“If you don’t claim it, you don’t get it.

That’s money down the drain

for millions of Americans.”
—Former IRS Commissioner Mark Everson
 475 TAX
DEDUCTIONS
FOR BUSINESSES AND
SELF-EMPLOYED INDIVIDUALS
Twelfth Edition

Bernard B. Kamoroff, CPA

AN A-TO-Z GUIDE TO
HUNDREDS OF TAX WRITE-OFFS
An imprint of Globe Pequot
Distributed by NATIONAL BOOK NETWORK
Copyright © 2018 Bernard B. Kamoroff, CPA
IRS Help Line cartoon, courtesy Bill Webster
Sister Ruby cartoon, courtesy John Grimes
Professional Writer cartoon, courtesy Mort Gerberg
Don’t You Dare Deduct Me cartoon, courtesy William Hamilton
IRS Files and Office photographs, courtesy Internal Revenue Service
Sacramento Tax Files photo by Dan Chan, courtesy Franchise Tax Board
Most People Bring Their Accountant cartoon, courtesy Boardroom Reports
King Kong cartoon, courtesy Kat Emerson
Quote from “Pretty Boy Floyd” by Woody Guthrie, courtesy Fall River Music
All rights reserved. No part of this book may be reproduced in any form or by any electronic or
mechanical means, including information storage and retrieval systems, without written permission
from the publisher, except by a reviewer who may quote passages in a review.
British Library Cataloguing in Publication Information available
The Library of Congress has cataloged the Taylor Trade Publishing edition as follows:
Kamoroff, Bernard.
475 tax deductions for businesses and self-employed individuals: an a-to-z guide to
hundreds of tax write-offs / Bernard B. Kamoroff, C.P.A. — Eleventh Edition.
pages cm
ISBN 978-1-58979-798-7 (pbk.: alk. paper)
1. Income tax deductions for expenses—United States—Popular works. 2. Self- employed—Taxation
—Law and legislation—United States—Popular works. 3. Small business—Taxation—Law and
legislation—United States—Popular works. I. Title. II. Title: Fourhundredseventy-five tax
deductions for businesses and self-employed individuals.
KF6394.K36 2013
343.7305’23—dc23
2012041962
ISBN 978-1-4930-3218-1 (paperback)
ISBN 978-1-4930-3219-8 (e-book)

The paper used in this publication meets the minimum requirements of American National
Standard for Information Sciences—Permanence of Paper for Printed Library Materials, ANSI/NISO
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Printed in the United States of America
In America, there are two tax systems, one for the informed and one
for the uninformed. Both are legal.
—Judge Learned Hand
 Contents

Contents
Preface: A Treasure Hunt
Chapter 1: Introduction to Tax Deductions
Relax
Who Is This Book For?
Business Legal Structure
How to Use This Book to Your Best Advantage
Expense Categories
Is Every Possible Tax Deduction Listed?
Isn’t This What You Pay Your Accountant For?
Will Your Deductions Trigger an Audit?
When in Doubt, Deduct
Tax Loopholes and Tax Secrets
Federal versus State Laws
Keeping Records
When Can You Take a Deduction?
Cash Method versus Accrual Accounting
Structuring—and Wording—Transactions to Your Best Tax
Advantage
Timing Transactions to Your Best Tax Advantage: Year-End
Strategies
Year-End Payments
Paying Business Expenses: You or Your Business?
 Multiple Businesses
Home-based Businesses
On-Demand Workers
Hobby Income and Losses
“I Wish I Had This Book Last Year”: Amending Prior Years’ Tax
Returns
One Last Caution
Chapter 2: Terminology
Self-employed Individuals and Independent Contractors
Employer / Employee
What Is a Tax Deduction?
Tax Write-Off
Personal versus Business
Capitalized Expenses
“Significant” Costs
Customers, Clients, and Etc.
IRS Audits
Tax Credits versus Tax Deductions
Chapter 3: The Four Basic Rules for All Expenses
Rule 1: Business Related
Rule 2: Ordinary Expenses
Rule 3: Necessary Expenses
Rule 4: Not “Lavish or Extravagant”
Chapter 4: 475 Tax Deductions, A to Z
About the Author
 Preface: A Treasure Hunt

Every business owner and every self-employed person is looking for ways
to reduce expenses without cutting corners, without reducing quality or
losing customers. But few businesses look to the one area almost
guaranteed to save you money: your tax return.
Last year, America’s small businesses overpaid their income taxes by
more than $2 billion, according to a CPA study reported in Business 2000
Magazine. The overpayments were made because the businesses failed to
take tax deductions they were legally entitled to take. Many of these
businesses are still unaware of their errors. They overpaid their taxes and
don’t even know it.
The IRS is not going to help these businesses. The IRS will never tell you
about a tax deduction you didn’t take. It’s entirely up to you. As former IRS
Commissioner Mark Everson famously said, “If you don’t claim it, you
don’t get it.”
Whether you struggle with your own tax return, hire an accountant, or put
your trust in a software application, the more you know about what’s
deductible, the more you’ll save on your taxes. Your tax return lists only a
handful of deductions, so it is up to you to make sure you find and claim
every one. It really is a treasure hunt.
Every tax deduction you find in this book will reduce your taxes,
honestly, legitimately, and with the full approval of the Internal Revenue
Service.
It is very much like finding free money.
IIf the adjustments required by section 481 (a) and Regulation 1.481-
1 are attributed to a change in method of accounting initiated by the
taxpayer, the amount of such adjustments, to the extent such
amount does not exceed the net amount which would have been
required if the change had been made in the first taxable year, shall
be taken into account by the taxpayer in computing taxable income
in the manner provided in section 481 (b) (4) (B) and paragraph (b)
of this section.
—Internal Revenue Code
Well as through this world I’ve rambled
I’ve seen lots of funny men.
Some will rob you with a six-gun
And some with a fountain pen.
—Woody Guthrie, “Pretty Boy Floyd”
 1
Introduction to Tax Deductions

Relax
Relax. Tax law isn’t easy, but this book is.
This book will not try to explain how to prepare a tax return. This book
will not have you struggling with tax forms. This book will not drag you
through the confusing, contradictory, confounding world of tax law.
This book will let you know about hundreds of tax deductions that are
available to every small business, every home business, every self-
employed individual, every independent contractor, and every on-demand
(sharing economy) worker.
A CPA by the name of George Brown, who was interviewed in a business
magazine, made a statement that has stuck with me for several years and
that inspired this book: “You get a raise every time you can legitimately
avoid paying a tax on something.” Every tax deduction you find will save
you money on your federal income taxes, on your state income taxes, on
your self-employment taxes, on local income taxes, and on any other
business taxes based on net profit.
If you really like the challenge of preparing your own tax return, I
encourage you to do it. And if you don’t want to struggle with tax forms,
leave that miserable job to your tax accountant. Either way, you owe it to
yourself to find every tax deduction you can.

Who Is This Book For?

This book is for anyone working for himself or herself. This includes sole
proprietors, partners in partnerships, members of limited liability companies
(LLCs), and people who own their own corporations.
 This book is for shopkeepers, repair people, manufacturers, tradespeople,
freelancers, professionals, independent contractors, outside contractors,
subcontractors, general contractors, contract laborers, entrepreneurs,
consultants, mail-order businesses, internet businesses, artists, craftspeople,
direct marketers, network marketers, multilevel marketers, free agents,
virtual assistants, sales reps, inventors, employers, moonlighters, home
businesses, full-time, part-time, sideline, you name it. Unless you are on
someone else’s payroll as an employee, you are in business for yourself.
You are entitled to all the business deductions in this book.
This book is for anyone who gets a 1099-MISC form, the IRS’s
Miscellaneous Income form that businesses give to individuals who are
doing contract work but are not on the payroll as an employee.
This book is for on-demand workers in the sharing economy or gig
economy—contract laborers and drivers and house cleaners and repair
people—getting assignments from smartphone-enabled platforms.
This book is for employers, and for people who own their own
corporation and who are employees of their own business.
This book is for people who invest in their own businesses, but not for
people who invest in other people’s businesses. This book is not for
investors in the stock market or commodities trading, but this book is for
people who offer consulting or financial services or brokering related to
these investments.
Rental income is not self-employment income, according to IRS laws,
and people who rent out their own property are not considered to be self-
employed. However, rental income is offset by deductible expenses, and
most of the deductions in this book apply. People who manage property and
rentals for others, however, are self-employed, and this book is for you.

Business Legal Structure

Different legal structures, how your business is legally set up, sometimes
have different tax deduction rules. Most of the tax deductions in this book
apply to all businesses, but some tax deductions apply to certain types of
businesses and not to others. Any deductions that have different rules for
different legal structures are labeled in bold. Here is a brief summary of the
different legal structures.
 Sole proprietorship: Most one-person businesses are sole proprietorships.
If you did not incorporate or set up as a limited liability company (LLC),
you are automatically a sole proprietor. All the deductions in this book,
except those specifically for businesses other than sole proprietorships,
apply to you.
Limited liability company: Most one-person LLCs are taxed as sole
proprietorships, and the rules for sole proprietorships apply to you. If you
are filing a Schedule C tax return, your LLC is taxed as a sole
proprietorship. However, some one-person LLCs are structured as
partnerships, which is very uncommon. If your one-person LLC is
structured as a partnership, the deductions in this book that apply to
partnerships apply to you. Multi-owner LLCs are taxed as partnerships.
Partnership and joint venture: A business owned by two or more people
(other than a married couple) that does not set up as a corporation or an
LLC is automatically a partnership. A business owned by a legally married
couple can be a partnership, following partnership tax rules, or can be
what’s known as a joint venture, which for tax purposes is two sole
proprietorships, one for each spouse. The rules for joint ventures are the
same as the rules for sole proprietorships.
Self-employment: All sole proprietors, partners in partnerships, couples in
joint ventures, and members (owners) of LLCs are what the IRS calls “self-
employed.” All the tax deductions for self-employed individuals apply to
you.
Corporation: People who structure their businesses as corporations are
not what the IRS calls “self-employed.” They are employees of their
businesses. Actually, they are owner/employees. Tax deductions for
owner/employees of corporations are sometimes the same as the allowable
deductions for all other employees and sometimes different. And the rules
for C corporations are often different than the rules for S corporations. The
A-to-Z listings spell out each difference.

How to Use This Book to Your Best Advantage

This guide lists every business tax deduction I have encountered in my
thirty years of tax practice, consulting, teaching, and running my own
businesses. I let you know what the deductions are and whether they apply
to you and your business.
Tax laws are precise, and I’ve tried to make this book as precise as
possible, but without making it so confusing and complicated that it
becomes unreadable—like most of the tax guides on the market. I’ve tried
to accomplish this task with a three-step system:
Step One: For each tax deduction, I define the terminology (and not in
IRS Code sections, accountant’s jargon, or other forms of advanced
Sanskrit), and I explain the basic laws. These laws apply to most
businesses, most of the time. “Most” is the key word. There may be
exceptions.
Step Two: If there are exceptions to the laws, or complications, or special
situations for some businesses, I alert you to these details and explain them.
Step Three: I refer you to one of the free IRS publications that have the
fine-print details of the laws. You can then do your own research, which
really isn’t all that difficult if you take it one deduction at a time; or you can
ask an accountant about the details. Either way, you now know there may
be yet another tax savings worth looking into.
The wording in tax law is important. The words have very specific
meanings. Don’t read more into the laws than what is explained here, don’t
read between the lines, and don’t make assumptions, as you can easily wind
up making assumptions that are inaccurate. Be particularly aware that in
some circumstances, terms such as “up to” and “as much as” mean that the
dollar amounts shown are maximums. These terms usually show up in
complicated laws with many exceptions.
If any terminology is confusing or unclear—if you do not understand a
word, a definition, or an explanation—it is important that you stop and take
the time to understand its meaning before using the information.
Misunderstanding tax law can lead to trouble. If you don’t fully understand
the concepts, get help from an accountant. Or do your own research—
carefully.
If you, like everybody else, are searching the internet for an answer, I
want to warn you about tax information on the internet. Many websites
have incorrect or out-of-date tax information. Even if you see the
information multiple times on multiple sites, do not assume it is correct.
Websites often lift information from other sites, sometimes word for word,
without bothering to verify its accuracy. Even if you are reading
information provided by tax professionals, check to see when the
information was written. It might be several years old. If you can’t find a
date, don’t trust it.
The most accurate, reliable tax information on the internet is on the IRS
website (IRS.gov), although it can be a challenge to navigate the site. It’s
easiest to enter what you’re looking for in a search engine and then look for
links to IRS.gov. I wouldn’t rely on any other site.
Although the IRS website and publications are current and accurate, the
same cannot always be said of tax information the IRS gives out over the
phone or in person. The IRS people do, on occasion, give out totally
incorrect information. Tax laws are vastly complicated, and even the experts
make mistakes. Do not rely on verbal information unless you can verify it.
Ask the IRS person for a reference in one of the agency’s publications, and
look it up.

Expense Categories
Every deduction listed in this book includes an expense category. The
expense category is a guide to help you fill out your tax return, to figure out
on what line of the tax return to post each deduction.
Schedule C, the business tax return for sole proprietors, lists only twenty-
four categories of expenses, twenty-four line items. The partnership and
corporate tax returns list a similar number of categories. And here we have
475 deductions to combine into twenty-four categories. Where do the 475
deductions go? What categories?
Some categories are obvious. Interest goes on the Interest line.
Advertising goes on the Advertising line. Pencils go on the Office Expenses
line. But where do you stick education expenses? Freight? Decorating
expenses? Alarm systems? You can use the Expense Category designations
in the book as a guide.
Keep in mind that these expense categories are only a guide. They are not
law, not rigid. It is not critical which deductions go on which lines on the
tax form. The IRS is not going to be upset if an expense that belongs on one
line winds up on another, especially low-cost items. Even I’m not sure
whether some deductions should be labeled Office Expenses or Supplies or
something else. If you have a deduction you don’t know where to put on the
tax return, just pick a reasonable category and put it there.
It is a good idea to make a worksheet showing which expenses you
combined for the tax return and keep it with your copy of your return (no
need to send it to the IRS). This will make things a lot easier should you
ever face an audit, if you need to check your figures later, or if you are just
looking back a year later trying to figure out how to fill out next year’s tax
return.
There is a line on the tax return called Other Expenses, used for
deductions that don’t fit into any other category. Many of the deductions in
this book are shown as Other Expenses because there wasn’t a more-
appropriate category on the tax return. Deductions you include in Other
Expenses are listed individually, unlike other deductions that are combined
on the tax return. The tax return provides a separate area for listing the
deductions that constitute Other Expenses. List each expense separately,
then show the total on the Other Expenses line on the return.
Just remember that the category you pick is not critical. What is critical is
that you take every deduction you are entitled to, regardless of where you
put it on the tax return.

Is Every Possible Tax Deduction Listed?

This list of 475 deductions is compiled from my studies of tax laws for
thirty years (somebody’s got to do it, right?), my background as a CPA, and
my experience working directly with hundreds of different businesses of all
types.
But still, I’d be a fool to say that I’ve listed every possible deduction
there is. If you have a deduction not listed in this book, and if it meets the
basic rules for all deductions (covered below), by all means take it. Or at
least ask an accountant about it. And let me know about it too, will you?
Maybe the next edition of this book will be called 476 Tax Deductions.

Isn’t This What You Pay Your Accountant For?

Here is the most important piece of information in this book: You have to
find these deductions yourself. You are the only person who knows the ins
and outs of your own business. You cannot rely 100 percent on your
bookkeeper, your accountant, your attorney, your software, or the Internal
Revenue Service.
Any experienced tax accountant will (or certainly should) know about
every tax deduction listed in this book. But your accountant can’t possibly
take the time to ask you—and his or her 300 other tax clients—about every
possible deduction you didn’t know about or failed to include in your
records and ledgers. The typical tax accountant may have several hundred
tax clients, and during the three hectic months of “tax season” (January 15
to April 15), your accountant is preparing a dozen or maybe two dozen tax
returns a day. The accountant most likely wants to take your annual totals,
totals you yourself have summarized from your records, or totals the
accountant pulls off your accounting software, enter them into the
computer, push Print, and collect his $250 fee. Next.
If you are expecting an accountant to actually sit down with you, discuss
tax deductions in detail, study your business and your records, and find you
savings, you should plan to do this well before tax preparation time, and
expect to pay about $100 an hour for this service. Even then, you really
should not expect an accountant who does not work day to day in your
business to be able to rattle off every possible tax deduction you may be
entitled to.
Instead, spend a few hours with this book. Skim the A-to-Z list of
deductions, and spot the ones that may apply to you. Then, if needed, ask
your accountant about them. Your accountant will be of much greater help,
and much greater value, if you first go through these 475 deductions before
seeing the accountant. And by doing a little homework, you may
significantly reduce the accounting fees.
The well-known tax attorney Julian Block said it best: “The informed
client gets the best advice.”

Will Your Deductions Trigger an Audit?

Are you afraid to take certain deductions because you fear they may trigger
an audit? Welcome to the club. There are thousands of small-business
people paying millions of dollars in taxes they don’t owe, year after year,
simply out of fear of being audited.
“Don’t take the home business deduction, it’ll guarantee an audit.” What
home business owner hasn’t heard that? It is a myth. The home deduction
does not invite an audit. And the same applies to most tax deductions.
But, yes, there are a few tax deductions that are red flags, ones likely to
bounce your return out of the computer, to put that nasty gleam in the eye of
some IRS auditor, deductions that are likely to invite an audit, and, yes,
ones you may want to avoid, or at least be careful about, when preparing
your tax return.
Deductions that are likely to invite an audit are marked in bold IRS Red
Flag Audit Warning in the A-to-Z list. They include: large travel and
entertainment deductions, probably the most likely to generate suspicion;
deductions for expenses not typically associated with your type of business;
deductions for items of a personal or recreational nature; any large
deductions out of line with the amount of income you are reporting.
(Although a home business deduction does not trigger an audit, a large
home deduction combined with a small income does increase your chances
of being audited.)
What will increase your odds of being audited is not so much the
deductions, but other things on your tax return: loss year after year,
especially for people who also have earnings from a job; an occupation
targeted by the IRS because of potential “abuse” (ease of cheating),
particularly businesses that deal in cash, such as Laundromats, car washes,
and hair salons; barter transactions; failing to report income that was
reported to the IRS on a W-2 or a 1099 Miscellaneous Income form; non-
business items that are incorrect or out of line; claiming your dog as a
dependent; telling the IRS that the income tax is unconstitutional.
If you discover from reading this book that you have a tax deduction that
may cause you trouble, it is up to you to decide how “aggressive” you want
to be or how safe you want to be, when claiming the tax deduction. I think
this book will help you make those decisions. But I recommend that you
talk to a tax accountant about your concerns. Any good accountant should
be able to help you stay within your comfort zone.
I think that is the real key: your comfort. No amount of money is worth
destroying your peace of mind. No tax saving is worth high blood pressure.
But short of a sleepless night of IRS worries, if you are entitled to a tax
deduction, take it. The laws were written to allow these deductions. The
IRS says, “Take the deductions, you don’t owe the tax.” If the government
in its wisdom is allowing a deduction, you in your wisdom should take it.

