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:
- Pub 538 – Accounting Periods and Methods – http://www.irs.gov/pub/irs-pdf/p538.pdf
- Pub 535 – Business Expenses – http://www.irs.gov/pub/irs-pdf/p535.pdf
- Pub 587 – Business Use of Your Home – http://www.irs.gov/pub/irs-pdf/p587.pdf
- Pub 463 – Travel, Entertainment, Gift and Car Expenses – http://www.irs.gov/pub/irs-pdf/p463.pdf
- Pub 334 – Tax Guide for Small Businesses – http://www.irs.gov/pub/irs-pdf/p334.pdf
- 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 http://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)
