You can deduct the costs of
running your business. These
costs are known as business
expenses. These are costs you do
not have to capitalize or
include in the cost of goods
sold.
To be deductible,
a business expense must be
both ordinary and necessary. An
ordinary expense is one that is
common and accepted in your
field of business. A necessary
expense is one that is helpful
and appropriate for your
business. An expense does not
have to be indispensable to be
considered necessary.
For more information about
the general rules for deducting
business expenses, see chapter 1
in Publication 535, Business
Expenses.
If you have an expense
that is partly for business and
partly personal, separate the
personal part from the business
part.
Useful Items - You
may want to see:
Publication
535
Business Expenses
See chapter 12 for information
about getting publications and
forms.
Bad Debts
If someone owes you money you
cannot collect, you have a bad
debt. There are two kinds of bad
debts, business bad debts and
nonbusiness bad debts.
A business bad debt is
generally one that comes from
operating your trade or
business. You may be able to
deduct business bad debts as an
expense on your business tax
return.
Business
bad debt. A business
bad debt is a loss from
the worthlessness of a debt
that was either of the
following.
Created or
acquired in your
business.
Closely related
to your business
when it became
partly or totally
worthless.
A debt is closely related to
your business if your
primary motive for incurring
the debt is a business
reason.
Business bad debts are
mainly the result of credit
sales to customers. They can
also be the result of loans
to suppliers, clients,
employees, or distributors.
Goods and services customers
have not paid for are shown
in your books as either
accounts receivable or notes
receivable. If you are
unable to collect any part
of these accounts or notes
receivable, the
uncollectible part is a
business bad debt.
You can take a bad
debt deduction for these
accounts and notes
receivable only if the
amount owed you was included
in your gross income either
for the year the deduction
is claimed or for a prior
year.
Accrual
method.
If you use an accrual
method of accounting, you
normally report income as
you earn it. You can take a
bad debt deduction for an
uncollectible receivable if
you have included the
uncollectible amount in
income.
Cash
method.
If you use the cash method
of accounting, you normally
report income when you
receive payment. You cannot
take a bad debt deduction
for amounts owed to you that
you have not received and
cannot collect if you never
included those amounts in
income.
More
information. For more
information about business
bad debts, see chapter 11 in
Publication 535.
Nonbusiness
bad debts.
All other bad debts are
nonbusiness bad debts and
are deductible as short-term
capital losses on Schedule D
(Form 1040). For more
information on nonbusiness
bad debts, see Publication
550, Investment Income and
Expenses.
Car and Truck
Expenses
If you use your car or truck
in your business, you may be
able to deduct the costs of
operating and maintaining your
vehicle. You also may be able to
deduct other costs of local
transportation and traveling
away from home overnight on
business.
You may be entitled to a
tax credit for an
electric
vehicle or a
deduction from gross income for
a part of the cost of a
clean-fuel
vehicle you place in
service during the year. The
vehicle must meet certain
requirements and you do not have
to use it in your business to
qualify for the credit or the
deduction. For more information,
see chapter 12 in Publication
535.
Local
transportation expenses.
Local transportation
expenses include the
ordinary and necessary costs
of all the following.
Getting from one
workplace to another
in the course of
your business or
profession when you
are traveling within
the city or general
area that is your
tax home. Tax home
is defined later.
Visiting clients
or customers.
Going to a
business meeting
away from your
regular workplace.
Getting from
your home to a
temporary workplace
when you have one or
more regular places
of work. These
temporary workplaces
can be either within
the area of your tax
home or outside that
area.
Local business
transportation does not
include expenses you have
while traveling away from
home overnight. Those
expenses are deductible as
travel expenses and are
discussed later under
Travel, Meals, and
Entertainment.
However, if you use your car
while traveling away from
home overnight, use the
rules in this section to
figure your car expense
deduction.
Generally, your tax home
is your regular place of
business, regardless of
where you maintain your
family home. It includes the
entire city or general area
in which your business or
work is located.
Example.
You operate a
printing business out of
rented office space. You
use your van to deliver
completed jobs to your
customers. You can
deduct the cost of
round-trip
transportation between
your customers and your
print shop.
You cannot deduct the
costs of driving your car or
truck between your home and
your main or regular
workplace. These costs are
personal commuting expenses.
Office
in the home. Your
workplace can be your home
if you have an office in
your home that qualifies as
your principal place of
business. For more
information, see
Business Use of Your Home,
later.
Example.
