As with any business, small businesses also have their share of tax issues and requirements. They must typically pay annual business taxes, sales taxes, property taxes, and other tax requirements. However, small businesses may also lend themselves to miscellaneous intricacies that do not exist for different, more traditional business types.
For example, they may have specific tax breaks or preferential tax treatment available, depending on state and local business regulations. They may also be associated with several tax deductions that may apply to them.
What Qualifies as a Tax-Deductible Business Expense?
Almost any business expense that is ordinary, reasonable, and necessary and helps to earn a business income is deductible. The Internal Revenue Service (IRS) has defined this as anything helpful and appropriate for your particular company. For instance, purchasing a work computer for a small business office would qualify as an ordinary and necessary business expense.
Some common types of company-related deductions for small businesses may include:
- General and administrative costs;
- Company-related travels;
- Car expenses (including repairs and upkeep of company vehicles);
- Company-related entertainment; and
- Worker benefits.
The standard business deductions are covered in full detail in Section 162 of the Internal Revenue Code. Again, the main guideline for deductions is ordinary, necessary, and reasonable.
What Am I Not Permitted to Deduct as a Business Expense?
The law expressly forbids you from deducting particular items as work-related expenses.
Examples of these may include:
- Bribes paid to public officials;
- Traffic tickets;
- Your home telephone line;
- Clothing worn during work, unless it is a required uniform;
- Personal expenses;
- Capital expenses; and
- Expenses used to specify the cost of goods sold.
Generally speaking, any items that involve criminal activity (such as bribes paid to public officials) will not be deductible.
If I Use My Car for My Business, How Much of that Expense Can I Write Off?
Normally, you may deduct vehicle-related work expenses by using either the standard mileage method or the actual expense method. The standard mileage method permits a person to deduct a predetermined amount per mile you drive for work purposes. The IRS calculates and determines the rate and changes every year.
In distinction, the actual expense method permits you to deduct the actual monetary costs you incur each year to operate your car.
Deductible costs include:
- Gas
- Oil
- Repairs
- Maintenance
- License fees
- Insurance
- Tolls
- Car washes
Other costs such as painting or replacing a logo on a car depend on whether the cost was reasonable, necessary, and ordinary.
While this technique may seem more attractive, the actual expense method requires more comprehensive recordkeeping. You must establish and support all expenses incurred under this method and therefore need to maintain evidence of every expense you claim. In addition, if you use the vehicle partly for personal use, it becomes complicated; you must multiply the vehicle expenses by the percentage of miles driven for work/company purposes to find the amount you can deduct.
Can I Claim a Deduction for Business-Related Entertainment?
In general, you may deduct 50% of the expenses you incur to entertain clients or customers for company purposes. Business entertainment that qualifies for deductions may include a wide variety of activities, including taking customers to a sporting event, a meal, or even having customers to your residence for drinks.
A pleasant exception is that any social event the small business puts on for its workers and their families, such as a party or picnic, is 100% deductible.
If I Work In My Home, Can I Take the Home-Office Tax Deduction?
If you use part of your residence for your small business operations, you may be able to deduct expenses for the business use of your home. This applies to all homes and is open to both homeowners and renters. This deduction often entitles you to claim a rental or mortgage costs deduction. You may also be able to deduct other related property costs, such as utilities and remodeling.
However, there are strict requirements you must meet to claim these types of small business tax deductions. For instance, you will not qualify for the deductions if you work part-time at home and your primary office is elsewhere. In addition, you may need to confirm that the place you claim for your office is not used for personal use.
If I Want to Start My Own Business, What Steps Should I Take to Avoid Trouble with the IRS?
The most crucial thing to do is to keep good business records. Even if you intend to employ someone to keep your documents, you need to know how to manage that individual and their work product. If they make a blunder, you may be ultimately accountable.
Small businesses should keep all receipts and canceled checks systematized for company costs in a safe location. Separate the documents according to the category: auto expenses; rent; utilities; advertising; travel; and entertainment. This will make it easier to sort out the expenses in the long run.
An Employer’s Liability for Employee’s Acts
Employers, and not the employees themselves, will oftentimes be held accountable for the behavior of their employees. This is true even if the employer had no intent to cause injury and played no physical role in the harm.
First, employers are seen as controlling the conduct of their workers and therefore must share in the good and bad consequences of that conduct. By the same token that an employer is legally qualified to benefit from an employee’s labor (profit), an employer also has legal liability if that same behavior results in harm.
When someone is hurt or injured and needs to be compensated, who is the most likely to pay: the worker or the employer? Fair or not, the legal system is interested in making the victim whole and giving liability to the employer rather than the employee having the best chance of meeting that objective.
What Are Job-Related Accidents?
Employers are vicariously liable under the doctrine of “respondeat superior” for their employees’ negligent acts or omissions in the course of employment. The key phrase is “in the course of employment.” For an act to be within the course of employment, it must be authorized by the employer or be so closely related to an authorized act that an employer should be held responsible.
This means that there is a significant difference between an employee who causes a job-related accident and an employee who causes an accident while on the job unrelated to their employment. Courts occasionally use the terms “detour” or “frolic” to signify the difference.
Do I Need a Lawyer to Help with My Small Business Taxes?
Unfortunately, small businesses are normally about three times more likely to be audited than individuals. If you are audited, then the burden is on you to establish that you did nothing criminal or in violation of tax laws.
Consulting a good tax attorney when you initiate your small business will help you to ensure that every decision you make is lawful. If you are audited, you should contact a small business accounting lawyer immediately, who will be able to advise you of your rights. Find the right small business accounting lawyer for your needs today.
