The United States Government and the Internal Revenue Services have provided numerous write-offs, on the premise that every business activity is considered to be a part of the economy and is effectively its contributor. The business firm in some or the other manner also contributes to economic growth. Another premise for such a write-off is that the profit of any business is computed by subtracting the expenditures from incomes.
Essentially certain expenditures are not a part of the income, and are inevitable. Hence the IRS has made provisions for tax deductions where the income, which is used to accommodate inevitable expenditures, are not taxed. In the paragraphs that follow, some important tax write-offs and small explanations have been provided. Take a look.
Common Definition of Write-Off
A write-off is a deduction which is subtracted from the Adjusted Gross Income of a certain tax payer, who may be an individual, firm or an incorporated body corporate. The total tax write-off of a year is basically the sum total of all the individual write-offs or deductions taken and claimed in the financial year.
In the article that follows, common tax write-offs which can be used by small businesses, such as sole proprietors, small-sized body corporates and partnership firms have been discussed. A small business basically means an organization with a limited turnover and lower work force.
The Small Business Administration of the United States, defines the scope and specifications for small businesses as per the sectors in which they operate. However in common parlance, an organization with income receipts which are lower than $7 million and a work force which is lesser than 500 people is considered to be a small business.
Tax Write-Offs for Small Businesses
The following is a list of some of the important and also commonly accepted tax write-offs of small businesses. These write-offs often coincide with the write-offs or deductions of individuals. Take a look...
The biggest head of write-offs is the depreciation expenditure. Any tangible long-term asset or property, which is expected to last for a time exceeding 12 months can be depreciated. The depreciation method used is the Modified Accelerated Cost Recovery System (MACRS) which is explained in IRS Publication 946. The Form 1040 Schedule C is used to claim this write-off.
Apart from that, the Section 179 Deduction can also be claimed for some select items and assets, which are deemed to be tax-deductible by the IRS. Common depreciable assets include, machinery, office assets such as furniture or office premises, office machines such as computers and printers, etc. Some intangible assets such as software in selected circumstances also qualify to be depreciable assets.
2. Home Use of Business
Small businesses often use residential premises, such as your home to operate. If you operate your business from your home, from one certain room, or the entire house in general exclusively and regularly, on the premise that your home is the principle place of operation of your business, then you can claim several deductions related to expenses of your house property.
Deductible expenses include, payment and installments of mortgages, insurance premiums, usage of utilities and also the depreciation of the property. The IRS publication 'Home Office Deduction' will provide you with the qualifying conditions. Apart from that, you can also refer to Publication 587: Business Use of Your Home. You will have to claim the said expenses in Form 8829: Expenses for Business Use of Your Home.
3. Travel, Meals, Entertainment and Gift Expenses
In case of small businesses, travel, meals, entertainment and gifts are operational expenses of your business. These can be completely or partially deducted, depending upon their nature and the guidelines of IRS. For example, 50% expenditure of meals can be written off when one is traveling - on business.
Such rules, guidelines, terms and conditions are given in the Publication 463 of the IRS. Now, your personal expenses will often coincide with your operational expenses. In such conditions, you can deduct the expenses which were made directly in relation to the business.
Now you must be using your personal car for business use extensively. The basic principle goes that the gas spent for business purposes is a deductible expense. The IRS provides a Standard Mileage Rates table annually, which can be used to compute the number of miles which have been traveled by the car for business, and how much fuel has been used by the car for the same. Qualifying conditions, laws and rules have been included in Publication 463.
5. Employee Expenditure
Expenditure which has been made for the employees, especially for their welfare and their well-being is deductible. Taxes paid along with the employees such as 'social security' or employer contribution of such schemes and taxes can be deducted, this may also include state imposed tax and state government tax or any local schemes which have to be complied with. Payment for retirement plans, rent, insurance schemes for employees and some other educational expenses which are employment-oriented, can be deducted as per the provisions of Publication 535: Business Expenses.
There are of course several such expenses which would be deductible in relation to the operations of your business. For more guidance, laws, rules and interpretations, you can visit the 'Small Business and Self Employment Tax Center' of the IRS website. Apart from that, Publication 1518: Tax Calendar for Small Businesses and Self-Employed and Publication 4591: Small Business Federal Tax Responsibilities shed more light on the compliance which needs to be completed by the small businesses.