The Internal Revenue Code allows you to deduct all ordinary and necessary expenses of operating your business. These can vary depending on the type of business.
You should speak with your tax advisor to see what other deductions you can take advantage of.
Here are the most common deductions and expenses for small or home based business.
Health Insurance~ Self-employed people can deduct up to 40% of their health insurance payments. This figure will rise to 80% by 2006. You can add the remainder you can't deduct to your itemized medical expenses. They may be enough to push you over the threshold of 7.5% of your gross income and make your remaining medical expenses deductible.
Home Office Deduction~ If you meet the IRS guidelines for operating a home office, you can get a significant tax break. Be sure to separate your expenses into direct and indirect expenses. Direct expenses are fully deductible. Those are things like painting or decorating your office, cleaning services for the business portion of your home and insurance on business equipment. Indirect expenses are those that apply to your entire home. Calculate the square footage of your office as a percentage of the square footage of your whole home to calculate how much you can deduct from rent, mortgage, utilities, and other expenses.
Retirement Plans~ Self-employed business owners have a wide variety of retirement plans available, such as Individual Retirement Accounts (IRA), Simplified Employee Pensions (SEP), and Keough Accounts. You can deduct contributions made to these plans, and their income is tax deferred.
First Year Expense Deduction~ You can deduct up to $18,000 worth of business equipment, such as computers, fax machines, copiers, phone systems, or other fixed assets, as a current expense using the first year expense deduction. This amount will increase up to $25,000 by 2003. Otherwise, you would have to deduct the cost of the equipment over several years via the tax codes depreciation schedules.
Rent, Phones, Utilities~ Your office rent or mortgage payments, your electricity, water or gas bills, your phone charges are all deductible.
Auto Expenses~ If you use your car for business, you can choose from two different methods to deduct business use charges. The most common method is to deduct the amount per mile that the IRS allows in any given year for business travel. Alternatively, you can itemize, take a depreciation deduction on the cost of your vehicle and add to that all the costs of running and maintaining your car, such as gas, oil, parking fees, repairs, insurance premiums, tolls, tires, license and registration fees. You can switch between methods from year to year, so it may pay to calculate both and choose the one that provides you with the greatest deduction.
Education~ Don't neglect deductions for education expenses that relate to your business, trade or occupation. Under IRS regulations, the education expense must maintain or improve skills required in your present employment or required by your employer or as a legal requirement of your job or profession. You can't deduct education expenses for a career change or to start a new business.
Entertainment~ You can deduct 50% of ordinary and necessary business expenses for entertaining a client, customer, or employee if it is directly related to your business or associated with your business. It is essential to keep excellent records for business entertainment expenses.
Gifts~ You can deduct gifts valued at up to $25 per person per year. So if you give out Christmas gifts to clients, or give presents to your staff after you've won a new contract, you may be able to deduct at least part of that cost.
Public Relations, promotion and advertising~ These important marketing costs shouldn't be forgotten at tax time. They are all deductible business expenses. If you send out free samples of your product, that is a deductible cost of promotion. So is hiring someone to write your press releases or flyers.
Trade shows, conventions, and seminars~ Whether you are exhibiting at a trade show, or just attending, the costs you incur can be considered legitimate business expenses.
Professional Publications~ Magazines, newspapers, newsletters or books related to your profession or operating your business are deductible. Some professionals, particularly those who work in media or communications fields, can legitimately deduct a newspaper subscription, cable television fees and other expenses if they can show they are professionally necessary.
Interest payments on business credit cards~ If you have a separate business credit card, you can deduct interest payments.
Internet and e-mail services~ Don't forget to deduct your monthly bill for your online service providers, especially if you are using the information on this page to help you run your business.
Professional Associations~ You can deduct dues for joining a trade association, your chamber of commerce, or any other professional group. On the other hand, you cannot deduct dues for a private club, such as social and athletic clubs.
Local Travel~ This includes taxi, train, or bus fare related to your business. Keep track of your travels in a datebook, and get receipts. You cannot deduct expenses related to commuting to and from your office.
Business Travel~ If you go overnight for a convention or business trip, you may deduct all expenses related to the trip, including transportation, lodging, meals, laundry expenses, cleaning, fax or phone charges, tips, etc. If you take a trip that combines business and pleasure, you can deduct travel expenses and business expenses only if 50% or more of your trip is devoted to business.
Parking~ While the meter is running, your tax deductions are growing too. Don't forget to deduct those garage, parking lot and meter charges. But if you get a ticket for letting the meter run out or running a red light on the way to a business meeting, you cannot deduct that. The IRS doesn't let you deduct fines from your taxes.
Postage~ Every letter you send for your business is worth a mini-tax deduction. Try buying your postage stamps over the phone from 1-800-STAMP-24 so you can pay with your business credit card and keep better track of the purchase.
Office Furniture~ Desks, chairs, lamps, filing cabinets, couches, and plants in your waiting room can be included in your business expenses.
Business Cards and Stationary~ Business cards, stationary, pens, pencils, paper clips, staples-All office supplies are deductible.
Insurance~ You can deduct premiums for all your business insurance, including equipment coverage, property insurance, liability coverage, etc.
Local business taxes and fees~ If you have to pay city, county, or state business taxes or incorporation fees, these charges are deductible.
Bank Service Charges~ Review your bank statement to see if you are being charged for operating your business accounts. If the answer if yes, then you've found another deduction.
