Deductible Business Expenses
To be deductible, a business expense must be ordinary and necessary. Generally, an ordinary expense is an expense that is normal, common and accepted in the business community. A necessary expense means an expense that is appropriate and helpful for the trade or business.
The following types of business expenses are generally deductible:
- Advertising expenses (reasonable cost of advertising directly related to business activities)
- Car and truck expenses for vehicles used in the business
- Cash payments to organizations that are not charitable contributions or gifts
- Education expenses paid for the cost of educating or training employees
- Employees' pay that is reasonable and for services performed
- Insurance that is for a trade, business or profession
- Interest charged for money that is borrowed and used for business activities
- Legal and professional fees charged by accountants and attorneys that are directly related to the operation of a business
- License and regulatory fees for a trade or business paid annually to state or local governments
- Reimbursements for ordinary and necessary travel, meal and entertainment expenses incurred by employees while carrying on trade or business
- Rent for property used in a trade or business
- Retirement plans
- Supply expenses for materials actually used during the tax year
- Taxes, such as federal, state, local and foreign taxes attributable to a trade or business
- Utility expenses for your business, such as heat, electricity, telephone service and water
Expenses That Are Not Deductible
Business expenses do not include expenses used to figure the cost of goods sold, capital expenses or personal expenses. For businesses that make products or buy them for resale, the cost of goods sold is determined by valuing inventory at the start and end of each tax year. Gross profit is then determined by subtracting cost of goods sold from gross receipts. If an expense is included in cost of goods sold, it cannot be deducted as a business expense. The following expenses are generally included when determining the cost of goods sold: cost of raw materials or products, storage costs, direct labor costs and factory overhead.
Capital expenses, which are generally costs that are part of the taxpayer's investment in a business, must be capitalized rather than deducted. Generally, the following types of costs are capitalized: business start-up costs, business assets and improvements.
Expenses that are purely personal in nature are not deductible as business expenses. If you have an expense for something that is used partly for business and partly for personal reasons, a taxpayer can split the cost and deduct the portion that is attributable to the business use. For example, if a taxpayer uses part of his home for business purposes, he can deduct expenses related to the business use of the home such as mortgage interest, insurance and utilities. Likewise, if a taxpayer uses her car for both business and personal reasons, she can divide expenses based on mileage and deduct car expenses related to the business purpose.
Preparing for a Meeting with Your Tax Attorney
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