As an owner of a small business, you’re allowed to deduct the cost of doing business from your gross income. What you get after this deduction is your net business profit. You have to pay tax on your net business profit.
If you know how to maximize your business expenses, you’ll be able to reduce your income tax, putting more money in your pocket. Guidance from a tax professional can help you understand the tax laws and how best to structure your balance sheet. You can even follow tax rules and actually get yourself a personal benefit like a holiday or retirement savings plan! It all depends on how you manage your deductions.
There’s no specific limit on the amount of operating expenses you can claim. Expenses have to be reasonable, but usually the IRS doesn’t question the amount of individual expenses you claim, because people are unlikely to pay more for something than it’s worth. However, you’ll need to be able to prove that you actually paid for each business expense that you claim. Good recordkeeping is key; you’ll need to keep your receipts and be able to track your payments for any expenses you’ve claimed.
When claiming expenses, it’s important to know the difference between personal and business expenses. For example, you cannot deduct expenses incurred you use for commuting to work. That is purely a personal expense. The same is true for meals you buy for yourself while you’re working. Although you can deduct the expense of meals you buy for clients, your tab for your own meal is considered personal.
Another type of expense that may raise a red flag with the IRS is payments you make to family members who have another business or large payments to a company in which your relative has an ownership interest. Here again, documentation and knowing the rules are key. For help with these or other small business tax issues, contact a tax professional.
Pyke & Associates, P.C. is a member of the American Academy of Estate Planning Attorneys.