Entrepreneurial

What is tax deductible for small business?

– Stephanie Rabiner is a contributor to FindLaw’s Free Enterprise blog. FindLaw is a Thomson Reuters publication. This article originally appeared here. –

There is no definite answer for those of you who wish to know just what is tax deductible for a small business.

According to the painfully dry tax code, a business may deduct all expenses that are ordinary, necessary and reasonable.

Just what does that mean? Think about expenses that are helpful, appropriate and common in your line of work. Oh, and they can’t make you laugh.

Internal Revenue Service Code section 162 provides a list of what is tax deductible — including travel, meal and entertainment expenses — under the ordinary and necessary clause. It, however, is not exhaustive, leaving many expenses to your interpretation.

If you have a business expense not covered, you need to ask yourself whether it’s ordinary and necessary. Consider whether it’s directly related to your business or an expense common in your trade. Also think about whether it helps your business make a profit and continue operating.

If you’re unsure, try what is known as the “laugh test” — can you put the expense down without laughing at yourself?

Free labor could pose problems for companies

As any small business owner knows, getting a new company off the ground requires a lot of work. And for those entrepreneurs not enamored with the idea of running their company as a one-person show, hiring employees is among the first steps along the way to actually making it happen.

Unfortunately, many of the same startups burdened with so much work also suffer from a limited supply of funds in their early days, meaning they can find it tough to afford the number of employees they need.

But with the ranks of unemployed in the United States hovering at its highest rate in more than two decades, some small firms have found a rather unusual solution to this dilemma  – people willing to work for free. Employment agencies such as Jobnob.com and PeopleConnect have done their part in connecting unemployed individuals willing to work without payment to small firms in need of a helping hand.

But hiring individuals to work for free, even for a few hours a week, could land your firm in legal hot water.

According to FindLaw, an online provider of legal information, the Fair Labor Standards Act states that minimum wage must be paid to employees at all businesses that have $500,000 or more in annual sales. While that seems to rule out some smaller companies, here are a few further guidelines from FindLaw on the finer points of the law to consider:

• Even if your firm’s sales fall short of the above threshold, your employees may still be covered if they work in commerce between states, which has been interpreted by courts to include sending or receiving mail from out of state, making interstate phone calls, or handling goods that have moved interstate
• Even those businesses that are small and local enough so as to fall outside of the sales parameters may be subject to their home state’s minimum wage law
• Some cities and counties also impose minimum wage requirements on businesses within their borders

Other common violations of the law related to employee wages cited by FindLaw include: paying the lower “training wage” or “youth minimum wage” to workers who should be paid more, not paying overtime, making employees work “off-the-clock” and not paying them for it, deducting too much for tips and deducting for wages paid in goods (such as meals or food).

Introducing Reuters Small Business

Today marks the launch of Reuters Small Business, designed to provide entrepreneurs with the knowledge they need to innovate and grow their businesses.

We’ve got a dedicated editorial team looking at the stories that matter most to the small business sector, and content from partners like Entrepreneur, BNET, IDG, GreenBiz.com, and Wired. Editor Jon Cook will also be reporting live from the Small Business Week conference in Washington, DC.

Here’s some of what is available this week:

• A look at start-up funding in the bailout era
• A multimedia feature on budding handbag maven Jane Saidenberg
• A FindLaw resource center with dozens of guides to navigating the legal waters as a small business
• A blog post on finding the right people for your business, by The Big Money‘s  Jonathan Weber

Are you a small business owner or a multimedia entrepreneur? We are looking to build a community of small business owners, and we want to hear from you!

What are conditions like for small businesses in today’s economy? What help is needed from local, state and federal government? And are you seeing any of the vaunted “green shoots” of recovery?

Leave your answers in comments.