Business Tax Questions: A Practical Guide

How to use this guide

Revenue recognition, inventory, reimbursements, entity basis, and business sales interact across tax years. Use these focused articles for a transaction-level answer, then return to the broader business tax planning guide for entity-wide decisions. Start with the question that matches your facts. Each article identifies a decision, records to keep, an illustrative example, and a primary IRS reference.

For a broader plan, see Business tax planning.

Revenue and inventory

• Are customer deposits taxable to a small business?
  An advance payment can be income when received, while a genuinely refundable deposit held as security may be a liability; method of accounting and contract terms matter.
• When does a business recognize gift-card sales for tax?
  Gift-card proceeds are advance payments; the available deferral rules depend on accounting method, applicable election, and recognition in financial statements.
• How do customer refunds affect business taxable income?
  Refunds, returns, and allowances reduce sales when properly recorded, subject to the business's accounting method and the timing of the original sale.
• Is sales tax collected from customers business income?
  Sales tax collected as an agent for the state is generally a liability rather than business revenue; taxes imposed directly on the seller can differ.
• Is business credit-card cash back taxable?
  A rebate tied to purchases often reduces the cost or basis of those purchases rather than being separate taxable income; promotional awards can differ.
• When must a business use accrual rather than cash accounting?
  Accounting-method eligibility depends on entity type, inventory activity, and the applicable gross-receipts tests and exceptions.
• Can a cash-basis business deduct unpaid customer invoices?
  A cash-method business generally does not recognize an unpaid invoice as income and therefore generally has no bad-debt deduction when it goes uncollected.
• When can an accrual-method business deduct a bad debt?
  An accrual-method business may deduct a bona fide receivable previously included in income when it becomes worthless, subject to substantiation.
• How are damaged inventory items deducted?
  Inventory losses generally affect cost of goods sold or inventory valuation under the taxpayer's adopted method; insurance reimbursements must be accounted for.
• Can a business deduct products given away as samples?
  The cost of samples used to promote sales may be an advertising expense or move through inventory accounting, but must not be deducted twice.

Technology and commercial leases

• How are inventory withdrawals for personal use taxed?
  Inventory taken for an owner's personal use is not a business cost of goods sold; the bookkeeping must remove that cost from deductible inventory expense.
• Is shipping paid to acquire inventory immediately deductible?
  Freight-in and other acquisition costs often form part of inventory cost and are recovered as the goods are sold, subject to applicable simplified rules.
• Can a business deduct a newly built website?
  Website costs can include currently deductible maintenance, capitalizable development, purchased software, and separately amortizable intangibles; scope determines treatment.
• Is the purchase of a premium domain name deductible?
  A purchased domain can be a capital asset or intangible rather than a routine annual registration fee; the rights and acquisition price matter.
• How are SaaS subscriptions different from software purchases for tax?
  Recurring access fees may be operating expenses, while acquisition of a perpetual license or custom software can require capitalization or different recovery.
• Can a small business deduct prepaid multiyear insurance immediately?
  A premium covering future years generally cannot all be deducted when paid; the coverage period and accounting rules control recovery.
• When can a business deduct rent paid in advance?
  Prepaid rent generally is allocated to the period it covers, with timing rules that vary by accounting method and benefit period.
• Is a commercial lease security deposit deductible?
  A refundable lease deposit is generally an asset when paid, not current rent expense; a forfeited or applied deposit is analyzed when its status changes.
• How is a landlord's tenant-improvement allowance taxed?
  The treatment of a construction allowance depends on lease terms, who owns the improvements, and whether a specific statutory exclusion applies.
• Can a business deduct a payment to exit a commercial lease?
  A lease termination payment may be deductible or capitalized depending on whether it ends a burden, acquires another right, or is part of a relocation or asset transaction.

