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Once you know what your gross profit is for the year, based on your business income minus any cost of goods sold, it's time to figure out how you can whittle that profit figure down for tax purposes by subtracting all your deductible business expenses.
Digging up every legitimate deduction you have is usually your best bet for reducing your taxable income, and therefore your tax bill, as much as possible in the short run.
In the long run, there may be other ways to save even more tax dollars - such as by shifting income to other tax years and by taking advantage of tax credits - that can take a certain amount of advance planning. But for many small businesses the deduction rules are often the best place to look for tax savings.
- General rules for business deductions - first, we'll explain the basic rules that apply to deductions in general, so that you'll be able claim all the deductions you've got coming this year and so that, in the future, you can become an expert at spotting deduction opportunities in time to take advantage of them.
Then, we'll be ready to get into the details of the special rules that apply to some commonly encountered business deductions:
- capital expenditures that must be distinguished from currently deductible business expenses
- "startup" expenses you incur before you get a new business up and running
- travel expenses you have while taking business trips
- meals and entertainment expenses when you entertain business guests
- business gifts you give to your clients and customers
- compensation and benefits for yourself and your employees
- the home office deduction for those with a home-based business
- casualty losses for those who suffered a sudden, severe loss to business assets
- vehicle expenses for cars, trucks, and other vehicles used in your business