You can deduct business expenses on your income tax return. These are the current operating costs of running your business. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business, trade, or profession. A necessary expense is one that is helpful and appropriate for your business, trade, or profession. An expense does not have to be indispensable to be considered necessary.
The following are brief explanations of some expenses that are of interest to people starting a business. There are many other expenses that you may be able to deduct. See your form instructions and Publication 535, Business Expenses.
Business Start-Up Costs
Business start-up costs are the expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting. They may include costs for advertising, travel, surveys, and training. These costs are capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). Other qualifying start-up costs can be recovered through amortization. This means you deduct them in equal amounts over a period of 60 months or more. If you do not choose to amortize these start-up costs, you generally cannot recover them until you sell or otherwise go out of business.
For more information on business start-up costs, see chapter 9 in Publication 535.
If property you acquire to use in your business has a useful life that extends substantially beyond the year it is placed in service, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year. This method of deducting the cost of business property is called depreciation.
Business property you must depreciate includes the following items:
- Office furniture.
- Machinery and equipment.
You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place it in service for use in your business. This deduction is known as the "section 179 deduction." You can also take a special depreciation allowance of 30% or 50% of the cost of qualified property for the year the property is placed in service.
For more information about depreciation, the section 179 deduction, and a definition of qualified property, see Publication 946, How To Depreciate Property.
Business Use of Your Home
You may be able to deduct the expenses for the part of your home you use for business. The business use of your home must meet specific requirements before you can deduct any of these expenses. Even then, your deduction may be limited.
To qualify to claim expenses for the business use of your home, you must meet the following tests:
- Your use of the business part of your home must be:
- Exclusive (however, see Exceptions to exclusive use, later),
- Regular, and
- For your trade or business, and
- The business part of your home must be one of the following:
- Your principal place of business,
- A place where you meet or deal with clients or customers in the normal course of your trade or business, or
- A separate structure (not attached to your home) you use in connection with your trade or business.
Exceptions to exclusive use. You do not have to meet the exclusive use test if you use part of your home:
- For the storage of inventory or product samples, or
- As a day-care facility.
Principal place of business. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet both of the following requirements:
- You use it exclusively and regularly for the administrative or management activities of your trade or business.
- You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
Which form do I file? If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. If you file Schedule F (Form 1040) or you are a partner, you can use the worksheet in Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).
More information. For more information about business use of your home, see Publication 587.
Car and Truck Expenses
If you use your car or truck in your business, you can deduct the costs of operating and maintaining it. You generally can deduct either your actual expenses or the standard mileage rate.
Actual expenses. If you deduct actual expenses, you can deduct the cost of the following items:
If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expenses based on the miles driven for each purpose.
Example. You are the sole proprietor of a flower shop. You drove your van 20,000 miles during the year. 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. You can claim only 80% (16,000 / 20,000) of the cost of operating your van as a business expense.
Standard mileage rate. Instead of figuring actual expenses, you may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. You can use the standard mileage rate for a vehicle you own or lease. The standard mileage rate is a specified amount of money you can deduct for each business mile you drive. It is announced annually by the IRS. To figure your deduction, multiply your business miles by the standard mileage rate for the year.
Business Standard Mileage Rates:
2003 = $0.360 per mile
2004 = $0.375 per mile
You will need to keep a MILEAGE LOG to support your deduction for mileage.
Caution. Generally, if you use the standard mileage rate, you cannot deduct your actual expenses. However, you may be able to deduct business-related parking fees, tolls, interest on your car loan, and certain state and local taxes.
Choosing the standard mileage rate. If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In later years, you can choose to use the standard mileage rate or actual expenses. If you want to use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period. For leases that began on or before December 31, 1997, the standard mileage rate must be used for the entire part of the lease period (including renewals) after that date.
Additional information. For more information about the rules for claiming car and truck expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.