It’s simple: The more tax deductions your business can legitimately take, the lower its taxable profit will be. . It all depends on paying careful attention to IRS rules on just what is—and isn’t—deductible.

Attorney Stephen Fishman and legal information site Nolo.com recommend exploring these common, yet often missed, business deductions:

  • Auto Expenses—If you use your car for business or your business owns its own vehicle, you can deduct some of the costs of keeping it on the road. Mastering the rules of car expense deductions can be tricky, but well worth your while.
  • There are two methods of claiming expenses:
  • Actual expense method—You keep track of and deduct all of your actual business-related expenses.
  • Standard mileage rate method—You deduct a certain amount for each mile driven (the standard mileage amount, which is 58.5 cents per mile effective July 1, 2008; 50.5 cents per mile for January 1, 2008 through June 30, 2008; and 48.5 cents per mile for 2007) plus all business-related tolls and parking fees.
  • As a rule, if you use a newer car primarily for business, the actual expense method provides a larger deduction at tax time. If you use the actual expense method, you can also deduct depreciation on the vehicle. To qualify for the standard mileage rate, you must use it the first year you use a car for your business activity. Moreover, you can’t use the standard mileage rate if you have claimed accelerated depreciation deductions in prior years, or have taken a Section 179 deduction for the vehicle. (For more on Section 179, see “New Equipment,” below.) If your auto is used for both business and non-business personal use, only the business portion produces a tax deduction. That means you must keep track of how often you use the vehicle for business and add it all up at the end of the year. Certainly, if you own just one car or truck, it’s pretty likely that no IRS auditor will let you get away with claiming that 100% of its use is related to your business.
  • Legal and professional fees—Fees that you pay to lawyers, tax professionals or consultants generally can be deducted in the year incurred. But if the work clearly relates to future years, they must be deducted over the life of the benefit you get from the lawyer or other professional. Business books, including those that help you do without legal and tax professionals, are fully deductible as a cost of doing business.
  • Bad debts—If someone stiffs your business, the bad debt may or may not be deductible—it depends on the kind of product your business sells.
  • Goods—If your business sells goods, you can deduct the cost of goods that you sell but aren’t paid for.
  • Services—If, however, your business provides services, no deduction is allowed for the time you devoted to a customer who doesn’t pay.
  • Business entertaining—If you pick up the tab for entertaining present or prospective customers, you may deduct 50% of the cost if it is either:
  • directly related to the business and business is discussed at the event—for example, a catered meeting at your office; or
  • associated with the business and the entertainment takes place immediately before or after a business discussion.
  • New equipment—Some small businesses can write off the full cost of some assets in the year they buy them, rather than capitalizing them—deducting their cost over a number of years. (Section 179 of the Internal Revenue Code allows you to deduct up to $250,000 of the cost of new equipment or other assets in 2008.) This is subject to a phase-out if you place more than $800,000 of equipment in service in 2008. Some assets don’t qualify for the Section 179 deduction, including real estate, inventory bought for resale and property bought from a close relative.
  • Interest—If you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. The same is true if you take out a personal loan and use the proceeds for your business. Be sure to keep good records demonstrating that the money was used for your business.
  • Software—As a general rule, software bought for business use must be depreciated over a 36-month period. But there are some important exceptions:
  • Computer software placed in service from January 1, 2003 to December 31, 2010 is eligible for a Section 179 deduction, which means that 100% of the cost of software can be deducted in the year purchased. Starting in 2011, you will no longer be able to use Section 179 to deduct off-the-shelf software.
  • When software comes with a computer, and its cost is not separately stated, it’s treated as part of the hardware and is depreciated over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year if the total cost is less than a certain amount ($250,000 in 2008; $125,000 in 2007). See IRS Publication 946, How to Depreciate Property.
  • Charitable contributions—If your business is a partnership, a limited liability company, or an S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular C corporation, the corporation can deduct the charitable contributions.
  • Taxes—Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
  • Sales tax on items you buy for your business’s day-to-day operations is deductible as part of the cost of the items; it’s not deducted separately. But tax on a big business asset, such as a car, must be added to the car’s cost basis; it isn’t deductible entirely in the year the car was bought.
  • Excise and fuel taxes are separately deductible expenses.
  • If your business pays employment taxes, the employer’s share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn’t a business expense.
  • Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense.
  • Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement—for example, to build a sidewalk—it isn’t immediately deductible; instead, it is deducted over a period of years.
  • Advertising and promotion—The cost of ordinary advertising of your goods or services—business cards, yellow page ads and so on—is deductible as a current expense. Promotional costs that create business goodwill—for example, sponsoring a peewee football team—are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the “Southwest Auto Parts Blues” or listing the business name in the program is evidence of the promotion effort.

Provided by Wells Fargo