If conducting a national survey about paying taxes, you'd likely be hard-pressed to find many individuals or business owners who enjoy handing over their hard-earned income to the Internal Revenue Service. Regardless, U.S. citizens and those working in the U.S. are required to pay taxes on earned income.
There are, however, ways to reduce one's income and tax liabilities. Tax deductions are potentially one of the most advantageous methods for reducing income. It should come as no surprise therefore that the IRS has many rules and regulations regarding who can and cannot take advantage of certain deductions.
For business owners, deductions related to business expenses can significantly reduce tax liabilities. At times, however, the lines between what is and is not an acceptable deduction are blurred.
According to IRS tax law, to qualify as a valid deduction "a business expense must be both ordinary and necessary." This rule pertains to expenses that are commonly incurred by other business owners in the same industry as well as those expenses that, while not necessary, are considered appropriate for one’s industry.
For many business owners who run a business out of their home or who are just starting out, it can often be challenging to discern between personal versus business expense. In general, a business owner who operates a business out of his or her home is allowed to deduct a portion of expenses related to mortgage interest, utilities and repairs.
Additionally, some expenses may relate to one's personal life and business' growth. Say for example that a small business owner is flying with his or her family to a tropical location. In addition to the family vacation, the business owner is also planning to meet with a potential client. In this type of situation, a business owner must be careful to deduct only those expenses that relate to the business portion of the trip.
Entrepreneurs and small business owners who have questions or concerns about deductions would be wise to consult with a tax professional. In cases where an individual or business is audited and concerns exist about whether or not expenses previously deducted are valid, it's wise to consult with a criminal defense attorney who handles IRS tax matters.
To speak with a tax attorney:
Source: IRS.gov, "Deducting Business Expenses," 2014
