- What are dividends and how are they taxed?
- What is the basis of property acquired by gift?
- What is the generation-skipping transfer tax?
- Is an early distribution from a retirement plan taxed?
- How is the gain or loss on the sale or transfer of a capital asset determined?
- What are the tax consequences of the sale of a principle residence?
- What are the rules for deducting home office expenses?
- Do I have to pay US income tax on money I earned in a foreign country?
- What are the reporting requirements for businesses with respect to independent contractors?
- Are any taxpayers exempt from paying property taxes?
Are There Specific Tax Deductions Available to Businesses?
Taking advantage of available tax deductions can help a business lessen its tax liability. The Internal Revenue Code provides that “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business” can be deducted. 26 U.S.C. §162. Section 162 specifically includes the following as deductible trade or business expenses:
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered;
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
26 U.S.C. §162(a). Under Section 162, the following types of expenses are typically deductible:
- Office supplies and expenses — This includes expenses that are reasonable, ordinary and necessary for the running of a business such as supplies, rent and the cost of utilities.
- Cost of legal and professional services —This includes payments that a business makes to attorneys, consultants and accountants.
- Business travel expenses — The business can typically deduct the cost of travel expenses such as airfare, rental car fees and hotel costs incurred when traveling for business purposes.
- Meals and entertainment costs — One-half of the cost of a meal in a restaurant or entertainment event can be deducted if there was a business-related purpose for the event.
- Car expenses — The costs of driving for business purposes can be deducted. The Internal Revenue Code sets forth a standard per mile rate, and businesses generally keep track of mileage and take a deduction at that rate.
In addition to the above trade or business expense deductions, there are a variety of other deductions that a business may claim. Examples of these deductions include:
- Interest on indebtedness paid or accrued in a taxable year (26 U.S.C. §163)
- Various taxes, including property taxes (26 U.S.C. §164)
- Losses not compensated for by insurance or otherwise (26 U.S.C. §165)
- Depreciation of property used in a trade or business (26 U.S.C. §167)
- Charitable contributions (26 U.S.C. §170)
- Net operating losses (26 U.S.C. §172)
- Business start-up expenses (with certain restrictions) (26 U.S.C. §195)
Deductions can help a business significantly lower its ultimate tax liability. Therefore, it is important to examine all possible deductions to see if they apply.
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