Small business owners who have recently established their company will have many questions regarding small business taxation, and rightly so. Making a mistake regarding taxes can lead to costly penalties that few small businesses can afford, so familiarizing yourself with the basics can go a long ways towards ensuring that everything is done by the book.
What Counts As A Tax Deductible Business Expense?
Any expense which is necessary for operating your business is considered deductible. Examples of such expenses could include things such as purchasing a sound system or piece of equipment that is needed in your office. However, buying the same item for other areas of your house such as the bedroom or living room would not be considered deductible, as they aren’t directly involved with the operating of your business.
There are a few things which the IRS specifically doesn’t allow to be used as deductibles, even when they are used for business purposes. Some of these include telephone lines, clothing which you wear while working (unless it is a uniform that has to be worn), or traffic tickets.
Will Incorporating My Small Business Allow Me To Receive A Tax Break?
The majority of tax breaks are given to established companies that have demonstrated their profitability. The reason for this is because splitting income between the business owners and business only works when the business has positive cash flow. Incorporating a company also incurs state fees as well as costs related to accounting and legal considerations. Unless you are absolutely certain that the business will quickly become profitable it may be best to postpone incorporating it.
Does It Make Sense For Me To File My Own Returns And Maintain My Books?
It is indeed sensible for many small business owners to keep their own books due to the high costs involved with hiring a professional accountant or firm to do them on their behalf. There are many software programs available for this purpose, as well as for filing your own tax returns. As your business matures you may find it necessary to hire a professional to do these things for you.
Can Home Business Owners Take Advantage Of The Home Office Tax Deduction?
Self-employed individuals who operate from home might be able to utilize the home office tax deduction. It allows these business owners to deduct a part of their mortgage, rent or utilities costs. However, there are stringent requirements that must be met. For example, you may not qualify if you use your office partially for personal and work tasks, or if the area isn’t used consistently for business purposes.
How Do Current Expenses Differ From Capital Expenses?
You’re allowed to deduct current expenses from the total income of your business within the year that they are incurred. This includes things such as electricity, office supplies or rent/mortgage costs. Capital expenses are things purchased today that will help generate income in the future, and have to be written off over the shelf life of the item. This period can range from three to seven years.
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