What can I deduct as expenses for my business? Expenses that are tax deductible reduce your gross revenue (total revenue) to net income (profit). This, in turn, reduces your taxable income. A cost, or “expense”, is typically written off during the year it is purchased.
Tip: A good rule of thumb is that a cost or expense will generally be deductible if it has a legitimate business purpose.
When an expense, such as a car, has a useful life of more than one year, it is called a capital asset and will be “written off” a little bit at a time; based on its useful life. This is called depreciation. The IRS determines the useful life of capital assets. Be aware that expenses such as pencils or other materials that are consumed are never considered a capital asset, even if they are bought in December and not used until March. The cost is to be deducted in the year purchased, not the year used.
To learn more about depreciation, you can go to the IRS website:

http://www.irs.gov/publications/p946/ch01.html#d0e896

Tip: Depreciation of assets does not include small items even if they have a useful life. For example, something like a 3-hole punch is an insignificant purchase and can be considered a simple deduction. Unless a purchase is of approximately $300 or more, never consider it to be a capital asset.
When you have a partnership, S Corporation, or LLC, you may want to use the Section 179 tax tool. This allows your business to expense up to $112,000 of certain equipment and capital assets in the year of purchase instead of having to depreciate them over time. Section 179 can be used to reinvest in the business and avoid income taxes.

Finally, you need to look at startup expenses. These expenses can include:

• Cost of travel
• Trade shows
• Educational or training seminars
• Accounting and legal fees
• Consulting fees
• Building costs
• Supplies or materials needed to get your business started (not inventory or raw materials)
• Fees paid to obtain licenses
• Accounting or legal fees for formation of the entity

You will be able to expense up to $5,000 for each startup cost and up to $5,000 for organizational costs. Costs over $5,000 must be written off over 15 years. For example, if you attend seminars totaling $7,500 prior to starting your business, you will be able to deduct $5,000 as a startup expense and then will have to write off the remaining $2,500 over the next 15 years.

However, if you were to go to the same show after you open your business, this would be considered a regular business expense and can be completely written off in that year. Determining which way is best for you regarding tax, is best determined by a CPA or other tax professional.
HOME OFFICE DEDUCTIONS
If you use a portion of your home for business purposes on a “regular and exclusive” basis, you may be able to take a home office deduction.

By the IRS definition, exclusive means you have dedicated a specific area of your home to conduct your business or trade or to meet with clients or customers. When the agency says regular, it means the area is used regularly for your business. Incidental or occasional business use is not regular use. You do not meet the requirements of exclusive business use if the area in question is used for both business and personal purposes.

Expenses you may be able to deduct for business use of the home include:

• A portion of your home’s real estate taxes
• Mortgage interest or rent
• Utilities
• Insurance
• Depreciation
• Painting and repairs

(To find out what qualifies as a deductible business expense, go to http://www.irs.gov/smallbiz. Then search for “business expenses.”)

Your deductions in these expense categories are determined by the percentage of your home that is used to conduct your small business. Computing the business percentage is easy; divide the area used for your business by the total area of the home.

For example, if you have a 2000 square foot home and use 250 square feet for your business, the business percentage would be:

250 / 2000 = .125 x 100 = 12.5 percent

To determine your home office deduction, multiply the percentage of your home that is used for business by your allowable indirect household expenses, like electricity and gas. Then you add your direct expenses. In the example above, 12.5 percent of your indirect expenses are deductible.

To fully understand the IRS rules in this area, you need to read Publication 587 “Business Use of Your Home.” The publication is available at http://www.irs.gov or by calling 800-829-3676.

If you claim a home office deduction, you should keep meticulous records of all your expenses and be prepared to back them up if you are asked to by the IRS. As with most tax matters, it is a good idea to check with a CPA or tax attorney if you have any questions.

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