Small Business Basics: Business Expenses - Can I Deduct That?

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Businesses offer a myriad of ways to save on taxable income. These are just some of the most used categories for business expenses:

1. Travel

2. Meals

3. Entertainment and Gifts

4. Insurance Premiums

5. Retirement Contribution

6. Social Security

7. Telephone Charges

8. Child Labor

9. Home Office

10. Office Supplies

11. Furniture

12. Other Equipment

13. Software and Subscriptions

14. Mileage

The IRS website says - "To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. It is important to separate business expenses from the following expenses:

1. The expenses used to figure the cost of goods sold

2. Capital Expenses

3. Personal Expenses

Cost of Goods Sold: If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring the cost of goods sold. The cost of products or raw materials, including freight:

1. Storage

2. Direct Labor Costs (including contributions to pensions or annuity plans) for workers who produce the products

3. Factory Overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs."

Businesses should seek the advice of unbaised tax professionals to ensure their business is benefitting from all tax deductions available to them! For most businesses, the biggest expense is employee pay. The IRS says, "You can generally deduct the pay you give your employees for the services they perform. The pay may be in cash, property, or services. It may include wages, salaries, or other compensation such as vacation allowances, bonuses, commissions, and fringe benefits." You can claim employment credits such as the following if you hire individuals who meet certain requirements:

1. Empowerment Zone and Renewal Community Employment Credit (Form 8844)

2. Work Opportunity Credit (Form 5884)

3. Credit For Employer Differential Wage Payments (Fprm 8932)

Another big expense is business vehicle use. Standard mileage makes filing alot easier. For 2012, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for each mile of business use is 55.5 cents per mile! Remember, the IRS has a 3 year window to audit a tax return. The ink on most receipts does not last 3 years. Freshbooks allows you to attach a scanned copy of the receipt to your expense report. If you pay expenses with credit cards, the statements can be used in leiu of receipts if the statement has details on what was purchased in addition to the store, date , time and cost.

Make sure your business is taking advantage of all the business expenses which lower taxable income!

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