Tax Tips: Avoid IRS Tax Problems by Correctly Determining Business Expenses

Probably one of the most controversial areas of tax law for small business and the self employed is correctly determining what a legitimate business expense is. You can avoid IRS tax problems with a few tax tips from a tax attorney or CPA to sort this out.

There are two general categories of deductible expenses:

• Business expenses - the ones you write off immediately

• Capital expenditures - these are assets that you write off over a period of time. E.g. if you buy a new phone system for $5,000 you will need to write that off over a period of time unless there is a tax credit which will allow you to write it off all in one year.

Business Expenses

Deductible business expenses are those expenses incurred in the normal course of running your business:

• Rent of business premises
• Purchase of goods for resale
• Wages and salaries to employees
• Telephone & internet
• Marketing & PR
• And so on

A business expense to be deductible must be both "ordinary" and "necessary". An ordinary expense is one that is considered widespread and accepted in your line of work. A necessary expense is one that is helpful and suitable for your organization.

Capital Expenditures

These are assets that have a life of greater than a year and are over a set limit such as $500. You should set a limit so the bookkeeping is kept simple—otherwise you could spend a lot of time on "assets" such as staplers and other office or plant items that are not worth keeping track of. For items under $500 (or whatever limit you set) you write them off as a business expense in one year. Capital expenditures are depreciated over the life of the asset:

• Land is a capital expenditure but is not depreciated
• Buildings
• Equipment
• Computers and software
• Office furniture

The best way to avoid IRS tax problems is to avoid them in the first place by utilizing the services of a tax attorney or CPA. John Spurgeon & Associates, who are both tax attorneys and CPAs, offer a complementary initial consultation. Please call 626-440-9518.

About John Spurgeon & Associates

John Spurgeon & Associates is a professional services firm located in Pasadena, California with a focus on tax law and related accounting services. They have extensive experience with federal and state income taxes, payroll taxes and sales taxes. They represent business, non-profits and individuals against the IRS and the Franchise Tax Board (California State Taxes). As both tax attorneys and Certified Public Accountants they offer a broad range of tax related services.

Author Bio

John Spurgeon is a native and resident of Pasadena, California. He is a father of eight and a grandfather of seven. He has over 25 years of experience dealing with corporate income tax, individual income tax, tax planning, litigation of civil criminal cases and tax controversy. Being both a tax attorney and CPA provides clients with the best of both worlds. For more information, please visit www.taxproadvocate.com.