You are a graphics
designer. You operate
your business out of
your home. Your home
qualifies as your
principal place of
business. You
occasionally have to
drive to your clients to
deliver your completed
work. You can deduct the
cost of the round-trip
transportation between
your home and your
clients.
Methods for
Deducting Car
and Truck
Expenses
For local transportation
or overnight travel by car
or truck, you generally can
use one of the following
methods to figure your
expenses.
Standard mileage
rate.
Actual expenses.
Standard mileage rate.
You may be able to use
the standard mileage
rate to figure the
deductible costs of
operating your car, van,
pickup, or panel truck
for business purposes.
For 2004, the standard
mileage rate is 37.5
cents a mile for all
business miles.
If you choose to
use the standard mileage
rate for a year, you
cannot deduct your
actual expenses for that
year except for
business-related parking
fees and tolls.
Choosing the standard
mileage rate.
If you want to use the
standard mileage rate
for a car or truck you
own, you must choose to
use it in the first year
the car is available for
use in your business. In
later years, you can
choose to use either the
standard mileage rate or
actual expenses.
If you use the
standard mileage rate
for a car you lease, you
must choose to use it
for the entire lease
period (including
renewals).
Standard mileage rate
not allowed.
You cannot use the
standard mileage rate if
you:
Use the car
for hire (such
as a taxi),
Operate five
or more cars at
the same time,
Claimed a
depreciation
deduction using
any method other
than straight
line, for
example, ACRS or
MACRS,
Claimed a
section 179
deduction on the
car,
Claimed the
special
depreciation
allowance on the
car,
Claimed
actual car
expenses for a
car you leased,
or
Are a rural
mail carrier who
received a
qualified
reimbursement.
Parking fees and tolls.
In addition to using
the standard mileage
rate, you can deduct any
business-related parking
fees and tolls. (Parking
fees you pay to park
your car at your place
of work are
nondeductible commuting
expenses.)
Actual
expenses. If you
do not choose to use the
standard mileage rate,
you may be able to
deduct your actual car
or truck expenses.
If you qualify to
use both methods, figure
your deduction both ways
to see which gives you a
larger deduction.
Actual car expenses
include the costs of the
following items.
Depreciation
Lease
payments
Registration
Garage rent
Licenses
Repairs
Gas
Oil
Tires
Insurance
Parking fees
Tolls
If you use your
vehicle for both
business and personal
purposes, you must
divide your expenses
between business and
personal use. You can
divide your expenses
based on the miles
driven for each purpose.
Example.
You are the sole
proprietor of a
flower shop. You
drove your van
20,000 miles during
the year. 16,000
miles were for
delivering flowers
to customers and
4,000 miles were for
personal use. You
can claim only 80%
(16,000 ÷ 20,000) of
the cost of
operating your van
as a business
expense.
More
information. For
more information about
the rules for claiming
car and truck expenses,
see Publication 463,
Travel, Entertainment,
Gift, and Car Expenses.
Reimbursing
Your Employees
for Expenses
You generally can deduct
the amount you reimburse
your employees for car and
truck expenses. The
reimbursement you deduct and
the manner in which you
deduct it depend in part on
whether you reimburse the
expenses under an
accountable plan or a
nonaccountable plan. For
details, see chapter 13 in
Publication 535. That
chapter explains accountable
and nonaccountable plans and
tells you whether to report
the reimbursement on your
employee's Form W-2, Wage
and Tax Statement.
Depreciation
If property you acquire to
use in your business is expected
to last more than one year, you
generally cannot deduct the
entire cost as a business
expense in the year you acquire
it. You must spread the cost
over more than one tax year and
deduct part of it each year on
Schedule C. This method of
deducting the cost of business
property is called depreciation.
The discussion here is brief.
You will find more information
about depreciation in
Publication 946, How To
Depreciate Property.
What
property can be depreciated?
You can depreciate
property if it meets all the
following requirements.
It must be
property you own.
It must be used
in business or held
to produce income.
You never can
depreciate inventory
(explained in
chapter 2) because
it is not held for
use in your
business.
It must have a
useful life that
extends
substantially beyond
the year it is
placed in service.
It must have a
determinable useful
life, which means
that it must be
something that wears
out, decays, gets
used up, becomes
obsolete, or loses
its value from
natural causes. You
never can depreciate
the cost of land
because land does
not wear out, become
obsolete, or get
used up.
It must not be
excepted property.
This includes
property placed in
service and disposed
of in the same year.
Repairs.
You cannot depreciate
repairs and replacements
that do not increase the
value of your property, make
it more useful, or lengthen
its useful life. You can
deduct these amounts on line
21 of Schedule C or line 2
of Schedule C-EZ.
