Is there anything worse than trying to explain to your accountant that the dog food that you bought for the family dog is a tax write-off because he's the security for your in-home business or that the trip to Paris was essential for client development for your coffee shop? These are the frustrating situations that many small business owners are faced with at this time of year as they dump shoeboxes of receipts on their accountants' desks. For the most part, however, identifying the best basic tax deductions for your business is a simple process. Here's how.

First things first: Expenses have to be what the IRS calls “ordinary and necessary” to qualify for a deduction. According to the IRS, “an ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” When I first researched the terms, I realized that there was a huge gray area that could spell trouble for unsuspecting small business owners, but the concept is easily understood with a little common sense.

For example, let’s say that there's a lawyer and a mechanic in the same town. Throughout the year, both companies make the same amount of income and, come tax time, both claim the same amount of client entertainment expenses. The lawyer can legitimately claim these expenses on his taxes as he can argue that he needs to take clients to lunch and dinner in order to further his relationships and gain business by entertaining clients. However, if the mechanic attempts to claim the same expenses, the IRS will most likely deny his claim. Why? The IRS deems it not "ordinary" or "necessary" for a local mechanic to take customers out to gain or keep business. As I move into the most common deductions, remember to check to make sure that they fall under one of those categories for your type of business.

Advertising

Around 20 years ago, we could just write off newspaper ads, classified ads and television commercials. These days, you can also write off Internet expenses such as search engine placement, pay-per-click advertisements, and e-mail lists.

Auto Expenses

If you're only using one car for your business, you can use either the actual expense or the standard mileage method of calculating deductions. If you use two or more, stick with the actual expense. The actual expense is calculated by keeping track of all expenses associated with the vehicles including maintenance and depreciation. Standard mileage is calculated by simply keeping track of all business miles, and replaces all actual fixed and operating expenses including depreciation. As of January 1, the standard mileage rate was changed to:

• 48.5 cents per mile for business miles driven (going up to 50.8 cents in 2008)
• 20 cents per mile driven for medical or moving purposes
• 14 cents per mile driven to a charitable organization

Further Education

This applies to registration or enrollment fees for professions in which continual education is needed to maintain proper licensing. Any books, tapes, or other supplies needed to take these courses can be included in the deduction.

Those are three examples for "brick and mortar" businesses. The next examples are best if you operate your business in your home.

Telephone

If you added a second phone or fax line that is dedicated to office use, you may deduct all expenses associated with that line provided they were used strictly for your business. If only one line is used, however, you are not permitted to write off the monthly charge associated with the line for personal calls, only the business portion of the calls. If your cell phone, voice mail, or any pay phone charges are needed for your business, you may also deduct their cost.

Insurance

You can deduct the business portion of your homeowner’s insurance for theft, fire, or any property damage that is subjected to home office limitations. In addition, you can also deduct all employee health insurance.

Taxes

You may deduct the business portion of your real estate, sales, and excise taxes. Business licenses and payroll taxes fall under this category as well.

And finally, here’s a general list of things that fall under both categories: postage, legal services, security, travel, accounting, answering services, and storage. Hopefully, one or all of these can help you as you meet with your accountants in the upcoming weeks.

So That's How They Caught 'Em

The IRS apparently doesn't care how you got your money; they just want their share.
Here's some of the oddest entries in the IRS Federal Income Tax Handbook for Individuals.
• If you receive a bribe, you must include it in your income.
• Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EC (Form 1040) if from your self-employment activity.
• If you steal property, you must report its fair market value in your income in the year you steal it unless, in the same year, you return it to its rightful owner.
• You must include kickbacks, side commissions, push money, or similar payments you receive in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040), if from your self-employment activity.

Quick Fixes

Many small business owners are still reeling from the effects of last year’s disappointing holiday season. In January, optimism among small business owners nationwide fell to its lowest level in 17 years, according to the Small Business Economic Trends report released by the National Federation of Independent Business.

Congress is hoping to help these business owners and give a much-needed boost to the ailing economy with the Economic Stimulus Act of 2008. The plan will deliver a one-time tax rebate checks to tens of millions of Americans and tax breaks for small businesses. In addition to the indirect boost that small business owners will get from consumers spending their tax rebates, they will also benefit from bonus depreciation and generous expense regulations enacted
to spur investment.

The business package allows small businesses to write off 50 percent of certain investments over the last year, including equipment expected to be used for less than 20 years, software, water utility expenses, and tangible property. It also increases the limit productive equipment expenses that small businesses can deduct from annual income from $128,000 to $250,000. This means a business can deduct an asset’s expense during the year it was purchased instead of letting it depreciate over several years.