Publication 583 |
2001 Tax Year |
Business Expenses
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 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.
Depreciation
If property you acquire to use in your business has a useful life
longer than one year, 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.
- Buildings.
- Machinery and equipment.
You can choose to deduct a limited amount of the cost of certain
depreciable property in the year you purchase it for use in your
business. This deduction is known as the "section 179 deduction."
For more information about depreciation and the section 179
deduction, 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 an employee, 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:
Depreciation |
Lease payments |
Rental fees |
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 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 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.
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