Marketing and employee costs

• Are trade-show booth costs deductible?
  Event fees and short-lived promotional costs may be operating expenses; a reusable booth structure or equipment can be a depreciable asset.
• Can a business deduct promotional giveaways?
  Ordinary promotional items can be advertising expense, while gifts to identified recipients can trigger business-gift limits and documentation rules.
• Are referral fees deductible and reportable?
  A bona fide referral payment for business may be deductible, but information-reporting, licensing, and anti-kickback rules can also matter.
• How should contractor expense reimbursements be handled?
  Amounts paid to a contractor for expenses can be part of reportable compensation depending on the arrangement; the business still needs ordinary expense substantiation.
• What happens if an S corporation reimburses owners without an accountable plan?
  Without an accountable plan satisfying business connection, substantiation, and return-of-excess requirements, payments may be taxable wages rather than tax-free reimbursement.
• Can a business pay for an employee's cell phone tax-free?
  Employer-provided phones primarily for noncompensatory business reasons can receive favorable fringe-benefit treatment, but cash allowances and personal arrangements need review.
• Can an employer reimburse home internet for remote work?
  A substantiated business share of necessary home internet may fit an accountable plan; a blanket payment for a personal household bill needs closer review.
• Are overtime meals for employees deductible?
  Meal deductions depend on business purpose, who receives the food, location, and statutory limitations; merely working late does not create unlimited tax-free meals.
• Are meals at a company-wide employee event fully deductible?
  Recreational events primarily for employees may receive different deduction treatment from ordinary business meals when they satisfy the statutory requirements.
• Is a client experience a gift or entertainment expense?
  The tax treatment of a tangible gift differs from entertainment, and separating food from event admission requires adequate billing.

Financing and S corporation owners

• Is a local sponsorship an advertising deduction or donation?
  A payment for meaningful advertising can be a business promotion cost, while an amount paid without substantial return benefit may be a charitable contribution.
• How do S corporation charitable gifts reach shareholders?
  An S corporation generally separately states eligible charitable contributions to shareholders, whose individual deductions can be limited by basis and personal rules.
• Is a bank loan taxable income for a business?
  Ordinary loan proceeds are generally not taxable because the borrower has a repayment obligation; interest and financing fees receive separate treatment.
• Is forgiven business debt taxable?
  Cancelled debt can create income unless an exclusion or other special rule applies; the tax effect can also adjust attributes such as basis or losses.
• Can an owner deduct interest on a personally guaranteed business loan?
  A guarantee alone does not make interest the owner's deduction; who is the borrower, who pays, and how proceeds are used all matter.
• What records make an owner-to-business loan bona fide?
  A genuine loan needs a real obligation to repay, credible terms, payment history, and consistent accounting; otherwise advances may be treated as equity or distributions.
• My S corporation is repaying a shareholder loan after losses reduced its basis. Will I owe tax?
  Prior losses can make principal repayment taxable; distinguish the written-note and open-account paths before filing Form 7203.
• When are S corporation distributions taxable?
  Nondividend S corporation distributions are generally tax-free only to the extent of stock basis, with excess potentially treated as gain; accumulated earnings can change ordering.
• I guaranteed my S corporation's bank loan. Can I deduct this year's loss?
  A guarantee alone is not debt basis; test actual payments, direct loans, Form 7203, and suspended losses before filing.
• How is health insurance for a more-than-2-percent S corporation shareholder reported?
  Premiums paid or reimbursed by the S corporation generally need proper W-2 inclusion for a more-than-2-percent shareholder before a potential above-the-line deduction is evaluated.

Partnerships and business sales

• Was a fixed partner payment filed as a distribution instead of a guaranteed payment?
  Review the agreement, Form 1065, K-1s, partner returns, and amendment or AAR path.
• Can a partner deduct expenses paid personally for a partnership?
  An unreimbursed partnership expense may be deductible by a partner when the partnership agreement requires the partner to bear it and reimbursement is unavailable.
• Is a partnership distribution of equipment taxable?
  A property distribution is often not immediately taxable, but special rules, partner basis, liabilities, and disguised-sale provisions can change the result.
• Why is part of a partnership buyout ordinary income?
  A partner's sale can produce ordinary income to the extent attributable to certain unrealized receivables or inventory, often called hot assets, even if the rest is capital gain.
• How do buyers and sellers allocate a business purchase price?
  An applicable asset acquisition generally requires allocation among asset classes, affecting buyer deductions and seller gain character.
• Can a buyer deduct the cost of an acquired customer list?
  A purchased customer-based intangible in a business acquisition may be subject to Section 197 amortization rather than an immediate advertising deduction.
• When is an escrow holdback from a business sale taxed?
  An escrowed portion of sale proceeds can have different timing depending on whether the seller has a fixed right to funds and the escrow conditions.
• How does a working-capital true-up affect business sale tax?
  A purchase-price adjustment can change amount realized or asset allocation; its character depends on the agreement and facts.
• How are noncompete payments in a business sale taxed?
  A separately bargained covenant can produce different tax character for the seller and amortization treatment for the buyer than goodwill does.
• Does sales tax apply when a business sells its equipment?
  State sales-tax treatment of a business asset sale varies by jurisdiction and transaction type, while federal gain is computed from proceeds and adjusted tax basis.

Business Return Corrections

Use the amended business return and depreciation correction center to compare amended returns, corrected K-1s, partnership AARs, and Form 3115 procedures. For a return-specific review, book a call with AE Tax Advisors.