An entrepreneur conducted business while vacationing with his family. When tax season came, he deducted the airfare and hotel expenses from his business taxes. In another case, an entrepreneur used her personal credit card when she treated a client to lunch and used her own money when she traveled for a business purpose.
In the first case, contrary to what the entrepreneur supposes, the airfare and hotel expenses are most likely to be classified by the Internal Revenue Service (IRS) as nondeductibles since the main goal and the primary activity pursued during the vacation were clearly not business-related. In the second case, unless the business was able to reimburse personal expenditures and deduct the expenses on its tax return (with proper proof, of course, such as receipts), then the entrepreneur would be losing out on available tax deductions.
“A tax deduction is an expense that the Internal Revenue Service allows a business to subtract from its adjusted gross income when calculating taxable income. These credits allow businesses to avoid paying taxes on money used for operational expenses, such as business travel, capital expenditures and client gifts. Business owners must be conscious, however, of not overstating deductions. The IRS has many rules surrounding what type of expense and what percentage of that expense is deductible.” (http://smallbusiness.chron.com/common-business-tax-problems-4157.html)
According to Timothy Todd, CPA and assistant professor of law at Liberty University School of Law, deductions, which also include entertainment expenses, meals and use of a personal vehicle, require extra substantiation. Lack of record keeping will make it too easy for the IRS to disallow business deductions, and IRS classification of nondeductible business expenses will most likely get approval from tax courts too.
Thus, according to tax and small business experts, keeping track of receipts or expenses and not commingling business and personal funds are very important things that can have major effects on your business if not observed properly. In addition to these, other factors small business owners should consider are changes in the tax code. In 2015, tax changes that greeted small business owners included:
The Affordable Care Act, corporate tax rates, net investment income tax, tax extenders, and deduction eliminations and limit reductions, which refer to some tax credits that businesses once depended on, expiring or being significantly reduced.
As explained by Tucson tax law attorneys at Russo, Russo & Slania, P.C., “Dealing with taxes can be frustrating in any situation, but in particularly complicated circumstances, taxes can become a substantial burden on individuals and businesses. Resolving these issues quickly and effectively can, in these circumstances, be crucial for protecting those involved in tax compliance disputes or controversies from punitive actions in the future. Thus, when attempting to resolve complicated tax issues, the assistance of a qualified legal professional with experience in tax law can be vital for both individuals and businesses.”read more