When businesses report revenues to the Internal Revenue Service and state governments for taxation purposes, they can lessen their tax loads by reporting business expenses and lowering the amount of income on which they must pay taxes. This practice can be vital to the survival of a business, as doing so makes the difference between paying taxes on total revenue and paying taxes on actual profits.
Normal Business Costs
It costs money to go into business. To get started, you may have to pay a substantial amount of money for real estate, professional services, inventory, employee wages, utilities and intellectual property. Many businesses do not make a profit during their first year of operation. This may be the case for you even if everything goes as planned. If your normal business costs exceed your total revenue, take this into account while calculating your taxes. Even if these costs do not exceed your revenue, you must take them into account to ensure that you are not overpaying on your taxes.
Stock and Equipment Losses
Manufacturing and retail businesses typically deal with large amounts of stock and equipment. A paper manufacturer produces, stores and ships large amounts of paper, and a general store keeps large amounts of clothing, electronics and household goods in stock. Should anything happen to this stock and equipment, keeping you from making money on it, you can deduct this from your taxes. An example would be a flood wiping out an entire store's inventory and checkout machinery or an automobile accident ruining an entire shipment of paper (and possibly the truck transporting the paper).
If your business uses any machinery or equipment of substantial value that loses value over time, you can claim this as a tax deduction. Automobiles, farm equipment, factory machinery and computers all fall under this category of assets. Real estate can sometimes depreciate in value as well. Even though there is no direct cost associated with depreciation, it can still account for a substantial amount of deductions on your tax return.
Businesses often provide products or services to clients under an agreement that they will pay later. If the client refuses or is unable to pay, this is a loss for the business. If your business has such bad debts, you can claim these bad debts as losses and get tax deductions for them. However, the law requires these debts to have occurred as a part of normal operations for the business that would have contributed to the business's taxable profits. For instance, if a web developer made a website but never received payment for it, this could be a tax deduction.
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