The Art of the Small Business Tax Write-Off

There is nothing illegal about a small business tax write-off. In fact, the IRS provides these incentives so you can operate your business in the most efficient manner possible. It would not make sense for the IRS to tax you on your profits when 30 percent of those profits went right out the door in operations costs. Instead, the government taxes you on your net income. Keeping this in mind, you will find there is a lot of room for interpretation in the tax laws. The laws are not finite; there are a number of gray areas, making business write-offs an art rather than a science.

Business Start-Up Costs

You can elect to either deduct or capitalize your start-up costs. Deducting the costs will give you the greatest benefit in the current tax year. The IRS found most small business owners were choosing this option. As a result, this option is pre-selected for all business owners at this point. If you wish to capitalize, you will have to file separate forms. When deducting start-up costs, consider all of the costs that went into two key areas of your business: money spent determining whether to open a business and money spent opening the business. If you hired analysts to help with your business considerations, perhaps determining where you should build your business, you can deduct this expense. Then, once you decided to build your business, if you hired consultants to help train your employees or write your business plan, for instance, you can deduct this expense as well.

Cost of Goods Delivered

Perhaps the easiest category to understand is the cost-of-goods small business category. Any money you spend on raw materials, including costs of freight and storage, can be deducted. It is harder to estimate cost of goods when you provide a service and not a product. This category is heavily used by manufacturing companies but not service companies as a result of this challenge.

Operating Expenses

Operating expenses is the area perhaps most subject to interpretation. Is dinner with a client a legitimate operating expense? It depends on what you speak about. If you talk business, then it is. If you do not discuss any business at all, then it is not. How about car insurance expenses? You can deduct the portion of expense equal to the portion of time you use your car for business. This gets confusing, and it is best to follow simple rules to make sure you are operating within the law. First, keep track of everything. Write down the total miles of each trip you take, the purpose of the trip and the date of the trip. With a business dinner, do the same. Record what was discussed and who was present. Second, keep a receipt. Each time you pay your car insurance or fill up on gas, place the receipt in your car expense file. When you go to a business dinner, keep the receipt in your business travel file. If you are ever subject to audit, you will have the ammunition to back up your tax claims.