Once you know what your gross profit is for the year, it's time to figure out how you can whittle that profit figure down for tax purposes by subtracting all your deductible business expenses. Digging up every legitimate deduction you have is usually your best bet for reducing your taxable income, and therefore your tax bill, as much as possible in the short run.

In the long run, there may be other ways to save even more tax dollars such as by shifting income to other tax years and by taking advantage of tax credits that can take a certain amount of advance planning. But for many small businesses the deduction rules are often the best place to look for tax savings.

General rules for business deductions claim all the deductions you've got coming this year and so that in the future, you can become an expert at spotting deduction opportunities in time to take advantage of them.

Special rules that apply to some commonly encountered business deductions:

• capital expenditures that must be distinguished from currently deductible business expenses
• "startup" expenses you incur before you get a new business up and running
• travel expenses you have while taking business trips
• meals and entertainment expenses when you entertain business guests
• business gifts you give to your clients and customers
• compensation and benefits for yourself and your employees
• the home office deduction for those with a home-based business
• casualty losses for those who suffered a sudden, severe loss to business assets
• vehicle expenses for cars, trucks, and other vehicles used in your business

What, Exactly, Is a Capital Expenditure?
The most common type of capital expenditure occurs when you purchase or otherwise acquire any asset that will benefit your business for more than one year. New equipment, a car, computer, office furniture, or even business real estate are the things that most commonly come to mind when you hear the words "capital asset."

Expenses that add to the value or useful life of an item of property also are considered capital expenditures. If you have a capital expenditure that pertains to a particular asset in some year after the asset is purchased, you must treat the expenditure as a separate asset and depreciate it under the rules applicable to that type of asset in the year you place the expenditure into service.

Start-up Expenses - Investigating the potential for a new business and getting it started can be an expensive proposition. However, under the general rules for business deductions you couldn't deduct these expenses, because only expenses for an existing trade or business can be deducted. By definition, you incur your startup expenses prior to the time that your business is born. Fortunately, there is a way around this dilemma. If your startup expenditures actually result in an up-and-running business, you can elect to amortize the costs (that is, deduct them in equal installments) over a period of at least 60 months, beginning with the month in which your business opens.

Business travel vs. personal travel. What about travel that has a combined business and personal aspect? Here's where it gets a bit more complicated. The IRS is on the lookout for taxpayers who might try to classify a nondeductible personal trip as a deductible business trip. So, if you travel to a destination and engage in both personal and business activities, you can deduct your traveling expenses to and from the destination only if the trip is primarily related to your business. If the trip is primarily personal in nature you can't deduct any of your airfare, hotel, or other traveling expenses. This is true even if you engage in some business activities while you are there. (You may be able to deduct particular expenses you incur while you're at your destination if they otherwise qualify as business deductions; for example, cab fare to an isolated business appointment.)

Meals & Entertainment - You may find yourself in the position of having to entertain clients or customers. While this sort of thing is often a business necessity, the costs can really add up. You'll be glad to know that the IRS allows you to take a deduction for 50 percent of the qualifying business entertainment expenses for yourself and your guests.

Generally, you can deduct ordinary and necessary expenses to entertain a customer or client if:

• Your expenses are of a type that qualifies as meals or entertainment.
• Your expenses bear the necessary relationship to your business activities.
• You keep adequate records and can substantiate the expenses.

Business Gift Expenses - giving gifts to clients and customers is part of the normal course of business, particularly around the holidays. What you may not know is that you can deduct only part of the cost of certain gifts as a business expenses. The IRS will let your business deduct only $25 or less for business gifts you give to any one person during your tax year. The limitation does not include incidental costs, such as packaging, insurance, mailing cost, or engraving etc. Exceptions to the $25 limit are items that are clearly and permanently imprinted with your name and are on a number of idential items widely distributed.

Compensation & Benefits - As a general rule, a business can claim a tax deduction for the salary, wages, commissions, bonuses, and other compensation it pays to its employees. To be deductible, the compensation must be ordinary and necessary, reasonable, based on services rendered, and actually paid or incurred in the year for which the deduction is claimed (as shown by your payroll records).

Salaries of Business Owners - Sole proprietorships may deduct wages paid to employees, but the owner of the business is not considered an employee and the owner's salary or draw is not deductible. All the net profits of the business are taxable income to the owner, and self-employment tax applies to the entire amount.

In a partnership, LLC, or S corporation, some partners or owners may receive salaries (known as guaranteed payments), but all of the businesses profits for the year will ultimately be taxable to the partners or owners, so the reasonableness of the compensation is rarely an issue.

But in a C corporation, the situation is very different. Payments made to an employee who is also the owner of the C-corporation are subject to very close scrutiny by the IRS, because salaries paid to owner/employees is deducted before the corporate income tax is imposed. Any after-tax corporate profits are distributed as dividends to the shareholders and taxed at their individual income tax rates. The difference between the corporate income tax rates and the individual income tax rates sometimes tempts business owners to inflate their salaries to get a larger deduction against the corporate income tax.

Home Office Deduction - If you use a part of your home for business, perhaps to perform paperwork — to store records, inventory, or samples; or even to meet customers — you may be able to claim a tax deduction for some of your expenses of maintaining the home.

Casualty Losses - If you've suffered the results of a theft, accident, fire, flood, or some other casualty during the year, you may be able to deduct some of your unreimbursed losses. The loss is treated differently depending on whether it occurred to property used in your business, used to generate investment income or used for personal or family purposes.

Vehicle Expenses - Using a vehicle in your business, make sure you get all the tax breaks the laws allow. Some of the tax issues that arise in relation to vehicles:

• Business use of a car: If a vehicle is used exclusively for business purposes, you may generally deduct the full cost of operating the vehicle. If you use a vehicle for business on a part-time basis, you will have to allocate your expenses based on your business and personal use.
• Compute your vehicle expenses by using either the standard mileage rate or the actual cost method. Either method requires detailed records of mileage and actual expenses if using the cost method.
• When employees use Vehicles - If they use their personal vehicle the employee generally reimburses the employee, if the employer does not reimburse the employee may claim the expenses on their personal tax return.