What the IRS Allows for Business Tax-Deductions

The IRS tells us there are costs involved in operating a small business for profit that can be considered tax-deductible business expenses. To qualify, a business expense must by one that is common to your type of business or trade. It can also be an expense that is needed and appropriate for your business.

There are 3 types of expenses that you, as a small business owner need to keep separate from business expenses:

• Expenses used to figure the cost of goods sold. If you deduct these from your gross receipts to figure your gross profit for the year, you may not use them again as a business expense. These include the cost of product or raw materials, including freight, storage, and direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products and factory overhead.
• Capital expenses. These are expenses that are considered as part of the investment in your company such as business start-up costs, business assets and improvements. These expensed must be “capitalized” rather than deducted as a business expense.
• Personal expenses. These cannot be deducted as a business expense, unless a portion of the expense is directly for business purposes. For example, your home cannot be considered a business expense, but the portion of your home used for your business office can be deducted.

These are the other basic allowable business expenses:

• Employees' Pay – for services performed for your business by employees.
• Retirement Plans – for retirement plans or savings plans for your own, and your employees' retirement.
• Rent Expense – for rental of property you don’t own for your business use.
• Interest - interest on a business loan for your business.
• Taxes - federal, state, local, and foreign taxes directly attributable to your trade or business.
• Insurance – the cost of insurance for your trade, business, or profession.

For more information and details on allowable business tax deductions, please visit the IRS website at http://www.irs.gov/businesses/small/article/0,,id=109807,00.html. This article also offers links to more details on tax deductions, including other types of business expenses and car mileage rates.