Expenses of Operating a Business
Starting a business involves expenses on utilities, office supplies, repairs and advertising. This can be deducted as current business expenses as long as you already open your doors for business. Business costs can be deducted as capital expenses. You can deduct $5,000 in your first year of business, and the remainder can be deducted in equal amounts during the next 15 years.
Bookkeeping, Legal and Professional
Fully deductible, as part of a cost of doing business, are the business books and those that help you do business without legal and tax professionals. It can also include the fees paid to lawyers, tax professionals, or consultants as long as it is deducted in the year incurred.
If you own the vehicle you use for business, you can deduct the cost of operation, maintenance and depreciation of this vehicle to make it road worthy. The rules can be tricky to master, but it will be worth your while to know how it is done. There are two available methods of claiming auto expenses:
- Actual expense method. Keeping track and deduct all the actual expenses.
- Standard mileage rate method. Keeping track of each mile driven plus all the business-related tolls and parking fees.
If the car you use for business is new (purchased in the tax year), the actual expenses method can provide a large deduction during the tax season. If using an actual expense method, you should also include the depreciation in the deduction for the vehicle. You cannot claimed accelerated depreciation deductions in prior years or use the Section 179 deduction for the vehicle.
If you only have one car and use it for both business and pleasure, only the business part will be qualified for a tax deduction. Careful tracking of business use is a must. IRS will not let you get away in claiming a 100% business related use.
Bad debts because somebody stiffs your business may or may not be deductible depending on the products you sell.
- Goods. You can deduct the cost of goods that you sell but weren’t paid for.
- Services. Business that provides services cannot deduct the losses as part of tax deduction.
Fifty percent of the cost for entertaining a present or prospective customer can be claimed for deduction if:
- The event is business related and business is discuss like a catered meeting in the office
- The entertainment takes place before or after a business discussion
Make sure to indicate on the receipt the specific business purpose.
Traveling for business can include the cost of the plane, cost of operating the car, lodging, meals, shipping business materials, phones calls, faxes, tips, taxis and other expenses related to your travel. If you combine business with pleasure, it is okay as long as business is still the primary purpose of the trip.
If you use your own personal credit card to finance business-related expenses, the interest incurred is tax-deductible. It can also be applied to personal loans where the proceeds is use for business. Just make sure you keep a record that the money was used for business.
Small businesses can write off the full cost of the new assets in the year they buy them, then deducting their cost over the years by capitalizing them.
Moving related to business or job can be tax deducted as moving cost. The workplace must be at least 50 miles farther from your old workplace.
Software bought for business must have a depreciating period of 36 months with some important exceptions:
- Computer software placed in service from January 1, 2003 through December 31, 2013 is eligible for a Section 179 deduction, which means that 100% of the cost of software can be deducted in the year purchased.
- When software comes with a computer, and its cost is not separately stated, it’s treated as part of the hardware and is depreciated over five years. However, under Section 179, you can write off a whole computer system (including bundled software) in the first year if the total cost is within the Section 179 annual deduction amount.
Your business can make a charitable contribution and pass through the deduction through you as long as the type of business you have is a partnership, LLC’s, or an S corporation. If you own a C corporation the corporation can deduct the charitable contributions.
Depending on the type of tax, taxes that incurred in operating the business are generally deductible.
- Sales tax on items you buy for your business’s day-to-day operations is deductible as part of the cost of the items; it’s not deducted separately. Excise and fuel taxes are separately deductible expenses.
- If your business pays employment taxes, the employer’s share is deductible as a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your federal return as an itemized deduction, not as a business expense.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance.
Educational expenses can be deducted as long as they are related to your occupation or business. The expense must be to improve skills required in your present employment.
Advertising and Promotion
Business cards, yellow page ad, and other advertising are deductible as current expenses. Promotional costs are also deductible as long as there is a clear connection between the business and the sponsorship.
Additional List of Overlooked Business Expenses that can be Routinely Deducted
- promotion and publicity
- seminars and trade shows
- taxi and bus fare
- telephone calls away from the business
- business gifts
- business-related magazines and books
- casual labor and tips
- casualty and theft losses
- coffee and beverage service
- office supplies
- online computer services related to business
- parking and meters
- petty cash funds
- consultant fees
- audiotapes and videotapes related to business skills
- bank service charges
- business association dues
- credit bureau fees
Keep track of the small items that matters like a receipt that can be use to deduct your expenses.