Small businesses can deduct expenses that are considered "necessary and ordinary" for conducting business, according to the Internal Revenue Service. Taxes, costs of goods sold, capital expenses and other business expenses are important for offsetting total tax costs. However, having a quick guide for tax deductions can help.

Deducting Taxes

According to the IRS, small businesses can deduct taxes. Taxes that may be deductible include federal, local, foreign and state taxes. However, to qualify, these taxes must be directly attributed to your business as a business expense. When in question about which taxes are eligible, contact your accountant.

Cost of Goods Sold

Businesses that purchase products for resale or manufacture products, can deduct cost of goods sold. For example, a company can deduct the cost of the raw materials purchased (including freight charges), the cost to store the products and labor costs. The overhead costs for a factory can also be deducted, according to the IRS.

Capital Expenses

Start-up costs and assets purchased for the business are usually deductible. In addition, if you spend money to make improvements on the business, these costs are usually eligible for deduction.

Home Business Deductions

A home office may qualify as a deduction, as long as the space is used solely for business activities. The deduction amount is a percentage of the total cost of your home's expenses (such as the mortgage, property taxes and utility bills). For example, if your office occupies 500 square feet of a 2,000 square foot house, you can take 25 percent of the total home expenses.

Other Tax Deductions

General business expenses, such as the cost to purchase office equipment and supplies can also be deducted. The cost for business meals and trips is also deductible. If a trip is both personal and business related, only part of the cost is eligible. For example, if 50 percent of the time was spent on business activities, 50 percent of the total costs can be deducted, according to the IRS. In addition, you can deduct items such as employee pay, the cost of retirement plans, interest expenses and insurance.

Source:

IRS: Small Business Deductions

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By Answerbag Staff on January 8th, 2010