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Tax season is upon us, which means it's time to start pulling out records and paying the government. While no one enjoys this process, it's possible to make it a little bit friendlier on your pocketbook. With these five tips and a little work, you can master the art of small business tax deductions.
1. Choose Wisely. Often times the law offers two accounting methods for small business tax deductions. For instance, if a business owner has kept impeccable records, it's possible to deduct the actual costs associated with business-related vehicles. However, the law also allows a business owner to deduct a pre-set mileage rate. The second choice may seem easier, but the first one may be more beneficial. When given options, it's necessary to determine which provides a larger deduction.
2. Be Ordinary and Necessary. IRS code section 162 permits small business tax deductions for anything that is deemed ordinary and necessary in the course of business. Sit down with IRS Publication 529 and any of the publications it refers to. Go through each category and write down any expenses that match up. You'll be surprised at what is deductible--professional publications, how-to books, continuing education and seminars.
3. It's Not Personal. Deducting personal expenses is so important that it deserves its own category. IRS employees know what they're looking for, and they'll be able to tell when an expense is personal. Be very meticulous about not deducting personal expenses, even if they are connected to business expenses. If a vacation was part business, part pleasure, only deduct a percentage of it. Same goes for a home office, a vehicle, and any loans.
4. Tax Credits Are Your Friends. Just because there isn't a small business tax deduction doesn't mean there isn't a small business tax credit. Tax credits are wonderful things in that they save you a specified amount of money regardless of your tax bracket. There are a bunch of new tax credits out there for small businesses this year, including those related to general business credits, new employees, and health insurance.
5. Knowledge Is Power. Tax law is always changing, and 2010 was no exception. President Obama signed countless bills into law last year that provided tax cuts to small businesses. To get the most out of your small business tax deductions, you need to be up to date on these changes and understand how they impact you. Otherwise, you may be paying the government more than you owe, and no one wants that.