When in Doubt, Deduct

Even after all the studying, talking to experts, and getting deep into the
Internal Revenue Code, sometimes you still cannot be positive that a
particular deduction is or isn’t legitimate. The IRS says one thing, the Tax
Court says the exact opposite, and your congressman, who dreamed up the
law, is still on vacation. What do you do?
The answer depends on your own personality, how comfortable or
uncomfortable you would be if you have to face an audit, and how much is
at stake. If you are only going to save a few bucks but might get a “Dear
Taxpayer” letter from the IRS—and maybe open up a Pandora’s box you’d
rather stay closed—it’s probably not worth the risk.
But if you have nothing to hide and lots to save, I personally would go for
it. Your chance of being audited, no matter what you deduct, is
extraordinarily small. If you do get audited, the worst that can happen is the
IRS will say “No Dice” and demand the back taxes you’d owe anyway, plus
interest. There is usually no penalty for making an honest mistake or a
reasonable, though incorrect, interpretation of the law.
I want to make one thing clear throughout this book: If any deduction is
questionable, if there is any doubt, any disagreement, any IRS opposition, I
spell that out in the description of the deduction. You will not be caught by
surprise; you will not have to wonder whether a certain deduction can lead
to possible trouble.

Tax Loopholes and Tax Secrets

Tax laws are often carelessly written. Every time a new tax law comes out,
clever accountants and eagle-eyed lawyers find holes in the laws, find
unintended deductions, and find ways around the laws neither Congress nor
the IRS intended: tax “loopholes.”
 Some of these tax loopholes are legitimate, some are not, and some are
what we call “gray,” or questionable, areas of tax law. In this book, every
tax loophole that applies to business is listed and explained, so you will
know which ones are legitimate deductions, which ones are questionable,
and which ones are not deductible.
Do you want to know about “tax secrets”? There are none. There are no
secrets in tax law. There are, however, legitimate tax deductions that few
people know about, sort of a secret I guess. Every “secret” deduction that
applies to business is in this book.
What isn’t in this book are “tax avoidance” schemes, “abusive” tax
shelters, tax scams, or dubious deductions that will get you audited. We are
not out to deceive the Internal Revenue Service or anyone else. Some of the
deductions listed in this book may be “tax loopholes” or “tax secrets,” but
they are genuine, acceptable, IRS-approved tax deductions. And each and
every one is money in your pocket that stays in your pocket.

Federal versus State Laws

The laws explained in this book are federal tax laws, for preparing your
federal tax return. Many states have the exact same laws as the IRS, and
most business deductions allowed on your federal return are allowed on
your state return. But that is not guaranteed. You should study the
instructions that come with your state tax forms or state tax publications, or
ask an accountant. You might find additional state deductions the IRS does
not allow, and save even more money on your state taxes.

Keeping Records
Many legitimate tax deductions are lost because people don’t know about
them. That’s the reason for this book. But many tax deductions are lost
simply because people failed to record them. People who do not keep good
records cheat themselves out of deductions because they didn’t write them
down. Recordkeeping is, in fact, the very heart of taking advantage of tax
deductions.
If you don’t have a good set of financial records, STOP. If you do not
have a good system for recording every business expense, STOP. Get a set
of paper ledgers, or set up a spreadsheet, or get accounting software, and
learn how to use it. If you are confused or don’t understand recordkeeping,
hire an accountant or a bookkeeper to help you set up your records and
teach you the basics. Or read my book Small Time Operator: How to Start
Your Own Business, Keep Your Books, Pay Your Taxes, and Stay Out of
Trouble. There is an entire section devoted to setting up and keeping good
financial records.
Get receipts for everything you possibly can, set up a good filing system
for the receipts, and keep the receipts at least three years. Three years from
the date you file your tax return is the IRS statute of limitations for most
audits. Receipts are your best proof if the IRS ever challenges a deduction.
If you don’t have receipts, make notes about expenses or keep a business
diary. Record mileage. And don’t forget all those tiny out-of-pocket
expenses: Even small purchases can add up to a significant tax deduction.
The IRS says that business records can be kept on paper or stored on your
computer or disk or flash drive, or on the internet or a provider’s server, as
long as the information can be retrieved if the IRS requests it.

When Can You Take a Deduction?

Most deductions are taken the year you incur the expense. But there are
many exceptions to this rule. Some prepaid expenses are deducted the year
they apply to, regardless of when they are paid. Some expenses are
depreciated, which means they are written off over several years. Inventory
(goods for sale) cannot be written off until the inventory is sold. In the A-
to-Z list of deductions, any expense that cannot be deducted currently is
explained. You will not have to guess if an expense is currently deductible.

Cash Method versus Accrual Accounting

Part of understanding when an expense can be deducted requires you to
know about the two methods of accounting allowed by the IRS: the cash
method and the accrual method. Almost all small businesses choose the
cash method, because it is easy to understand and requires much simpler
recordkeeping.
 Under the cash method, also called cash basis, expenses are recorded
when paid (though with some exceptions). Purchases and commitments
you’ve made but haven’t yet paid for are not recorded in your expense
records and are not deducted on your tax return until paid. The cash method
does not mean that all your transactions are in cash. Don’t let the word
“cash” confuse you. The cash method has nothing to do with how you pay
your bills, only when you can deduct payments.
Under the accrual method, all expenses are recorded whether paid or not.
An expense you incur this year but do not pay until next year is recorded as
this year’s expense and taken as a tax deduction this year, not next year
when the bill is paid. It is the exact opposite of the cash method, much more
complicated, and, for most small businesses, unnecessary.
Who can use the cash method? Businesses with annual sales of $5 million
or less can use either the cash method or accrual method, your choice.
Businesses with annual sales of $5 million to $10 million can use either
method if the business is not a corporation. Corporations (other than
personal service corporations) are required to use accrual accounting if
sales exceed $5 million a year. All businesses are required to use accrual
accounting if annual sales hit $10 million.
Every IRS law is guaranteed to have exceptions, and the cash method is,
well, no exception. Certain expenses cannot be deducted when paid, even
for cash-method businesses. When you look up an expense item in the A-to-
Z list, the entry will tell you if the expense cannot be deducted currently,
and when it can be deducted.

Structuring—and Wording—Transactions to Your Best Tax Advantage

Some business expenses are deductible, and some aren’t. Often simply the
way you structure a deal, the way you word a contract, or how you describe
an expense can mean the difference between something that is deductible
and something that isn’t.
Throughout the book, I try to warn you about expenditures that can be
interpreted or structured in different ways so that you’ll be able to make the
tax laws work for you. And it is perfectly legal. Large corporations hire
$300-per-hour tax attorneys to do nothing but find ways around the taxes
they don’t want to pay. You get to buy this book. But don’t be afraid to quiz
your tax accountant about any expense that may want a little “reworking.”
Regardless of the wording or the deductibility of an expense, business
transactions should not solely be tax motivated. How many times have you
heard about some business that is losing money or making a worthless
purchase or spending frivolously; but, hey, it’s a tax write-off. After thirty
years of dealing with tax laws, I still don’t find logic in this strategy. The
concept of incurring an expense solely as a tax write-off is, when you get
right down to it, ridiculous. The expense will always be greater than the tax
write-off the expense brings; that must be obvious. (A tax “write-off” and a
tax “deduction” are the same thing.) Make sure an expense has a real
purpose independent of tax consequences. Then figure out how to structure
the deal to your best tax advantage.

Timing Transactions to Your Best Tax Advantage: Year-End Strategies

As the end of the year approaches, you can plan your business transactions
to increase or decrease your profit, and therefore increase or decrease the
taxes you will pay. Within limits, you can postpone or accelerate purchases
and other business expenses.
For example, if you are thinking of buying a new computer, you can buy
it in December for a deduction this year, or buy it in January for a deduction
next year. You can do the same with most office equipment, machinery,
supplies, maintenance, and repairs.
If you are on the cash method of accounting, you can prepay some of next
year’s expenses and get a deduction this year instead of next year. Or you
can postpone paying some of this year’s bills until next year if you would
rather get the deduction next year.
If the current year is a low-income year, and if you already have enough
deductions to bring your taxes down and keep your tax bracket at the
minimum, you would probably benefit from postponing expenses to next
year. If, on the other hand, this is a high-income year and you could use
more deductions to reduce your tax burden, accelerating expenses—
spending the money this year instead of next year—may be the best tax
strategy.
 You have right up to December 31 to make a purchase or expenditure that
you can deduct for the current year. Once it’s New Year’s Day, it’s too late.

Year-End Payments
Checks that are mailed or delivered by December 31 can be deducted the
year written, even if cashed in the new year. Automatic payments and any
other bills paid electronically are deducted the year the payment is
processed. Expenses on debit cards are deducted the year incurred.
Expenses charged to credit cards (MasterCard, VISA, Discover,
American Express) are deducted the year the expense is incurred, even if
paid next year. But expenses on charge cards issued by individual stores and
gasoline companies cannot be deducted until paid (except for businesses on
the accrual method of accounting). This curious rule is typical of a lot of
IRS laws: unnecessarily complicated regulations that generate little or no
additional tax revenue but sure generate a lot of irritation for people trying
to prepare an honest tax return.

Paying Business Expenses: You or Your Business?

Who actually pays for a business expense—you the owner or the business
itself—can affect the deductibility of the expense.
If your business is a sole proprietorship, a one-person LLC, or a joint
venture (married couple in business together), it does not matter whether
you or your business pay the bills. If an expense is business related, your
business gets the deduction. Cash you pay out of your pocket for a business
expense is deductible. You can make business purchases on a personal
credit card or debit card and get a business deduction. The card does not
have to be in the business name. You can write a check on your personal
bank account for business-related purchases and deduct them as business
expenses. Your business vehicle does not have to be registered in the
business name. A building or other business location that you own or rent
does not have to be in the business name. You still get the deduction.
If your business is a partnership, corporation, or multi-owner LLC, the
laws are very different. Business deductions are sometimes disallowed
when claimed by the owners of the business instead of by the company
itself. Try not to pay business expenses out of your personal funds. If you
do pay any business expenses out of your own pocket or from your personal
credit card, have the business reimburse you so that the business itself can
claim the deductions. But be careful: Business reimbursements have their
own set of IRS rules, requiring a written reimbursement policy, called an
“accountable plan.” See Reimbursements in the A-to-Z list.

Multiple Businesses
If you have more than one business, the IRS requires that you keep separate
records and file separate tax returns for each business. You could, instead,
choose to have only one business with several different “parts” or
“divisions.” With one business, you need to keep only one set of records
and file one tax return.
If you do set up separate businesses, shared expenses that apply to both
businesses—such as office space, computer, telephone, employees working
for both businesses—should be prorated between the businesses: 50-50 or
any other split that reasonably approximates usage.

Home-based Businesses
As far as the IRS is concerned, a home-based business is no different than
any other business. Home business owners file business tax returns, report
the earnings as business income, and deduct business expenses. The
expenses that home-based businesses can deduct are exactly the same as the
expenses every other business can deduct, with one important exception:
the home itself.
If you use part of your home for business—your office, workshop, store,
warehouse, or whatever you are using your home for—the cost of the space
(the rent or, if you own your home, the depreciation) and some of the
expenses directly related to the space, such as utilities and maintenance, can
be deducted only if the space meets special IRS requirements. The
requirements are explained under Home Expenses in the A-to-Z listing.
The requirements are not difficult to understand and are very easy to meet
for most home-based businesses. Still, lots of home businesses do not take
the deduction because of a widespread belief that deducting your home
office or workspace is likely to lead to an audit. Which is not true. The IRS
does not audit home-based businesses any more than other small
businesses, at least not home businesses that report a profit. The IRS is
more likely to audit a home business if the business has a loss, especially if
the loss is offsetting other income and reducing income taxes. Auditors are
suspicious, often correctly, that the money-losing home business is not
really a business at all but a hobby or some pursuit or fun project that
you’re trying to write off on your tax return. The IRS is also more likely to
audit a home business, or any business for that matter, that takes large
deductions for expenses like travel and entertainment, the “red flag”
deductions in the A-to-Z listings.
So the message here, and throughout the book, is: Don’t worry about the
IRS. Deduct everything you are entitled to.
I mention this in the Home Expenses listing, but it bears repeating: If you
do not qualify for the home expense deduction, it does not prohibit you
from operating your business out of your home. It only means that one
possibly large expense, the cost of the home itself and the expenses related
to the home, such as utilities, are not deductible on your federal income
taxes. You can still deduct all legitimate business expenses other than those
directly related to the business space.
There actually is one other tax deduction, in addition to the home expense
deduction, that is limited for home-based businesses. The cost of a land-line
telephone into the home cannot, in some cases, be deducted. It’s a mean-
spirited little law that’s getting slowly obsolete as more and more
businesses are switching to cell phones, smartphones, and internet
connections, which do not come under this land-line law. See Telephones in
the A-to-Z listing.
Other business use of the home: The Home Expenses deduction applies
not just to businesses that are home based but also to any business where
the owner of the business uses his or her home for business purposes. Many
mobile businesses—businesses that travel to customers—quality for the
home expenses deduction. Contractors, salespeople, entertainers,
freelancers, consultants, and others who earn income outside the home may
be eligible for the home expenses deduction. Even businesses that have
separate business locations outside the home may be eligible for the
deduction. All IRS rules for deducting home expenses are explained under
Home Expenses in the A-to-Z list.

On-Demand Workers
The on-demand economy—the sharing economy, the gig economy—has
become successful, at times extraordinarily successful, because the on-
demand businesses (“platforms”) found a way, a loophole in the law, to
eliminate the number-one biggest expense most businesses face: employees,
and all the costs, paperwork, and employment laws associated with hiring
employees.
On-demand businesses hire people they call “on-demand workers.” (Uber
likes to call them “partners,” though the workers are not partners in any
legal sense.) These on-demand workers are what the IRS calls “independent
contractors” or “contract labor.” The on-demand workers are not legally
employees, which lets the on-demand businesses operate without paying
any of the costs required of regular employers: payroll taxes, workers’
compensation insurance, unemployment taxes, and health insurance
coverage. No vacation pay, no holiday pay, no overtime pay, no sick leave.
On-demand companies do not have to comply with minimum wage laws,
employment safety laws, discrimination laws, or termination laws. On-
demand companies refer to themselves as “disruptors.” They’ve disrupted a
legal system that was put in place to protect employees and to protect
consumers.
Whether you love the disrupters or hate them or just don’t care, the
bottom line is that if you are an on-demand worker, you are in business for
yourself. You are, no matter what you or anyone else calls you, self-
employed. Every tax deduction in this book applies to you.
Legally, you are a sole proprietor. You file a sole proprietorship tax form,
Schedule C, Profit or Loss from Business, that attaches to your 1040
income tax return. You report your income from your on-demand work,
combined with the income from any other related self-employment, on
Schedule C. You deduct your expenses, and you pay income tax on the
profit: Total income less deductible expenses equals taxable profit.
1099 workers: On-demand workers are sometimes called “1099
workers,” which refers to IRS form 1099-MISC, Report of Miscellaneous
Income. The smartphone-enabled companies (the “platforms”) that collect
money for on-demand workers are required to prepare 1099-MISC forms
for every worker who received $600 or more in a calendar year. For the
worker, however, it does not matter whether you get a 1099 form or not; it
does not matter whether you earned $600 or not. If you are earning money,
and if you are not an employee with a paycheck, withholding, and a W-2
statement at year end, you are an independent contractor. You are self-
employed. And as I mentioned above, and mention again, every deduction
in this book applies to you.
Home expenses deduction. One important tax deduction that on-demand
workers should know about is the home expenses deduction. Self-employed
individuals can get a tax deduction for having an office in their home,
which can reduce your taxes significantly. You don’t have to actually be
doing your work in your home to get the deduction. You can be working in
a client’s home, or driving your car, or whatever else the on-demand
platforms contract you to do, and still get the home expenses deduction.
You do have to comply with certain IRS requirements, but they are easy to
meet. Read the Home Expenses entry in the A-to-Z listing, and set up your
office and your business scheduling to meet the IRS requirements.
Occasional work: Some on-demand workers are working only
occasionally, not regularly earning money. These workers are not self-
employed, according to the IRS. Self-employed individuals are people who
work, to quote the IRS, “with a reasonable degree of regularity.” Occasional
on-demand income does not meet this requirement. The income is taxable,
but you do not fill out a business tax return, and you cannot take any
business deductions. This is a real problem for workers with occasional
income, as the IRS does not define what they call “a reasonable degree of
regularity.” I definitely suggest that you talk to an experienced (and
sympathetic) tax accountant. This law does not apply to self-employed
people who earn money from several different sources, of which on-
demand income is only a part. You report all your income on one tax form,
and you can claim all your deductible expenses.

Hobby Income and Losses

Hobbies are not businesses; income from hobbies is not self-employment
income. Any income earned from a hobby is taxable, but not all the
expenses are deductible. To take full advantage of the tax laws, you want to
be sure your business is in fact a real business, and not just a hobby earning
a few bucks. More important, if your business is showing a loss, you don’t
want the IRS to rule that the business isn’t a business, no loss allowed. A
business that is a real business and not a hobby can show a loss and be able
to use that loss to offset other income in figuring your taxes.
When is an endeavor a hobby, and when is it a business? The IRS has
specific rules defining what is and isn’t business income. In chapter 3, The
Four Basic Rules for All Expenses, Rule 1 spells out the IRS requirements.
The IRS also has what they call the Hobby Rule, or the Three-year/Five-
year Rule: If you do not show a profit for at least three out of five
consecutive years, the IRS can declare your business to be a hobby and
disallow business deductions and any losses. This is not a firm rule,
however. A business can deduct losses for several years in a row without
being challenged by the IRS. In the event of an audit, the IRS will allow the
ongoing losses if they are convinced that you are operating a real business
and trying, though unsuccessfully, to make a profit.
The key issue is intent. What are you really doing? Trying to earn some
money or just having fun? It will help if your business looks like a business
—licenses, financial records, bank account, website, business cards—and if
you’re devoting time to it in a businesslike manner.

“I Wish I Had This Book Last Year”: Amending Prior Years’ Tax
Returns
Did you miss some deductions on last year’s tax return that you were
entitled to? Well, as some newspaperman said many years ago, “Yes,
Virginia, there is a Santa Claus.”
You can go back and amend prior tax returns and claim a refund of prior
years’ taxes. Amended tax returns must be filed within three years from the
date you filed your original return or within two years from the time you
paid your tax, whichever is later. A return filed early is considered filed on
the due date. So for 2018 tax returns filed and paid on time (April 15,
2019), you have until the April 15, 2022, to amend the return.
 Tax returns are amended on form 1040-X for sole proprietorships and
one-person LLCs, 1120-X for regular corporations, 1120-S (marked
“Amended”) for S corporations, and 1065 (marked “Amended”) for
partnerships and multi-owner LLCs. Refunds are fairly prompt. Amended
returns are not more likely to be audited than original returns.
If your federal return was in error, your state return was probably also in
error. States have similar procedures for amending returns.

