Small business owners may be able to deduct some of the costs necessary in running the business. Generally, the Internal Revenue Service (IRS) defines a small business tax deduction as a business expense that is both ordinary and necessary. To qualify as a deduction, the IRS requires that the expense to be ordinarily accepted in your particular industry. In addition, necessary expenses are those that you need to make to practice your trade. Examine your expenses under this general IRS guideline to help you determine whether a business expense is deductible.
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Home Office
Small business owners who use their home to conduct business qualify for deductions commensurate with the percentage of the home used for business. According to the IRS, working out of a home office makes part of your home expenses tax deductible. For example, expenses like insurance, utilities, home repairs and mortgage-interest payments are partially deductible. To qualify for the deduction, you must use part of your home particularly for business purposes and your home must be the primary place of business.
Retirement
Contributions to retirement plans are also tax deductible for small business owners. For instance, proceeds paid into personal retirement savings accounts like Individual Retirement Accounts (IRAs) are tax deductible on personal income tax returns. In addition, as self-employed workers, small business owners are subject to the full 15.3 percent required Social Security contribution. Normally, the 15.3 percent is paid evenly between employees and employers. However, self employed workers are considered both employee and employer and therefore are liable for the full contribution to Social Security.
Mileage
Small business owners using their vehicles for business purposes are eligible to take a mileage deduction based on IRS standard rates. To fully qualify, vehicles must be used for medical, business, moving or for charity purposes. According to the IRS, the mileage rate as of January 1, 2010, is 50 cents per mile driven for business purposes, 14-cent per mile in the aid of charitable entities,16.5 cents per mile for moving or for medical reasons. According to the IRS, the mileage rates are lower for 2010 because of lower costs of transportation than in 2009.
Entertainment
The IRS allows tax deductions for particular entertainment expenses related to business activity. IRS publication 334 indicates that, "You can deduct ordinary and necessary expenses to entertain a client, customer or employee if the expenses meet the directly related test or the associated test." For example, if you meet with a client over dinner, engage in business and expect some business benefit from the meeting, you can deduct the meal as as an entertainment-expense deduction because the dinner was directly related to business activity.
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