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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:
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Advertising
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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.
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Car & Truck
Expenses - If you qualify, you may choose to use the standard mileage rate
(see chart below). 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.
Commuting & personal miles are NOT deductible!
|
Tax Year |
Business Standard Mileage
Rate |
|
2007 |
$0.485 |
|
2006 |
$0.445 |
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Commissions & Fees
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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 also elect
to expense certain qualifying assets that are placed in
service during the tax year. This is known as a "Section
179 Expense" (see chart below for maximum expense amounts).
|
Tax Year |
Maximum Section 179
Expense |
|
2007 |
$125,000 |
|
2006 |
$108,000 |
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Depletion
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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.
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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.
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Insurance
- You may deduct fire, theft, flood, casualty, inventory, liability,
malpractice, worker's compensation, and other types of business related
insurance costs.
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Interest
- You may deduct mortgage interest related to business property, other
interest related to business property, and interest on automobile 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).
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Legal & Professional Fees
- such as those paid to lawyers and accountants
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Office Expenses
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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. Special rules apply to automobile and truck lease
payments.
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Supplies
- Generally, items that are used up in your business. This does NOT
include inventory! See inventory below.
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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!
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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.
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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.
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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.
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Utilities
- This includes electric, gas, water, telephone, cell phone,
pagers, internet access charges and the like.
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Wages Paid to Employees &
Employee Benefit Program Costs
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Other -
Things such as bank charges, education, subscriptions to trade or
professional journals, and any other "ordinary, necessary and
reasonable" business expense.
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Inventory (Cost of
Goods Sold) -
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*FORMULA: Beginning Inventory +
Purchases + Freight IN - Ending Inventory |
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Beginning Inventory
consists of merchandise in trade, raw materials, work in progress,
finished goods, and supplies that become part of the product. |
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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. |
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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. |
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Ending Inventory
is the physical materials and items that have NOT been sold at the
end of the tax year. |
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*Formula does not apply to manufacturing. Other costs are included
such as labor and overhead. |
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