One Last Caution

Verify what you read in this book with a current IRS publication or with a
competent accountant. Tax laws change every year. Congress is constantly
screwing around with the tax laws. As soon as they pass another confusing
law (and promptly go on vacation), the IRS starts issuing interpretations of
the law. And then some clever tax attorney finds a loophole, and the Tax
Court gets to put in its two cents. Pretty soon, the law means something
different than it did a few months ago.
The word once printed cannot be altered. Tax law, however, changes
constantly. As the carpenter says, “Measure twice, cut once.”
 2
Terminology

There are many different terms for the same thing. Ten different businesses
in ten different states may have ten different terms for a given business
expense. To make this book as easy as possible to use, I have tried to list
every term I know for every business deduction.
For example, you can look up Goodwill and find that it is also known as
Blue Sky. You can look up Blue Sky and find it is also known as Goodwill.
Business Assets are also listed as Fixed Assets and Depreciable Assets.
This system results in some repetition and duplication of definitions and
explanations, but I think it makes the book faster and easier for people to
use, and it eliminates the need to spend time poring over an index.
Here are a few important definitions you should know before getting any
deeper into this book:

Self-employed Individuals and Independent Contractors

Throughout this book you will see the terms “self-employed individuals.”
Self-employed individuals are in business for themselves. They are sole
proprietors, partners in partnerships, and member/owners of limited liability
companies (LLCs). Freelancers, consultants, building contractors,
subcontractors, contract laborers, free agents, and other people in an
independent trade or profession are self-employed individuals.
The IRS often refers to self-employed people as independent contractors.
The term “independent contractor” does not refer to being a building
contractor. “Independent” means you are not someone’s employee.
“Contractor” means you are doing contract labor, another IRS term for self-
employed people. Independent contractors are also known as outside
contractors. They mean the same thing.
 There is an important distinction between self-employed individuals and
people who set up their businesses as corporations. People who own
corporations, both regular C corporations and S corporations, are employees
of their businesses. Although they are obviously self-employed, the IRS
does not refer to them as self-employed individuals, and neither does this
book. Owners of their own corporations are referred to as employees or, if a
distinction is important, as owner/employees.

Employer / Employee
As you go through this book, be careful reading the last letter of these two
words. The employer hires the employee. The employee works for the
employer. The employer-employee relationship is a formal, legal
relationship, with specific tax consequences. Tax deductions for employers
are very different than for employees.
Independent contractors, contract laborers, and other self-employed
individuals are not employees. If you hire these people, you are not their
employer. If you are an independent contractor, the person or company
hiring you is not your employer.
If you are the owner of your own corporation, you are an employee of the
business. In fact, you are both employer and employee, as I explained above
under Self-employed Individuals.
This book is careful to distinguish between employers, employees, and
self-employed individuals. You are cautioned to be equally careful.

What Is a Tax Deduction?

There are no dumb questions. A tax deduction is a business expense that is
subtracted from your total business income (your total sales) in order to
arrive at your taxable income, your net profit.
A tax deduction, also called an allowable business expense, is what you
can deduct, not necessarily what you spent. While most expenses are
deductible the year paid, some expenses are deducted over several years
even though the payment was made all in one year. Some expenses are only
partially deductible. You may have a $100 expenditure but only a $50 tax
deduction, because only half the expense is allowed by tax law. There are
also business expenses, totally legitimate business expenses, that are not
deductible at all. This book explains which expenses are fully deductible
the year paid, which expenses are deductible over several years, which
expenses are only partly deductible, and which expenses are not deductible
at all. I have listed every possible business expense whether it is deductible
or not.

Tax Write-Off
A tax write-off is another term for a tax deduction. The two terms are used
interchangeably.

Personal versus Business

A personal expense is a non-business expense. It is not deductible on a
business tax return. Expenditures that are partly personal and partly
business can be prorated. The business portion is deductible.
The term “personal” also has a second, completely different meaning in
tax law. “Personal property” is any tangible property other than real estate.
Personal property includes machinery, equipment, furniture, and other
assets a business owns. This personal property is actually business property,
a business expense.
The difference between “personal expense” (not a business expense, and
not deductible) and “personal property” (deductible business assets) is
obviously very important, but you don’t have to keep remembering it.
Throughout the book, I point out the differences as they come up.

Capitalized Expenses
“Capitalize” is a tax term that means the cost of an asset is deducted over a
period of years instead of being deducted the year incurred. Most buildings
have to be capitalized. Most business assets other than buildings
(machinery, equipment, furniture, vehicles) can be capitalized or, at your
option, can be deducted the year of purchase.
Assets that are capitalized are written off using a procedure called
depreciation or amortization, two terms that mean the same thing except
that “depreciation” is used for tangible assets (physical assets), and
“amortization” is used for intangible assets, such as patents, copyrights, and
trademarks.

“Significant” Costs
IRS rules often distinguish between “significant” costs and “insignificant”
costs, between “major” expenses and “minor” expenses. Insignificant or
minor expenses often can be deducted currently, while significant or major
expenses may have to be depreciated over several years.
The IRS generally considers anything costing under $2,500 to be
insignificant, but that amount is not fixed in law (except for a few specific
deductions). Most businesses I know consider $2,500 to be quite
significant, but if the IRS is okay with a deduction, so am I.
If you have employees, one “significant” issue to be careful about is the
value of gifts or special benefits for your employees. The IRS is always on
the lookout for “disguised compensation”: paying employees in some form
other than money in an attempt to avoid payroll taxes. This is an area of law
that has much more rigid rules—and much more IRS scrutiny—than how
you write off an asset. The $2,500 guideline does not apply here. But don’t
worry. Throughout the book, I guide you under the radar: no questionable
deductions that might attract an auditor.

Customers, Clients, and Etc.

“The customer is always right.” Or maybe the client is always right. Or . . .
Different types of businesses have different terms for the people who buy
their goods or services. Regardless of the terminology you prefer—
customer, client, patron, guest, passenger, patient, student, subscriber—for
tax law, all the terms are interchangeable. Throughout the book, I use the
word “customer” (sometimes “client” for variety) to refer to whoever is
buying whatever you’re selling. I mean no disrespect to doctors or teachers
or others who have specific terms to describe the people they serve. I’m just
trying to keep the explanations, and the sentences, short.

IRS Audits
Throughout the book, I warn you about any deductions that might trigger
IRS audits, and potential audit situations you might want to discuss with an
accountant. Look for the bold IRS Red Flag Audit Warnings.
What’s your chance of being audited? Every year the IRS selects a small
percentage (actually a very small percentage, lately under 1 percent) of
business tax returns to examine, looking to prove that the returns are
accurate, that income is correctly stated, and that deductions are legitimate.
IRS agents accomplish this task by talking to you or your accountant, by
looking at your business records, and by examining your bank statements
and business receipts.
Some audits are extensive, examining your entire business operation for
the year. Most audits, however, are narrowly focused, questioning only one
or a few deductions. Some audits are done in person, but most audits are
conducted through the mail or over the phone. At the conclusion of the
audit, the IRS will report their findings and let you know if your tax bill
increased, decreased, or remained unchanged. Once you see the results of
the audit, you can decide to accept or appeal the outcome. If your taxes
went up a little, I suggest just paying the extra amount even if you think the
IRS is not correct. It’s never worth the time and hassle to argue with the IRS
over a few dollars. If, however, the tax bill has jumped significantly, and if
you think the IRS made a mistake, you can appeal directly, or you might do
much better to hire an experienced tax accountant to give you some advice.
Quite often the IRS will find an error on a tax return when processing the
return, typically an adding mistake or a tax calculation mistake. The IRS
will automatically correct your return and notify you of your error and the
increase or decrease in taxes. This kind of correction is not an audit. It does
not increase or decrease your chances of being audited.
By the way, the term “audit” is no longer officially used by the IRS.
According to the latest IRS press release, the IRS no longer audits tax
returns. They, ah, conduct examinations. The examinations, however, are
identical to what the IRS used to call audits. Why the euphemism, I do not
know. Parts is parts. An audit is an audit. And one of the goals of this book
is to help you avoid an audit.

Tax Credits versus Tax Deductions

Tax credits are different from tax deductions, and you need to know the
difference. A tax deduction reduces your net profit from your business. A
tax credit does not reduce your business profit, but it does reduce your
income taxes. The difference is quite important.
You compute your business net profit by taking your total income and
subtracting your tax deductions. You figure your tax based on this net
profit. After you compute your taxes, you then use tax credits to reduce
those taxes.
A tax credit is much more valuable than a tax deduction. A tax deduction
of $1,000 might save you $300 or $400 in taxes, depending on your tax
bracket. But a tax credit of $1,000 will save you a full $1,000 in taxes. An
item is either a tax deduction or a tax credit, not both, although you can
often get a tax deduction and a tax credit for the same expenditure. The tax
credit is a little gold mine, it is.
Why does Congress offer both tax deductions and tax credits? To confuse
the issue, of course. To make life more complicated for people trying to
figure their taxes. To make accountants and tax lawyers rich. And because
no one in Congress does his own tax return and has no idea how confusing
the tax laws are. That’s why.
That’s not why. Most tax deductions are actual business expenses, the
actual costs of running a business. Tax deductions tend to stay the same,
year after year. Many tax credits have nothing to do with the actual expense
of running a business. They are instead tax breaks to encourage you to do
socially responsible things like hire people to get them off welfare, or
purchase equipment or vehicles that will make for cleaner air and water.
Some tax credits are meant to stimulate the economy. And some, believe it
or not, just give you a much-needed tax break, period.
So send a letter of thanks to your congressman or congresswoman for the
self-employment tax credit, the health insurance tax credit, tuition tax
credit, research and development tax credit, oil drilling tax credit (that’s
right), and whatever else they’ve given us—or their corporate buddies—for
Christmas this year.
Unlike tax deductions, tax credits tend to come and go, available one year
and not the next. Congress has discovered that it is much easier to end a tax
credit than it is to drop a long-standing tax deduction.
 In this book, tax credits are specifically labeled as such. If an item in this
book does not say it is a tax credit, it is a tax deduction. If it doesn’t say
whether it is a tax deduction or a tax credit, it is a tax deduction. Read
carefully.
 3
The Four Basic Rules for All
Expenses

Some business tax deductions are specifically spelled out in the IRS tax
code: Yes, you can deduct this; no, you cannot deduct that. But the great
majority of business deductions, most of the tax deductions listed in this
book, are not mentioned anywhere in the IRS code books. The law does not
say, for example, that you can or cannot deduct pens for the office,
lightbulbs for the warehouse, or bank service charges.
What the IRS does say, and say adamantly, is that all business expenses,
whether spelled out in the IRS code books or not, must meet four basic
rules in order to be deductible:

1. The expenses must be incurred in connection with your trade,

business, or profession.
2. The expenses must be “ordinary.”
3. The expenses must be “necessary.”
4. The expenses must “not be lavish or extravagant under the
circumstances.”

Any expense that does not meet all four of these requirements cannot be
deducted on your business tax return.
The four basic rules, however, are not always as basic as they sound (of
course). It is important for you to understand these rules and, most
important, to understand the definitions of the words as they are used in tax
law. If you will take five minutes to read these definitions, you will have a
much greater understanding of tax law, and what you can legitimately
deduct on your tax return.
Rule 1: Business Related
The expenses must be incurred in connection with your trade, business, or
profession.
The words “trade,” “business,” and “profession” are used
interchangeably. All three refer to an activity, to quote the IRS, “carried on
with a reasonable degree of regularity” and “sincere attempt to make a
profit.” It includes business owners and all self-employed individuals,
freelancers, independent contractors, free agents, and independent
professionals. It includes home businesses and people earning a living as
on-demand workers.
“Reasonable degree of regularity” rules out occasional activities that
bring in a little income. Such occasional activities are not considered a trade
or business by the IRS. Part-time, seasonal, and pop-up businesses qualify
if they are an ongoing activity.
“Sincere attempt to make a profit” rules out hobbies and other ventures
done purely or mostly for the fun of it. There needs to be a real profit
motive or the IRS says it is not a trade or business.
The expression “in connection with your trade or business” also means
that you have already started a business. You must actually be in business
before you are allowed to write off business expenses. You are not allowed
a deduction for business expenses incurred in connection with a business
you are thinking of starting, planning to start someday, or researching in
anticipation of starting—until you have actually started the business,
opened your doors, made your first sale. At that point, some of the pre-
opening expenses can be deducted. See Start-up Costs and, if you are
starting a corporation, Organizational Costs, in the A-to-Z list.
Expenditures that are partly personal (non-business) and partly business
can be prorated. The business portion is deductible.

Rule 2: Ordinary Expenses

The expenses must be “ordinary.” An ordinary expense is one that is
common or accepted in your type of business. Ordinary expenses do not
have to be recurring or habitual.
Rule 3: Necessary Expenses
The expenses must be “necessary.” A necessary expense, according to the
IRS, is one “that is appropriate and helpful in developing and maintaining
your trade or business.”
The word “necessary” in this context does not have the same definition
we usually associate with necessary, as in essential, indispensable, must be
done. It is not necessary that you buy nice furniture. It is not necessary that
you air condition your office. These are not mandatory requirements of your
business, but they pass the “necessary” test. An expense only has to be
“appropriate and helpful” to meet the necessary test.
An important part of the necessary test is whether there is an “economic
justification” for an expense, a good business reason to claim the deduction.
This sometimes comes into play when an owner of a business is deducting
payments that only benefit the owner or the owner’s family.
Owner/employees of corporations who take advantage of employee fringe
benefits are sometimes denied the deductions, the IRS claiming there is no
economic justification for the payments. This is definitely a foggy area of
tax law, worth discussing with an experienced tax accountant.

Rule 4: Not “Lavish or Extravagant”

The expenses must “not be lavish or extravagant under the circumstances.”
Defining what is or is not lavish or extravagant under the circumstances
depends on, well, depends on the circumstances. The bigger the business
and the more income the business earns, the more likely you can deduct
large amounts of money and call the expenses “not lavish or extravagant
under the circumstances.” Full-time, ongoing businesses can usually get
away with a bit more lavishness than part-time and new businesses. But
there are no specific rules. My own guideline: If you think a deduction
might be considered lavish or extravagant, there is a good likelihood that it
is. This is an area where I suggest you talk to an experienced tax
accountant.
There is no question that all four basic requirements are sometimes vague
and subject to interpretation. The IRS, fortunately, tends to be quite
reasonable about what’s reasonable (“not lavish or extravagant”), as well as
what is “ordinary” and “necessary.” If the expense is business related, if it
isn’t outrageously extravagant, if it doesn’t stick out on your tax return like
a tuba in a string quartet, you are probably okay.
And remember, try to get receipts for everything—and keep them.
 4
475 Tax Deductions, A to Z

Anyone may so arrange his affairs that his taxes shall be as low as
possible. He is not bound to choose that pattern which best pays the
Treasury. Everyone does it, rich and poor alike, and all do right. For
nobody owes any public duty to pay more than the law demands.
—Judge Learned Hand
From Accountants to Zoning, these 475 listings are arranged in alphabetical
order. Deductions that may not be obvious are defined and explained.
Special situations—such as rules for home-based businesses,
manufacturers, corporations, employers, or specific kinds of businesses—
are labeled in bold and explained.
This alphabetical listing also includes tax credits, which are different than
tax deductions (explained in chapter 2), and business expenses that are not
deductible, just so you’ll know.
Some of the bold headings in the listing:
Expense category. The expense category suggests where to put the
deduction on your tax form. However, as I mentioned in Introduction to Tax
Deductions, many deductions could easily come under different expense
categories. Which category you choose is often not important. What is
important is being sure you take the deduction, regardless of the category.
New businesses. Expenses associated with buying a business and
expenses incurred before starting your business come under special rules.
Tax deductions are limited. As soon as you start operating your business,
these start-up limitations no longer apply. See Buying a Business, Start-up
Costs, and, if you are starting a corporation, Organizational Costs.
Home-based business. Any tax deduction that is different for home-
based businesses than for other businesses is flagged in bold. Most of the
differences have to do with deducting the business portion of the home
itself. Read the Home Expenses entry. Any business owner who uses part of
his or her home for business purposes, whether the business is home based
or not, may be eligible for the Home Expenses deduction.
IRS Red Flag Audit Warning. Some tax deductions, especially ones
that could easily be for non-business expenses—fun stuff like going out to
dinner, traveling, or flying your airplane—are always on the IRS radar as
suspicious. The expenses might be legitimate business expenses, legally
deductible, but IRS auditors are not the most trusting people, and they are
always on the lookout for these “red flags,” especially if the deductions are
large. Sometimes, especially if the tax savings is small, it might be better
not to take a deduction that could invite an audit.
More information. If you want to learn more about specific tax
deductions, the IRS publishes dozens of tax booklets, which they update
every year. All the IRS publications are free, available as print editions or as
PDF downloads. View, download, or order print publications from IRS.gov
or call (800) 829-3676. Two IRS publications useful to all businesses are
Publication 334, Tax Guide for Small Business, and Publication 535,
Business Expenses.
Accountants
It figures that the very first entry would be “accountants.”
Accountants’ fees are deductible. Business consultations with an
accountant are deductible. Accounting, bookkeeping, payroll, tax return
preparation, auditing, tax advice, and similar services are all deductible.
The cost of hiring an accountant to help you with an IRS audit is deductible.
For preparing the tax return of a sole proprietor or a one-person LLC,
only the cost of preparing the business part of the 1040 tax return (schedule
C and related schedules) is deductible as a business expense. Ask your
accountant to separate out the fee for the business and personal parts of
your tax return—or just prorate the cost yourself: Unless you have a lot of
non-business tax issues, I’d figure that 90 percent of the cost is business
related.
Accounting and tax software that you lease or subscribe to can be
deducted currently. Software that you purchase can be deducted currently,
or it can be amortized over three years; see Software.
 Expense category: For fees, Legal and Professional Services. For leased
or subscribed software, Office Expenses. For purchased software,
Depreciation.

A tax is a compulsory payment for which no specific benefit is

received.
—US Treasury

Accident Insurance
Vehicle accident insurance comes under the tax deduction rules for vehicles.
Accident insurance that is part of a health insurance policy is deducted
under the rules for health insurance. Workers’ compensation insurance that
covers you if you are injured at work is deductible only if your state
requires you to have the coverage, which most states don’t require unless
you are an employee of your own corporation. See Vehicles, Health
Insurance, and Workers’ Compensation Insurance.
Expense category: Depends on what kind of insurance you purchase.
(Yes, I know, “Accident” should come before “Accountants,” but I did
not want to start the book with “Accident.”)
ADA Expenses
Costs of complying with the Americans with Disabilities Act can be
deducted under a variety of rules. See Disabled Access.
Advances
Self-employed individuals cannot deduct any advances you pay to yourself.
See Paying Yourself.
Advances paid to contractors, professionals, vendors, and suppliers are
deductible.
If the advance is a prepayment for goods or services to be received in the
following year—if, for example, you pay in December for goods to be
delivered or work to be done in January—the deduction may have to be
postponed to next year. Some prepayments can be deducted currently, but
some prepayments cannot be deducted until the following year. The IRS has
a specific list of what is and isn’t currently deductible. See Prepayments.
 If an advance is later refunded to you, and if you’ve already taken a
deduction for it, you reduce your current expenses or increase your gross
income by the amount of the refund. Either way, the net effect is the same:
to reverse the deduction you originally claimed.
Some advances are called deposits, but advances and deposits are not
always the same thing. Generally, refundable deposits are not deductible.
Nonrefundable deposits are deductible. But like advances, deposits that are
actually prepayments of some expense come under the prepaid expense
rules. See Prepayments.
Expense category: Varies depending on actual expenses.
Employers: Advances to employees are wages, taxable to the employees
and deductible for the employer at the time the advance is given. See
Wages.
Corporations: Owners of corporations are employees of their businesses.
Advances to yourself are taxable employee wages. The rules are the same
as the rules for employers.

