Biz Expense BasicsPosted on Sunday, September 2nd, 2012 by Andy Jones
Business Expenses – The Basics Explained
A business expense is an ORDINARY and NECESSARY expense for your trade, profession, or business. In addition, the expense MUST also be REASONABLE.
Below are a list of the most common types of business expenses:
Bad Debts – If someone owes you money you cannot collect, you have a bad debt. A business bad debt is generally one that comes from operating your trade or business .
Car & Truck Expenses – If you qualify to use the standard mileage rate, it is $0.375 per business mile for tax year 2004. Commuting & personal miles are NOT deductible. In addition to the standard mileage rate, you can deduct the costs of tolls, parking fees, and interest on a vehicle loan. The standard mileage rate includes ALL other expenses. Instead of using the standard mileage rate you may use actual expenses, which includes depreciation of your vehicle. If the vehicle is NOT used 100% for business, the expenses will need to be prorated. You MUST keep a mileage log, which shows the date, business purpose, and number of business miles driven whether using actual expenses or the standard mileage rate.
Commissions & Fees
Depreciation – If you have assets in your business that have a life of greater than 1 year, you generally MUST depreciate the cost of the asset over its life. Some common assets are vehicles, computers and peripherals, cellular phones, desks, chairs, and other furniture and equipment. Keep a list of ALL assets you acquire, that includes the cost and date of purchase. You may qualify for “bonus depreciation”, which will give you an additional 30% or 50% deduction in the first year. Furthermore, you may also elect to expense up to $102,000 of qualifying assets that are placed in service during tax year 2004. This is known as a “Section 179 Expense.”
Depletion – If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. More than one person can have an economic interest in the same mineral deposit or timber.
Health Insurance – You may deduct 100% of health insurance premiums paid for your employees. If you are self-employed you are also allowed to deduct 100% of your own Health Insurance premiums, as an adjustment to gross income on Form 1040.
Insurance – You may deduct fire, theft, flood, casualty, inventory, liability, malpractice, worker’s compensation, and other types of business related insurance costs.
Interest – You may deduct mortgage interest related to business property, other interest related to business property, and interest on auto loans, if the vehicle is used for business . The interest will need to be prorated if the property is NOT used 100% for business (tracing requirement).
Legal & Professional Fees – such as those paid to lawyers and accountants
Office Expenses Rent or Lease Payments – Rent is any amount you pay for the use of property you do NOT own. In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business. If you have or will receive equity in or title to the property, the rent is not deductible.
Supplies – Generally, items that are used up in your business. This does NOT include inventory! See inventory below.
Taxes & Licenses – You may deduct real estate taxes, employer’s share of Social Security and Medicare taxes, unemployment taxes, state and local taxes, excise taxes, fuel taxes, franchise taxes, personal property taxes, foreign taxes, occupational license fees, professional license fees, etc. Federal income tax is NOT deductible!
Pension & Profit Sharing Costs – You may deduct 100% for employees. Self-employed individuals get a deduction that is an adjustment to gross income on Form 1040.
Travel – You may deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Also, deductible are the costs for lodging, dry cleaning, laundry, tips, and telephone while on the business trip.
Meals & Entertainment – You can deduct the cost of meals 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 meal 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.
Utilities – This includes electric, gas, water, telephone, cell phone, pagers, internet access charges and the like.
Wages Paid to Employees & Employee Benefit Program Costs Other – Things such as bank charges, education, subscriptions to trade or professional journals, and any other “ordinary, necessary and reasonable” business expense.
Inventory (Cost of Goods Sold)–
*FORMULA: Beginning Inventory + Purchases + Freight IN – Ending Inventory
Beginning Inventory consists of merchandise in trade, raw materials, work in progress, finished goods, and supplies that become part of the product.
Purchases are all materials and items acquired during the year that make up the product. You MUST subtract any items that are used for personal purposes.
Freight IN are the costs associated with shipping the materials and items to YOUR facility. Do NOT include Freight OUT. That is a selling expense.
Ending Inventory is the physical materials and items that have NOT been sold at the end of the tax year.
*Formula does not apply to manufacturing. Other costs are included such as labor and overhead.