The Small Business Assistance Programs focus primarily on expenses related to the cost of carrying on a trade or business. Under IRS guidelines, these
expenses are usually deductible if the business is operated to make a
profit. The information contained on these pages, "Small Business Assistance," "Starting, Operating and Closing a Business," "Employment Taxes" and "Independent Contractors" is reproduced through the courtesy of the Internal Revenue Service and is also found at http://www.irs.gov. Please read these pages before contacting us.
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 the
year. 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, and
administrative 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 Goods
Sold, 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
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 or
business. 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.
