Ordinary and necessary business expenses may be deducted from your gross income. An ordinary expense is one that is common to your trade—for example, bar association dues if you are an attorney. Necessary expenses are indispensable, like Internet or electricity. While it seems like these are obvious concepts, many business owners face audits because they deduct inappropriate expenses. Hiring a good tax service in Des Moines, IA reduces the likelihood of this error. Here are six possible deductions for your business tax returns:
- Cost of goods sold: Many small ventures deal in services, but if you manufacture or resell products, you may be able to deduct the cost of the sold goods. Start by valuing inventory at the beginning of each year, and then make another estimated value when the year concludes. The expense incurred while acquiring them reduces your gross profit. However, if you included this expense in another Schedule C category, you cannot include it with cost of goods sold, too. Elements used to determine this value include cost of raw materials, storage expense, labor and factory overhead.
- Capital expenses: When you invest in your business, it is considered a capital expense. For example, a moving company may grow by buying additional trucks, or if you create web pages, you may upgrade your computers. These efforts are business assets that enhance your productivity. Besides acquiring assets and improving your business, you may also be able to deduct your startup costs.
- Personal expenses: You need to be careful with this one, because listing personal, family and household expenses as business expenses can get you in trouble. But if part of the expense goes towards your business, that can be deducted. For example, your Internet connection may be used by the household 60 percent of the time, and by your business 40 percent. When you total your Internet bills for the year, 40 percent of it can be deductible. This is a tricky area for home office workers and must be handled carefully.
- Home office deduction: There is a deduction available if you run your business from home. It combines mortgage interest, insurance, repairs and depreciation and creates an amount based on how much space in your home is used for work. If you make any repairs that are specific to your business, keep receipts and explanations. Sometimes the IRS feels the need to investigate these claims, because this deduction is frequently abused.
- Car expenses: If you drive for a living or use your car for business errands, keep track of this mileage! Unless your car or truck is used only for business purposes, you must separate personal and commercial use. This is done by recording mileage on business trips, and you cannot benefit from the deduction if you do not make that effort.
- Other expenses: Employee pay, retirement plans, rent, interest on borrowed money, taxes and insurance may also be deductible. Track these expenses, since you may reduce your tax liability significantly.
Accounting & Tax Professionals, PLC offers payroll and tax service in Des Moines, IA. Call us today to schedule a consultation.