Depreciation method.
The method for
depreciating most business
and investment property
placed in service after 1986
is called the Modified
Accelerated Cost Recovery
System (MACRS). MACRS is
discussed in detail in
Publication 946.
Section 179
deduction.
You can elect to deduct a
limited amount of the cost
of certain depreciable
property in the year you
place the property in
service. This deduction is
known as the “section
179 deduction.” The
maximum amount you can elect
to deduct during 2004 is
$102,000. This limit is
reduced by the amount by
which the cost of the
property placed in service
during the tax year exceeds
$410,000. The total amount
of depreciation (including
the section 179 deduction
and the special depreciation
allowance) you can take for
a passenger automobile you
use in your business and
first place in service in
2004 is $10,610. Special
rules apply to electric
vehicles and trucks and
vans. For more information,
see Publication 946. It
explains what property
qualifies for the deduction,
what limits apply to the
deduction, and when and how
to recapture the deduction.
Your section 179
election for the cost of any
sport utility vehicle (SUV)
and certain other vehicles
placed in service after
October 22, 2004, is limited
to $25,000. For more
information, see the
Instructions for Form 4562
or Publication 946.
Special
depreciation allowance.
You may be able to claim
an additional 50% (30%, if
applicable) special
depreciation allowance. The
special depreciation
allowance is an additional
deduction you can take
before you figure MACRS
depreciation for the year
you place the property in
service. For more
information, see the
instructions for Form 4562
or Publication 946.
Listed
property.
Listed property is any of
the following.
Most passenger
automobiles.
Most other
property used for
transportation.
Any property of
a type generally
used for
entertainment,
recreation, or
amusement.
Certain
computers and
related peripheral
equipment.
Any cellular
telephone (or
similar
telecommunications
equipment).
You must follow special
rules and recordkeeping
requirements when
depreciating listed
property. For more
information about listed
property, see Publication
946.
Form 4562.
Use Form 4562,
Depreciation and
Amortization, if you are
claiming any of the
following.
Depreciation on
property placed in
service during the
current tax year.
A section 179
deduction.
Depreciation on
any listed property
(regardless of when
it was placed in
service).
If you have to use
Form 4562, you must file
Schedule C. You cannot use
Schedule C-EZ.
Employees' Pay
You can generally deduct on
Schedule C the pay you give your
employees for the services they
perform for your business. The
pay may be in cash, property, or
services.
To be deductible, your
employees' pay must be an
ordinary and necessary expense
and you must pay or incur it in
the tax year. In addition, the
pay must meet both the following
tests.
The pay must be
reasonable.
The pay must be for
services performed.
Chapter 2 in Publication 535
explains and defines these
requirements.
You cannot deduct your own
salary or any personal
withdrawals you make from your
business. As a sole proprietor,
you are not an employee of the
business.
If you had employees
during the year, you must use
Schedule C. You cannot use
Schedule C-EZ.
Kinds of
pay.
Some of the ways you may
provide pay to your
employees are listed below.
For an explanation of each
of these items, see chapter
2 in Publication 535.
Awards.
Bonuses.
Education
expenses.
Fringe benefits
(discussed later).
Loans or
advances you do not
expect the employee
to repay if they are
for personal
services actually
performed.
Property you
transfer to an
employee as payment
for services.
Reimbursements
for employee
business expenses.
Sick pay.
Vacation pay.
Fringe
benefits.
A fringe benefit is a form
of pay for the performance
of services. The following
are examples of fringe
benefits.
Benefits under
qualified employee
benefit programs.
Meals and
lodging.
The use of a
car.
Flights on
airplanes.
Discounts on
property or
services.
Memberships in
country clubs or
other social clubs.
Tickets to
entertainment or
sporting events.
Employee benefit programs
include the following.
Accident and
health plans.
Adoption
assistance.
Cafeteria plans.
Dependent care
assistance.
Educational
assistance.
Group-term life
insurance coverage.
Welfare benefit
funds.
You can generally deduct
the cost of fringe benefits
you provide on your Schedule
C in whatever category the
cost falls. For example, if
you allow an employee to use
a car or other property you
lease, deduct the cost of
the lease as a rent or lease
expense. If you own the
property, include your
deduction for its cost or
other basis as a section 179
deduction or a depreciation
deduction.
You may be able to
exclude all or part of the
fringe benefits you provide
from your employees' wages.
For more information about
fringe benefits and the
exclusion of benefits, see
Publication 15-B, Employer's
Tax Guide to Fringe
Benefits.
Insurance
You can generally deduct
premiums you pay for the
following kinds of insurance
related to your business.
Fire, theft, flood,
or similar insurance.
Credit insurance
that covers losses from
business bad debts.
Group
hospitalization and
medical insurance for
employees, including
long-term care
insurance.
Liability insurance.
Malpractice
insurance that covers
your personal liability
for professional
negligence resulting in
injury or damage to
patients or clients.
Workers'
compensation insurance
set by state law that
covers any claims for
bodily injuries or
job-related diseases
suffered by employees in
your business,
regardless of fault.
Contributions to a
state unemployment
insurance fund are
deductible as taxes if
they are considered
taxes under state law.
Overhead insurance
that pays for business
overhead expenses you
have during long periods
of disability caused by
your injury or sickness.
Car and other
vehicle insurance that
covers vehicles used in
your business for
liability, damages, and
other losses. If you
operate a vehicle partly
for personal use, deduct
only the part of the
insurance premium that
applies to the business
use of the vehicle. If
you use the standard
mileage rate to figure
your car expenses, you
cannot deduct any car
insurance premiums.
Life insurance
covering your employees
if you are not directly
or indirectly the
beneficiary under the
contract.
Business
interruption insurance
that pays for lost
profits if your business
is shut down due to a
fire or other cause.
Nondeductible premiums.
You cannot deduct premiums
on the following kinds of
insurance.
Self-insurance
reserve funds. You
cannot deduct
amounts credited to
a reserve set up for
self-insurance. This
applies even if you
cannot get business
insurance coverage
for certain business
risks. However, your
actual losses may be
deductible. For more
information, see
Publication 547,
Casualties,
Disasters, and
Thefts.
Loss of
earnings. You cannot
deduct premiums for
a policy that pays
for your lost
earnings due to
sickness or
disability. However,
see item (8) in the
previous list.
Certain life
insurance and
annuities.
For
contracts
issued
before June
9, 1997, you
cannot
deduct the
premiums on
a life
insurance
policy
covering
you, an
employee, or
any person
with a
financial
interest in
your
business if
you are
directly or
indirectly a
beneficiary
of the
policy. You
are included
among
possible
beneficiaries
of the
policy if
the policy
owner is
obligated to
repay a loan
from you
using the
proceeds of
the policy.
A person has
a financial
interest in
your
business if
the person
is an owner
or part
owner of the
business or
has lent
money to the
business.
For
contracts
issued after
June 8,
1997, you
generally
cannot
deduct the
premiums on
any life
insurance
policy,
endowment
contract, or
annuity
contract if
you are
directly or
indirectly a
beneficiary.
The
disallowance
applies
without
regard to
whom the
policy
covers.
Insurance to
secure a loan. If
you take out a
policy on your life
or on the life of
another person with
a financial interest
in your business to
get or protect a
business loan, you
cannot deduct the
premiums as a
business expense.
Nor can you deduct
the premiums as
interest on business
loans or as an
expense of financing
loans. In the event
of death, the
proceeds of the
policy are not taxed
as income even if
they are used to
liquidate the debt.
Self-employed health
insurance deduction.
You may be able to deduct
the amount you paid for
medical and dental insurance
and qualified long-term care
insurance for you and your
family.
How to
figure the deduction.
Generally, you can use the
worksheet in the Form 1040
instructions to figure your
deduction. However, if any
of the following apply, you
must use the worksheet in
chapter 7 of Publication
535.
You have more
than one source of
income subject to
self-employment tax.
You file Form
2555 or Form 2555-EZ
(relating to foreign
earned income).
You are using
amounts paid for
qualified long-term
care insurance to
figure the
deduction.
Prepayment.
You cannot deduct expenses
in advance, even if you pay
them in advance. This rule
applies to any expense paid
far enough in advance to, in
effect, create an asset with
a useful life extending
substantially beyond the end
of the current tax year.
Example.
In 2004, you signed a
3-year insurance contract.
Even though you paid the
premiums for 2004, 2005, and
2006 when you signed the
contract, you can only
deduct the premium for 2004
on your 2004 tax return. You
can deduct in 2005 and 2006
the premium allocable to
those years.
More
information. For more
information about deducting
insurance, see chapter 7 in
Publication 535.
Interest
You can generally deduct as a
business expense all interest
you pay or accrue during the tax
year on debts related to your
business. Interest relates to
your business if you use the
proceeds of the loan for a
business expense. It does not
matter what type of property
secures the loan. You can deduct
interest on a debt only if you
meet all of the following
requirements.
You are legally
liable for that debt.
Both you and the
lender intend that the
debt be repaid.
You and the lender
have a true
debtor-creditor
relationship.
You cannot deduct on Schedule
C or C-EZ the interest you paid
on personal loans. If a loan is
part business and part personal,
you must divide the interest
between the personal part and
the business part.
Example.
In 2004, you paid $600
interest on a car loan.
During 2004, you used the
car 60% for business and 40%
for personal purposes. You
are claiming actual expenses
on the car. You can only
deduct $360 (60% × $600) for
2004 on Schedule C or C-EZ.
The remaining interest of
$240 is a nondeductible
personal expense.
More
information. For more
information about deducting
interest, see chapter 5 in
Publication 535. That
chapter explains the
following items.
Interest you can
deduct.
Interest you
cannot deduct.
How to allocate
interest between
personal and
business use.
When to deduct
interest.
The rules for a
below-market
interest rate loan.
(This is generally a
loan on which no
interest is charged
or on which interest
is charged at a rate
below the applicable
federal rate.)
Legal and
Professional Fees
Legal and professional fees,
such as fees charged by
accountants, that are ordinary
and necessary expenses directly
related to operating your
business are deductible on
Schedule C or C-EZ. However, you
usually cannot deduct legal fees
you pay to acquire business
assets. Add them to the basis of
the property.
If the fees include payments
for work of a personal nature
(such as making a will), you can
take a business deduction only
for the part of the fee related
to your business. The personal
part of legal fees for producing
or collecting taxable income,
doing or keeping your job, or
for tax advice may be deductible
on Schedule A (Form 1040) if you
itemize deductions. For more
information, see Publication
529, Miscellaneous Deductions.
Tax
preparation fees.
You can deduct on Schedule
C or C-EZ the cost of
preparing that part of your
tax return relating to your
business as a sole
proprietor or statutory
employee. You can deduct the
remaining cost on Schedule A
(Form 1040) if you itemize
your deductions.
You can also deduct on
Schedule C or C-EZ the
amount you pay or incur in
resolving asserted tax
deficiencies for your
business as a sole
proprietor or statutory
employee.
Pension Plans
You can set up and maintain
the following small business
retirement plans for yourself
and your employees.
SEP (Simplified
Employee Pension) plans.
SIMPLE (Savings
Incentive Match Plan for
Employees) plans.
Qualified plans
(including Keogh or H.R.
10 plans).
SEP, SIMPLE, and qualified
plans offer you and your
employees a tax favored way to
save for retirement. You can
deduct contributions you make to
the plan for your employees on
line 19 of Schedule C. If you
are a sole proprietor, you can
deduct contributions you make to
the plan for yourself on line 32
of Form 1040. You can also
deduct trustees' fees if
contributions to the plan do not
cover them. Earnings on the
contributions are generally tax
free until you or your employees
receive distributions from the
plan. You may also be able to
claim a tax credit of 50% of the
first $1,000 of qualified
startup costs if you begin a new
qualified defined benefit or
defined contribution plan
(including a 401(k) plan),
SIMPLE plan, or simplified
employee pension.
Under certain plans,
employees can have you
contribute limited amounts of
their before-tax pay to a plan.
These amounts (and earnings on
them) are generally tax free
until your employees receive
distributions from the plan.
For more information on
retirement plans for small
business, see Publication 560,
Retirement Plans for Small
Business (SEP, SIMPLE, and
Qualified Plans).
Publication 590,
Individual Retirement
Arrangements (IRAs), discusses
other tax favored ways to save
for retirement.
Rent Expense
Rent is any amount you pay
for the use of property you do
not own. In general, you can
deduct rent as a business
expense only if the rent is for
property you use in your
business. If you have or will
receive equity in or title to
the property, you cannot deduct
the rent.
Unreasonable rent.
You cannot take a rental
deduction for unreasonable
rents. Ordinarily, the issue
of reasonableness arises
only if you and the lessor
are related. Rent paid to a
related person is reasonable
if it is the same amount you
would pay to a stranger for
use of the same property.
Rent is not unreasonable
just because it is figured
as a percentage of gross
receipts.
Related persons include
members of your immediate
family, including only
brothers and sisters (either
whole or half), your spouse,
ancestors, and lineal
descendants. For a list of
the other related persons,
see Publication 538,
Accounting Periods and
Methods.
Rent on
your home. If you rent
your home and use part of it
as your place of business,
you may be able to deduct
the rent you pay for that
part. You must meet the
requirements for business
use of your home. For more
information, see
Business Use of Your Home,
later.
Rent paid
in advance.
Generally, rent paid in
your business is deductible
in the year paid or accrued.
If you pay rent in advance,
you can deduct only the
amount that applies to your
use of the rented property
during the tax year. You can
deduct the rest of your
payment only over the period
to which it applies.
More
information. For more
information about rent, see
chapter 4 in Publication
535.
Taxes
You can deduct on Schedule C
or C-EZ various federal, state,
local, and foreign taxes
directly attributable to your
business.
Income
taxes.
You can deduct on Schedule
C or C-EZ a state tax on
gross income (as
distinguished from net
income) directly
attributable to your
business. You can deduct
other state and local income
taxes on Schedule A (Form
1040) if you itemize your
deductions. Do not deduct
federal income tax.
Employment
taxes.
You can deduct the social
security, Medicare, and
federal unemployment (FUTA)
taxes you paid out of your
own funds as an employer.
Employment taxes are
discussed briefly in chapter
1. You can also deduct
payments you made as an
employer to a state
unemployment compensation
fund or to a state
disability benefit fund.
Deduct these payments as
taxes.
Self-employment tax.
You can deduct one-half of
your self-employment tax on
line 30 of Form 1040.
Self-employment tax is
explained in chapter 1.
Personal
property tax.
You can deduct on Schedule
C or C-EZ any tax imposed by
a state or local government
on personal property used in
your business.
You can also deduct
registration fees for the
right to use property within
a state or local area.
Example.
May and Julius Winter
drove their car 7,000
business miles out of a
total of 10,000 miles.
They had to pay $25 for
their annual state
license tags and $20 for
their city registration
sticker. They also paid
$235 in city personal
property tax on the car,
for a total of $280.
They are claiming their
actual car expenses.
Because they used the
car 70% for business,
they can deduct 70% of
the $280, or $196, as a
business expense.
Real estate
taxes.
You can deduct on Schedule
C or C-EZ the real estate
taxes you pay on your
business property.
Deductible real estate taxes
are any state, local, or
foreign taxes on real estate
levied for the general
public welfare. The taxing
authority must base the
taxes on the assessed value
of the real estate and
charge them uniformly
against all property under
its jurisdiction.
For more information about
real estate taxes, see
chapter 6 in Publication
535. That chapter explains
special rules for deducting
the following items.
Taxes for local
benefits, such as
those for sidewalks,
streets, water
mains, and sewer
lines.
Real estate
taxes when you buy
or sell property
during the year.
Real estate
taxes if you use an
accrual method of
accounting and
choose to accrue
real estate tax
related to a
definite period
ratably over that
period.
Sales tax.
Treat any sales tax you
pay on a service or on the
purchase or use of property
as part of the cost of the
service or property. If the
service or the cost or use
of the property is a
deductible business expense,
you can deduct the tax as
part of that service or
cost. If the property is
merchandise bought for
resale, the sales tax is
part of the cost of the
merchandise. If the property
is depreciable, add the
sales tax to the basis for
depreciation. For
information on the basis of
property, see Publication
551, Basis of Assets.
Do not deduct state
and local sales taxes
imposed on the buyer that
you must collect and pay
over to the state or local
government. Do not include
these taxes in gross
receipts or sales.
Excise
taxes.
You can deduct on Schedule
C or C-EZ all excise taxes
that are ordinary and
necessary expenses of
carrying on your business.
Excise taxes are discussed
briefly in chapter 1.
Fuel taxes.
Taxes on gasoline, diesel
fuel, and other motor fuels
you use in your business are
usually included as part of
the cost of the fuel. Do not
deduct these taxes as a
separate item.
You may be entitled to a
credit or refund for federal
excise tax you paid on fuels
used for certain purposes.
For more information, see
Publication 378, Fuel Tax
Credits and Refunds.
Travel, Meals, and
Entertainment
This section briefly explains
the kinds of travel and
entertainment expenses you can
deduct on Schedule C or C-EZ.
Table 8-1.
When
Are Entertainment
Expenses Deductible?
(Note.
The following is
a summary of the
rules for
deducting
entertainment
expenses. For
more details
about these
rules, see
Publication
463.)
General rule
You can deduct
ordinary and
necessary
expenses to
entertain a
client,
customer, or
employee if the
expenses meet
the
directly-related
test or the
associated test.
Definitions
Entertainment
includes
any
activity
generally
considered
to
provide
entertainment,
amusement,
or
recreation,
and
includes
meals
provided
to a
customer
or
client.
An
ordinary
expense
is one
that is
common
and
accepted
in your
field of
business,
trade,
or
profession.
A
necessary
expense
is one
that is
helpful
and
appropriate,
although
not
necessarily
required,
for your
business.
Tests to be
met
Directly-related
test
Entertainment
took
place in
a clear
business
setting,
or
Main
purpose
of
entertainment
was the
active
conduct
of
business,
and
You did
engage
in
business
with the
person
during
the
entertainment
period,
and
You had
more
than a
general
expectation
of
getting
income
or some
other
specific
business
benefit
Associated
test
Entertainment
is
associated
with
your
trade or
business,
and
Entertainment
directly
precedes
or
follows
a
substantial
business
discussion.
Other rules
You
cannot
deduct
the cost
of your
meal as
an
entertainment
expense
if you
are
claiming
the meal
as a
travel
expense.
You
cannot
deduct
expenses
that are
lavish
or
extravagant
under
the
circumstances.
You
generally
can
deduct
only 50%
of your
unreimbursed
entertainment
expenses.
Travel
expenses.
These are the ordinary and
necessary expenses of
traveling away from home for
your business. You are
traveling away from home if
both the following
conditions are met.
Your duties
require you to be
away from the
general area of your
tax home (defined
later) substantially
longer than an
ordinary day's work.
You need to get
sleep or rest to
meet the demands of
your work while away
from home.
Generally, your
tax home is your
regular place of business,
regardless of where you
maintain your family home.
It includes the entire city
or general area in which
your business is located.
See Publication 463 for more
information.
The following is a brief
summary of the expenses you
can deduct.
Transportation.
You can deduct the cost of
travel by airplane, train,
bus, or car between your
home and your business
destination.
Taxi,
commuter bus, and limousine.
You can deduct fares for
these and other types of
transportation between the
airport or station and your
hotel, or between the hotel
and your work location away
from home.
Baggage
and shipping. You
can deduct the cost of
sending baggage and sample
or display material between
your regular and temporary
work locations.
Car or
truck. You can
deduct the costs of
operating and maintaining
your vehicle when traveling
away from home on business.
You can deduct actual
expenses or the standard
mileage rate (discussed
earlier under
Car and Truck Expenses),
as well as
business-related tolls and
parking. If you rent a car
while away from home on
business, you can deduct
only the business-use
portion of the expenses.
Meals
and lodging.
You can deduct the cost of
meals and lodging if your
business trip is overnight
or long enough that you need
to stop for sleep or rest to
properly perform your
duties. In most cases, you
can deduct only 50% of your
meal expenses.
Cleaning. You can
deduct the costs of dry
cleaning and laundry while
on your business trip.
Telephone. You
can deduct the cost of
business calls while on your
business trip, including
business communication by
fax machine or other
communication devices.
Tips.
You can deduct the tips
you pay for any expense in
this list.
More
information. For
more information about
travel expenses, see
Publication 463, Travel,
Entertainment, Gift, and Car
Expenses.
Entertainment expenses.
You may be able to deduct
business-related
entertainment expenses for
entertaining a client,
customer, or employee. In
most cases, you can deduct
only 50% of these expenses.
The following are examples
of entertainment expenses.
Entertaining
guests at
nightclubs, athletic
clubs, theaters, or
sporting events.
Providing meals,
a hotel suite, or a
car to business
customers or their
families.
To be deductible, the
expenses must meet the rules
listed in Table 8-1. For
details about these rules,
see Publication 463.
Reimbursing
your employees for expenses.
You generally can deduct
the amount you reimburse
your employees for travel
and entertainment expenses.
The reimbursement you deduct
and the manner in which you
deduct it depend in part on
whether you reimburse the
expenses under an
accountable plan or a
nonaccountable plan. For
details, see chapter 13 in
Publication 535. That
chapter explains accountable
and nonaccountable plans and
tells you whether to report
the reimbursement on your
employee's Form W-2, Wage
and Tax Statement.
Business Use of Your
Home
To deduct expenses related to
the part of your home used for
business, you must meet specific
requirements. Even then, your
deduction may be limited.
To qualify to claim expenses
for business use of your home,
you must meet the following
tests.
Your use of the
business part of your
home must be:
Exclusive
(however, see
Exceptions
to exclusive
use, later),
Regular,
For your
business, and
The business part of
your home must be one of
the following:
Your
principal place
of business
(defined later),
A place
where you meet
or deal with
patients,
clients, or
customers in the
normal course of
your business,
or
A separate
structure (not
attached to your
home) you use in
connection with
your business.
Exclusive
use. To qualify under
the exclusive use test, you
must use a specific area of
your home only for your
trade or business. The area
used for business can be a
room or other separately
identifiable space. The
space does not need to be
marked off by a permanent
partition.
You do not meet the
requirements of the
exclusive use test if you
use the area in question
both for business and for
personal purposes.
Example.
You are an attorney
and use a den in your
home to write legal
briefs and prepare
clients' tax returns.
Your family also uses
the den for recreation.
The den is not used
exclusively in your
profession, so you
cannot claim a business
deduction for its use.
Exceptions to exclusive use.
You do not have to meet
the exclusive use test if
you use part of your home in
either of the following
ways.
For the storage
of inventory or
product samples.
As a daycare
facility.
For an explanation of these
exceptions, see Publication
587, Business Use of Your
Home (Including Use by
Daycare Providers).
Regular
use. To qualify under
the regular use test, you
must use a specific area of
your home for business on a
continuing basis. You do not
meet the test if your
business use of the area is
only occasional or
incidental, even if you do
not use that area for any
other purpose.
Principal
place of business.
You can have more than one
business location, including
your home, for a single
trade or business. To
qualify to deduct the
expenses for the business
use of your home under the
principal place of business
test, your home must be your
principal place of business
for that business. To
determine your principal
place of business, you must
consider all the facts and
circumstances.
Your home office will
qualify as your principal
place of business for
deducting expenses for its
use if you meet the
following requirements.
You use it
exclusively and
regularly for
administrative or
management
activities of your
business.
You have no
other fixed location
where you conduct
substantial
administrative or
management
activities of your
business.
Alternatively, if you use
your home exclusively and
regularly for your business,
but your home office does
not qualify as your
principal place of business
based on the previous rules,
you determine your principal
place of business based on
the following factors.
The relative
importance of the
activities performed
at each location.
If the relative
importance factor
does not determine
your principal place
of business, you can
also consider the
time spent at each
location.
If, after considering your
business locations, your
home cannot be identified as
your principal place of
business, you cannot deduct
home office expenses.
However, for other ways to
qualify to deduct home
office expenses, see
Publication 587.
Deduction
limit. If your gross
income from the business use
of your home equals or
exceeds your total business
expenses (including
depreciation), you can
deduct all your business
expenses related to the use
of your home. If your gross
income from the business use
is less than your total
business expenses, your
deduction for certain
expenses for the business
use of your home is limited.
Your deduction of
otherwise nondeductible
expenses, such as insurance,
utilities, and depreciation
(with depreciation taken
last), allocable to the
business is limited to the
gross income from the
business use of your home
minus the sum of the
following.
The business
part of expenses you
could deduct even if
you did not use your
home for business
(such as mortgage
interest, real
estate taxes, and
casualty and theft
losses that are
allowable as
itemized deductions
on Schedule A (Form
1040)).
The business
expenses that relate
to the business
activity in the home
(for example,
business phone,
supplies, and
depreciation on
equipment), but not
to the use of the
home itself.
Do not include in (2) above
your deduction for one-half
of your self-employment tax.
Use
Form 8829,
Expenses for Business Use of
Your Home, to figure your
deduction.
More
information. For more
information on deducting
expenses for the business
use of your home, see
Publication 587.
Other Expenses You
Can Deduct
You may also be able to
deduct the following expenses.
See Publication 535 to find out
whether you can deduct them.
Advertising.
Clean-fuel vehicles
and refueling property.
Donations to
business organizations.
Education expenses.
Environmental
cleanup costs.
Impairment-related
expenses.
Interview expense
allowances.
Licenses and
regulatory fees.
Moving machinery.
Outplacement
services.
Penalties and fines
you pay for late
performance or
nonperformance of a
contract.
Repairs that keep
your property in a
normal efficient
operating condition.
Repayments of
income.
Subscriptions to
trade or professional
publications.
Supplies and
materials.
Utilities.
Expenses You Cannot
Deduct
You usually cannot deduct the
following as business expenses.
For more information, see
Publication 535.
Bribes and
kickbacks.
Charitable
contributions.
Demolition expenses
or losses.
Dues to business,
social, athletic,
luncheon, sporting,
airline, and hotel
clubs.
Lobbying expenses.
Penalties and fines
you pay to a
governmental agency or
instrumentality because
you broke the law.
Political
contributions.
Repairs that add to
the value of your
property or
significantly increase
its life.
