supplies, repairs, advertising, insurance costs. Larger material goods and equipment are usually depreciated over a period of years determined by statute or rule unless the taxpayer elects to use Section 179 to expense them in the year in which the capital asset was put into service in which case a deduction is allowed for that taxable year not to exceed the amount the taxpayer received from the business during that taxable year up to an upper limit of $500,000. Some of the costs most frequently encountered are: Wages and Benefits The cost of wages paid to employees are deductible as ordinary and necessary expenses in the running of the business. Also deductible are the major classes of fringe benefits provided to employees like health insurance, life insurance, long term care insurance, and educational assistance. Family members of the business owner may work as employees provided that actual bona fide services are performed. Wages paid are subject to the employment tax (see below). If the business is organized as a “C” or “S” corporation then payments to the owner for services are deductible as wages and are subject to the employment tax. The owner may also deduct the cost of health insurance for the owner, the owner’s spouse, and the owner’s dependents. If the business is organized as a sole proprietorship or LLC, payments to the owner are classed as draws or distributions and are not tax deductible. The owner may, however, deduct the costs of health insurance for the owner, the owner’s spouse, and owner’s dependents. For both an LLC and a sole proprietorship, the owner will be subject to the employment tax. The Use of Independent Contractors The business should be very cautious about engaging anyone to work as an independent contractor who is paid a contract fee not wages and who provides his or her own benefits. In recent years, the Internal Revenue Service and the Minnesota Department of Revenue have both expressed
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