It’s simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. Also, in addition to putting more money into your pocket at the end of the year, the tax code provisions that govern deductions can also yield a personal benefit: a nice car to drive at a small cost, or a combination business trip and vacation. It all depends on paying careful attention to IRS rules on just what is — and isn’t — deductible.
When you’re totaling up your business’s expenses at the end of the year, don’t overlook these important business tax deductions.
1. Auto Expenses
If you use your car for business, or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
There are two methods of claiming expenses:
Actual expense method. You keep track of and deduct all of your actual business-related expenses.
Standard mileage rate method. You deduct a certain amount (the standard mileage rate) for each mile driven, plus all business-related tolls and parking fees. Check the IRS website for the current standard mileage rate.
As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle. (For more on Section 179, see “New Equipment,” below.)
If your auto is used for both business and pleasure, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
To learn more about deducting driving expenses, see Nolo’s article How to Deduct Your Local Business Driving Expenses.
2. Expenses of Going Into Business
Once you’re running a business, expenses such as advertising, utilities, office supplies, and repairs can be deducted as current business expenses — but not before you open your doors for business. The costs of getting a business started are capital expenses, and you may deduct $5,000 the first year you’re in business; any remainder must be deducted in equal amounts over the next 15 years.
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