Keep in mind that if you are audited, you must be able to show some proof that the entertainment expense was either directly related to, or associated with, business. So, keep a guest list and note the business (or potential) relationship of each person entertained.

Parties, picnics, and other social events that you put on for your employees and their families are an exception to the 50% rule -- such events are 100% deductible, and you need not prove it was directly related to a business goal.

What is the difference between current and capital expenses?

Current expenses can be deducted from your business's total income in the year you incur them. They include the everyday costs of keeping your business going, such as office supplies, rent, and electricity.

Expenditures for things that will help generate revenue in future years -- a desk, a copier, or a car, for example -- are called capital expenses and must be written off over their useful life. Usually that period is three, five, or seven years, according to IRS rules.

There is one important exception to this rule, called the Section 179 deduction, which may let you fully deduct capital expenses in the year you incur them. There is also a one-year only bonus depreciation for property placed in service in 2008. This special deduction allows taxpayers to depreciate 50% of the adjusted basis of qualified property during the first year the property is placed in service. For more information, see Deduct It!: Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

If I buy a new computer system this year, do I have to deduct the cost over a five-year period?

Probably not. Under Section 179, you can deduct in one year the cost of tangible personal property that you buy for your business (such as computers, office furniture, and equipment). This is a major exception to the general rule that the cost of capital equipment -- equipment that has a useful life of more than one year, such as a computer system -- must be deducted over a number of years.

There is a limit to the total amount of business property expenses that you can deduct each year under Section 179. For 2008, the limit is $250,000, subject to a phase-out if you purchase more than $800,000 of equipment in one year. Many small businesses can fit all of their capital expenditures each year into this allotted amount. For 2009 and later, the limit is scheduled to be much lower ($128,000 plus an annual inflation adjustment with a $510,000 phase-out cap).

Section 179 doesn't apply to land, buildings, inventory, intangible assets, and air conditioning and heating units. It does apply to vehicles, but special rules limit the portion of the cost of a car that you can depreciate each year.

There is also a special one-year only bonus depreciation deduction for property placed in service in 2008. Under this provision, taxpayers can depreciate 50% of the adjusted basis of qualified property during the first year the property is in service. For more information, see Deduct It!: Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

I am planning a trip to a trade show. Can I take my family along for a vacation and still deduct the expenses?

If you take others with you on a business trip, you can deduct business expenses for the trip, but no more than if you were traveling alone. If, for example, your family rides in the back seat of the car and stays in one standard motel room, then you can fully deduct your automobile and hotel expenses. But you can't claim a deduction for your family's meals or jaunts to Disneyland or Universal Studios.

If you extend your stay and partake in some of the fun after the business is over, the expenses attributed to the nonbusiness days aren't deductible, unless you extended your stay to get discounted airfare (the "Saturday overnight" requirement). In this case, your hotel room and meals would be fully deductible.

Also, you can fully deduct the cost of your airline ticket even if it features a two-for-one or companion discount.

I work in my home part time. Can I take the home office tax deduction?

If you run a business out of your home, you may be able to take the home office deduction. This allows you to deduct a portion of your rent or mortgage costs, as well as some related costs -- such as utilities, insurance, and remodeling. However, there are strict requirements you must meet. For instance, you will not qualify if you use your office partly for work and partly for personal reasons, or if you don't use the space regularly for business.

For more information, check with a tax professional.

I want to start my own small business. What do I have to do to keep out of trouble with the IRS?