Business Expenses

Posted on | December 18, 2009 | 8 Comments

TIS THE SEASON

TO DO TAX PLANNING

 

TAKE ALL THE LEGITIMATE

BUSINESS EXPENSES YOU CAN

 

Some might say that the list of potential business expenses is limited only to what the mind can perceive. That would be a big stretch.   Believe it or not, the IRS knows your business better than you do.  That is to say, they know what expenses are ordinary and acceptable for your type of business.  After all, they have audited millions of businesses over the years.  So, when it comes to deciding what business expenses you can legitimately take, why not start with IRS publications and other documents to find out what the IRS will allow.  You may even find some expenses you never thought of taking. 

To be deductable, expenses must be “ordinary” and “necessary.”  That is, to be deductable, the expense must be normal, usual and customary for the type of business you are in (that’s the ordinary part) and it must be necessary for your specific business. 

I have created a generic list for you to use as you prepare to do your taxes.  Use this as a checklist to make sure you have not forgotten anything.  I will be updating the list from time to time to insure it is as complete as possible although I’m not trying to cover every niche business.  I’m sure there are some unique expense items that I haven’t even thought of, but this list will be a good starting point for all of you to review to ensure you don’t miss any of the big ticket items.  If any of you want to add to the list, send me an e-mail and I’ll be glad to do so. 

Sometimes, depending on your business entity, expenses are handled differently, that is to say, they might do on a different part of your return.  Feel free to contact me if you have any questions. 

Let me start by giving you links to some IRS publications that you might find useful:

1. Pub 538 – Accounting Periods and Methods – http://www.irs.gov/pub/irs-pdf/p538.pdf
2. Pub 535 – Business Expenses – http://www.irs.gov/pub/irs-pdf/p535.pdf
3. Pub 587 – Business Use of Your Home – http://www.irs.gov/pub/irs-pdf/p587.pdf
4. Pub 463 – Travel, Entertainment, Gift and Car Expenses – http://www.irs.gov/pub/irs-pdf/p463.pdf
5. Pub 334 – Tax Guide for Small Businesses – http://www.irs.gov/pub/irs-pdf/p334.pdf
6. Pub 583 – Starting a Business & Keeping Records – http://www.irs.gov/pub/irs-pdf/p583.pdf

So here’s the list: 

 Cost of Goods Sold (generally for those who make or build something)

            Cost of products or raw materials

            Storage

            Direct labor – labor involved in manufacturing the product

            Factory overhead – the costs of running the factory

            Capitalization of direct costs for certain production activities

            Inventory

            Freight in

Dump fees

Employees pay including certain fringe benefits

Owner’s salary – only if the business entity is a corporation or subchapter S corporation.

Owner’s draws, per se, are not a deductible expense

Independent Contractor fees

Consultant fees

Advertising

Commissions and fees

Generally, penalties are not deductible

Professional services

            Bookkeeping

            Accounting

            Tax preparation

            Legal

            Professional photographer

            Web designer

Partnership guaranteed payments (only in partnership returns)

Rent

Taxes on leased property

Cost of getting a lease

Improvements by lessee (generally amortized)

Equipment rental

Interest

            Mortgage interest (for business real estate)

            Vehicle loan interest (business vehicles; to extent used in the business)

            Capitalization of interest

            Prepaid interest

            Credit line and business loan interest

Taxes & licenses

            Real estate taxes (business assets)

            Employment taxes

            Other business related taxes

            Business licenses

            Building permits and fees

Insurance

            Business insurance (for example, E&O insurance)

            Auto insurance (prorated for business use)

            Self employed health insurance                                 

Capitalized expenses (amortizing or depreciating them over a proscribed period of time)

            Business start-up costs

            Business organizational costs

            Business assets

            Improvements

                        Capital vs. Deductible expenses

Amortization

            Intangibles such as Goodwill

Business bad debts are handled differently depending on the accounting method you use

             Cash basis – not deductible – income is not recognized until money received

            Accrual basis – deductible because income recognized when earned

Repairs (vs. capital improvements) and maintenance

Repairs keep the property in good working condition without materially adding to the properties’ value.  Examples include painting, fixing a leak, replacing broken items, etc. 

Personal vs. business expenses – be very careful not to intermingle the two.

Personal expenses are never deductable as business expenses, although many people try

Charitable expenses

With the exception of a C Corporation, charitable expenses will carry to your Schedule A.

Depreciation

            MACRS

            ADS

            Assets to be depreciated

                        Software

                        Office equipment

                        Furniture

                        Automobile

                        Manufacturing equipment

                        Buildings

                        Capital improvements

Bonus depreciation – only used when allowed by IRS

Section 179 depreciation

            Allows full amount to be taken in current year – subject to limits

Depletion

Pension & profit sharing plans – treatment depends on business entity

            SEP

            IRA

            401K

            SIMPLE

Employee benefit programs – treatment depends on business entity

            Insurance

            Health and welfare programs

Reimbursable business expenses through a formal reimbursement plan

Domestic production activities credit

Business credits – there are many types of business credits

Travel (must be for a business purpose)

            Airline tickets

            Rental car       

            Hotel/motel

            Taxi

Meals and Entertainment (generally limited to 50% of actual expenses)

            Travel

            Entertaining customers or meeting with colleagues

Office in home (OIH) expense

Business must be profitable before you can take OIH expenses in current year

Special rules apply See my blog https://www.professionaltaxservicesinc.net/2009/08/office-home-expense/

Automobile and truck expenses

            Mileage vs. actual (allowable expenses to maintain and operate vehicle)

                        Actual almost always exceed mileage but you must keep good records

                        You must keep written records either way

            Auto loan interest

            Leasing expenses

Parking fees and tolls 

Miscellaneous Expenses         

Bank charges

Business start-up expenses (if under $5000 and not amortized)

Business Bond

Consulting fees

Credit and collection costs

Credit card processing fees

Damages

Delivery (Freight out)

Discounts

Documents

Dues and subscriptions

Dump fees

Exposition (show) fees and expenses

Equipment rental

Federal (FUTA) and State (SUTA) unemployment taxes

Ferry fees

Gifts

Limited to $25 per client or customer

Internet fees

Janitorial

Labor & Industry taxes

Laundry & dry cleaning

            Only for specialized clothing

Maintenance

Marketing

Meeting expenses

Miscellaneous

Office expenses

Organizational expenses (if not amortized)

Pay pal fees

PO Box

Postage and delivery

Printing

Professional memberships (special rules apply)

Professional education (Continuing professional education)

Professional supplies and publications

Real estate agent fees

Sales & promotion expenses

Security

Small tools & equipment

Staging costs

Storage

Supplies

Surety bond

Telephone

            Cell phone

            Second phone in home for business

            Fax line

Training & professional education

Utilities

Waste disposal

Web hosting

Website costs

Work clothing (special rules apply)

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As an Enrolled Agent and consummate tax professional, Bill provides year-round, affordable tax services for his clients. Bill is experienced in small business start-up and tax planning in addition to a full range of tax return preparation.

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