Avoid IRS Tax Problems by Correctly Determining Business Expenses

Probably one of the most controversial areas of tax law for small business and the self employed is correctly determining what a legitimate business expense is. You can avoid IRS tax problems with a few tax tips from a tax attorney or CPA to sort this out.

There are two general categories of deductible expenses:
• Business expenses – the ones you write off immediately
• Capital expenditures – these are assets that you write off over a period of time. E.g. if you buy a new phone system for $5,000 you will need to write that off over a period of time unless there is a tax credit which will allow you to write it off all in one year.

Business Expenses

Deductible business expenses are those expenses incurred in the normal course of running your business:
• Rent of business premises
• Purchase of goods for resale
• Wages and salaries to employees
• Telephone & internet
• Marketing & PR
• And so on

A business expense to be deductible must be both "ordinary" and "necessary”. An ordinary expense is one that is considered widespread and accepted in your line of work. A necessary expense is one that is helpful and suitable for your organization.

Capital Expenditures

These are assets that have a life of greater than a year and are over a set limit such as $500. You should set a limit so the bookkeeping is kept simple—otherwise you could spend a lot of time on “assets” such as staplers and other office or plant items that are not worth keeping track of. For items under $500 (or whatever limit you set) you write them off as a business expense in one year. Capital expenditures are depreciated over the life of the asset:
• Land is a capital expenditure but is not depreciated
• Buildings
• Equipment
• Computers and software
• Office furniture

Author:artilecity.com.