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How to deduct business expenses
By Cora M. Barnhart •
Bankrate.com
Aug. 5, 1999 -- Deducting business expenses
is probably one of the few little bits of fun a business owner has
during tax season. This tax tip explains the basic requirements
for deducting a business expense.
Taxpayers starting a new business
will be especially interested in this tip. A related
tax tip discusses tax requirements for taking the home office
deduction.
What makes an expense deductible?
While a business expense doesn't have to be
indispensable to be deducted, there are two specific requirements
it does need to meet. The IRS only permits business owners to deduct
those expenses that are both ordinary and necessary. Ordinary business
expenses are expenses that are commonplace for other professionals
working in the business area. Necessary expenses are those that
help the business; they are considered appropriate for its field.
Start-up
costs
An owner often incurs several expenses before a business even
opens its doors. These start-up costs include costs for travel,
advertising, research and training. The IRS regards these as capital
expenses, meaning they will be deducted over several years. See
IRS Publication
535 for more information on deducting business costs.
Business owners often purchase property that
is expected to last more than one year. New owners may not realize
they won't be able to deduct the entire cost as a business expense
right away. The IRS requires businesses to spread the cost over
more than one tax year. The owner will deduct part of it each year
on Schedule
C or C-EZ.
Deducting the cost of business property in this manner is called
depreciation.
Depreciation
Business owners can depreciate property that satisfies certain
basic requirements: it must be used in business and have a determinable
useful life of more than one year, and the property must be something
that wears out or loses value without any action on the part of
the owner.
Be aware that the IRS prohibits business owners
from depreciating certain items. These include inventory, land and
property placed in service and disposed of in the same year.
There is an exception to these rules regarding
depreciation. The IRS permits business owners to deduct a limited
amount (for 1999, up to $19,000) of the cost of certain depreciable
property in the year it is purchased for use in the business. This
deduction is known as the "Section
179 deduction."
There are some important rules to follow regarding
this deduction. If property isn't used more than 50 percent of the
time for business during any tax year, owners can't choose the Section
179 deduction. This property will have to be depreciated according
to special rules discussed in detail in IRS Publication
534.
Use Form 4562, Depreciation
and Amortization, to report depreciation and the Section
179 deduction. Also, any business owner who uses Form 4562 will
have to file Schedule C instead of Schedule C-EZ.
Using
your car for business
If a self-employed taxpayer uses a personal car in his business,
he can deduct certain expenses. The IRS allows self-employed workers
to deduct actual car expenses including depreciation, lease payments,
gas and oil, tires, repairs, tune-ups, insurance and registration
fees. However, only costs incurred for the business are supposed
to be deducted. Since the vehicle is probably used for personal
needs as well, the taxpayer has to separate personal expenses for
the car from business expenses.
Does this seem complicated? There is an easier
way to take this deduction. Many self-employed people base their
business usage on mileage incurred for the business. Instead of
trying to figure out the business portion of these expenses, they
use a standard mileage rate to calculate the deduction. For 1998,
the standard mileage rate for a car was 32.5 cents for each business
mile not reimbursed in some other fashion.
Self-employed taxpayers have additional automobile
expenses they can deduct. The IRS allows self-employed workers to
deduct the business part of interest on their car loan, state and
local personal property tax on the car, parking fees, and tolls.
The taxpayers can take this deduction whether they have claimed
the standard mileage rate or not.
-- Posted Aug. 5, 1999
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