Business Tax Planning Information Center
Income Tax Deductions for Businesses
Careful planning can allow a business to lessen its tax liability by using qualified income tax deductions. The Internal Revenue Code can be a daunting piece of text. It is exceedingly long and detailed. In addition, most sections of the IRC have corresponding regulations that further help to interpret its provisions. However, a basic understanding of deductions is important as they may lessen your business' tax liability. A tax attorney can help your business minimize its tax obligation with federal income tax deductions.
Trade or Business Expenses
The Internal Revenue Code (IRC) provides that "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business" are deductible. 26 U.S.C. §162. Section 162 specifically includes the following as deductible trade or business expenses:
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
26 U.S.C. §162(a). Section 162 also sets forth various expenses that are not deductible.
The following trade or business expenses can generally be deducted under section 162:
- Office supplies and expenses: includes reasonable office expenses that are ordinary and necessary for the carrying on of a trade or business such as office supplies, rent and utility costs
- Business travel expenses: includes airfare, rental car and lodging expenses
- Meals and entertainment: half of the cost of a meal in a restaurant or an entertainment event if there was a business-related purpose for the meal or event
- Legal and professional services: includes payments to attorneys, consultants and accountants
- Car expenses: the costs of all driving done for business purposes; usually a business keeps track of mileage and deducts at the IRC's standard per mile rate
Other Deductions Available to Businesses
In addition to trade or business expense deductions, there are a number of other deductions available to businesses, including:
- Interest on indebtedness paid or accrued in a taxable year (26 U.S.C. §163)
- Various taxes, including property taxes (26 U.S.C. §164)
- Losses not compensated for by insurance or otherwise (26 U.S.C. §165)
- Depreciation of property used in a trade or business (26 U.S.C. §167)
- Charitable contributions (26 U.S.C. §170)
- Net operating losses (26 U.S.C. §172)
- Business start-up expenses (with certain restrictions) (26 U.S.C. §195)
Conclusion
The information above is simply an overview of the more common business deductions. There are a number of other itemized deductions that may apply. Such deductions can substantially lower a business' tax liability. An attorney who is familiar with tax planning can help your business maximize its federal income tax deductions.
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