Top Small Business Tax Deductions

July 12, 2010 | By: TaxCure Staff

small-business-tax-deductionsMaking legitimate tax deductions can render small businesses more profitable. By paying attention to IRS rules on deductible expenses, such benefits as combining a business trip and family vacation can become a legitimate business expense.

Consider and review the following top business tax deductions:

Vehicle Expenses

If the business has its own vehicle or if a personal car is used for business, deductions for the vehicle can be made. Some of the costs of keeping the vehicle on the road for business purposes can be deducted. There are two methods of determining expenses for a business vehicle:

  1. Actual Expenses: Under this method, all expenses related to the business use of the vehicle are recorded and deducted. This includes:
    • Petrol
    • Lease payments
    • License/Registration
    • Depreciation
    • Tires
    • Parking and tolls
  2. Standard Mileage Rate: When this system is used a standard mileage rate is applied for each mile traveled ($0.50 per mile) plus all business-related expenses such as road or bridge tolls and parking fees.

Some small business owners double-time their personal vehicles as business vehicles. This means that business owners must maintain records on how often they use the vehicle for business use. The business portion of the car expenses are only used for tax deductions. Vehicle costs related to the following can be considered as tax-deductible:

  • Visiting clients or customers
  • Attending business meetings
  • Traveling from home to a temporary workplace, not their regular workplace. Note that traveling to their regular workplace is considered commuting and is not eligible.

Educational Seminars

The cost of attending educational seminars and classes offered by local community colleges are tax-deductible. Any courses that further general business development, such as accounting courses or courses offered in your field of expertise are deductible. In addition to the tuition and books, travel, meals, and any hotel costs for overnight, out of town, conferences are deductible.

Business Entertainment Expenses

Business and entertainment expenses are a necessary part of building a client-customer relationship. The IRS has specific guidelines for deductible entertainment expenses. Generally, 50% of the entertainment expenses can be deducted. The expense must meet one of the following requirements:

  1. Directly Related Test: To meet this qualification, the entertainment expenses must:
    • Show that business was conducted
    • Show that you engaged in business with the person
    • There was an expectation of getting income.
  2. Associated Test: To meet these qualifications all expenses must be associated with the business or meals or entertainment which occurred directly before or after business discussions.

Entertainment expenses conducted in nightclubs, theaters, or at sporting events would probably not qualify for deductions as there are “substantial distractions” which would limit the number of actual business discussions that could take place. Meals and entertainment expenses can only be claimed on one “category.” For example, a meal can be claimed as an entertainment expense, or as a meal for traveling, but not both.

Keep Good Records

Keep all receipts and make notes on the bill. Document who, what, when and where so that a lunch receipt can be explained or remembered. A quick note such as “met with Pat Smyth of Acme Widgets – discussed widget layout” might garner a bit more leverage for deductibility than just a receipt with an “amount paid” on it.