Deductible Business Expenses

It is not easy coming up with all the necessary pieces to start up a business, so make sure you are spending wisely to build your business in ways that will allow you to enjoy deductible business start up expenses.

Business expenses are defined as the cost of conducting trade or business. These expenses are usually deductible if the business is operated to make a profit.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

It is important to separate business expenses from the following expenses:

• The expenses used to figure the cost of goods sold,
• Capital Expenses, and
• Personal Expenses.

Cost of Goods Sold

If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.

The following are types of expenses that go into figuring the cost of goods sold.

• The cost of products or raw materials, including freight
• Storage
• Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
• Factory overhead

Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.

This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million.

Other Types of Business Expenses

• Employees’ Pay – You can generally deduct the pay you give your employees for the services they perform for your business.
• Retirement Plans – Retirement plans are savings plans that offer you tax advantages to set aside money for your own, and your employees’ 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 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.
• Interest – Business interest expense is an amount charged for the use of money you borrowed for business activities.
• Taxes – You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.
• Insurance – Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

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