It’s recorded in historical footnotes that the First Dynasty of Egypt

before 3,000 B.C. was so civilized that it had “deadly weapons of
metal, government officials, and taxes.”
—San Francisco Chronicle
Advertising
Advertising is a very broad category and includes most expenses that
promote or bring recognition to your business. Ads, flyers, catalogs, and
sponsorships are deductible. Giveaways, such as pens or souvenirs with
your business name or logo, are deductible. Contests and prizes are
deductible, but see Prizes for an important tax issue.
Donations you make to charities and community organizations that help
promote your business are sometimes deductible as advertising expenses,
depending on what you donate. See Donations.
You cannot deduct the cost of advertising in political programs or at
political events or meetings.
Expense category: Advertising.
Agents
For musicians and entertainers, booking agents usually deduct their fees
from whatever pay is coming to you. But if you pay any booking fees, or
any other fees out of your pocket, the fees are deductible.
Expense category: Commissions and Fees.
Agricultural Businesses
See Farming.
Air Conditioning
Portable air conditioners can be deducted the year of purchase or
depreciated over seven years. For built-in air conditioning you are
installing, small businesses can deduct the cost the year you incur it or
depreciate the cost over several years: the life of the building if you own the
building, fifteen years if you are leasing the building.
See Business Assets for portable units. See Building Improvements for
built-in systems.
Expense category: If deducting air conditioning that costs $2,500 or less,
Other Expenses. If deducting air conditioning that costs more than $2,500
or if depreciating the air conditioning, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including air conditioning in the manufacturing area, may have to
be included in the cost of inventory. Most businesses with indirect costs
under $200,000 are exempt from this requirement, but see “Indirect Costs”
under Inventory.
Home-based business: Air conditioning is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.

And it came to pass in those days that there went out a decree from
Caesar Augustus, that all the world should be taxed. This decree
seems to have been enforced ever since.
—Professor C. Northcote Parkinson

Aircraft
Business aircraft can be deducted the year of purchase or depreciated over
five years. If the aircraft is used partly for non-business purposes, the costs
are prorated between business and personal use. See Business Assets. The
cost to rent, lease, or charter an aircraft for business can be deducted.
Expense category: If purchased, Depreciation. If rented or leased, Rental
Expense.
More information: If purchased, IRS Publication 946, How to Depreciate
Property.
Employers: If any of your employees use your business’s aircraft for
personal trips (not business related), the value of the flights is considered
taxable wages subject to all payroll taxes.
Corporations: Owners of corporations are employees of their businesses.
The rules for employees also apply to you.
IRS Red Flag Audit Warning: Unless you are in the airplane business
(flying, leasing, maintaining, selling), a business deduction for owning or
using aircraft could increase your likelihood of an audit. Flying around in
the corporate jet and deducting the expenses may be pushing the envelope,
as the hotshot pilots say. If you are audited, the IRS will ask to see detailed
records of the aircraft’s use, looking for invalid deductions that were in fact
personal, non-business expenses.
Airfare
Deductible if certain requirements are met. See Travel.
Alarms
Alarm systems can be deducted the year of purchase or depreciated over
fifteen years. See Business Assets. Monthly service charges and alarm
rentals are fully deductible.
Expense category: If deducting an alarm system that costs $2,500 or less,
Other Expenses. If deducting an alarm system that costs more than $2,500
or if depreciating the system, Depreciation. If rented or leased, Rent or
Lease. For service charges, Office Expenses.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including alarm systems in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Alarm systems in your home are part of the
Home Expenses deduction, not deducted separately. See Home Expenses.
Allowance for Bad Debts
An allowance for bad debts, funds set aside in anticipation of a bad debt, is
not deductible. Actual bad debts may or may not be deductible. See Bad
Debts.
Amortization
Intangible assets such as trademarks and patents are deducted over a period
of years. The deduction is called amortization. It is similar to depreciation.
The procedure is the same; the tax deduction rules are the same. See
Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Trademark license: If you acquire rights to a trademark from another
business under a licensing agreement, the payments are deductible when
paid. They do not have to be amortized.
Expense category: Other Expenses.
Loan amortization: The term “amortization” also refers to paying off a
loan. Loan amortization is not a deductible expense. A loan is not income
when you get it and is not an expense when you pay it off. Any interest is
deductible. See Interest.
Animals
A business consultant I know has a large brass plaque on his desk that says,
“Don’t invest in anything that eats.” But since you did anyway, the cost of
purchasing and maintaining any animal that meets the IRS ordinary and
necessary tests can be deducted. A watchdog or guard dog meets these tests.
See Guard Dog. Farm animals come under rules for farmers. See Farming.
Animal breeders treat the cost of their animals as inventory. See Inventory.
Businesses that board, groom, or train animals can deduct their animal-
related expenses like any other business expenses, depending on what the
expenses are actually for.
Answering Machines
Answering machines can be deducted. See Business Assets.
Expense category: Other Expenses.
More information: IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Answering Service
Telephone answering service fees are deductible. Any initial setup or
installation charges are also deductible.
Expense category: Legal and Professional Services.

Napoleon Bonaparte waged war. Britain had to raise money for

defense, so levied the first English income tax. It set a pattern for
income taxes elsewhere. Burning hatred of Napoleon lives on to this
day.
—L. M. Boyd, “Grab Bag,” San Francisco Chronicle

Antiques
Valuable antiques, if used for decoration only, cannot be depreciated and
cannot be deducted until sold.
Antiques actually used in the business, such as an old desk or a
professional musician’s rare instrument, come under conflicting rules. The
IRS has always said that “rare and valuable antiques” cannot be depreciated
or written off, regardless of how they are used. The Tax Court has overruled
the IRS on several occasions, and allowed the deduction if the item being
deducted can wear out or deteriorate from use (which applies to just about
anything except maybe Fred Flintstone’s granite desk).
Personally, I do not know how the IRS determines if something is “rare
and valuable” or even if it is an antique, a term with no legal definition. If it
were me, I would assume that my beautiful oak filing cabinet was old, but
not that old, and take the deduction. Like too many IRS laws, it’s a
judgment call. If you choose to take the deduction, see Business Assets.
Expense category: If deducting an asset that costs $2,500 or less, Other
Expenses. If deducting an asset that costs more than $2,500 or if
depreciating an asset, Depreciation.
 More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Dealers in antiques treat antiques as inventory, deducted as part of cost
of goods sold. The IRS prohibition does not apply to you. See Inventory.
App
App is short for “application software.” If you spend money for an app, it is
deducted the same as software.
Appraisal Fees
Appraisal fees paid to determine the amount of a loss are deductible. Real
estate appraisal fees are deductible. Appraisal fees involving the purchase
or sale of a business may have to be capitalized (deducted over several
years); see Start-up Costs.
Expense category: Legal and Professional Services.
Architectural Firms
Some architectural firms are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction. This deduction,
however, is available only to businesses that have employees. See Domestic
Production Deduction.
Art Treasures
Art treasures are not deductible. The IRS states that these objects do not
depreciate in value, so no deduction or depreciation is allowed. You report a
profit or loss on the items when you sell them.
Dealers in art treasures: Treat art treasures as inventory, deductible as
part of cost of goods sold. This prohibition does not apply to you. See
Inventory.
Assessments
Local government assessments for repair (not construction) of streets,
sidewalks, water lines, sewers, and the like are deductible.
Expense category: Taxes and Licenses.
Assessments for improvements to your property are not deductible. The
expense is added to the cost of your property and depreciated. These
assessments include new construction of streets, sidewalks, and water and
sewer lines. See Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: Property assessments are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Assets
Business assets can be deducted the year of purchase or depreciated over
several years. See Business Assets.

Count the day won, when the earth, turning on its axis, imposes no
additional taxes.
—F. P. Adams, New York Evening Mail, 1834

Associations
Membership fees and dues for an association, an organization, or a club
may or may not be deductible, depending on what the association is and
what it spends its money on.
Dues and other expenses for professional organizations, merchant and
trade associations, business leagues, unions, chambers of commerce, and
similar business groups are deductible. Dues to community service
organizations such as Rotary, Lions, and Kiwanis are deductible.
If part of your dues to an association or a union is for political lobbying,
that portion of the dues is not deductible.
Expense category: Other Expenses.
Clubs: Dues and membership fees in clubs run for pleasure, recreation,
or other social purposes are not deductible. These include athletic,
luncheon, hotel, airline, sporting, and other entertainment or recreational
organizations, associations, clubs, and facilities. Even if you use a club
membership solely to generate or discuss business, the dues are not
deductible. Sometimes the term “business club” is used to describe such a
facility. If the business club is not a business organization, the dues are not
deductible. Entertainment costs at these clubs, however, if for business, are
50 percent deductible. See Entertainment.
 Meetings and seminars: The cost of attending business meetings and
seminars is deductible even if held at clubs or other non-business locations.
See Travel.
Athletic Facilities
Athletic and recreation facilities on the business premises are deductible if
they are open to all employees. For structures and built-in structural
components, see Building Improvements. For equipment, see Business
Assets.
Dues and membership fees to athletic clubs are not deductible.
Expense category: If deducting equipment that costs $2,500 or less, Other
Expenses. If deducting equipment that costs more than $2,500 or if
depreciating equipment or built-in facilities, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. For
equipment, if the cost is $2,500 or less, see IRS Notice 2015-82, De
Minimis Safe Harbor Deduction.
IRS Red Flag Audit Warning: Unless you have a lot of employees and
a big operation, I suspect any deduction for athletic facilities or equipment
will invite an audit.
ATM Fees
ATM (automatic teller machine) fees are deductible.
Expense category: Office Expenses or Other Expenses.

The American War of Independence had its origin in the refusal to

pay taxes imposed by Britain. Constitutional scholars argue to this
day whether the framers of the Constitution ruled out or allowed an
income tax. But for 85 years, no income tax was ever considered,
until the government ran short of funds during the Civil War. The Act
of Congress of August 5, 1861 imposed a 3% federal income tax.
The Supreme Court ruled it unconstitutional. Congress, determined
to have an income tax, voted 318 to 14 for the Sixteenth Amendment
in 1909.
— Professor C. Northcote Parkinson, The Law and the Profits
Attorneys
I met with an attorney once and asked him what he charged. He said he
charged $400 to answer three questions. I laughed and asked him if he was
joking. He said no, he wasn’t joking. Then he asked me what my third
question was.
Attorney fees are deductible, but see two exceptions below. Also see
Lawsuits.
Expense category: Legal and Professional Services.
Exceptions: Expenses incurred before starting your business and
expenses associated with buying a business come under special rules. See
Buying a Business, Start-up Costs, and, if you are starting a corporation,
Organizational Costs. Attorney fees related to acquiring property may have
to be capitalized, added to the cost of the property. If this is a substantial
sum, I suggest talking to an experienced accountant.
Accountants are usually less expensive. Most business issues, including
many legal requirements, can often be handled by an experienced
accountant, who probably charges less than an attorney. A good accountant
will know when an attorney is required.
Audits
The cost of an audit by an accounting firm or auditing service is deductible.
The cost of hiring an accountant or lawyer to defend yourself in an IRS
audit of your business is deductible. Any taxes or IRS penalties are not
deductible. Interest on back taxes is not deductible except for corporations.
Expense category: Legal and Professional Services.
Automobiles
You can deduct the cost of using an automobile for business, or you can
take a Standard Mileage Rate. See Vehicles.
Awards
For awards and prizes given out to customers, see Prizes.
Employers: Awards paid to employees are considered taxable wages
subject to all payroll taxes. It does not matter if an award is money, debit
cards, gift certificates, or goods: The awards are taxable. However, small
token awards of merchandise—but not cash or gift cards or certificates—
are not taxable to the employee.
 There is one exception to the employee award rule. The IRS recognizes
something they call an “employee achievement award.” Up to $400 per
year can be given to an employee, tax free, as an employee achievement
award, and the employer gets a deduction. The maximum increases to
$1,600 a year if you have an IRS-approved “qualified plan.” Employee
achievement awards are for length of service or for safety, but not for things
like top salesperson of the month or extra hours worked. Employee
achievement awards cannot be “disguised compensation.” You will
probably need help from an experienced accountant to set up such a plan.
Corporations: Owner/employees of C corporations (but not S
corporations) can give themselves employee achievement awards. However,
see the warning below.
Expense category: If an employee achievement award, Employee Benefit
Programs. If not, Wages.
IRS Red Flag Audit Warning: Owner/employees of C corporations who
give themselves (or give family members on the payroll) employee
achievement awards, basically getting an extra $400 or $1,600 in tax-free
pay, could be challenged by the IRS, claiming that the deduction does not
meet the “ordinary” or “necessary” test. Giving yourself a tax-free award
looks too much like you’re padding the bill, with no economic justification
for the payment other than beating the tax man.

In seventeen hundred seventy six, a group of American mavericks

Renounced the yoke of tyranny, the tax on stamps, the tax on tea
Our fathers felt that we were fit, to tax ourselves and you’ll admit
We have been very good at it.
—American lyricist Howard Dietz (1896–1983)

Babysitting
See Dependent Care.
Bad Debts
Some bad debts are deductible. These include customers’ bounced checks
and credit card charges customers refuse to pay: payments you received and
posted to your income record before you found out the check or credit card
was no good.
If a customer owes you money but never pays, you cannot take a bad debt
expense for uncollectible accounts (if you use the cash method of
accounting, which most small businesses use), because the income was not
recorded in the first place. You get a bad debt deduction only if you
recorded income in your income ledger that you are unable to collect.
A self-employed individual cannot take a bad debt deduction for his or
her own time devoted to a client or customer who doesn’t pay. You do not
get a deduction for the income you should have earned, the money you
were cheated out of. I know that doesn’t sound fair, and it isn’t, but that is
how the tax laws are written. You are out the money you should have
earned, and the IRS says, “Tough luck.”
You do get a deduction for any inventory (goods) you sold that you didn’t
get paid for. Inventory is deducted at the end of the year as part of cost of
goods sold. See Inventory.
Deduct only those bad debts you are certain are uncollectible. The bad
debts should be specifically identified. Amounts cannot be estimated. If you
are unsure, you can wait until next year. You can write off a bad debt in any
future year that it becomes definitely uncollectible.
Expense category: Bad Debts.
Bad debt reserve: A few businesses that anticipate large bad debts
sometimes set aside money in a bad debt reserve fund, sort of like self-
insurance. Such reserves are not really business expenses and are not tax
deductible.
Bank Charges
Bank charges, services, ATM fees, penalties, and check writing and credit
card fees are deductible. Credit card chargebacks are deductible. Check
printing costs are deductible.
Expense category: Office Expenses.
Bankruptcy
Cost of filing for bankruptcy and related expenses are deductible.
Expense category: Legal and Professional Services.
 Customer bankruptcy: If one of your customers files for bankruptcy
and you are unable to collect money owed to you, you cannot take a bad
debt expense for uncollectible accounts (if you use the cash method of
accounting, which most small businesses use), because the income was not
recorded in the first place. You get a bad debt deduction only if you
recorded income in your income ledger that you are unable to collect. Any
expenses you incur to try to collect the debts are deductible.
If a supplier goes bankrupt, and if you have paid for goods or services not
delivered, you can deduct your loss as a bad debt.
Expense category: Bad Debts.
Barter
“In the beginning, there was no money.” But there always was the tax man,
and barter does not escape his grasp. Barter transactions are taxable just like
all other business transactions.
When you exchange or trade your business goods or services for someone
else’s goods or services, it is called barter. The “fair market value” of the
goods or services you receive is included in your regular business income
and treated just like any other business income. “Fair market value” is what
you would have normally paid for the goods or services in the normal
course of business—an “arm’s length transaction”—had you been paying
cash.
You report the full fair market value as business income regardless of
what you are receiving or how you use it. It could be a business computer
or a paint job for your office, or it could be a guitar or horse riding lessons
for your kid. Either way, the value of what you receive is taxable business
income. If you do use the goods or services in your business, you can take a
tax deduction just like you would if you had paid cash for what you
received. The amount you deduct is the fair market value of what you
receive.
You also get a tax deduction for merchandise you are trading away, but
only for your cost of the merchandise, not the fair market value. You deduct
the merchandise just like you would if you sold the merchandise, as part of
cost of goods sold; see Inventory. If you are trading your services, you do
not get a tax deduction because you cannot deduct the value of your own
time.
 If you join a barter club (exchange, network), the rules are basically the
same. Barter club commissions and fees are deductible if the transaction is
for your business. Barter clubs report all transactions to the IRS.
Businesses that deal in digital currency such as Bitcoins are conducting
business identical to barter transactions as far as the IRS and tax law is
concerned. The amount you record as an expense is the fair market value of
the goods or services received.
Expense category: Depends on what is acquired in trade.
IRS Red Flag Audit Warning: In IRS audits of businesses, one of the
first questions often asked is, “Do you engage in trade or barter?” A yes
answer is a signal to the auditor to expand the scope of the audit, looking
for unreported income. Also see the warning under Bitcoins.
Benefits
For employee fringe benefits, see Fringe Benefits. For other benefits, look
up the individual items.
Bicycles
Bicycles used for business can be deducted the year of purchase or
depreciated over several years. If the bicycle is used partly for non-business
purposes, the costs are prorated between business and personal use. See
Business Assets.
Expense category: If deducting a bicycle that costs $2,500 or less, Other
Expenses. If deducting a bicycle that costs more than $2,500 or if
depreciating the bicycle, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Employers: Employers can reimburse employees who bicycle to work up
to $20 a month for expenses. See Commuting.

According to the Internal Revenue Service, the number 1040 (Form

1040) was a random selection. In Old England, Lady Godiva rode
naked through the streets of Coventry to protest oppressive taxes.
The year was 1040.
If Patrick Henry thought that taxation without representation was
bad, he should see how bad it is with representation.
—Farmers’ Almanac

Billboards
Rental costs for billboards are deductible. Billboards you own can be
deducted the year of purchase or depreciated over fifteen years.
Expense category: If renting or leasing, Rent or Lease. If purchasing a
billboard that costs $2,500 or less, Other Expenses. If the cost is more than
$2,500 or if depreciating the billboard, Depreciation.
More information: For billboards you own, IRS Publication 946, How to
Depreciate Property. If the cost is $2,500 or less, see IRS Notice 2015-82,
De Minimis Safe Harbor Deduction.
Bitcoins
Business expenses paid in Bitcoins and other digital currencies are
deductible exactly the same as expenses paid in US currency. The amount
of the expense is the fair market value of the goods or services you are
getting in exchange for the Bitcoins. This is identical to the IRS rules
regarding barter. See Barter.
Expense category: Depends on the type of expense.
IRS Red Flag Audit Warning: The US Department of Justice thinks
that anyone using Bitcoins is likely to be involved in illegal activities or tax
fraud, and it has instructed IRS agents to be looking for Bitcoin activity.
Blue Sky
“Blue sky” is another term for goodwill, an intangible asset. If purchased as
part of the purchase price of a business, it is amortized over fifteen years.
See Goodwill. Also see Buying a Business.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.

