How to Find Legal Tax Deductions for a Corporation

Your business can claim deductions for any actions and items you that exert a demonstrable effect on your ability to do business. Follow these steps to take deduction that will withstand the scrutiny of an IRS audit.

Things You'll Need

• Corporate attorney
• Corporate accountant

Instructions

1. Review the basic definition used by the IRS to determine allowable business deductions. Expenses that can be classified as "ordinary and necessary" are deemed allowable. However, since the IRS does not strictly define ordinary and necessary, the corporation must. As you evaluate potentially deductible expenses, always be aware of how "ordinary and necessary" can be applied to that expense.

2. Never deduct personal expenses. IRS auditors are on the watch for travel expenses, in particular. Rental cars, airfare or hotel stays deducted from a corporation's profits must be demonstrably tied to a legitimate business expense. For a more comprehensive list of illegal deductions, read the U.S. Code Title 162 (see Resources below).

3. Deduct the cost of office supplies and furniture. You can choose to take these deductions all at once in the year of purchase, or spread it out over seven years as a function of depreciation. The same rules apply to electronics such as computers, although these can only be depreciated over five years.

4. Save all receipts from travel and entertainment expenses. The full cost of hotels, travel and incidentals is a legal tax deduction. Your corporation may choose to instate an internal limit for such expenses. Meals, however, obey different rules.

5. Know which part of your operating expenses you can deduct. Write off your contributions to employee retirement and health savings accounts, liability insurance premiums, necessary business licenses, employment taxes you pay on behalf of your employees and bad debts from consumers who didn't pay you for services rendered.

6. Work with both a corporate lawyer and a corporate accountant to keep your books in order. Initiate a system of redundant reviewing so that all deductions and expenses are approved by more than one person.

7. Prepare your taxes 6 weeks ahead of the due date to ensure you have enough time to gather the necessary documentation. If receipts are missing, you will need to obtain copies.

Tips & Warnings

• Your taxable income as a corporation is your gross profits minus your costs of doing business.

• Section 162 of the tax code covers legal exemptions. Read it if you have any question about a particular deduction.

• Read the IRS Audit Techniques Guide to find out what kinds of questions you'd be asked if you were audited (see Resources below).

• Using illegal tax deductions can come back to haunt you during an audit. If you are found guilty of tax evasion or illegal tax maneuvers, you could be fined or face jail time.