Small Business Deductions for Your Taxes

in Tax Deductions


As most small business owners already know, tax planning plays a big role in maximizing profit and minimizing expenses, and tax deductions are a big part of this. The American tax system is designed for more than merely collecting revenue, but is specifically designed to encourage behavior that the government feels is beneficial to society and the state. Among the behaviors that are encouraged is small business, which means the tax code provides a myriad of tax benefits that are part of the larger goal of using the tax code to actively encourage small business activity. A wide range of business expenses are deductible from the amount owed in taxes each year if the business owner chooses to go to the trouble of itemizing them all.

Most small business expenses that are deductible fall within one of two categories: regular business expenses and capital expenses. Business expenses are those that are paid on a regular basis and are necessary for the successful operation of the business. These may include rent and utilities payments for a store front, travel expenses, and the cost of managing a payroll. Capital expenses are those related to buying specific assets meant to improve your business or enhance your service, like new equipment or vehicles. Generally speaking, capital expenses are not deductible as business expenses, but there may be other methods by which these amounts can be recovered in the tax code through amortization, depreciation or depletion. Knowing the difference between these two classifications of business expense can help small business owners avoid trouble with the Internal Revenue Service (IRS) due to claiming expenses as deductions incorrectly.

With most business structures – corporations, companies, partnerships – a separate tax return has to be filed and most of your business deductions are deducted from the business, not the owner’s personal taxes. There are some exceptions to this, such as pay outs from partnerships or limited Liability companies (LLCs) that have “flow through” taxation or for sole proprietorships. However, as a general rule business deductions are claimed against the business’s tax liability, not that of the individual running the business. There are also many times when personal and business expenses become confused, but the IRS has very strict guidelines regard what can – and can not – be deducted as a business expense.

Confusing personal and business expenses is a major problem and the IRS is now actively going after people that claim many of their personal expenses as business deductions. This has been a real problem due to the advertising efforts of online “tax planners” that make the factually incorrect claim that if a small business is based at home, the small business owner can claim most of their household expenses as business deductions. Although there are some home office expenses that can be claimed as deductions, the guidelines are very strict and spelled out in detail in IRS Publication 587. Further, people claiming home office deductions come under closer scrutiny and have to file a special form – Form 8829 – in order to ensure that the claims receive special attention from IRS processors and enforcement agents.

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