Below are a list of the most common types of business expenses:
Advertising
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.
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