Small businesses are very unhappy with the IRS. And I don’t blame
them.
—Former IRS Commissioner Charles O. Rossotti
Boats
Boats, if needed for your business, can be deducted the year of purchase or
depreciated over several years. See Business Assets. Boats used for
recreation or entertainment are usually not deductible even if they are used
only for business purposes.
Expense category: If deducting a boat that costs $2,500 or less, Other
Expenses. If deducting a boat that costs more than $2,500 or if depreciating
the boat, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
IRS Red Flag Audit Warning: Unless you are in the business of
operating boats (fishing, charters, rentals, tugboat), a business deduction for
any kind of watercraft will increase your likelihood of an audit. If audited,
the IRS may ask to see detailed records of the boat’s use, looking for invalid
deductions that were in fact personal, non-business expenses.
Bodyguard
(1) If needing a bodyguard is an ordinary and necessary expense of your
business, it is a deductible expense. (2) If needing a bodyguard is an
ordinary and necessary expense of your business, I would suggest you start
a different business.
Expense category: Other Expenses.
Bonds
Surety bonds: A surety bond is a type of insurance. If you do not complete
a job, for any reason, a surety bond pays the costs. Service businesses such
as auto repair shops and building contractors are often required by law to
have surety bonds. The cost of surety bonds is deductible.
Expense category: Insurance.
Fidelity bonds: A fidelity bond is also a type of insurance. Fidelity
bonds are placed on employees, insuring against theft or embezzlement by
the bonded employees. If you have employees going into people’s homes
and businesses, such as a janitorial service, a fidelity bond protects you and
the client should one of your employees turn out to be a thief. You can also
have fidelity bonds on independent contractors you hire. The cost of fidelity
bonds is deductible.
Expense category: Insurance.
Interest-bearing bonds: There are monetary documents called bonds,
interest-bearing “instruments” (as they are often called) similar to notes or
loans. The bonds themselves are not deductible. The interest is deductible.
Expense category: Interest.
Bonus
Self-employed individuals cannot deduct any bonus you pay to yourself.
See Paying Yourself.
Employers: Bonuses given to employees are wages, taxable to the
employees and deductible for the employer at the time the bonus is given.
Year-end bonuses are deducted the year the bonus is given. A bonus handed
out in January for the previous December is a January expense, deductible
in the new year. See Wages.
Corporations: Owners of corporations are employees of their businesses.
Bonuses you pay to yourself are taxable employee wages. The rules are the
same as the rules for employers.
Bookkeeping
Bookkeeping, recordkeeping, accounting, and similar services are
deductible. Cloud or other internet-based software can be deducted
currently. Bookkeeping software you purchase can be deducted currently or
can be amortized over three years; see Software.
Expense category: For services, Legal and Professional Services. For
internet subscriptions or access, Office Expenses. For software purchased,
Depreciation.
Also see Accountants.
Booking Agency Fees
For musicians and entertainers, booking agents usually deduct their fees
from whatever pay is coming to you. But if you pay any booking fees, or
any other fees out of your pocket, the fees are deductible.
Expense category: Commissions and Fees.
Books
Books, magazines, newsletters, newspapers, and all other publications are
deductible. The cost of buying and maintaining your books (your ledgers) is
deductible.
Expense category: For publications, Office Expenses. For bookkeeping
services, Legal and Professional Services.

Bounced Checks
Bounced checks are deductible; that is, the ones your lousy customers
bounce on you. You can deduct the amount of the check, assuming you
recorded the check as income when you got the check. Any bank charges
are also deductible.
Expense category: For the amount of the check, Bad Debts. For the bank
charge, Office Expenses.
Your own bounced checks, the ones you wrote, are not deductible.
Because nothing was actually paid, right? That makes sense, doesn’t it?
Bank charges and penalties are deductible.
Expense category: Office Expenses.
Boxes
Boxes, cartons, and other containers and packaging materials that hold the
goods you sell are considered part of your inventory and are included in
cost of goods sold. See Inventory. If, however, the cost of the boxes is not
significant or if the boxes are used only occasionally, most businesses
deduct the costs currently as shipping supplies.
Expense category: Supplies.
Bribes
It is illegal to bribe a US or foreign government official, to offer a bribe to
win a foreign contract, to bribe a contractor working on a federally funded
project, or to bribe a banker to influence loan transactions. Illegal payments
are not deductible.
But some bribes are legal, and legal bribes are deductible. The federal
government has no laws against bribing a company official, a purchasing
agent, a sales rep, or other people not involved with the government or
banking. But your state may outlaw these bribes. If the bribe is illegal in
your state, no deduction. The IRS goes by state laws on this deduction.
By the way, business gifts are deductible, but only up to $25 per recipient
per year. Is a gift a bribe? Is a bribe a gift? Twenty-five dollars?
Expense category: If legal, Other Expenses.
Also see Kickbacks. Or not. You can run a successful business without
ever resorting to underhanded or questionable or distasteful transactions.
Stand tall, and as Jiminy Cricket said, “Always let your conscience be your
guide.”
Broker’s Fees
A broker’s fee to buy or sell real estate is added to the value of the real
estate and depreciated. See Buildings. A broker’s fee as part of buying or
selling a business is amortized over five years. See Buying a Business.
Any other broker’s fees paid in the normal course of business are
deductible.
Expense category: Legal and Professional Services.
Building Components
Most building components are considered part of the building and are
depreciated along with the building. See Buildings. Some components of
buildings, however, can be depreciated separately from, and at a faster rate
than, the building itself. Movable partitions, built-in supports for heavy
equipment, portable air conditioning, awnings, and some fixtures may fall
into this category. See Building Improvements below.

The current tax system is an unwieldy, inefficient, ungodly mess.

—Former IRS Commissioner Shirley Peterson

Building Improvements
Building improvements, renovations, remodeling, refreshing, and repairs—
all somewhat overlapping terms—can be deducted currently or depreciated
over several years, depending on several factors.
The general rule (though with several exceptions) is that building
improvements that add to the value or extend the useful life of a building, or
adapt the building to a new use, are depreciated over the life of the building.
The exceptions:
Improvements of $2,500 or less: Under a law called “de minimis safe
harbor,” any improvements of $2,500 or less can be deducted currently.
(The terms “de minimis” and “safe harbor” are explained under Business
Assets, which I encourage you to read, as it is a real indicator of how the
IRS thinks about small business expenses.)
Improvements of $10,000 or less: Another IRS safe harbor rule, “safe
harbor for small taxpayers,” can be used by any business that has annual
gross sales of $10 million or less (the IRS’s definition of “small”
taxpayers), and applies to any building that costs $1 million or less. You can
deduct up to $10,000 a year in building improvements and repairs, but only
up to a maximum of 2 percent of the building’s cost. So for a building that
costs under $500,000, the maximum you can deduct for improvements and
repairs is 2 percent of the cost of the building. Improvement costs greater
than the 2 percent maximum are depreciated over the life of the building.
This rule applies to buildings you own or are renting.
Improvements to retail stores and restaurants: Under a law called
“remodel/refresh safe harbor,” owners of retail stores and restaurants can
deduct 75 percent of the cost of remodeling and depreciate the 25 percent
balance over fifteen years. You can ignore this 75–25 percent rule (and take
a full deduction currently) for improvements that meet the $2,500 or
$10,000 rules above.
Leasehold improvements: Leasehold improvements are nonstructural
components of a building that you are renting or leasing, such as air
conditioning, fixtures, support for heavy machinery, partitions, and
awnings. If you, the tenant, are paying for leasehold improvements, you can
deduct the expenses that meet any of the above exceptions. Expenditures
that don’t meet the above exceptions can be depreciated over fifteen years.
Repairs: The IRS laws for deducting repairs are contradictory and
confusing (and explained under Repairs), but the bottom line is that most
small businesses can deduct any repairs costing $10,000 or less. Repairs
come under the two “safe harbor” rules above.
Depreciation as an option: Improvements that are eligible to be deducted
currently can instead, at your option, be depreciated, deducting some of the
expense this year and some of the expense in future years. Most businesses
prefer, whenever possible, to take the current deduction (writing off the
entire expense) because the calculations are simple and the tax savings are
immediate. For more information on depreciation and why you might want
to take it instead of deducting the entire expense currently, see
Depreciation.
Expense category: If deducting under the safe harbor rules, Other
Expenses. If deducting as a repair, Repairs and Maintenance. If
depreciating, Depreciation.
More information: For depreciation, IRS Publication 946, How to
Depreciate Property. For the de minimis deduction, IRS Notice 2015-82,
De Minimis Safe Harbor Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including building improvements in the manufacturing area, may
have to be included in the cost of inventory. Most businesses with indirect
costs under $200,000 are exempt from this requirement, but see “Indirect
Costs” under Inventory.
Home-based business: Home renovations and repairs are part of the
Home Expenses deduction, not deducted separately. See Home Expenses.
Most informed observers are justifiably horrified at the complexity of
the Tax Code. The cost of taxpayer compliance is over $80 billion
per year, more than eight times the cost of the IRS budget.
—Former IRS Commissioner Charles Rossotti

Buildings
Buildings that you or your business owns are depreciated. See Depreciation.
Building improvements, remodeling, or renovating can be deducted
currently or depreciated, depending on several factors. See Building
Improvements above. Buildings you rent are deductible. See Lease and
Rent Expenses.
Some bulk storage facilities, single-purpose agricultural and horticultural
buildings, restaurant property, retail property, and some energy-saving
improvements to commercial real estate can be deducted the year of
purchase.
Expense category: If owned, Depreciation. If renting or leasing, Rent or
Lease.
More information: IRS Publication 946, How to Depreciate Property.
Land: The land under the building cannot be depreciated or deducted.
You get no tax deduction until you sell the land. For depreciation
deductions, you will need to separate the cost of the building from the cost
of the land.
Renting to yourself: A sole proprietor who owns a building cannot rent
the building to his or her business. For tax purposes, there is no rental
income or rental expense. The owner of a corporation can rent a building to
his or her corporation, and the corporation can get a tax deduction, but the
rent would be taxable income to the owner of the corporation. Likewise,
partners can rent buildings to the partnership, though there can be tax
complications in such an arrangement. This is an area to discuss with an
accountant. Who legally owns the building (you or your business) and how
you structure the deduction can have a major impact on taxes.
Rehabilitation Tax Credit: If you are rehabilitating a certified historic
building or a building built before 1936 for use in your business, you may
be eligible for a special tax credit in addition to the regular depreciation
deduction. See Tax Credits.
 Disabled Access Tax Credit: If you renovate your workplace to
accommodate people with disabilities, you may be eligible for a special tax
credit. See Disabled Access.
Real estate developers: Predevelopment costs such as planning and
design, blueprints, building permits, engineering studies, landscape plans,
and the like cannot be deducted currently but have to be capitalized. If you
construct low-income housing, you may be eligible for a Low-Income
Housing Tax Credit. See Tax Credits.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including the building, may have to be included in the cost of
inventory. Most businesses with indirect costs under $200,000 are exempt
from this requirement, but see “Indirect Costs” under Inventory.
Home-based business: Buildings are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Also see Building Improvements and Building Components.

It takes 4.6 billion hours of paperwork and costs $140 billion for all
Americans to file federal income taxes. This is in addition to the
amount of tax paid.
—J. Scott Moody, senior economist, The Tax Foundation

Business Assets
This deduction is for business assets you own or are purchasing, including
lease-purchases. For assets you are renting or leasing, see Lease and Rent
Expenses.
Business assets are possessions you use in your business: machinery,
equipment, tools, furniture, fixtures, office machines, computers, display
cases, vehicles, buildings, and assets specific to the kind of business or
profession you’re in, such as a musician’s instruments or a surveyor’s
transit. Business assets also include intangible assets such as patents,
trademarks, and copyrights. Software is an intangible business asset, even
though it may be on a tangible (physical) disk or flash drive.
Business assets (for this tax deduction) do not include inventory, which is
deducted as part of cost of goods sold; see Inventory. Business assets also
do not include supplies or any assets that wear out or become useless in a
year or less, which can be deducted as Supplies or Office Expenses.
Most tangible business assets both new and used, other than buildings,
can be deducted the year of purchase or, at your option, can be depreciated
over a period of years, deducting part of the cost each year. Most buildings
and intangible assets are depreciated; see Depreciation. Land and some
antiques cannot be deducted or depreciated until sold. See Land, Antiques,
and Art Treasures.
The IRS has two options for writing off tangible assets the year you
purchase them, depending on the cost.
Option 1: Assets that cost $2,500 or less can be deducted the year you
purchase them, under a law called the De Minimis Safe Harbor Method.
“De minimis” means trivial or insignificant, which I sure wouldn’t call
$2,500, but then the IRS and I live in different worlds. It’s called “safe
harbor” because the IRS decided, I guess, that $2,500 was too small an
amount to waste their time on, so they won’t question you; you’re “safe” to
just take the deduction (which should give you some idea how concerned an
auditor might be over some of your other “insignificant” deductions).
The $2,500 limit is per asset. You can deduct every tangible asset you
buy that costs $2,500 or less. If you choose this “safe harbor” option, you
must use it for all tangible assets that cost $2,500 or less.
The limit increases to $5,000 per asset if your business has what’s called
an Applicable Financial Statement, or AFS, which means you’ve gone
through a CPA-certified audit, which few if any small businesses have
done.
Expense category: Other Expenses (not Depreciation). You are also
required to include a statement with your tax return listing the assets
individually.
More information: IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Option 2: Assets that cost more than $2,500 can also be deducted the
year you purchase them, under a different law known as the First Year
Write-Off, or Section 179 deduction. Option 2 has an annual maximum of
$510,000, all assets combined (this amount can increase every year). Assets
that exceed the maximum are depreciated.
 Option 2 can be used for most tangible assets, including those that cost
$2,500 or less. If you want, you can skip Option 1 and use Option 2 instead.
But Option 2 has an annual maximum and many restrictions, while Option
1 does not. Businesses are better off using Option 1 for the $2,500-and-less
assets and using Option 2 for the more expensive assets.
Unlike Option 1, you can write off some assets under this option and
depreciate others. However, there are many restrictions on what assets can
be deducted using Option 2:

1. If you have more than one unincorporated business, $510,000 is

the maximum for all combined businesses.
2. Married couples are allowed a maximum write-off of $510,000
between them.
3. If you purchase more than $2,030,000 in depreciable assets in any
one year, the $510,000 maximum is reduced, dollar for dollar, by
the amount in excess of $2,030,000. This maximum can also go up
every year.
4. The deduction cannot exceed your taxable income. For sole
proprietors, taxable income is all income, both business and non-
business, reported on your tax return (married couples combined if
filing jointly). Any deduction disallowed because of this income
limitation can be carried forward to the next year, and future years
if necessary, until the assets are fully written off.
5. Automobiles and SUVs have a lower maximum Section 179
deduction. Trucks and vans are not subject to this limitation. See
Vehicles.
6. If an asset is used 50 percent or less for business the first year, you
are not eligible for this Section 179 deduction.
7. Assets that are purchased one year but paid for in the next year,
and assets bought in installments with payments over more than
one year, can be written off the year you first use the assets, paid
for or not.
8. If you sell assets you’ve previously written off, or convert them to
non-business use, you may have to “recapture” the amount you
wrote off (add it back into income) the year of sale or conversion,
depending on how many years you own the assets.
 9. Assets you owned before going into business, that you are using in
your business (“converted to business use”), are not eligible for the
Section 179 deduction. These assets can be depreciated; see
Depreciation. The IRS has not ruled if “converted” assets are
eligible for the De Minimis Safe Harbor deduction (Option 1).
That deduction applies to assets “acquired” in the current year,
which may or may not include assets converted to business use. I
suggest depreciating the assets.
10. Most buildings cannot be deducted under this Section 179 option,
but there are a few exceptions. Single-purpose agricultural and
horticultural buildings, restaurant property, retail property,
leasehold improvements, and some bulk storage facilities are
eligible for first year write-off. This is a major tax break if you
qualify. Be sure to get help from an experienced accountant.

Manufacturers and crafts businesses: Indirect costs of producing goods

for sale, including business assets used for manufacturing, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Expense category: Depreciation. Note that the assets deducted under
Option 2 are listed under Depreciation, even though you are not
depreciating them. This may sound confusing, because assets deducted
under Option 1 are listed under “Other Assets,” not under Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Rental businesses: Businesses that rent out any type of products can
deduct the assets you rent just like other business assets.
Disabled Access Credit: Equipment that is used to assist disabled
employees or customers is eligible for the Disabled Access Tax Credit. See
Disabled Access.
Dealers in business assets: Companies that sell business assets, such as
office supply stores, furniture stores, equipment dealers, and car
dealerships, and companies that manufacture business assets treat the assets
they sell as inventory. The business asset rules above do not apply to these
businesses (for the assets they manufacture or sell).
Business Associations
Most expenses for business associations are deductible. See Associations.
Business Cards
Business cards are deductible.
Expense category: Office Expenses.
Business Gifts
Tax deductions for business gifts are limited to $25 per recipient in any one
year, though with some exceptions. Gifts with your company name or logo
imprinted on them are exempt from the $25 limitation. Gifts to business
entities, such as a gift to a corporation, if not given to specific individuals,
are exempt from the limitation.
Prizes awarded to customers are not business gifts and are not subject to
the $25 limitation, but prizes have tax problems you should know about.
See Prizes.
Samples of your merchandise, given to prospective buyers or to people
who might review or publicize your products, are not considered gifts and
are not subject to the gift limitation. You write off the cost of the free
samples (not the retail or market value) as part of cost of goods sold. See
Inventory.
Expense category: For gifts, Office Expenses.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
Employers: Cash gifts to employees, “cash equivalents” such as gift
cards and gift certificates, and items of significant value are considered
taxable wages, subject to payroll taxes. Small nonmonetary gifts, such as a
Thanksgiving turkey or a birthday gift, are deductible and are not
considered part of the employee’s wages. Gifts to employees are not subject
to the $25 cost limit.

What’s bad news for some is a bonanza for others. Those tens of
billions in costs are going into the pockets of tens of thousands of tax
preparers who are organized and love complexity as much as the
rest of us hate it.
 —Columnist Nicholas von Hoffman

Business Licenses
Business licenses, registrations, and similar fees are deductible.
Expense category: Taxes and Licenses.
Business Opportunity
Business opportunity refers to a business “package” or “kit” that you can
buy to start your own small business, such as a cleaning system, a vending
machine route, a sales cart, or a distributorship arrangement. Deductions for
business opportunities depend on what you are actually buying—an idea or
instructions, equipment, inventory, supplies—and whether you are already
in business when you make the purchases. See Buying a Business and Start-
up Costs. If you are starting a corporation, also see Organizational Costs.
Business Trips
Business trips are deductible, but there are many rules and restrictions. See
Travel.
Business Use of Your Home
See Home Expenses.

From a tax lawyer’s point of view, we’re in heaven.

