Business Expenses allowed by the IRS

Business Expenses allowed by the IRS,

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.
But, What Can A Company Deduct?

According to Internal Revenue Service 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 according to the Internal Revenue Service

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The expenses used to figure the cost of goods sold,
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Capital Expenses, and
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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  some of the types of expenses that go into figuring the cost of goods sold.

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

You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. There are, in general, three types of costs you capitalize.

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Business start-up cost
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Business assets
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Improvements

Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.

For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

according to IRS, if you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Refer to Home Office Deduction and Publication 587, Business Use of Your Home, for more information.
Business Use of Your Car

If you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses. For a list of current and prior year mileage rates see the Standard Mileage Rates.
Other Types of Business Expenses

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

There are so many rules and regulations regarding the different expenses, you should be aware  that only a true tax professional can give you the correct and safest advise. Also a true tax professional can make sure your tax return stays off of the IRS radar screen. Call us today.  Fresh Start Tax   1-866-700-1040

Related posts:

1. The IRS National Standards Program for 433-A and 433-F.