Small Business Taxes FAQ

Have some questions about your small business taxes? Great! We have answers. Here are five frequently asked business tax questions.

1. Can I deduct my start-up costs for opening my business?

The answer is no, but there is an exception. Business start-up costs are referred to as capital expenditures. These expenses were incurred prior to your business actually being established. As such, they cannot be deducted as a qualifying business expense.

However, the IRS does allow you to amortize, or gradually reduce the expense, over a period of time, assuming you remain in business. This timeframe varies from six months to 60 months, depending on when you started your business.

See Chapter 8 of IRS Publication 535 for more information.

2. I drive my car for my business, and I also use it for myself. How much can I deduct?

The answer to this depends on what method you choose to use to deduct your qualifying business-related vehicle expenses.

If you choose to deduct the standard mileage rate, which is currently at 50 cents per business mile, then you would add up all miles driven for business purposes.

Qualifying mileage is defined as driving from one place of work to another, visiting clients or customers in the course of your day, and attending business meetings. Driving from your home to your first job and then returning home from your last job are not deductible miles.

The other option is to take actual vehicle expenses. Individuals often use the mileage rate over the actual expenses because it's easier to keep track of, even though the actual expenses may yield a higher deduction.

If you use your car for both business and personal reasons, you need to estimate the percentages of use and then apply the expenses evenly over that same percentage.

3. Should I incorporate my business to get some tax breaks?

Perhaps, but keep this in mind. The reason corporations can take advantage of tax breaks and deductions is that they can offer services and products to their employees that allow them to reduce their overall tax obligations.

Unless you have employees and can offer services like pension plans, 401(k)s or health insurance, or you can restructure your business so that assets and income are split between business holdings and the corporate officers, it likely will not be cost-effective to incorporate from a tax-paying standpoint.

4. Do I need an accountant?

To be sure, hiring a reputable accountant provides some peace of mind when it comes to tax filing and payroll. However, if you are looking to keep costs down, consider purchasing bookkeeping and tax filing software that you can easily familiarize yourself with. Remember, the purchase is a tax deduction.

5. Can I take a home office deduction?

If your home is your principal place of business, and you use it regularly for business activities, you absolutely can.

Qualified deductions include painting, repairs and structural modifications to the area of the home designated for business, as well as a portion of your real estate taxes, homeowner's insurance, rent (but not mortgage payments), and utilities.

For more information, see the following IRS publications:

Publication 587 Business Use of Your Home

Publication 535 Business Expenses

Publication 463 Travel, Entertainment, Gift and Car Expenses