—Tax attorney Leslie B. Samuels

Bus
You can deduct the cost of using a bus for business, but with limitations.
See Vehicles.
Mobile businesses and touring entertainers: If you are staying in a bus
while traveling, your travel and living expenses are deductible (the cost of
meals is 50 percent deductible). If, however, you are constantly traveling,
living in your bus, the IRS considers the bus to be your home and will
disallow most travel expenses, including the costs of operating the bus. This
is a major issue with IRS auditors. See Travel.
Buying a Business
There are four ways someone might buy a business: (1) purchasing a
business from the former owner of the business; (2) buying a franchise,
where you become a franchisee, purchasing the right to the franchise name
and operating as though your business was part of a much larger operation;
(3) buying into a direct-sales (multilevel, networking) program, usually
where you buy and resell consumer goods, often cosmetics, vitamins, or
kitchenware; (4) buying a “business opportunity,” where you purchase a
start-your-own-business “kit” that includes training guides, and possibly
inventory and equipment.
Buying an independent business: When you buy someone else’s
business, some of the purchase price is deductible, some of the cost is
depreciated over several years, and some of the cost may not be deductible
at all. A lot depends on how the business is structured legally (corporation,
partnership, LLC, or sole proprietorship) and what the purchase agreement
says. The precise legal wording can affect how the sale is taxed, how the
assets are valued for tax purposes, and how much of the purchase price will
be deductible.
For most business purchases, you are not actually buying a “business,”
you are buying a collection of assets that are part of a business: equipment,
furniture and fixtures, inventory, supplies, possibly a building, possibly the
accounts receivable, possibly the debts and liabilities. The purchase price
sometimes includes a covenant not to compete: The seller agrees not to start
another business that will be in competition with the one you are buying.
You may also be buying what’s called goodwill, money you are paying
above the actual value of the assets. An ongoing, successful business is
worth more than a new, untested business. That “worth more” is the
goodwill, obviously a very subjective value, and the reason goodwill is also
called “blue sky” (as in “picking a number out of thin air”).
Each component of the business (assets, inventory, goodwill,
commissions) is valued separately, and each component comes under
different tax deduction rules. You may also be paying a business broker’s
commission. A lot of tax money is at stake here. You should talk to an
experienced tax accountant before signing any agreement.
Expense category: Depends on what is being purchased.
Buying a franchise, business opportunity, or direct-sales
distributorship: Tax deductions for buying a franchise or other
prepackaged business opportunity depend on what you are actually
purchasing. A one-time fee to become a franchisee or distributor is
considered an intangible asset, and is amortized over fifteen years. See
Depreciation. Ongoing annual franchise or distributor fees can be written
off when paid (Expense category: Other Expenses). Costs for equipment,
inventory, and supplies are deducted under the rules for the specific items
you are purchasing. Also see Start-up Costs and, for corporations,
Organizational Costs.
Cafeteria
Employers can deduct the cost of operating a company cafeteria if more
than 50 percent of the meals eaten there were served to employees who
needed to be available during their meal breaks, or because there were no
other reasonable meal alternatives for the employees.
Expense category: Varies depending on actual expenses.
Cafeteria Plan
This is a term for an employee fringe benefit plan, also known as a Flexible
Spending Account, where you can reimburse employee medical and child
care expenses. Employees get to choose from several fringe benefit options,
sort of like choosing food from a cafeteria.
If set up properly, the costs of a cafeteria plan are deductible for you, the
employer, and not taxable to your employees. This will require the help of
an experienced accountant.
Corporations: Owner/employees of regular C corporations are eligible
for most employee fringe benefits, but owner/employees of S corporations
are usually not eligible. Check each listing to see which types of businesses
qualify.
Expense category: Employee Benefit Programs.
More information: IRS Publication 15-B, Employer’s Guide to Fringe
Benefits.
Campaign Contributions
Political contributions are not deductible.
Cancellation Penalties
Cancellation penalties are deductible.
 Expense category: Other Expenses.
Capitalized Expenses
“Capitalized” is a tax term that means the cost of an asset is deducted over a
period of years instead of being deducted the year incurred. For tangible
assets, the deduction is called depreciation. For intangible assets such as
patents and trademarks, the deduction is called amortization. Look up
individual assets to see which assets can (or must) be capitalized.
Carrying Charges
A carrying charge is a service charge or financing charge for buying
something on time, in installments, or on layaway. Carrying charges are
treated like interest charges and are usually deductible. See Interest.
Expense category: Interest.
Cars
You can deduct the cost of using a car for business, or you can take a
Standard Mileage Rate, but with limitations. See Vehicles.
Cartons
Cartons, boxes, and other containers and packaging used to hold the goods
you sell are considered part of your inventory and included in cost of goods
sold. See Inventory.
If, however, the cost of the containers or packaging is not significant or
the containers are used only occasionally, most businesses write them off
currently as shipping supplies or office supplies.
Expense category: Supplies.

Laws, they are spider webs for the rich and mighty, steel chains for
the poor and weak, fishing nets in the hands of government.
—French printer Pierre Joseph Proudhon (1809–1865)

Casualty Losses
Business losses from fire, storm, or other casualty or from theft, shoplifting,
or vandalism are sometimes deductible and sometimes not, depending on
what was destroyed or stolen. There are different rules for different types of
losses and different types of businesses.
First and most important, document your losses. Take photos, make a list
of everything affected, and if theft or vandalism is involved, file a police
report. Theft and vandalism losses are deducted the year discovered,
regardless of the year they occurred.
Any loss covered by insurance is not deductible. Losses in excess of
insurance coverage may be deductible, depending on what was destroyed or
stolen. If you have insurance, you are required to file a claim with the
insurance company or you cannot take a tax deduction on any of the insured
property.
For businesses other than C corporations, most theft and casualty losses
are, unfortunately, not deductible as business expenses. The losses are
deducted on the owner’s 1040 tax return. Even though it is a business loss,
it is not reported on the business tax form. Because of this illogical law,
cash and business assets stolen from your business do not reduce your
business profit. The only exception to this rule is inventory. Inventory that
is stolen, damaged, or destroyed is deducted as part of your cost of goods
sold. See Inventory.
Expense category: If inventory, Cost of Goods Sold.
More information: IRS Publication 547, Casualties, Disasters, and
Thefts. Also see the Instructions for Form 4684, Casualties and Thefts.
Cell Phones
Cell (cellular) phones and smartphones, if used 100 percent for business,
are 100 percent deductible. See Business Assets. If your phone is used
partly for business, you can deduct the percentage of the cost used for
business. This includes the cost of the phone, the cost of any contract, and
the monthly fees. Determining the percentage used for business (incoming
and outgoing calls and text messages and whatever else you are using the
phone for) can be a real nuisance, and most businesses estimate usage. If
you are audited, however, and you don’t have a record of your business
usage, an IRS auditor could disallow the deduction, but probably wouldn’t.
I suggest keeping a record if you can, and making an honest estimate if you
can’t. An auditor would have to be in a mighty bad mood to disallow the
deduction.
 Expense category: For purchase, Other Expenses. For monthly fees,
service contracts, and repairs, Office Expenses.
More information: For purchase, IRS Notice 2015-82, De Minimis Safe
Harbor Deduction.
CGS
“CGS” stands for cost of goods sold. See Inventory.
Chargebacks
All business-related chargebacks are deductible.
Expense category: Depends on what the chargeback is for. If you aren’t
sure, use Office Expenses.
Charitable Contributions
See Donations.
Chauffeur
As I discussed in the beginning of this book, all business expenses, in order
to be deductible, must meet three IRS requirements. They must be (1)
ordinary, (2) necessary, and (3) not lavish or extravagant. If you can look an
underpaid, underappreciated IRS agent in the eye and convince her that the
cost of hiring your personal chauffeur is ordinary, necessary, and not lavish
or extravagant, I congratulate you.
Seriously, though, there could be a business situation (for example, when
you want to make an impression on a client) where a chauffeur is
appropriate, and deductible. Be aware that you may be walking a fine line
between promoting your business, which is fully deductible, and
entertainment, which is only 50 percent deductible. You may want to
discuss this deduction with a tax accountant.
Expense category: Legal and Professional Services.
IRS Red Flag Audit Warning: Definitely. If the deduction is not going
to save you a lot of tax money, I suggest that you consider not taking it.
Child Care
See Dependent Care.
Child care business: Expenses for running a child care business are
deductible like the expenses of any other business, including meals served
to the children (with exceptions; see Meals). If you run a child care business
out of your home, see Home Expenses for the child care deductions
allowed.
Children on Payroll
You can hire your children and get a deduction for their wages; and within
certain limitations, the children are not subject to income tax or payroll
taxes. This deduction for your children applies to sole proprietorships,
spousal partnerships, spousal joint ventures, and one-person LLCs. It does
not apply to corporations, regular partnerships, or multi-owner LLCs.
The rules are very specific, but generally, if you have children under
eighteen years old, you can pay each of your children who qualify up to
$6,350 a year tax free and get a business deduction for the wages. The
maximum amount changes from year to year; it is the same as the standard
deduction for unmarried individuals. The children should be doing
legitimate, business-related work to justify the salary earned: You can’t hire
your seventeen-year-old to babysit your three-year-old and get the
deduction.
The children do not have to file a federal income tax return, and they owe
no federal income taxes. And you, the parent-employer, get a full tax
deduction for the wages paid. It’s a rare tax law indeed that lets you have
your cake and eat it too.
If your child has what’s called unearned income, such as bank interest,
that income cannot exceed $1,050; and the child’s total income, wages and
all other taxable sources, cannot exceed $6,350.
If the child does have excess unearned income, or if the child is earning
more than the $6,350 income maximum, he or she is required to file an
income tax return. But the child’s wages, regardless of the amount paid, are
exempt from Social Security and Medicare taxes.
You will need to fill out a W-4 payroll form for each child (does not need
to be sent to the IRS) and, at year end, file W-2 and W-3 payroll forms as
you would for any employee, but no payroll taxes are due. You do not need
to file a 941 or 944 payroll tax return.
State taxes: Check with your state employment department before you
hire your children. Many states have similar laws to the IRS, impose no
state income or payroll taxes, nor require workers’ compensation insurance
on your children. Check your state employer’s guide. Do not rely on verbal
information. People who work at state employment departments are often
unaware of child employment laws.
Children who hire their parents: The parents are considered regular
employees, subject to all regular income and employment taxes except
Federal Unemployment Tax (FUTA). This law does not apply to
corporations.
Expense category: Wages.
More Information: IRS Publication 15, Employer’s Tax Guide.
Classes
Many classes and education expenses are deductible. See Education.
Cleaning Service
Cleaning and janitorial services for the business premises are deductible.
Cleaning and laundry services for clothing used exclusively for work are
deductible if the clothing is unsuitable for street wear, such as a uniform,
costume, or protective gear, or clothing with your company’s logo or
advertising. See Clothing.
Cleaning and laundry services for your regular clothing are deductible
when you’re traveling away from home overnight on business.
Expense category: Office Expenses. If traveling, Travel.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including cleaning the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Cleaning services for the business portion of the
home are part of the Home Expenses deduction, not deducted separately.
See Home Expenses.

Special interest tax perks leave the IRS under terrific pressure to
collect from ordinary Americans who don’t have pals in Congress.
—Newsweek magazine

Closing Costs
Loan closing costs include broker commission, processing fees, title
insurance, property taxes, termite reports, transfer taxes, loan fees, points,
and other costs. Some of these closing costs are deductible immediately;
some are deducted over a period of years. This is a complicated area of law
that may need the help of an experienced accountant.
Expense category: Varies depending on actual expenses.
Clothing
Clothing used exclusively for work and unsuitable for street wear is
deductible. The term “unsuitable for street wear” was written into law more
than fifty years ago. Today, it’s hard to say what is considered unsuitable for
street wear. Clothing with your company’s logo or advertising is deductible,
even though the clothing is suitable for street wear. Uniforms, costumes,
and protective gear are deductible.
 Tax deduction for the whole family. The
late New Orleans R&B legend Oliver “La
La” Morgan had one hit record, “Who
Shot the La La”; he never tired of
promoting it, or himself.

Musicians and entertainers: Stage outfits and tuxedos are deductible.

Stage costume jewelry is deductible. Clothing with your band’s name or
logo is deductible, even though the clothing is suitable for street wear: Get
yourself an entire wardrobe of T-shirts and hats and jackets with your stage
name or your band name or logo on them, and write it off.
Cost of cleaning is deductible.
Expense category: Supplies.
Cloud Computing
Cost of renting, leasing, or subscribing to cloud software and storage is
deductible.
Expense category: Office Expenses.
Clubs
Membership fees and dues for clubs, associations, and organizations may or
may not be deductible, depending on the nature of the organization and
what it spends its money on. See Associations.
Club owners: This deduction does not apply to clubs you own.
Coffee Service
Deductible. Deductible. Deductible. Thank you.
Expense category: Office Expenses.

The blame for the maddening complications of the federal tax

system goes to the people with the most money. They put the
complexity into the tax laws to get out of paying, and now they cry
out against the side effects of the imbecilities wrought by their own
lobbyists. They denounce the inconveniences attendant on the very
favors they bought themselves with their campaign contributions.
Talk about wanting it both ways.
—Columnist Nicholas Von Hoffman

Collection Agency
Fees charged by collection agencies are deductible.
For businesses on the cash method of accounting (most small businesses),
accounts turned over to collection agencies should be added to income at
the time the money comes in: the amount you actually receive, not the full
amount owed you.
Accounts that collection agencies are unable to collect cannot be
deducted as a bad debt. You cannot deduct income that you earned but
never received.
Expense category: Legal and Professional Services.
Commissions
Commissions that you pay to outside salespeople or companies and
commissions paid for referrals, finders fees, and the like are deductible.
However, see Sales Reps for very important information on how to deduct
what you pay them.
Commissions that you pay to acquire new customers who sign long-term
contracts may have to be amortized over a period of years. The IRS says the
deduction should be spread over the average number of years new
customers stay with the business.
Real estate commissions are added to the cost of the real estate and
depreciated. See Depreciation.
A business broker’s commission for helping to buy or sell a business may
have to be amortized over five years. See Buying a Business.
Expense category: If deductible, Commissions and Fees. If amortized or
depreciated, Depreciation.
Community Donations
Community service expenses and donations to community organizations
that bring recognition or publicity to your business may be deductible,
depending on what is being donated. See Donations.
It has become a Talmudic exercise to differentiate between an
everyday expense and a capital cost. It is a situation worthy of Lewis
Carroll. A more congenial Internal Revenue Service? Forget about
that.
—BusinessWeek magazine

Commuting
Commuting expenses, home to your regular place of business and back, are
not deductible. That’s the law, and for some reason, the IRS really goes
after small businesses that deduct the cost of going to work. If you’re the
CEO of a multinational conglomerate, you can legally save millions of
dollars in taxes just by opening a one-room office in Lower Slobovia and
telling the IRS that’s your new corporate headquarters. But if you own a
little business in some little town in the United States, just try to write off
53¢ for commuting that non-deductible mile to work.
Employers: Employers can pay up to $255 a month per employee for
transit passes or employer-provided van pool vehicles. The payments are
not taxable to the employees as long as the employer pays for the passes or
the vehicle and does not pay the employees directly. For employees who
bicycle to work, employers can reimburse the employees up to $20 a month
tax free.
Corporations: Owner/employees of regular C corporations are eligible
for the employer-paid commuting deductions, but owner/employees of S
corporations are not.
Expense category: Employee Benefit Programs.
Home-based business: Home business owners do not commute to work,
but there is one fine point in the commute law. If you drive to clients or
customers, the IRS considers the trip from your home to your first client a
commute, not deductible. The same goes for the trip home from your last
call of the day. The IRS says the trip home is a commute. There may be a
way to avoid this loss of a deduction. If you go to your home office and do
some work before you visit your first client, most accountants feel that you
already did your commute (to your office), and that your first client visit is
deductible. Ditto for returning home after visiting your last client, if you
return to your office to work before quitting for the day. Pretty picky rules
here, I admit. Part of the secret to success in business is (1) knowing the
rules and (2) knowing how to break them.
Compensation
Self-employed people cannot take a deduction for compensation you pay to
yourself. See Paying Yourself. Compensation paid to any independent
contractor or other nonemployee is deductible. See Independent
Contractors.
Employers: Compensation to employees is deductible. See Wages.
Corporations: Owners of corporations are employees of their businesses.
Your compensation is treated like any other employee wages. See Wages.
Computers
Computers and peripherals (monitors, printers) can be deducted the year of
purchase or depreciated over five years. If your computer is used partly for
non-business purposes, you can deduct the percentage of the cost used for
business. See Business Assets.
Expense category: If deducting a computer that costs $2,500 or less,
Other Expenses. If deducting a computer that costs more than $2,500 or if
depreciating the computer, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Computer Programs
See Software.
Condominium
Business condominiums that you rent or lease are deductible.
Expense category: Rent or Lease.
Business condominiums that you own are depreciated like any other
business building. See Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Condominium associations, management fees, and other charges are
deductible if business related.
Expense category: Legal and Professional Services.
 IRS Red Flag Audit Warning: Deducting a condo is one mighty fast
way to invite an audit. I highly suggest that you discuss this with an
experienced accountant.
Home-based business: Buildings are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.

The Higher the Tax Bracket, the Better the View.

—Advertisement for luxury Florida real estate development

Conferences
Costs of conducting or attending business conferences are deductible.
Travel is deductible. Meals are 50 percent deductible. See Travel.
Expense category: Other Expenses (for the conference itself).
IRS Red Flag Audit Warning: Travel is always a deduction that catches
IRS attention. See Travel for suggestions on how to avoid—and, if
necessary, how to prepare for—audits.
Consignment
Consigned inventory is merchandise that a business or self-employed
individual places with another business for the other business to try to sell.
For example, a dressmaker may consign inventory to a dress shop. The
business consigning the goods (the dressmaker) has not made a sale and
does not get paid until the business that has taken the goods on consignment
(the dress shop) sells the goods.
For tax and inventory purposes, the consignor (in our example, the
dressmaker) has not sold the dress. There is no income to report. At
December 31, assuming the dress is unsold, the dress should be included in
the dressmaker’s year-end inventory. The consignee (the dress shop) has not
purchased the dress until it resells the dress to its customer. The dress shop
does not include the dress in its year-end inventory. See Inventory.
Expense category: Cost of Goods Sold.
Bankruptcy and consignment: Consignors should be warned that these
consignment laws are income tax laws only. They may not hold up in
bankruptcy court. If the dress shop files for bankruptcy before it sells the
dress, the court can seize and sell consigned inventory to pay off the
creditors of the dress shop, even though the shop doesn’t legally own the
goods. The dressmaker will have to stand in line with all the other creditors
hoping to get paid. The dressmaker can protect herself/himself by filing
what’s known as a UCC-1 form with the county or state where the dress
shop is located (“UCC” stands for Uniform Commercial Code). This is a
legal notice that the goods belong to the dressmaker and not to the dress
shop. It will usually hold up in bankruptcy court, enabling the consignor to
get the unsold merchandise back. If the dress was sold by the dress shop but
the shop filed for bankruptcy before paying the dressmaker, the dressmaker
is just another creditor who probably will never see her money. A UCC-1
filing will not help. If you are the consignor (the dressmaker in our
example), if the consignee (the dress shop) is bankrupt and you cannot get
paid or get the dress back, you can deduct the cost of the dress as part of
cost of goods sold. See Inventory. There is no deduction for the lost income.
Construction
How construction costs are deducted depends on what is being constructed.
For buildings, see Buildings. For built-in additions or renovations to
buildings, see Building Improvements. For machinery or equipment, see
Business Assets. If you are constructing or manufacturing merchandise to
sell, see Inventory.
Home-based business: Buildings and built-in components are part of the
Home Expenses deduction, not deducted separately. See Home Expenses.
Construction Businesses
Some construction businesses are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction. This deduction,
however, is available only to businesses that have employees. See Domestic
Production Deduction.
Construction Equipment
Heavy construction equipment like tractors, excavators, and dump trucks
can be deducted the year of purchase or depreciated (five years for vehicles,
seven years for machinery), as explained under Business Assets.
Construction equipment does not come under the IRS special rules for
vehicles.
 Expense category: If deducting equipment that costs $2,500 or less, Other
Expenses. If deducting equipment that costs more than $2,500 or if
depreciating the equipment, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

The IRS is trying to change its image. At the San Francisco Internal
Revenue Service office, now renamed the IRS Customer Service
Center, lobby signs now read “Please Wait Here” instead of “Wait
Here.” Agents wear colorful buttons that say, “We Work for You.” The
IRS no longer audits taxpayers, it “conducts examinations.” The
examinations are conducted by IRS auditors and they are the same
as what used to be called audits, it’s just that they aren’t called
audits anymore. As for quotas, they don’t exist either. “We don’t have
quotas,” IRS spokesman Larry Wright said. “The term we use is
compliance statistics.” Have A Nice Day.
—San Francisco Chronicle

Consultants
Definition of a consultant: someone who saves his client almost enough
money to pay his fee. Consultant fees are deductible.
Expense category: Commissions and Fees.
Containers
Boxes, cartons, and other containers and packaging materials that hold the
goods you sell are considered part of your inventory and included in cost of
goods sold. See Inventory. If, however, the cost of the containers or
packaging is not significant or the containers are used only occasionally,
most businesses deduct them as a current expense.
Expense category: Supplies.
Contamination Cleanup
If the cost is minor, the cleanup can be deducted. If the cost is significant, it
may have to be added to the cost of the land, which means no deduction
until you sell the land. The cost of contamination cleanup from inventory
manufacturing is added to the cost of the inventory and deducted as part of
cost of goods sold. See Inventory. If you have significant contamination
costs, I suggest you talk to an experienced accountant.
Expense category: If minor, Other Expenses. If inventory, Cost of Goods
Sold.
Contests
The cost of holding a contest that generates publicity or sales for your
business is deductible. The prizes given out are deductible, but prizes have
tax problems you should know about. See Prizes.
Expense category: For the cost of holding a contest, Advertising. If the
prize is merchandise you normally sell, Cost of Goods Sold. If the prize is
something other than your merchandise, Advertising.
Contract Labor
The term “contract labor” refers to independent contractors. See
Independent Contractors. Also see Temporary Help Agency.
Contractors
A building contractor’s fees for new construction is added to the cost of the
building and depreciated. Contractor fees for doing major renovations may
have to be added to the cost of the building or may be deducted currently,
depending on the situation. Minor work and repairs can be deducted
currently. See Depreciation, Building Improvements, and Repairs. Also see
Independent Contractors.
Expense category: If minor, Repairs. If new construction or renovations,
Depreciation.
Home-based business: Building costs and repairs are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Contracts
The cost of preparing a contract is deductible if it is not a substantial
amount of money. Contracts that are expensive to negotiate and prepare and
cover more than a year are amortized over the length of the contract. A
payment to be released from a contract is deductible.
 Expense category: If deductible currently, Legal and Professional
Services. If amortized, Depreciation. If contract release, Other Expenses.
Service contracts and extended warranties can be deducted currently if
they do not exceed twelve months. If they do exceed twelve months, see
Prepayments.
Expense category: Office Expenses.

