Acounting for Small Business Expense

Taxes are predictable and enduring for most of us, especially business owners. For the small business owner, tax deductions are an advantage in reducing their tax burden, but accounting for these deductions must be precise and direct. Every owner of a small business hopes to make a profit; they will also owe taxes on their net business profits. But business owners who benefit from their deductible expenses can significantly lower their business taxes, including some business-pleasure perks that are legal tax deductions.

These perks can range from the car you use for work to business travel, including meals and entertainment directly related to your business. In accounting for travel expenses, 50% of the cost is allowed as long as accurate records are kept on all your business entertainment expenses and your records must show how your expenses relate to your business. Family members are permitted on a business trip, but no deduction is allowed for anyone that is not part of the business team.

Tax laws change regularly, which makes accounting for legal tax benefits complex and difficult. Your deductions require expertise on current changes, guidelines and advice for your individual situation. A number of permissible tax deductions are available as business deductions if looked at closely. These deductions can yield even more savings on your tax liability if everyday deductions are considered.

Home-based businesses that have a home office may deduct a part of the real estate taxes paid on the home, including a portion of utilities, telephone and repairs for the office. If your business have employees, the following are accounted for as business expenses: wages, employee education, training and other employee benefits. In other cases, tax deductions for your small business include rent or lease payments, interest on business loans, real estate taxes on business property, state, local and foreign business income taxes and insurance for your business. Educational expenses required to maintain or improve the level of the present position you or your employees hold are valid business deductions, but educational expenses outside of your present position do not qualify.

Expenses for starting a business fall into two categories. Capital expenses, the cost of setting up a business and business expenses, the cost of running a business after the business is set up. Accounting for the cost of starting a business the first year is a limited deduction; remaining expenses are divided into a 15-year period. Newly started businesses usually don't realize a profit the first several years, so spreading your deductions over several years could balance any profits.

The cost of operating the car used for business purposes is a business expense and you may select one of two ways for accounting for the expenses, standard mileage, which is a limit of 48.05 cents per mile, or actual mileage by keeping precise records of miles driven for business. Tolls and parking fees are also permitted, including depreciation. However, if your car is used for business and pleasure, only the business part of these expenses is allowed.

Advertising or promoting your business and products is a valid business expense under certain conditions. The advertisement must be specific to the business and products you are sponsoring. Legal and professional fees can be accounted for in the year they are incurred, if they are related to that specific year. Expenses incurred in one year but are linked to future years, must be expanded over the related period. Unpaid charges may be recuperated as bad debts, but not all unpaid charges qualify as a tax deduction. For instance, time committed to servicing a client who failed to pay, is not a valid deduction. Interest and other charges on borrowed money used for your business is completely deductible, but your records must show that the money was used exclusively for your business.

Some expenses for business assets, such as new equipment can be entirely accounted for in the year purchased, under a certain IRS Code. However, not all assets qualify for this deduction. The depreciation of computers and software used in your business must be carried over 3 years, but there are some changes for tax-year 2008. The IRS Code that allows the entire cost of software in the year of purchase will no longer be available. The new rule states that the depreciation period for computers and software purchased together must be expanded over five years. However, the old rules still exist for computer systems that cost less than $112,000 in 2007. Contact the IRS for more information on this deduction.

Taxes are normally deductible when acquired for the operation of your business. Account for sales tax as part of the cost of items bought for business operations, but excise and fuel taxes are deducted separately. Employment taxes are paid by the employer and deducted as a business expense, self-employment tax is paid by individuals who are self-employed. Federal income tax is not deductible, however state income tax is deducted on your federal return as an itemized deduction and real estate tax on business property is deductible, along with local evaluation for repairs or maintenance. But, evaluations for improvements are deducted over a period of years. Moving expenses are not business expenses, but are valid under certain circumstances. The move must be directly connected to the business or the person's position in the business and the destination of the move must be 50 miles or more.

Owners of small businesses accounting for charitable contributions, except corporations taxed as partnerships, can enter these deductions on their individual tax returns. Old computers or office furniture with completed depreciation can be donated to charity, but no deduction is allowed.

Michael Russell

Your Independent guide to Accounting

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