U.S. Business Expenses Deduction
Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. It is important to separate business expenses from the following expenses:
- The expenses used to figure the cost of goods sold,
- Capital Expenses, and
- Personal Expenses.
Cost of goods sold
If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold unless you are a small business taxpayer. The cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
Capital Expenses
You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called capital expenses. Capital expenses are considered assets in your business. In general, there are three types of costs you capitalize.
- Business start-up costs
- Business assets
- Improvements
Personal versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
Other Types of Business Expenses
Employees?Pay: You can generally deduct the pay you give your employees for the services they perform for your business.
Rent Expense: 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.
Taxes: You can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses. Federal income tax excluded.
Insurance: Generally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.
Please note this list is not all inclusive of the types of business expenses that you can deduct. For additional information.
Reference: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses#what
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