Making the IRS more friendly will not fix the problem. As long as we
have a seven million word tax code, no one will ever understand it,
let alone be able to enforce it fairly.
—Business owner W. H. Richards, Terrell, Texas

Contributions
Money you contribute to your own business is neither income nor expense,
and it is not deductible. Political contributions are not deductible.
Charitable and community contributions are sometimes deductible; see
Donations.
Conventions
The cost of attending a business convention is deductible. Travel and
lodging expenses are deductible; meals are 50 percent deductible. The
expense of a spouse traveling with you is not deductible unless the spouse is
a partner or employee in the business and has a valid business reason for
attending. See Travel.
Expense category: Travel.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
IRS Red Flag Audit Warning: Travel is always a deduction that catches
IRS attention. See Travel for suggestions on how to avoid—and, if
necessary, how to prepare for—audits.
Copies
Deductible.
Expense category: Office Supplies.
Copyrights
The IRS says that a copyright is amortized over fifteen years. Last time I
checked with the US Copyright Office, it costs $35 to obtain a copyright.
So following the IRS regulations, you can deduct $2.30 a year for fifteen
years. Me, I’d deduct the $35 the year I paid it and hope the statute of
limitations runs out before they catch me. You have the right to an attorney.
You have the right to remain silent . . .
Expense category: If obeying the law, Depreciation. If disobeying the
law, which of course I do not recommend, Taxes and Licenses.
Cost of Goods Sold
Businesses cannot deduct the cost of inventory until the goods are sold,
though with exceptions. The expense is called cost of goods sold. See
Inventory.
Expense category: Cost of Goods Sold.
Costumes
Clothing used exclusively for work and unsuitable for street wear is
deductible. Cost of cleaning is deductible. See Clothing.
Expense category: Supplies.
Courier Service
Any business service of this type is deductible.
Expense category: Office Expenses.
Covenant Not to Compete
A covenant not to compete is a contract where the seller of a business
agrees not to start another business that will be in competition with the one
you are buying. Often included as part of the purchase price of a business, a
covenant not to compete can be amortized over fifteen years. See Buying a
Business and Depreciation.
Expense category: Depreciation.
Crafts Business
Businesses that produce handcrafted goods—jewelry, pottery, furniture,
toys, clothing, musical instruments, sculptures, just about any physical
product—come under the same tax deduction rules as manufacturers. In
particular, crafts businesses should read “Indirect Costs” under Inventory.
 Crafts businesses are eligible for the Manufacturer’s Deduction, also
known as the Domestic Production Deduction. This deduction, however, is
available only to businesses that have employees. See Domestic Production
Deduction.

US Treasury Department undercover auditors visited 25 IRS

Taxpayer Assistance Centers across the United States. The auditors
found that IRS Tax Counselors inaccurately advised clients about
what forms to use, which deductions to take, and what income to
report. Out of 23 “test” tax returns submitted to the IRS Counselors,
the Counselors provided erroneous information for 19 of the returns.
—US Treasury Department

Credentials
The cost of education to obtain a credential is deductible in some situations,
but not others. See Education.
Credit and Debit Cards
Business purchases made with a credit card or debit card are fully
deductible. You can use your personal credit or debit card for business
purchases and get a full business deduction for business purchases (sole
proprietors and one-person LLC owners only).
Credit and debit card fees and interest are also deductible. If the card is
used partly for business, you prorate any bank charges or fees, personal
versus business. If you have interest charges, only the interest on business
purchases can be deducted.
Expense category: For purchases, the category depends on what was
purchased. For bank fees, Office Expenses. For interest charges, Interest.
Corporations, partnerships, and multi-owner LLCs: To maximize tax
deductions and minimize paperwork, businesses other than sole
proprietorships should have credit and debit cards in the business name, not
in the owner’s or employee’s name. If you do use your personal card to pay
business bills, to get the best tax advantage, have the business reimburse
you for your expenses. See Reimbursements.
Credits
If you receive a credit reducing the cost of goods or services you are
buying, treat the credit like a discounted price. The credit is not shown as a
separate item in your records or on your tax return. If a credit is a refund for
something you previously bought, reduce or delete the expense previously
recorded. If the expense was from a prior year, add the refund to your
income for the current year.
Expense category: If reducing expenses, whatever category was used for
the original expense.
Also see Tax Credits.
Customer List
A customer list that you purchase is considered an intangible asset, which
usually has to be amortized over fifteen years. However, if it isn’t a
significant amount, most businesses just deduct it currently.
Expense category: If deducting, Office Expenses. If amortizing,
Depreciation.
More information: If amortizing, IRS Publication 946, How to Depreciate
Property.
Customs
Customs duties and all fees and taxes related to importing and exporting
can be deducted, although these expenses can sometimes be added to the
cost of the inventory being purchased or sold and deducted as cost of goods
sold. You may want to talk to an accountant with export and import
experience.
Expense category: For duties and tariffs, Taxes and Licenses. For non-
government fees, Legal and Professional Services. If adding to the cost of
the inventory, Cost of Goods Sold.
Damaged Property
If business assets are damaged or destroyed, you are entitled to a deduction.
See Casualty Losses. If inventory is damaged or destroyed, it can be
deducted as part of cost of goods sold. See Inventory.
Damages
Penalties for breach of contract are sometimes called damages. They are
deductible.
Expense category: Other Expenses.
Damage to business property may be deductible. See Casualty Losses.
Damaged inventory is deductible as part of cost of goods sold. See
Inventory.
Legal damages (court-awarded payments) are usually deductible. See
Lawsuits.
Database
A database that you purchase is considered an intangible asset, which
usually must be amortized over fifteen years. However, if it isn’t a
significant amount, most businesses just deduct it currently.
Expense category: If deducting, Office Expenses. If amortizing,
Depreciation.
More information: If amortizing, IRS Publication 946, How to Depreciate
Property.
Day Care
See Dependent Care.
Day care business: Expenses for running a day care business are
deductible like the expenses of any other business, including meals served
(with exceptions; see Meals). If you run a day care business out of your
home, see Home Expenses for the day care deductions allowed.
Debit Cards
Debit card fees and expenses are handled the same as credit cards. See
Credit Cards.
Decorating
Decorating expenses are deductible.
Expense category: Office Expenses.
Valuable art treasures and antiques come under different rules. See
Antiques and Art Treasures.
Home-based business: Office decorating costs are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Taxpayers who walk into IRS offices get incorrect answers to their
tax questions nearly 75% of the time.
— Kiplinger Tax Letter

Delivery Charges
Delivery charges for goods you sell are deductible. Delivery charges for
inventory you are buying are added to the cost of the inventory. See
Inventory. Delivery charges for business assets you are buying (machinery,
equipment, furniture) should be added to the cost of the asset. See Business
Assets.
Weekly delivery service charges on a contract with UPS, FedEx, or other
delivery service are deductible.
Expense category: For delivery charges on merchandise you sell, Other
Expenses. For weekly service charges, Office Expenses.
De Minimis Safe Harbor
This is a method for deducting the cost of business assets and building
improvements and renovations. See Business Assets; also Building
Improvements.
Demolition
The cost to demolish a building is added to the cost basis of the land. It
cannot be deducted or depreciated.
Cost of removing storage tanks is deductible.
Expense category: Other Expenses.
Demonstration Costs and Products
Costs incurred to demonstrate a product or service you are selling are
deductible. The cost of the products themselves is deductible if they are not
going to be put back into inventory to sell.
Expense category: For the cost of the products themselves, Cost of Goods
Sold. For any other costs, Advertising.

This agency intends to become an efficient consumer service

organization, keeping taxpayers satisfied.
 —IRS press release

Dependent Care
You can deduct up to $5,000 a year for child and dependent care for your
own children or dependents. The deduction cannot exceed your net profit
from the business. If you are married, both spouses must have jobs or be
looking for jobs, or one spouse must be a full-time student or unable to care
for him/herself. There are additional rules and limitations for married
people and on how the money can be spent.
Employers: Dependent care provided for your employees’ families is
deductible. You can also pay employees money for them to spend on
dependent care, tax free to the employees, up to $5,000 per year. You, the
employer, get a deduction. You can take the deduction for your own family
only if you offer the same assistance to your employees. If you provide
child care facilities for your employees, you may be eligible for an
Employer’s Child Care Tax Credit. See Tax Credits.
More information: IRS Publication 503, Child and Dependent Care
Expenses.
Child care business: Expenses for running a child care business are
deductible like the expenses of any other business, including meals served
to the children; see Meals. If you run a child care business out of your
home, see Home Expenses for the child care deductions allowed.
Depletion
If you own mineral property or standing timber, you can take a deduction
for depletion. This is a complex area of tax law that will require help from
an experienced accountant.
Expense category: Depletion.
Deposits
Refundable deposits are not deductible. This applies to rent and cleaning
deposits, deposits required by utility companies, sales tax deposits, or any
other deposits where you will get your money back. If you do not get your
money back, if whoever has the deposit applies it to the rent or whatever it
was for, you can deduct the amount of the deposit at that time.
Nonrefundable deposits are deductible when you make the deposit.
 Expense category: Depends on what you are purchasing.
Bank deposits are not deductible; they are not expenses. But you know
that.
Advances: Some deposits are called advances. An advance is really a
prepayment for work to be done or goods to be delivered, not money you
expect to get back. Advances are deductible. See Advances.

Every April 15, I promise myself I’ll be better prepared for next year’s
taxes. Then I turn to some more immediate concern, like earning a
living, and forget all about taxes until next April 15, when I panic
again.
—Tom Person, Laughing Bear Publishing, Houston, Texas

Depreciable Assets
Depreciable assets are business assets that are eligible for depreciation,
although most depreciable assets can be deducted the year of purchase
instead of being depreciated. See Business Assets.
Depreciation
“Depreciation” is a tax term and means that the tax deduction for the cost of
a business asset—buildings, vehicles, machinery, equipment, furniture—is
spread out over several years. When you depreciate an asset, you do not
deduct the entire cost of the asset the year you purchase it. Each year, a
portion of the cost is deducted.
Depreciation is required for most buildings. Most business assets other
than buildings can be deducted in full the year they are purchased instead of
being depreciated, which most small businesses do, and which may or may
not be to your advantage. Many new businesses make little or no profit the
first year or two, and may owe little or no income tax. Rather than take a
full deduction for business assets when you purchase them, it might be
better to depreciate the assets, spreading the deduction over several years.
In this way, you deduct the bulk of the expense in future years when you
can use it to save taxes. You might want to calculate (or hire an accountant
to calculate) your profit and taxes under both methods to find the bigger tax
savings.
 If you want to deduct the full cost of your business assets instead of
depreciating them, the rules are explained under Business Assets. No need
to read any more of this entry. If depreciation will save you tax money, or if
depreciation is your only option, there are several ways to calculate
depreciation. Unfortunately, all of them are complicated.
What can be depreciated? Depreciable assets include buildings,
components of buildings, vehicles, machinery, shop equipment, office
equipment, furniture, fixtures, tools, aircraft, boats, trailers, intangibles such
as trademarks, patents, and software, and some farm animals, plants, and
trees. Major building improvements and major repairs that extend the life of
an asset can be depreciated. Both new and used assets can be depreciated.
Depreciable assets are also called fixed assets or, as they are throughout this
book, business assets.
What cannot be depreciated? Inventory, supplies, inexpensive tools, or
anything that will not last more than a year cannot be depreciated. Land
cannot be depreciated or written off until sold, but some land
improvements, including parking lots and landscaping, can be depreciated.
Different assets have different numbers of years they can be depreciated,
called “write-off periods” or “recovery periods”:
3 years: Software you purchase or develop, on-road tractor units, race-
horses over two years old, all horses over twelve years old.
5 years: Vehicles, trailers, aircraft, computers, office equipment,
carpeting, movable partitions, outdoor lighting, equipment used for research
and experimentation, semiconductor manufacturing equipment, some
alternative energy property such as solar and wind, some electronic
equipment, some software you develop, movable gasoline storage tanks,
appliances and furniture used in residential rental property.
7 years: Most machinery, furniture, fixtures, most signs, vending
machines, railroad track, horses other than those listed under “3 years.”
10 years: Most boats, single-purpose agricultural and horticultural
structures, fruit and nut trees, vines.
15 years: Large outdoor signs, gas stations including their mini-marts,
restaurant and retail store renovations, leasehold improvements, parking
lots, major landscaping, custom-designed software, and intangible property
such as goodwill, trademarks, trade names, franchises, customer lists, and
covenants not to compete.
 20 years: All-purpose farm buildings.
27½ years: Residential rental buildings. For business use of your home,
if your home is part of an apartment building that you own.
39 years: All buildings other than those listed above. For business use of
your home, if your home is a single-family residence.
Other: Patents and copyrights are depreciated over the life granted by the
government.
Assets that were purchased before going into business can be depreciated
regardless of when acquired. These assets are valued at their cost or at their
market value at the time the assets are first used in your business,
whichever is less. If some old machinery that cost you $2,000 eight years
ago was worth only $500 (market value) when first used in your business,
you may depreciate only $500.
Assets used partly for business and partly for non-business can be
depreciated to the extent used for business. For example, if you use your
tools 50 percent for business and 50 percent for personal use, you can
depreciate 50 percent of the cost.
There are four methods of depreciation, each requiring different
calculations. All four methods result in the same tax write-off eventually,
but each method involves different amounts that can be deducted in any
given year. For some assets, you can choose which depreciation method you
want to use. Other assets must use a specific method. There are additional
rules for the first year an asset is depreciated, and additional calculations if
you sell or abandon an asset. The methods and rules are explained in detail
in the IRS publication mentioned below, if you want to study and compare
them. There is no way to simplify the procedure, other than using tax
software or hiring an accountant.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: Depreciation of your home (if you own the
home) is part of the Home Expenses deduction, not deducted separately.
See Home Expenses.
Design Costs
Most design costs, including brochures, packages, and logos, are
deductible. Cost of trademarking a design may have to be amortized. See
Trademarks.
Expense category: Advertising.
Development
Product and business development expenses are usually deductible. See
Research. Development expenses may also be eligible for the Research Tax
Credit. See Tax Credits.
Real estate developers: Predevelopment costs such as planning and
design, building permits, engineering studies, landscape plans, and the like
cannot be deducted currently but are depreciated.
Direct Costs: Manufacturing and Crafts
Inventory that you produce or manufacture has two components: direct
costs, the materials, supplies, and paid labor that go into making the
product; and indirect costs, all other costs associated with producing or
manufacturing your products. How you deduct these costs is explained in
Inventory.
Direct Marketing
Direct Selling
“Direct marketing” and “direct selling” refer to a type of business, not to
marketing expenses. If you are starting a direct marketing or direct selling
business, see Start-up Expenses. If you are setting up a corporation, also see
Organizational Costs.
Directors’ Fees
Fees paid to corporate directors are deductible.
Expense category: Commissions and Fees.
Disability Insurance
Disability insurance covers a loss of income due to illness, injury,
pregnancy, childbirth, or taking time off to care for a family member.
Disability insurance for self-employed people is not deductible. However,
overhead insurance, which pays for business overhead expenses such as
rent and utilities while you are recovering from illness or an injury, is
deductible.
Expense category: For overhead insurance, Insurance.
 Employers: Some states require employers to pay for disability insurance
for their employees. This insurance is deductible if it is required by law.
Also see Workers’ Compensation Insurance.
Corporations: If your state requires you to carry disability insurance for
yourself (as an employee of your business), the insurance is deductible.
Expense category: For employers, Employee Benefit Programs.
More information: For employers, IRS Publication 15-B, Employer’s Tax
Guide to Fringe Benefits.

I hate the government on April 15 every year, but otherwise it leaves

me alone.
—Scott Adams, creator of Dilbert

Disabled Access
Businesses that purchase equipment or devices, modify currently owned
equipment or devices, or modify buildings or parking areas to make them
more usable for disabled people are eligible for a Disabled Access Tax
Credit. The maximum credit is $5,000. The credit is 50 percent of
expenditures over $250, up to $10,250: Take your total disabled access
expenditures, subtract $250, and multiply the balance by 50 percent; the
credit is the resulting amount or $5,000, whichever is less. If the credit
exceeds your taxes for the year, the credit can be carried forward to apply to
the next year. Businesses that gross over $1 million or have more than thirty
employees are not eligible for this credit.
Expense category: The tax credit is taken on your 1040 return, not on
your business schedule. For the cost of building and parking lot alterations,
Building Improvements. For equipment, Business Assets.
A Warning: This warning has nothing directly to do with tax deductions,
but every business that has customers or clients who come to the premises,
or has fifteen or more employees, is required to comply with the Americans
with Disabilities Act (ADA). ADA rules are very specific, the requirements
are lengthy, and the penalties can be steep. If you are out of compliance,
you can be sued. There are lawyers who specialize in suing small
businesses for ADA violations, and those lawyers are ruthless. Be
forewarned.
Disaster Losses
Deductible, but with special rules. See Casualty Losses.
Discounts
“List price $1,599.00. On Sale Today $14.95.” Discounts given to
customers reduce your income. You show a lower gross income (sales) on
your tax return. Discounts are not shown as an expense deduction.
Discounts on items you purchase reduce the cost of the items being
purchased. Discounts should not be recorded or deducted separately.
Expense category: Depends on what you are purchasing.
Employers: You can give discounts to employees and their families for
anything your business makes or sells, tax free to them, as long as the
discounted price is not below your cost. Employee discounts are recorded
the same as discounts to customers.
Displays
Goods on display are considered inventory. See Inventory. Permanent
display fixtures are business assets. See Business Assets. Display
decorations can be deducted.
Expense category: For decorations, Supplies.
Dividends
Corporate dividends: When corporations distribute their profits to
shareholders, these distributions are called dividends. Dividends are not
considered business expenses and are not deductible. Any costs associated
with distributing dividends, such as bank or broker fees, are deductible.
Expense category: For costs and fees, Legal and Professional Services.
Dividend rebates: Rebates to customers are sometimes called dividends.
These rebates are deductible, not as an expense deduction but as a reduction
to your income.
Expense category: Returns and Allowances.
Domain Name
Expenses associated with acquiring, registering, and keeping a domain
name are deductible. Also see Internet.
 Expense category: Office Expenses.
Domestic Production Deduction
This deduction, more commonly known as the Manufacturer’s Deduction,
is only available to employers. If you have no employees and if you are not
an employee of your own corporation, you cannot take this deduction.
The Domestic Production Deduction is for manufacturers, as well as
some construction firms, land developers, engineering firms, architecture
firms, energy producers, software developers, film and videotape producers,
farmers, and agricultural firms. The maximum deduction is 9 percent of net
income from domestic (not overseas) production. The deduction cannot
exceed 50 percent of the firm’s W-2 wages attributable to production
activities.
The Domestic Production Deduction is a complex law. The IRS rules go
on for 224 pages! But it is a major tax break, benefiting many businesses
that manufacture, build, design, or grow products in the United States. Talk
to an experienced accountant. Don’t let this deduction get away.
Expense category: For businesses other than C corporations, this
deduction is taken on the 1040 tax return, not on Schedule C or on the
business tax return. This deduction does not reduce your business profit.
For C corporations, the deduction is taken on Form 1120.
More information: IRS Instructions for Form 8903.

