A simple explanation of two IRS deductions for small businesses

The Internal Revenue Service (IRS) provides some tax benefits to small businesses. Many of these benefits are in the form of tax deductions. When it comes to pass-through entities like sole proprietors, partnerships and limited liability companies (LLC), two examples include:

Tax deduction #1: Business losses

The IRS allows small business owners to claim certain business losses as a tax deduction on their federal tax returns. The IRS generally requires the business owner to calculate the net operating loss by taking the adjusted gross income and subtracting standard or itemized deductions, but not personal exemptions.

The tax code also limits the deduction to business owners who file $250,000 for single returns or $500,000 joint. Additional restrictions are present for activity the agency considers passive. The IRS states passive activity is that the business does not participate in on a regular basis. The agency still allows deductions for passive activity, but the IRS generally caps this amount and does not allow it to exceed the income of the business.

Tax deduction #2: Business expenses

The federal agency also allows businesses to deduct “ordinary and necessary” expenses. Examples of qualifying business expenses eligible for a deduction include the expense of a home or other property, rent, business vehicle, internet and a portion of meals and entertainment. Business owners with employees can also deduct employees’ pay and other expense related to employees’.

Business owners are wise to carefully review these and other tax planning strategies to better ensure they make the most of potential tax savings.

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