Tax Tips for Small Business Owners

By Steve Takamatsu | Print This Article

Whether you’re an investor, a business owner or a consultant, there are many benefits to working for yourself. And one major factor involves tax advantages.

If you have your own business, there are plenty of ways you can reduce your taxable income.

The two biggest things you’ll need to concern yourself with are expenses: business expenses and capital expenses.

Business expenses are the cost of conducting a trade or business, and they are usually tax-deductible. For example, the costs of renting an office, going on business trips and paying employees are all deductible business expenses. Such expenses must be both “ordinary” and “necessary” in order for you to take the deduction.

Capital expenses, by contrast, are the costs of purchasing specific assets, such as property or equipment that usually has a life of one year or more. If, for example, you purchase a computer or a car for business use, they could be considered capital expenses.

Such purchases do not qualify as business expenses, but you can still recover the money you spent on capital expenses through depreciation, amortization or depletion. These recovery methods allow you to deduct part of your cost each year so that you are able to recover your capital expenses over time.

Figuring out whether a purchase is a business expense or a capital expense is not always clear-cut, so consult the IRS or an accountant for more detailed advice.

One big decision many small business owners face is whether to claim part of your house as a home office. The key here is that the space must be devoted exclusively to your business. No other activities may routinely go on there, and the burden of proof is on you to demonstrate that. To figure the deduction, measure your work area and divide by the square footage of your home. That percentage is the fraction of your home-related business expenses—rent, mortgage, insurance, electricity, etc.—that you can claim.

I would recommend against using the home office deduction. Not only is this a red flag when it comes to attracting IRS audits, it can be a complicated calculation and can be a pain if you ever sell your house.

However, whether you work at home or in an office, there are other expenditures that are easily justifiable as write-offs:

  • Computers and peripheral equipment (fax machines, modems, routers, monitors, printers, scanners, digital cameras, etc.)
  • Cell phone bills
  • Land line bills
  • Internet access
  • Pretty much any subscription (Internet or hardcopy) that you can tie to being relevant to your business
  • Office furniture
  • Office supplies
  • Postage and delivery
  • Tools of the trade

In addition, one big deduction item is contributing your vehicle at a current Fair Market Value to your business. You don’t have to change the title (ownership) of the vehicle. But you can either depreciate the vehicle over 5 years (for the portion of the FMV that you use for the business), or take a per-miles deduction.

Finally, 50 percent of business meals can be deducted, as well as travel, meals and entertainment expenses related to business meetings and events.

The key concerns with business write-offs are being reasonable and having good documentation. Deductions that appear to be out of line with normal parameters will almost certainly attract the wrong kind of attention—so use common sense!

Whether you’re an investor, a business owner or a consultant, there are many benefits to working for yourself. And one major factor involves tax advantages.


Steve Takamatsu, CPA, is the owner of three automotive-repair businesses in Austin, Texas: Epps Body & Paint, Lawson Tire & Automotive and Fastbrake Mobile Brake Repair

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