Deducting Business Expenses

Deductng

are the cost of carryng on a trade or busness. These expenses are usually deductble f the busness operates to make a prof

Note:  f do not carry on the actvty to make a proft, must report all of the gross ncome (wthout deductons) from the actvty on Form 1040, lne 1. Specal lmts apply to what expenses for a not-for-proft actvty are deductble; for detaled nformaton, refer to Publication 535, Business Expenses.

To be deductble, a busness expense must be both ordnary and necessary. An ordnary expense s one that s common and accepted n r trade or busness. A necessary expense s one that s helpful and approprate for r trade or busness. An expense does not have to be ndspensable to be consdered necessary.

t s mportant to separate from the followng expenses:

f r busness manufactures products or purchases them for resale, generally must value nventory at the begnnng and end of each tax year to determne r cost of goods sold unless are a small busness taxpayer (defned below). Some of r expenses may be ncluded n fgurng the cost of goods sold. The cost of goods sold s deducted from r gross recepts to fgure r gross proft for the year. f nclude an expense n the cost of goods sold, cannot deduct t agan as a busness expense.

The followng are types of expenses that go nto fgurng the cost of goods sold.

Under the unform captalzaton rules, must captalze the drect costs and part of the ndrect costs for certan producton or resale actvtes unless are a small busness taxpayer (defned below). ndrect costs nclude rent, nterest, taxes, storage, purchasng, processng, repackagng, handlng, and admnstratve costs.

Small busness taxpayer. Effectve for tax years begnnng after 1/31/017, a small busness taxpayer s a taxpayer that (a) has average annual gross recepts of $5 mllon or less for the 3 pror tax years and (b) s not a tax shelter (as defned n secton 448(d)(3)). See secton 471(c) and secton 63A().

f are small busness taxpayer, can adopt or change r accountng method to account for nventores () n the same manner as materals and supples that are non-ncdental, or () conform to r treatment of nventores n an applcable fnancal statement (as defned n secton 451(b)(3)), or f the taxpayer does not have an applcable fnancal statement, the method of accountng used n the taxpayers books and prepared n accornce wth the taxpayer’s accountng procedures. See secton 471(c)(1).

For addtonal nformaton, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on nventores, Publication 538, Accounting Periods and Methods.

must captalze, rather than deduct, some costs. These costs are a part of r nvestment n r busness and are called captal expenses. Captal expenses are consdered assets n r busness. n general, there are three types of costs captalze.

Note: can elect to deduct or amortze certan busness start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.

Generally, cannot deduct personal, lvng, or famly expenses. However, f have an expense for somethng that s used partly for busness and partly for personal purposes, dvde the total cost between the busness and personal parts. can deduct the busness part.

For example, f borrow money and use 70% of t for busness and the other 30% for a famly vacaton, can deduct 70% of the nterest as a busness expense. The remanng 30% s personal nterest and s not deductble. Refer to chapter 4 of Publication 535, Business Expenses, for nformaton on deductng nterest and the allocaton rules.

f use part of r home for busness, may be able to deduct expenses for the busness use of r home. These expenses may nclude mortgage nterest, nsurance, utltes, repars, and deprecaton. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more nformaton.

f use r car n r busness, can deduct car expenses. f use r car for both busness and personal purposes, must dvde r expenses based on actual mleage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a lst of current and pror year mleage rates see the Standard Mileage Rates.

Ths lst s not all nclusve of the types of that can deduct. For addtonal nformaton, refer to Publication 535, Business Expenses.

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