In today’s economy, with people unemployed, many are starting their own businesses either before or just after their unemployment benefits are depleted.
Many expenses are deductible. Many expenses will be extremely high when first starting up. It is critical that the new business owner keep accurate records of not only the expenses but also the profit. When it is time to file income taxes, the sole proprietor will use Schedule C for filing income and expenses. Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. See Schedule C-EZ for details.
Every year the tax laws change and it is important to contact your State Comptroller to determine what is required. You may be required to file state taxes, fees, licenses, etc.
Section 179 is important to know. This section allows you to take a full deduction for the expense of the purchase the first year; sometimes this is better than amortization (spreading the expense out over several years). In years past the section 179 was lower, this year it is $500,000. Most instances, I weigh the purchase price against the life expectancy is of the item, example, computer or vehicle is normally 5 to 7 years. I bought a hay bale buggy for my ranch. The cost of the equipment was $700 (no tax due to agriculture use). I opted to deduct it for 2010 versus spreading a few dollars over 7 years.
Mileage rates fluctuate. For two consecutive years, the IRS changed mileage reimbursement rates mid-year. This year, the IRS reduced reimbursable mileage rates to .50. Keeping mileage logs in your business is critical. I created an EXCEL table that has “From” and “To” for location headers, which allows me to input/write in the exact location of the starting and ending points. I have an odometer column so I can log the odometer reading. If you get rushed or forgetful, you can put in the “To” and “From” points in an electronic online map system or use your GPS car system; I don’t recommend that. Your columns must have a date header. My EXCEL spreadsheet has columns for Date, To, From, Odometer Begin, Odometer End, Purpose of Trip.
The above is a basic tracking tool. You may want to add more columns for your business.
Healthcare Act. There is a new credit for employers who provide healthcare to their employees. Be sure you understand this section or that your Certified Public Accountant / Tax Preparer understands it.
There are a number of other forms that you may also have to complete for the IRS depending on your business’ situation, i.e., Form 4684 to report a casualty or theft, Form 8829, Schedule F to report profit or (loss) from a farm/ranching business, Form 8903 to take a deduction for income from domestic production activities, etc.
Expenses in a business get tricky when you are working with heavy equipment (i.e., trucking industry), oil and gas productivity, and inventory (manufacturing, purchasing for resale, etc.). You really need to read the detailed instructions and know what you are doing or you could pay the IRS more than what you owe or not pay them what you owe, which results in penalties.
For this article, we will zero on the easier to understand, but often overlooked expenses you can deduct:
Advertising: this is bulletin boards, business cards, phone director, electronic signage for your vehicle(s), flyers, website, and cost of advertising a website or blog, television ads, radio ads, print ads.
Car and truck expenses – for mileage I suggest using the standard mileage, not exact gasoline or oil expense. However, if you repaint your vehicle and add a logo, do not place that here. It goes under advertising.
Commissions and fees – for example, a Realtor may have to pay another lister a commission or a fee – that would go here;
Contract labor – ensure it truly is contract labor. If you control the time and place of a person that is not contract labor – that is an employee and does not go in this section;
Insurance (other than health) – i.e., liability insurance, property insurance. I put my barn insurance expense in this section.
Interest is divided into bank interest you pay on a mortgage and other interest – other interest is normally interest you pay on something other than a mortgage, i.e., vehicles used in your business paid to a third party (not a bank), interest paid on carrying a personal loan to a third party.
Deductible meals and entertainment – this one is highly scrutinized, so don’t put down you took your wife or girlfriend to lunch and you talked about business for 10 percent to 5 percent of a meal – that will not count.
Clothing, uniforms and tools are often overlooked and misunderstood – clothes cannot be what you would wear everyday but can be part of a uniform – for example, a black pair of pants that you could wear to the movies and you wear in your work do not qualify, but a black pair of pants with the company’s logo/name on it would qualify. Manufacturing tools or carpenter tools used in a construction worker’s job would qualify. Shoes – metal-toed boots would qualify and work boots, but not walking shoes that you could use everywhere.
If you own your own business, specifically in manufacturing or manufacturing-related, you will have a Cost of Goods Sold (COG) section. The COG section includes all costs associated with putting the item together so it can be sold, i.e, inventory, wages, etc. You will input your vehicle expenses and all other expenses not covered in the Schedule C expenses. Amortization can go here: Air pollution controls Costs of research and experimentation Copyright fees, goodwill expenses Bad debts that you know you will never recover Expenses associated with making a building energy efficient And, there are more.