Knowing what you’re doing at tax time, especially as a businessperson, can have a big impact on your end of the year finances. Tax regulations allow deductions of certain business expenses, which can help lower the amount of taxes your business will be responsible for. Costs deducted from your gross income results in your net business profit, which is the amount that is taxed.

Maximizing your deductible expenses can help lower the amount of taxed profits. These expenditures can be a nice car, business trip or vacation, or even a retirement savings plan. Though, you need to know exactly how to deduct expenses to avoid any trouble with the IRS.

Necessary and Ordinary Expenses

Section 162 of the tax code, which states that all business expenses must be “ordinary and necessary”, can help you determine which expenses are able to be deducted. The tax code doesn’t give a standard definition for either term, though, so you have to use logic to figure out what can be deducted. Most of the time, deductible expenses are rather obvious, for example office supplies and equipment used exclusively for the business.

Large Expenses

The tax code doesn’t necessarily limit the amount you can deduct, however it’s been ruled that Section 162 implies that large expenses must be reasonable. A small business owner can’t deduct an expense to fly halfway across the country to look at a condiment manufacturer, however a large apparel company can use a jet to fly to meet their supplier.

Personal Expenses

The IRS checks to determine whether business owners are trying to deduct personal expenses as business. Commuting to work is considered a personal expense, so therefore it cannot be claimed as a business cost. The same is true for personal use of the company car or credit card. Since this is a relatively common practice, the IRS Agents are ever aware.

The good things is, there are ways to legally organize your affairs so you can maximize your benefit and increase the way you spend your extra money.