Understanding the Basics of Business Tax Deductions
When going through the great task of doing taxes for a business, you can easily get trained to a tax philosophy. Specifically, you will always start asking if something is deductible.
The IRS is an evil, thieving devil hell bent on stealing every last penny youve made during the year. As the prince in shining armor, your primary weapon to beat back the beast is the tax deduction. Hah! And you thought tax was a boring subject. Okay, it is, but at least I tried.
So, is something deductible or isnt it? As you probably know by now, the answer is it depends, a common refrain when dealing with taxes. That being said, you can go a long way to figuring out the answer by understanding what a business tax deduction is in the eyes of the beast known as the Internal Revenue Service.
Lets start with the basics. A tax deduction is simply an amount you can deduct from your total business revenues. The idea is to claim as many legal deductions as possible. Why? Well, the more you deduct, the lower your ultimate net profit will be. The amount you end up paying the IRS is based on your net profit. Given this fact, you should be very interested in deductions.
Business tax deductions are a mysterious part of the tax code. To the surprise of many, they are not actually written into the code for the most part. This is the primary reason why any tax advice you receive is hedged with a lot of CYA comments. So, if it isnt in the code, how do you know something can be deducted? It all has to do with a very vague section of the code.
In the view of the IRS, a business expense may be deducted if it is an ordinary and necessary expense of the business. How is that for being vague? Regardless, you can see there is definitely some wiggle room in the phrase. Still, the IRS defines the statement differently than most people would.
In the view of the IRS, an ordinary expense is one that is found with most business in your industry. It is not expenses found in business as a whole, just your niche. As a result, a bakery probably cannot delete international travel flight costs whereas a travel agent probably can.
A necessary expense is one that iswell, necessary to maintain or grow your business. Attending a conference on the latest advancements in your industry is a necessary expense. Attending a club with scantily clad women while at the conference is generally not. Exceptions, of course, are probably made for players of professional sports, but there you are.
On top of these two requirements, we have a catch all the IRS can use to smack you around if it thinks you are going too far with the deductions. What is it? The lavish rule. A deduction that is otherwise ordinary and necessary can be capped or voided if the deduction amount is too lavish. Basically, this means you are deducting something excessive compared to your business. The IRS will not bat an eye at Microsoft claiming a ten million dollar deduction for marketing. It will, however, blink a few times if Johns Pumpkin Pie Patch tries to claim the same deduction.
Figuring out tax deductions for your small business is not that taxing, pun intended. There are specific rules, but you should start with the question of whether the expense is ordinary and necessary.
Richard A. Chapo is with BusinessTaxRecovery.com - providing information on how to stop wage garnishment from the IRS.
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