How to deduct business expenses
By Cora Barnhart • Bankrate.com

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.

Startup costs
An owner often incurs several expenses before a business even opens its doors. These startup 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