There are many financial benefits of becoming a business, depending on how you structure it. Not only are businesses taxed after their expenses have been deducted, but many legitimate deductions are available to a small business that reduce its reported earnings.
The IRS tax code specifies the following related to business expenses:
IRS Code Section 162(a),Trade or business expenses:
“There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”
IRS Code Section 212, Expenses for production of income:
“In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year.”
Our business makes some profit, but not much, largely due to our focus on living systems — clean air, safe water and healthy soil — and maintaining a healthy quality of life rather than super-sizing our bank account. Keep in mind, the more money you earn, the more you pay in taxes. And the bigger the operation, the more complex and involved your income and balance sheet might become.
As we write about in ECOpreneuring, here are a few of our favorite business-related expenses that we can deduct from our revenues:
(1) Business Travel
As freelance writers, photographers, artists or consultants will attest, why not travel for work? If you love what you do, following your Earth Mission, you can deduct your airline, train, car rental and just about every other cost related to your business trip, so long as it’s for business, and not just lying around on a beach. It’s no coincidence that Las Vegas and Orlando are among the top U.S. destinations for trade shows. If you use your own vehicle for business purposes (keeping track of the miles), you might amaze yourself how far ahead you could be if your vehicle is fuel efficient.
(2) Equipment and Capital Expenses
Some investments in your business, like equipment or improvements that are usually quite large, are considered capital expenses and reflected as assets on your balance sheet. Rather than deducting them, you must capitalize them as longterm investments. Assets, however, can be depreciated, reducing reported earnings. A new metal roof on a rental property is a capital expense, requiring a depreciation schedule to be created (keep in mind that a quality metal roof will last longer than you will). A ream of recycled paper is not a capital expense; it’s recorded simply as “supplies” and deducted in the year you purchased it.
Business assets wear out, break down and become obsolete, especially with the rapid advancements in technology. The IRS allows a non-cash deductible business expense of depreciation to account for the loss of value over time for assets owned by the business. Depreciation reduces the reported earnings of the business. The amount of depreciation and its duration varies by the type of asset.
Photo Credit: Mixed cash by stopnlook at Flickr (under a Creative Commons license)