Top Ten Deductions for Your Business

Deducting expenses can save you money.

Having your own business can be financially and emotionally rewarding. It can also be a great tax shelter. Almost everything you spend on your business is tax deductible so long as it is ordinary and necessary and the cost is reasonable.

These deductions can really add up. For example, if you buy a $2,000 computer and use it for your business, you could deduct the full cost from your taxes. If you were in the 28% federal income tax bracket, this would save you $560 in income tax. In effect, you’d be getting a 28% discount on the computer. The catch is you must really be in business and use the computer for the business. You can’t deduct personal expenses.

The following are ten of the most common tax deductions taken by small businesses:

Number One: Car Deductions

The most popular tax deduction for a small business is for car and truck expenses. The cost of all driving you do for your business (with the important exception of commuting to and from your home to work) is tax deductible. If you like record keeping, you can keep track of all your car expenses (including gas, oil, repairs, and car washes) to figure your annual deduction. But if you’d rather not keep up with all those receipts and numbers, you can use the standard mileage rate. When you use the standard rate, you keep track of the miles you drive for business, not how much you spend on your car.

How much can car deductions be worth? Plenty. In 2001, the median car deduction for business owners earning $25,000 to $100,000 per year was $6,100. And this year, business owners can deduct extra depreciation on vehicles: an extra $7,650 of the cost of a new car or the full cost of a heavy SUV (over 6,000 pounds) -- this could mean a deduction of up to $60,000 or $70,000 in one year!

Number Two: Office Expenses

You can also deduct money you spend on your business office. For example, you can deduct the rent and utilities you spend on an outside office or other workspace. If you have a home office, you can also deduct costs associated with it. For example, if you are a renter, you can deduct a portion of your monthly rent. In 2001, the median home office deduction for small businesses was $3,000.

Number Three: Business Travel

Travel expenses are also deductible. These include airfare or other transportation costs and hotel or other lodging expenses. Unfortunately, the law only allows you to deduct 50% of the cost of meals. If you plan things right, you can mix pleasure and business and still get a deduction. In 2001, the median travel deduction for small businesses was $2,300.

Number Four: Meals and Entertainment

You can deduct 50% of the cost of a meal in a restaurant, or an entertainment event like baseball game, if you have a serious business discussion before, during, or soon after the event. The median meal and entertainment deduction for small businesses in 2001 was $1,000.

Number Five: Depreciation

When you buy business property that will last more than one year, you may deduct the cost a little at a time over a period of years. This process is called depreciation. Examples of depreciable property include machinery, computers, office furniture, and even race horses. However, you don’t always have to depreciate such long term business property. Small businesses have the option of deducting the entire cost of such property in a single year. This enables you to get a big deduction in a single year rather than spreading it out over several years. In 2001, the median depreciation deduction for the small business was $4,300.

Number Six: Rent for Equipment and Tools

Many business owners don’t buy expensive equipment, vehicles, or tools -- they rent them instead. This rent is fully deductible as a business expense. In 2001, the median rent expense deduction for small businesses was $3,100.

Number Seven: Supplies

Supplies are business items that you finish using in less than one year. They include everything from paperclips to postage stamps. In 2001, the median supplies expense deduction for small businesses was $3,000. That’s a lot of paperclips.

Number Eight: Legal and Professional Services

You can deduct business-related fees that you pay to attorneys, accountants, consultants, and other professionals. In 2001, the median deduction for legal and professional for small businesses was $700.

Number Nine: Insurance

Insurance you buy just for your business is deductible -- for example, business liability insurance or insurance for business property. If you have a home office, you may deduct a portion of your homeowners insurance. Self-employed people are also allowed to deduct 100% of their health insurance premiums from their income taxes. In 2001, the median insurance expense deduction for small businesses was $1,600.

Number Ten: Business Start-Up Expenses

If you are not yet in business, but are thinking about starting one, you don’t get any deductions. However, if you actually begin the business, many of the expenses you incurred starting it up are deductible over the first 60 months you are in business. Such expenses may include research, advertising, travel expenses for finding a suitable business location, and operating expenses incurred before the business begins, such as rent, telephone, utilities, office supplies, and repairs.

Copyright 2004 Nolo

Contact Us