Tax Deductions for Businesses

January 6, 2014 by in category Deductions tagged as , , , , , with 0 and 0
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U.S. businesses are faced with a myriad of tax regulations when preparing and filing returns. Although it is time consuming, management must sort through these rules to reduce taxable income to its legal minimum. Luckily, the Internal Revenue Code does provide deductions businesses can use, and parsing through the IRC reveals some simple, yet effective deductions that lower taxes payable.

Home Office Deduction

For home-based businesses, the home office deduction is allowable provided IRS criteria are met. Homes must be the principal place of business, and at least part of the residence must be used exclusively for conducting operations. In 2013, the home office deduction was amended creating two methods for calculation. The new Simplified Method standardizes the deduction and reduces the number of calculations needed to record it. In particular, home depreciation and recapture are no longer required. However, small businesses still have the option of using the Regular Method. The optimal method is dependent on a company’s tax strategy.

Business Expenses

Businesses are allowed to deduct qualified expenses from taxable income making it important to know the excluded costs. For instance, certain start-up costs and capital equipment must be capitalized and expensed over a specified time period instead of being expensed right away. Also, personal expenses not associated with conducting the business do not qualify for deduction. Expenses that do quality include office supplies, utilities and other general administrative costs. Whether filing Form 1040 and Schedule C and SE or Form 1120, it is possible to deduct qualified expenses.

The IRS lists qualified business expenses including:

  • Cost of goods sold
  • Employees’ pay
  • Retirement plans
  • Rent expense
  • Interest
  • Charitable Contributions

    The Small Business Administration notes that businesses can deduct charitable contributions but that the IRS rules associated with deductions are complex. The rules differ from personal charitable contributions that are reported on Schedule A of an individual’s tax return. The donation of money is deductable but only up to specific thresholds. Before attempting to deduct charitable contributions, businesses must consult their tax professionals to sort through all of the rules associated with the transaction. All of the leg-work associated with figuring out the deduction may seem daunting. However, charitable contributions do help to reduce taxable income.

    Dividends Received Deduction

    Corporations that hold the stock of other companies have the option of taking the dividends received deduction. The rules and thresholds associated with this deduction are complex, and specific thresholds apply given the ownership percentage a corporation has in the entity paying dividends. The Legal Information Institute at Cornell University outlines the rules and percentages for interested parties to read and evaluate. Consulting with a tax professional will help to interpret and apply the deduction accurately.

    By taking the right business deductions, small and large companies can reduce taxes payable and save money. It is important to consult with tax professionals when there are questions regarding deduction criteria or thresholds. Taking qualified business deductions helps companies optimize their tax returns and minimize their taxes to the legal minimum.

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