How to deduct business expenses
You can deduct business expenses on your business or personal income tax return, depending on the form of your business. 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 IRS form instructions or here for more information.
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 generally capital expenses.
You usually recover costs for a particular asset (such as machinery or office equipment) through depreciation (discussed next). However, you can elect to deduct up to $10,000 of business start-up costs and up to $5,000 of organizational costs. The $10,000 deduction for business start-up costs is reduced by the amount your total start-up costs exceed $60,000. The $5,000 deduction for organizational costs is reduced by the amount your total organizational costs exceed $50,000. Any remaining costs must be amortized.
For more information about amortizing start-up and organizational costs, see section 8, Amortization, here.
Depreciation
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:
• Office furniture
• Buildings
• Machinery and equipment
You can choose to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” For more information about depreciation and the section 179 deduction, see Pub. 946.
Note that depreciation must be taken in the year it is allowable. Allowable depreciation not taken in a prior year cannot be taken in the current year. If you do not deduct the correct depreciation, you may be able to make a correction by filing Form 1040-X, Amended U.S. Individual Income Tax Return, or by changing your accounting method. For more information on how to correct depreciation deductions, see chapter 1, How Do You Correct Depreciation Deductions?, in Pub. 946.
Business Use of Your Home
To deduct expenses related to the business use of your home, you must meet specific requirements. However, even if you meet the requirements your deduction may still be limited.
To qualify to claim expenses for business use of your home, you must meet both the following tests:
1. Your use of the business part of your home must be:
a. Exclusive (however, see Exceptions to exclusive
use, later),
b. Regular,
c. For your trade or business, AND
2. The business part of your home must be one of the
following:
a. Your principal place of business (defined later),
b. A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
c. A separate structure (not attached to your home) you use in connection with your trade or business.
Exclusive use
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Exceptions to exclusive use
You do not have to meet the exclusive use test if either of the following applies:
1. You use part of your home for the storage of inventory or product samples.
2. You use part of your home as a daycare facility.
For an explanation of these exceptions, see Pub. 587.
Principal place of business
Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements:
• You use it exclusively and regularly for 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.
Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the
previous rules, you determine your principal place of business based on the following factors:
• The relative importance of the activities performed at each location.
• If the relative importance factor does not determine your principal place of business, the time spent at each location.
If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. However, for other ways to qualify to deduct home office expenses, see
Pub. 587.
Simplified method
The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses normally required to determine your home
office expense deduction. With this method, you will generally figure your deduction by multiplying $5, the prescribed rate, by the area of your home (measured in square feet) used for a qualified business. The area you use to figure your deduction is limited to 300 square feet.
For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I.R.B. 478, available here.
Which form do I file?
If you file Schedule C (Form 1040), use Form 8829, Expenses for Business Use of Your Home. However, if you elect to use the simplified method, use the Simplified Method Worksheet in the Instructions for Schedule C or Pub. 587.
If you file Schedule F (Form 1040) or are a partner, you should use the Worksheet To Figure the Deduction for Business Use of Your Home in Pub. 587. However, if you elect to use the simplified method, use the Simplified Method Worksheet in Pub. 587.
Further information about business use of your home is also available in Pub. 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:
- Depreciation Lease payments Registration
- Garage rent Licenses Repairs
- Gas Oil Tires
- Insurance Parking fees Tolls
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.
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 either the standard mileage rate or actual expenses. If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals).
For more information about the rules for claiming car and truck expenses, see Pub. 463