Top 10 Tax Deductions for Small Businesses

Updated: May 14, 2009

Issue

In the best of times, maximizing deductions is nothing less than smart tax planning. But in today's highly challenging economic environment, taking full advantage of legitimately claimable tax deductions will not only put more money into your pocket, but — in some cases — mark the difference between business success and failure.

When you're calculating your company's expenses this tax season, don't overlook these top 10 business deductions.

Considerations

1. Travel: Hitting the road (or air) to either perform or find work is completely tax deductible, as long as business is the journey's primary reason. Deductible expenses include plane fares, car costs, meals, tips, communications and a variety of other items. Friends and family members may accompany you on the trip, but you can't claim any deductions for them. And don't confuse travel expenses with vehicle expenses (see below).

2. Vehicle expenses: If your company uses a car or truck to make deliveries, visit clients or for any other business purpose, you'll want to deduct some of the costs of keeping it on the road and moving. There are two ways to deduct vehicle expenses: the actual expense method and the standard mileage method. The actual expense method generally offers the biggest deduction for newer vehicles. Still, regardless of the vehicle's age or type, you'll want to calculate expenses with both methods in order to determine which approach offers the biggest tax break.

3. New equipment: Few businesses can survive without new equipment. Capitalizing these costs over several years is both complex and confusing, but Section 179 of the Internal Revenue code lets you deduct up to $250,000 of the cost of new equipment placed into service during the tax year. There are some limitations to Section 179 deductions, so check with your tax professional for details.

4. Bad debt: As the economy sours, more businesses are facing a rising pile of bad debt. Some comfort can be found in the fact that the cost of goods sold but not paid for can be deducted. On the other hand, service providers are out of luck — deductions aren't allowed for clients who fail to pay for a time-based service.

5. Interest: Interest rates may be at or near rock bottom, but that doesn't mean you can't deduct the cost of borrowing money. Finance costs and carrying charges for business purchases are fully deductable. Interest is also deductable for personal loans that finance business operations.

6. Taxes: In good times or bad, taxes eat up a substantial portion of business revenue, so it's important to keep careful records and to deduct allowable taxes. Deduction rules and procedures differ for various types of taxes, so check with your tax professional for details.

7. Education expenses: Many businesses and professions require owners to receive periodic training. Education expenses may be deducted if they directly relate to a current business, occupation or trade. Education costs can't be deducted if the training is designed to prepare you for a new business or occupation.

8. Advertising and promotion: Advertising and promotion can help businesses find new customers and clients in tough times. Advertising costs are fully deductable. So are promotional costs, as long as there's a clear connection between your business and the sponsorship or other activity.

9. Legal and professional fees: Just about every business needs outside advice on legal, financial, training and a variety of other issues. You can generally deduct fees for any legal or professional service supplied during the tax year. Any advice that relates to future years, however, must be deducted over the project's lifespan.

10. Business entertainment: As anyone who has ever had to pitch a product or service to a client at an event knows, business entertainment isn't always the perk that many people imagine. You can deduct up to 50% of entertainment expenses if the event is directly related to your business (such as a catered meal) and business issues are discussed at the event. You can also deduct 50% of the cost if entertainment occurs immediately before or after a business discussion. In either case, be sure to keep detailed records.

The Bottom Line

Now is not the time to ignore money-saving strategies such as tax deductions. Make sure your company audits and records the money spent on the above-listed strategies, and you'll be sure to enjoy a number of deductions come tax season.

To learn more about taxes and financial services, consult Focus' Financial Services Resource Center, where you'll find comprehensive research and advice from Focus Experts.

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