Introduction: Small Business Tax Law in the US

Small business tax law can be confusing for beginners, but there are really only two important distinctions to understand. The first is the difference between deduction and capitalization; the second is the difference between a personal and business expense. If you know these rules, you will be able to get started with your taxes.

Deduction v. Capitalization

When you deduct an expense, you itemize it on your taxes, and it is subtracted from your taxable income. Examples of deductions include purchases and shipments of raw materials. When you capitalize an expense, you are adding it to your business equity, and you pay taxes on this capital gain over time. Examples include purchasing real estate for your business and buying equipment.

Personal v. Business Expense

It may seem simple to differentiate between the two, but there are many gray areas with personal and business expenses. If you use your computer for both, can you deduct it? If you take a client out to dinner, is this a tax free meal? The answer is not straight-forward. You have to ask whether you truly use the item, whether it is a computer or a dinner, for business purposes only. If you do, then it is a deduction.