All our clients ask us, "What can I deduct on my business tax return?" The short answer is there are 5 main types of expenditures you'll want to keep track of for this purpose:
1. Ordinary and necessary business expenses – generally tax deductible in the current tax year.
2. Inventory additions – must be added to cost of goods sold, ending inventory not deductible.
3. Capital expenditures, including business start-up costs, must be depreciated or amortized.
4. Personal expenses, including personal tax payments and other withdrawals- generally not tax deductible but if partially used for business, may be allocated.
5. Transfers between accounts, including credit card payments – generally not tax deductible.
a. Note: Individual credit card charges are considered expenditures to be classified 1-4 above.
Examples of business expenses:
1. Taxes (except Federal income)
2. Employees’ payroll. Owners of an S-Corp can be an employee.
3. Retirement plans for you and employees
4. Rent expense – paid for the use of property you do not own. Must be used in a trade or business. There are special rules for deducting Home office expenses.
5. Automobile expense – must allocate business use based on mileage.
6. Interest –amount borrowed for business activities.
7. Insurance – trade, business or profession only, not life. Health insurance for yourself and your family are deductible as personal expenses.
8. Charity paid by the business is generally deductible as a personal expense.
9. Meals and entertainment – special recordkeeping rules apply and generally 50% deductible.
10. Travel- Out-of-town (overnight) travel should be separated from local travel.
Form 1099 must be filed with the IRS for each individual or unincorporated business if:
The sum of all payments made to a person or unincorporated business for services is $600.00 or more in the calendar year. The expenditure must be made in the course of your trade or business.