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Tax Deductions for Small Businesses

As a small business owner, you’re swamped with responsibilities and paperwork. Now that tax season is here, you’re thinking, “What exactly can small business owners deduct from their business’ taxes?”.

Good news! You can deduct anything and everything that has a legitimate business purpose. If a payment is made to strengthen, promote, or further a business, then it is deductible. The deductions that businesses can take are much more generous than what individuals can receive. The only exception is that “Meals & Entertainment” are only 50 percent deductible.

The most common deductions include:

  • Insurance
  • Payroll
  • Rent
  • Advertising
  • Mileage
  • Professional services
  • Depreciation
  • Supplies

There is also no limit on the amount small businesses can deduct. If you donated to organizations, donations are deductible if you have the cash flow. The IRS may audit a small business to verify that there is a legitimate business purpose for certain questionable expenses. Some business owners may try to sneak in some personal expenses, but that is not allowed.

A common misconception is that personal items can be run through the business bank account and be deducted on a tax return. There has to be a clear dividing line between personal expenditures and business expenditures. Small business owners should have at least one personal bank account and at least one business account where funds are not co-mingled.

You may also be wondering if your operating and capital expenses can be deducted. Operating expenses are those of day-to-day operations – they can even be a large amount. Big expenses like rent and payroll are operating expenses. For example if a large repair is needed on an air conditioning unit, you may deduct this under “Repairs and Maintenance”.

Capital Expenditures are the purchase of assets that have a useful life of greater than one year. They must be over a certain dollar threshold (usually $1,500) and will be depreciated ratably over the useful life of the asset.

For example, a brand new air conditioning unit that is over $1,500 may be capitalized and expensed over time. A car, a building, furniture, fixtures, and equipment are good examples of fixed assets that are capital expenditures. Each asset has a certain depreciable period. So, if a commercial building is used for 39 years, the purchase must be depreciated over 39 years; A car is 5 years, a desk is 7 years, a new parking lot is 15 years.

If you have any questions or need assistance with your small business’ tax deductions, contact us at http://hylencpa.com/contact-us/ or (781) 436-5810.

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