If you are running a small business, then you need to know all the heads under which you can claim business tax deductions. These could go a long way in drastically reducing the total amount of tax you pay at yearend. According to the Code 162 of the Internal Revenue Service, all ordinary and necessary expenses that are paid or incurred for carrying out any trade or business are claimable as deductions during the taxable year.

Speaking on broad terms, these expenses could include rents, salaries and allowances paid to the employees, traveling expenses, entertainment expenses and such overheads. Though these are all ordinary and necessary expenses, all of them may not be deductible. The IRS has its own parameters to judge what ordinary and necessary expenses are. According to them, the expenses should be fanciful or exorbitantly large. The expenses should be commensurate with the circumstances under which they are made. Also any personal expenses would not count towards business tax deductions. Showing such expenses as business tax deductions could land the taxpayer in a soup.

Contrary to what the tax-saving pundits say, it is not a very good idea to make payments to relatives and show them as business expenses. The tax auditors scrutinize such expenses under a microscope. If you do not have justifiable cause to make the payment to your relative, do not do it.

But, all the expenses that are made directly for conducting the business are claimable. These include the expenses incurred on the transport or on the vehicles themselves in running the business. There are two ways to claim vehicle tax deduction. The first is the standard mileage method I which the sum is deducted by per mile formula which is devised by the IRS itself. The second method is the actual expense method in which the actual costs incurred in operating the vehicle are deducted. Depreciation charges and gas and maintenance bills can be shown here.

If you need to entertain clients on a regular basis, then it can be shown for deductions. About half of the entire expenses incurred in entertaining clients could be claimed. This could include expenses like throwing parties for your clients, taking them to restaurants, concerts, movies or even for inviting them over. Needless to say, there should be some proof that the meeting was for business purposes and not plainly for pleasure. Each bill needs to be shown, and the purpose of the meeting written on each of them.

It is a good business habit to file and keep records of all expenses incurred during the course of the year. These could be claimed as deductions when the assessment time comes. Your everyday expenses to keep the business going like rent, stationery, maintenance and electricity bills could be shown in such expenses.

Make a habit of filing your expenses in different folders so that they are easily accessible at the end of the year. Also keep these records after the tax is paid, because they could be needed for verification at any point of time.