Owners/operators of a business can deduct from income any expense the business needs to incur to operate. The Internal Revenue Service does not specify the precise expenses that each business can deduct, they do however state that the expenses must be ordinary and necessary for the business to function. Here is a list of a few of the tax-deductible expenses that most owner/operators find necessary for their businesses.
No matter what type of business you own, you may find it necessary to provide meals for clients, employees or yourself. These meals are generally deductible at 50 percent of their cost as long as you can prove the meal is for business. There are a couple of exceptions to the 50 percent rule. If the client reimburses you for the meal, you will record the reimbursement as income and the meal expense is deductible at 100 percent. Meals provided for staff parties are another exception to the 50 percent rule; this would include meals such as holiday dinners that are 100 percent deductible.
The deduction for automobile expenses comes in the form of a standard rate or the actual expenses you incur. The standard deduction is a mileage rate that the Internal Revenue Service determines each year. You simply multiply your business miles by the standard rate (50 cents per mile for 2010 and 51 cents per mile for 2011), to determine the total standard deduction to claim.
Actual expenses include items such as insurance, gasoline, depreciation, loan interest, oil, tires, etc.; any expense you incur to keep the vehicle on the road. To determine your actual expense deduction you must allocate the expenses to the business use of the vehicle and remove any portion that you attribute to personal use. Divide the total business miles you have driven the vehicle by the total miles driven for the year to get a percent of business use. Multiply this percentage by all of the vehicle's expenses to arrive at the allowable actual expense deduction for the year.
Whichever method of automotive expense deduction you choose, you must keep adequate records to prove your business use. According to the IRS, you must keep records that are in writing in order for it "to be considered adequate."
Home Office Expense
The portion of your personal home you use for business is a deductible expense. To determine the amount that you can deduct, total the square footage of your home that you use for your business. Divide this amount by the total square footage of your home -- the result is the percentage of business use of your home. Multiply the percentage of business use by the total expenses for operating your home to arrive at the allowable home office deduction. These may include items such as interest, depreciation, utilities, maintenance and repairs or insurance.
Taxes for the Business
Taxes that are deductible for the owner/operator include those that the business incurs. These do not include personal income taxes that belong to you as the owner/operator. Deductible taxes would include payroll taxes for employees, taxes on real property or taxes on equipment that you own.
Reporting the Deductions
Where you as an owner/operator report your deductions depends on the way the business is set up with the IRS. If you are in a partnership with your spouse or someone else, your deductions are reportable on Form 1065. If you are in business as a sole-proprietor, report your deductions on Form 1040 Schedule C. If you made an election to file your taxes as an S-Corporation, use Form 1120-S to report your deductions.
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