These sessions are led by a litigation support specialist and Emeritus Professor of Law and Taxation, assisted by an IRS Special Enrolled Agent and Assistant Professor of Taxation, a tax accountant, and a tax attorney.
Our Small Business Assistance Program is coordinated by an IRS Enrolled Agent, tax law professor, public accountant, and a licensed attorney admitted to practice before the U.S. Tax Court. It focuses primarily on expenses related to the cost of carrying on a domestic trade or business. Under IRS guidelines, these expenses are usually deductible if the business is operated to make a profit.
The information contained here, "Small Business Assistance," "Starting, Operating and Closing a Business," "Employment Taxes" and "Independent Contractors" is reproduced through the courtesy of the IRS and is also found at http://www.irs.gov.
What Can I Deduct?
According to IRS provisions, for an expense to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.It is important to separate business expenses from the following expenses: The expenses used to figure the cost of goods sold,Capital Expenses, and Personal Expenses.
Cost of Goods Sold
According to IRS provisions, if your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for theyear. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring the cost of goods sold. The cost of products or raw materials, including freight storage direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products factory overhead under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes,storage, purchasing, processing, repackaging, handling, andadministrative costs. This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.
For additional information, refer to the chapter on Cost of GoodsSold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods.
Capital Expenses
According to IRS provisions, you must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize. Business start-up cost (see the note below), Business assets, and Improvements.
Note: You can elect to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses.
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part. For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
Business Use of Your Home
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.
Business Use of Your Car
If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.
Other Types of Business ExpensesEmployees' Pay
You can generally deduct the pay you give your employees for the services they perform for your business.
Retirement Plans
Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees' retirement.
Rent Expense
Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade orbusiness. If you have or will receive equity in or title to the property, the rent is not deductible.
Interest
Business interest expense is an amount charged for the use of money you borrowed for business activities.
Taxes
You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
Insurance
Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession. This list is not all inclusive of the types of business expenses that you can deduct. For additional information, refer to Publication 535, Business Expenses.
As a business owner, when another person performs work for you, you must first correctly classify that person as an independent contractor or employee. If the person is an independent contractor, refer to Forms and Associated Taxes for Independent Contractors for your tax responsibilities. If the person is classified as an employee you must have an Employer Identification Number (EIN). Your tax responsibilities include withholding, depositing,reporting, and paying employment taxes. You must also give certain forms to your employees, they must give certain forms to you, and you must send certain forms to the IRS and SSA.
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For assistance, please write: michaelstuart@taxlawinstitute.com "Taxes are what we pay for civilized society" Supreme Court Justice Oliver Wendell Holmes, Jr.
Courtesy of Internal Revenue Service. Located on the Web at: http://www.irs.gov
Contact us at 1.888.334.3959
Our Small Business Assistance Program is coordinated by an IRS Enrolled Agent, tax law professor, public accountant, and a licensed attorney admitted to practice before the U.S. Tax Court. It focuses primarily on expenses related to the cost of carrying on a domestic trade or business. Under IRS guidelines, these expenses are usually deductible if the business is operated to make a profit. 
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