Deducting Business Expenses

Finance

Business expenses are the price of carrying on the trade or business. These expenses are deductible if the business enterprise operates to make an income usually. What MAY I Deduct? What Can I Deduct? To be deductible, a continuing business expense must be both normal and necessary. An ordinary expense is one that is common and accepted in your business or trade. A necessary expense is one that is helpful and appropriate for your business or trade.

An expense doesn’t have to be indispensable to be considered necessary. If your business manufactures buys or products them for resale, you generally must value the inventory at the start and end of each tax season to determine your cost of goods sold unless you are a small business taxpayer (described below).

Some of your expenses may be contained in figuring the cost of goods sold. The cost of goods sold is deducted from your gross receipts to figure your gross revenue for the entire year. If an expense is included by you in the price of goods sold, you can not deduct it as a small business expenditure again.

The pursuing are types of expenses that get into figuring the cost of goods sold. Under the uniform capitalization guidelines, you must capitalize the direct costs and part of the indirect costs for certain creation or resale activities unless you are a little business taxpayer (defined below). Indirect costs include rent, interest, taxes, storage space, purchasing, handling, repackaging, handling, and administrative costs.

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For additional information, make reference to the section on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses, and the chapter on Inventories, Publication 538, Accounting Periods, and Methods. 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. Generally, there are three types of costs you capitalize. Note: You can choose to deduct or amortize certain business start-up costs. Refer to chapters 7 and 8 of Publication 535, Business Expenses. Generally, you can deduct personal, living, or family expenses.

However, if you have an expense for something that can be used partly for business and partly for personal purposes, divide the total cost between the continuing business and personal parts. You can deduct the carrying on business part. For instance, if you borrow money and use 70% from it for business and the other 30% for a family group vacation, you can deduct 70% of the eye as a business expense. The remaining 30% is personal interest and is not deductible.