary purpose of your trip must have been business, not pleasure.
If you mixed both, then separate out the business expenses.Also, if your family comes along with you, you cannot deduct their expenses.
Deduct the following expenses:air fare meals (50%) lodging taxis tips telephone calls and faxes dry cleaning , If you entertain a client, then you can take a deduction for 50% of the cost.However, you need to closely analyze these expenses because the IRS rules are a little complicated.
Generally, there must be substantial business discussions happening before, during, or after the meal or entertainment.
You can write off 100% of meals or entertainment offered for the benefit of your employees.Keep good notes on the bill or receipt.
For example, write something like, “Dinner with Andrew Axel of ABC Mattresses to discuss service contract.” , You can take a deduction if your business owns a car or if you use yours for business.
The IRS gives you two ways to calculate the amount:
Actual expenses.
This is the amount spent to keep the car on the road.
Save receipts for gas, repairs, etc.
Remember that you can't deduct the entire amount if you also use the car for personal reasons.
Accordingly, if you use the car half of the time for business, then you can only deduct half of your expenses.
Standard mileage rate method.
You add up the miles driven and then multiply it by the standard mileage rate. , So long as an expense is necessary and ordinary, you can deduct it.
Other common deductions include the following:employee pay insurance interest on business loans legal and professional fees office supplies postage promotion and publicity rent taxes , Generally, you can deduct the cost of buying equipment by claiming a depreciation allowance over several years.However, small businesses can claim the entire cost of the purchase in the year it is made.
This is a great way to drastically reduce your tax burden.
You can deduct up to $500,000 for the year you purchased the equipment.
This is ideal for large purchases of vehicles, computers, or other equipment.
About the Author
Helen Burns
Brings years of experience writing about crafts and related subjects.
Rate This Guide
How helpful was this guide? Click to rate: