Business Expenses and Tax Deduction

Business Expenses - What Expenses are Tax-Deductible?

The more business expenses you legitimately deduct, the lower your taxable income will be. Here is a summary of business expenses that you may deduct to lower taxable profit.

Business Expenses
Expenses to Run Business
Auto Expenses (Cars and Trucks)
Legal and Professional Services
Commissions and Fees
Travel Expenses
Meals and Entertainment
Education Expenses
Taxes and Licenses
Insurance
Bad Debts from Sales or Service
Interest
Software

Expenses to Run Business
This refers to expenses that go into business when you operate business.

Advertising and Promotion
Office Supplies (Office Expenses): consumable supplies such as pens, pencils, paper, pads, books, receipt books, or related supplies
Utilities: including telephone, electricity, gas, water, or sewer on business property.
Repairs

You can deduct these current expenses only after you’ve started running business.

Notes: If you spent money in these areas to get your business started, you can deduct the cost as startup expenses, up to $5000 for the first year. The rest of it should be deducted in equal amounts over the next 15 years.

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Auto Expenses (Cars and Trucks)
There are two methods for claiming car and truck expense when you use them for business purpose or your business owns them.

- Actual expense method: You can deduct the business portion of all the actual expenses paid, including gas, oil, tires, repairs, insurance, licenses, and cleaning. The lease amount can be deductible as well for leased vehicles. If the business owner owns the car, they may deduct its depreciation.

- Standard mileage rate method (Optional method): You can deduct a certain percentage of each mile driven. You may deduct business-related parking fees and tolls as well. The standard mileage rate is 50.5 cents per mile for January 1, 2008 through June 30, 2008.

- Additional expenses - Generally, the standard mileage rate method is regarded to cover most of the expenses listed under the actual method. However, these expenses may be deducted under either method.
– Business portion of any finance charges paid on the purchase of the vehicle.
– Business portion of any personal property tax on the vehicle.
– Parking fees and tolls

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Legal and Professional Services
Fees paid to tax professionals, attorneys, or consultants can be deducted in the year incurred. If the service is related to future years, it must be deducted over the period that the benefit lasts.

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Commissions and Fees
Referral fees or payments paid to independent contractors or individuals can be deductible in the year incurred. This doesn’t include commissions or fees paid to employees.

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Travel Expenses
You can deduct travel expenses such as plane tickets, accommodations, transportation, meals or telephone calls when you travel for business. You may combine business and entertainment as long as business is the primary reason of the trip.

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Meals and Entertainment
When there are clear business purposes, you may deduct entertainment expenses such as meals or amusement costs that are spent for present or prospect clients or customers. Business discussion must be held immediately before, after or during the entertainment. Tax deduction of entertainment cost is generally limited to 50% of the total expenses.

- The cost of business promotion gifts to present or prospect clients or customers can be deducted up to $25 per client per year.
- Tickets to shows, events, or sports games given to clients for business promotion purpose can be deducted.

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Education Expenses
Education expenses can be deducted if they are related to your current business or trade. They are not deductible if education is for a new job qualification.

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Taxes and Licenses
Here is the list of various taxes that you may deduct.

- Real estate tax imposed on property used for business.
- State or local tax on gross income.
- Federal income tax paid on business income is not deductible. State income tax on business income can be deducted as an itemized deduction, but not as a business expense.
- Sales tax on items for everyday business operations can be deducted as part of the cost of the items, but not deducted separately.
- Employer’s share of employment taxes (Self-employment is not a business expense because the tax is paid by individuals, not their businesses.)

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Insurance
You may deduct insurance premiums as an operating expense when it’s for protection of the business against losses, such as fire, flood, theft, credit, public liability, workers’ compensation, merchandise and inventory, employees disability, or malpractice.

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Bad Debts from Sales or Service
You can deduct the cost of sold goods that aren’t paid for when your business is selling goods, not providing service.

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Interest
- Mortgage interest is deductable for the property used for business.

Note: If it’s a home-based business, the business portion of mortgage interest is not included here. It should be deducted as a part of the business-use-of-home deduction.

- Financial charges on credit cards or interest paid on installment can be deductible if their purchases are made for business.

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Software
In general, software paid for business purpose must be depreciated over a 36-month period.

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1 Comment

  • By Jame, March 25, 2009 @ 3:18 am

    Hi there, Thanks for sharing your experience!

    Jame

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