Deductions your small business shouldn't miss

Concrete Construction, Dec, 2002 by Shauna Roche

Software with a useful life of less than a year--and given the rapid change in technology, this could apply to a lot of programs--can be deducted as a business expense in the year you buy it.

When software comes with a computer, and its cost is not separately stated, it's treated as part of the hardware and is depreciated over 5 years.

You can write off a whole computer system, including bundled software, in the first year (under a special provision, IRC Sec. 179) if cost is less than $24,000 (2001 and 2002 amount).

10. Charitable contributions

If your business is a partnership, limited liability company, or S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you to claim on your individual tax return. If you own a regular ((2)corporation, the corporation can deduct the charitable contributions.

Tip: If you've got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. But if the equipment has been fully depreciated (written off) you can't claim a deduction.

11. Taxes

Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.

Sales tax on items you buy for your business in day-to-day operations is deductible as part of the cost of the items; it's not deducted separately. But tax on a big business asset, such as a car, must be added to the car's cost basis; it isn't all deductible in the year the car was bought.

Excise and fuel taxes are separately deductible expenses.

If your business pays employment taxes, the employer's share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so is not a business expense.

Federal income tax paid on business income is never deductible. State income tax can be deducted on your personal return as an itemized deduction, not as a business expense.

Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for improvement--for example to build a sidewalk--it isn't immediately deductible; instead it is deducted over a period of years.

12. Advertising and promotion

The cost of ordinary advertising of your goods or services--business cards, yellow-page ads and so on--is deductible as a current expense. Promotional costs--for example, sponsoring a peewee football team--are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort.

More easily overlooked business expenses

Here are some additional routine deductions that many business owners miss. Keep your eye out for them.

* audio and videotapes related to business skills

* bank service charges

* business association duties

* business gifts