Answers to common tax questions on tax deductions for small businesses.

What's Below:

What is -- and isn't -- a tax deductible business expense?
If I use my car for business, how much of that expense can I write off?
Can I claim a deduction for business-related entertainment?
What is the difference between current and capital expenses?
If I buy a new computer system this year, do I have to deduct the cost over a five-year period?
I am planning a trip to a trade show. Can I take my family along for a vacation and still deduct the expenses?
I work in my home part time. Can I take the home office tax deduction?
I want to start my own small business. What do I have to do to keep out of trouble with the IRS?
Does incorporating a small business start-up offer tax breaks?
Is it safe and sensible for me to keep my own books and file my own tax returns?
I am hiring people to help out with a big job coming up. Are they considered independent contractors or new employees?

What is -- and isn't -- a tax deductible business expense?

Just about any "ordinary, necessary, and reasonable" expense that helps you earn business income is deductible. What's ordinary and necessary? The IRS has defined this as anything that's "helpful and appropriate" for your business. For example, buying a computer, or even a sound system, for your office or store can be an ordinary and necessary business expense. Buying the same items for your family room cannot be a business expense, however.

A few things are specifically prohibited by law from being deducted even if the expenses are for the purpose of conducting business -- for instance, a bribe paid to a public official. Other deduction no-nos are traffic tickets, your home telephone line, and clothing you wear on the job, unless it is a required uniform.

If I use my car for business, how much of that expense can I write off?

You can calculate your vehicle deduction using the standard mileage method or the actual expense method. The standard mileage method is more commonly used because the record-keeping requirements are much simpler. Under this method, the IRS determines the amount you can deduct per mile. Effective January 1, 2009, the rate is 55 cents per business mile driven. In 2008, the IRS increased the rate half-way through the year because of the high cost of fuel. The rate was 58.5 cents per mile for July 1, 2008 through December 31, 2008 and 50.5 cents per mile for January 1, 2008 through June 30, 2008.

Under the actual expense method, you deduct the actual costs you incur each year to operate your car, plus depreciation you pay for gas and repairs (according to a tax code schedule). Your deductible costs include gas and oil, repairs and maintenance, license fees, insurance, tolls, and even car washing. If you use the car partly for personal use, you must multiply your actual expenses by your percentage of business use.

Most people use the standard mileage rate because they don't want to bother with a lot of record keeping. But this ease comes at a price -- you usually get a lower deduction using the standard mileage rate than you would with the actual expense method. You must use the standard mileage rate, however, if you claimed certain related deductions (such as under Section 179 of the IRC) in previous years. (For more information on Section 179 depreciation, see Understanding Small Business Tax Deductions.)

To use either of these methods, you must keep track of how much you use your car for business. (And you'll need to produce your records if you are audited.) Keep a log showing the miles for each business use, always noting the purpose of trip.

You can also depreciate (write off) the cost of the vehicle over a number of years. For more information, see Deduct It!: Lower Your Small Business Taxes, by Stephen Fishman (Nolo).

Can I claim a deduction for business-related entertainment?

You may deduct only 50% of expenses for entertaining clients or customers for business purposes, no matter how many martinis or Perriers you swigged. (Yes, this is a change. In the old days you could write off 100% of every entertainment expense, and, until a few years ago, 80%.) Qualified business entertainment includes taking a client to a ball game, a concert, or dinner at a fancy restaurant, or just inviting a few of your customers over for a Sunday barbecue at your home.