People will do silly things to avoid taxes.

—J. C. Small, tax attorney, New Jersey Division of Taxation

Donations
Businesses other than corporations are not allowed a deduction for
donations to charities or community organizations, at least not under a
category called “charitable.” However, if a donation results in favorable
publicity for the business, and therefore a likelihood of increased sales,
many businesses deduct the donations, not as charitable contributions but as
a promotion expense. This interpretation of tax law (taking a promotion
deduction for a charitable contribution) has been fought by the IRS for
years. But the Tax Court has ruled in favor of the deduction several times,
and the IRS has allowed it in at least one case I know of. I suggest you read
the Red Flag warning below and then decide if you want to take the
deduction. If you do take the deduction, how it is written off depends on
what the business is donating:
Cash donations are deducted as promotion expenses.
Expense category: Advertising.
Merchandise donated, such as a raffle prize for a fundraiser, or a food
store donating food or beverages for a charity or community event, is
deducted as part of cost of goods sold. See Inventory.
Expense category: Cost of Goods Sold.
Gift certificates and gift cards cannot be deducted when given out
because no expense was incurred (other than the cost of producing the
certificates or cards). When cards and certificates are redeemed, you can
deduct the cost of the merchandise being given to the customer as part of
cost of goods sold. See Gift Cards and Inventory. If the gift is a service you
provide, there is no tax deduction at all, because you cannot deduct the cost
of your own time. This is explained under Paying Yourself.
Sales proceeds or a percentage of sales proceeds donated to a charitable
or community organization can be deducted as a sales expense.
Expense category: Other Expenses.
Ads and sponsorships: An advertisement in a charitable organization’s
directory or event program, or sponsorship of an organization’s team or
event, is deductible. These expenses are not considered charitable
donations. The IRS says they are legitimate promotional expenses. Instead
of making a charitable donation that may or may not be deductible, place an
ad or offer a sponsorship. As Father O’Malley happily said as he accepted
the contribution, “It’s a win-win situation.”
Expense category: Advertising.
Political donations are not deductible.
Corporations: Corporations can deduct charitable contributions and
donations as a charitable business deduction, if the charities have IRS
charitable nonprofit status. Corporations can deduct up to 10 percent of
their taxable income. C corporations (not S corporations) that donate
inventory to qualified charities can get a deduction for more than the cost of
the inventory. They can deduct the cost plus half the difference between
cost and regular sales price, up to twice the cost of the inventory. If all this
is too complicated, corporations can follow the lead of the non-corporate
businesses and write off the entire donation as a promotion expense—as
long as you read the IRS warning below.
Expense category: Charitable Contributions; or Advertising.
IRS Red Flag Audit Warning: The IRS, despite losing several times in
Tax Court, still might challenge a business that deducts a donation as an
advertising expense if the IRS audits the business and if the auditor
discovers the deduction. But since the deductions are included in
advertising or other expenses, and not labeled charitable, the IRS is unlikely
to spot the deductions. For me, if the Tax Court says the deduction is
legitimate, so do I. Still, you may want to discuss this with an experienced
accountant.

Father O’Malley answers the phone.

“Is this Father O’Malley?”
“It is.”
“This is the IRS. Can you help us?”
“I can.”
“Do you know a Patrick Houlihan?”
“I do.”
“Is he a member of your congregation?”
“He is.”
“Did he donate $10,000 to the church?”
“He will.”

Downloads
Downloaded music, apps, and publications, if for your business, are
deductible. Downloaded software that you lease or subscribe to can be
deducted currently. Downloaded software that you purchase can be
deducted currently or can be amortized over three years; see Software.
Expense category: Software that you purchase (not subscribe to),
Depreciation. Other downloads, Office Expenses.
Draw
Draw, partner, refers to drawing money out of your business. When you are
self-employed, as a sole proprietor, partner in a partnership, or member
(owner) of a limited liability company, you are not an employee of your
business. You do not get a salary or a wage. If you want some money from
your business, you “draw” it; that is, you just take it. This is not an expense
and is not a tax deduction. See Paying Yourself.
Corporations: If you own a corporation, the rules are very different. You
do not “draw” money, but you do pay yourself a salary, taxable as regular
employee wages. Any money you take out of a corporation in excess of
your salary is also not a draw. It is a taxable dividend. See Wages and
Dividends.
Drilling
The cost of drilling and developing a water well can be depreciated over
fifteen years. Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
The costs of drilling oil and gas wells come under a complicated set of
laws involving natural resources extraction that will require the help of an
accountant with experience in this area.
Driveways
You can deduct the costs of maintaining a private road or driveway on your
business property. The construction of a driveway is depreciated. See
Depreciation.
Expense category: Repairs and Maintenance. For construction,
Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: A driveway is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Drones
Drones used for business can be deducted the year of purchase or
depreciated over seven years. See Business Assets.
Expense category: If deducting a drone that costs $2,500 or less, Other
Expenses. If deducting a drone that costs more than $2,500 or if
depreciating the drone, Depreciation.
 More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Drop Shipping
Drop shipping is a business arrangement where your business contracts
with another business to warehouse and ship products to your customers for
you. The drop shipper may be the manufacturer, importer, or wholesaler of
the products, selling the products to you but shipping them to your
customers for you; or the drop shipper may simply be a warehouse and
shipping service.
Goods that you have drop shipped for you are considered inventory even
though you never have them in stock. You include the cost of the goods as
part of cost of goods sold. Warehousing and shipping fees are also part of
cost of goods sold. See Inventory.
Expense category: Cost of Goods Sold.
Drug Testing
Drug tests that are required by law are deductible. Drug tests for employees
or independent contractors you hire, if not required by law, are deductible if
they meet the IRS’s “ordinary” and “necessary tests.”
Expense category: Other Expenses.

Pay my “fair share” of taxes? That sounds like something coming out
of Moscow, you know, their “fair share.” Karl Marx talked like that. Is
there going to be Big Brother that’s going to decide what your “fair
share” is? That is not a concept that’s contained in the Internal
Revenue Code.
—Bill Simon, multi-millionaire and former candidate for California
governor

Dues
Membership dues and fees to organizations, associations, and clubs may or
may not be deductible, depending on the nature of the organization and
what it spends its money on. See Associations.
Duties
Duties and all fees and taxes related to importing and exporting can be
deducted, although these expenses can sometimes be added to the cost of
the inventory being purchased or sold and deducted as part of cost of goods
sold. You may want to talk to an accountant with export and import
experience.
Expense category: For duties and tariffs, Taxes and Licenses. For non-
government fees, Legal and Professional Services. If adding to the cost of
the inventory, Cost of Goods Sold.
Education Expenses
The cost of education for self-employed individuals (sole proprietors,
partners, LLC owners, and spouses in joint ventures) is deductible, if the
education maintains or improves skills needed in your present work or is
required to continue in your business or occupation. In other words, the
education needs to be related to a business you are already running, not a
business you have not yet started.
A self-employed welder who takes a course in a new welding method can
deduct the costs of the education. A self-employed dance teacher who also
takes dance lessons can deduct the cost of the lessons. A professional can
deduct the costs of continuing education in that profession.
Education expenses are not allowed if the education is required to meet
minimum educational requirements of your business. Education expenses
are not allowed if the education will qualify you for a new trade or business.
A fast-food store owner who takes a course to become a general contractor
cannot deduct the expenses. Taking a course in pottery before opening your
pottery shop is not deductible. However, any self-employed person can take
a course in recordkeeping, taxes, or computers, or most anything else
related to your business, and deduct the cost.
You can even choose where you want to be educated. Sign up for a
business seminar at a beach hotel in Hawaii, or on the cruise ship headed
there, and write it off. Isn’t that nice? You cannot, however, deduct travel
itself as an education expense. You cannot deduct the cost of visiting stores
in Paris, or New Orleans, or all those charming little shops on Disneyland’s
Main Street. You could deduct the cost of traveling to meet with a
distributor or manufacturer of a product you want to add to your selection
of merchandise, especially if it is directly related to the products you
already sell. If that distributor happens to be in a country you’ve always
longed to visit, well, how can you pass up an opportunity like that?
Education expenses include tuition, registration fees, course fees,
instructional material, textbooks, supplies, laboratory fees, travel between
your business and the class location, and travel expenses while away from
home overnight. Overnight travel is subject to limitations. See Travel.
Expense category: Other Expenses.
More information: IRS Publication 970, Tax Benefits for Education.
Partnerships and multi-owner LLCs: The business can pay for
education expenses for the partners or the LLC owners and get a deduction.
If the partners or LLC owners (not the businesses) pay for the education,
the businesses can reimburse the partners or LLC owners and get the
deduction, but only if you have an “accountable reimbursement plan,”
which is a written policy that the expenses are business related and that the
expenses are substantiated (you have receipts).
Employers: Employers can deduct, and employees can exclude from
their income, the cost of job-related education expenses. Employers can
also pay up to $5,250 annually for employee education expenses that are
not job related (if the education involves sports, games, or hobbies, the
education must be job related). To get the deduction, you are required to
have a written educational assistance program. Payments in excess of
$5,250 are considered taxable wages.
Corporations: You can deduct the cost of employment-related education
for yourself. You cannot deduct the cost of education for yourself if the
education is not related to your business. You do not qualify for the $5,250
deduction for employees.
Expense category: If tax free, Employee Benefit Programs. If taxable,
Wages.
More information: IRS Publication 15-B, Employer’s Guide to Fringe
Benefits; IRS Publication 970, Tax Benefits for Education.
Also see Scholarships.

Americans love taxes that other people pay.

—Columnist Debra J. Saunders
Electricity
Electricity and other utilities are deductible.
Expense category: Utilities.
Solar electric: If you purchase a solar electric system, you can depreciate
the system. See Depreciation. You may also be eligible for an Energy Tax
Credit. See Tax Credits.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Electronics
Electronic equipment and devices are considered business assets, which can
be deducted the year of purchase or depreciated over five years. See
Business Assets.
Expense category: If deducting equipment that costs $2,500 or less, Other
Expenses. If deducting equipment that costs more than $2,500 or if
depreciating the equipment, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

Once you become knowledgeable about the law, you can make the
government agents go after the real criminals and leave law abiding
people like yourself alone.
—Peyman Mottahedeh, dean and sole professor at Freedom Law
School, Tustin, California

Employee Business Expenses

If an employer reimburses an employee for out-of-pocket business
expenses, the employer is entitled to a tax deduction for the expenses.
However, there are some strict IRS rules about reimbursing employees, and
how the reimbursements affect employee wages. This also applies to
owners of corporations. See Reimbursements.
Remember that a self-employed individual—sole proprietor, partner, or
owner of an LLC—is not an employee of the business. Employee business
expense reimbursements do not apply to self-employed individuals. Owners
of corporations are employees of their businesses.
Expense category: Depends on actual expenses.
Employee Incentives
See Awards. Also see Fringe Benefits.
Employees
Wages and benefits you pay your employees are deductible. See Wages and
Fringe Benefits. If you lease employees, see Temporary Help Agencies. If
you employ your spouse, see Spouse. If you employ your children, see
Children on Payroll.
Expense category: Wages. For fringe benefits, Employee Benefit
Programs.
More information: IRS Publication 15, Employer’s Tax Guide.
Employment Agencies
Fees for employment agencies that charge you to find employees (such as
executive search services) are deductible. Temporary help agency fees (for
agencies that send their employees to work at your business) are also
deductible, but see Temporary Help Agency for a warning.
Expense category: Legal and Professional Services.
Employment Taxes
Deductible. See Payroll Taxes.
Expense category: Taxes and Licenses.
Energy
The cost of using energy in a business is usually deductible. Look up
individual subjects.
Energy Producers
Some producers of energy are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction. This deduction,
however, is available only to businesses that have employees. See Domestic
Production Deduction.
Engineering Firms
Some engineering firms are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction. This deduction,
however, is available only to businesses that have employees. See Domestic
Production Deduction.
Entertainment
Only 50 percent of entertainment expenses are deductible. To get the
deduction, it has to be business related. It doesn’t have to result in a sale,
but some discussion or other genuine business involvement is required.
Keep a record of who you entertained and what was discussed.
In some cases there is a fine line as to what is entertainment, subject to
the 50 percent limit, and what is not entertainment and therefore fully
deductible. For example, a fashion show put on by a dress designer would
not be considered entertainment, but a 100 percent deductible advertising
expense. A party or lunch after the show, however, would be entertainment
subject to the 50 percent limit.
Sometimes the term “promotion” is also called “entertainment.” But
promotion expenses are fully deductible, and entertainment is limited to a
50 percent deduction. You get to define your own expenses. The right
choice of words will get you the right deduction.
Some entertainment is 100 percent deductible. A company or holiday
party where all employees are invited (and customers and prospective
customers could also be invited) is 100 percent deductible.
The cost of owning or leasing an entertainment facility is not deductible.
 IRS Red Flag Audit Warning: Every IRS auditor is suspicious of
entertainment deductions. Sometimes I advise my tax clients to simply not
take any deduction for entertainment. Try to arrange your business
“interactions” to meet the definition of promotion, or of a business meeting,
or anything other than “entertainment.” Don’t lie about a deduction, just be
legally creative, or just forego the deduction.
Expense category: Travel, Meals, and Entertainment.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
Entertainers and entertainment business: The cost of entertainment
that you provide is 100 percent deductible. These entertainment limitations
and warnings do not apply to you.
Environmental Remediation
See Contamination Cleanup.
Equipment
Equipment can be deducted the year of purchase or depreciated over five or
seven years, depending on the type of equipment. See Business Assets.
Expense category: If deducting equipment that costs $2,500 or less, Other
Expenses. If deducting equipment that costs more than $2,500 or if
depreciating equipment, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including equipment in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Estimated Taxes
The IRS requires businesses to pay income and self-employment taxes in
advance. Sole proprietors, partners in partnerships, owners of LLCs, and
owners of S corporations are required to make quarterly prepayments of
their federal income and self-employment taxes, if the estimated combined
taxes are $1,000 or more. C corporations make quarterly tax prepayments if
estimated federal income tax for the year is $500 or more.
These estimated tax payments are not deductible expenses.
Exchange
Exchange, as in trade or barter, is a taxable transaction. Goods and services
received in trade are deductible just like goods and services purchased with
cash. See Barter.
Expense category: Varies depending on actual expenses.
Excise Taxes
Federal excise taxes, if levied, are deductible.
Expense category: Taxes and Licenses.
More information: IRS Publication 510, Excise Taxes.
State taxes: Some states call their corporate income tax an excise tax.
Income taxes have different rules. See Income Taxes.
Expense Accounts
Does anyone who owns a business actually have an expense account?
Expense accounts per se are not deductible, but the actual expenses are
deductible, depending on what the expenses are for. Also see
Reimbursements.
Corporations: If you are an employee of your own corporation, see
Employee Business Expenses.
Exporting
All duties, tariffs, fees, and taxes related to exporting can be deducted,
although these expenses can sometimes be added to the cost of the
inventory being sold and deducted as part of cost of goods sold. You may
want to talk to an accountant with export and import experience.
Expense category: For duties and tariffs, Taxes and Licenses. For non-
government fees, Legal and Professional Services. If adding to the cost of
the inventory, Cost of Goods Sold.
Exterminator Service
Deductible.
Expense category: Other Expenses.
Home-based business: Exterminator costs are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Family
A spouse or a parent on your payroll is treated like any other employee,
except a spouse and parents are not subject to Federal Unemployment
(FUTA) tax. See Spouse and Parents on Payroll.
If you hire your children, if they are under the age of eighteen, they may
be exempt from income and payroll taxes. See Children on Payroll.
Corporations: These rules do not apply to corporations. Family
members employed by your corporation are no different than any other
employees, subject to all payroll taxes.
Expense category: Wages.
More Information: IRS Publication 15, Employer’s Tax Guide.

A man’s respect for law and order exists in precise relationship to his
paycheck.
 —Congressman Adam Clayton Powell Jr. (1908–1972)
When you got nothing, you got nothing to lose.
—Jack Dawson, 1912, passenger on the Titanic who won his
passage in a poker game

Farming
For tax law, farming includes orchards, vineyards, plantations, ranches, and
raising fish (though not fishing). Farming does not include plant and garden
nurseries.
Most of the deductions in this book apply to farming businesses. Farmers
also have additional, farming-only tax deductions. Expenses for planting,
irrigation, livestock, feed, and agricultural supplies have their own tax rules,
totally different than rules for non-farming operations. Some farm-related
buildings and structures have different depreciation rules than non-farm
structures.
Many people have sideline farming income, which may or may not
qualify them for the special deductions for farmers. Some deductions are
available only to people who live and work on a farm or whose principal
business is farming.
Farms that are on the same property as the farmer’s home are not
considered home-based businesses, and are not subject to the home business
limitations. However, farmers who have offices in their homes may qualify
for the Home Expenses deduction for the office, in addition to any
deductions for the farm.
Some farming businesses are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction, in addition to all
your other tax deductions. This deduction, however, is available only to
farmers who have employees. See Domestic Production Deduction.
There are enough rules specific to farming that I suggest you talk with an
experienced accountant who regularly works with farms, vineyards, or
whatever similar type of venture you are undertaking.
Expense category: There is no expense category called “farming.”
Farmers do not file Schedule C. Farmers file Schedule F, Profit or Loss
from Farming. Deductions depend on what is being deducted.
More information: IRS Publication 225, Farmer’s Tax Guide.
 Farm equipment: Mobile farm equipment that you purchase can be
deducted the year of purchase or depreciated like all other equipment, as
explained under Business Assets. The equipment does not come under the
IRS special rules for vehicles. Vehicle depreciation limitations and standard
mileage rates do not apply.
IRS Red Flag Audit Warning: “Weekend” farmers who claim losses on
their farm operations are likely to face an audit, particularly if you have
other substantial income. The IRS has always been suspicious of farming
losses that offset other income and lower taxes.

The farmer is the man, the farmer is the man.

He lives on his credit until fall.
Well, his pants are wearin’ thin, his condition is a sin,
But the taxes on the farmer feeds us all.
—“Taxes on the Farmer Feeds Us All,” song from the Depression,
author unknown

Fees
Some fees are deductible, and some fees may have to be amortized over
several years. Look up the individual fees.
FICA Tax
“FICA” stands for Federal Insurance Contributions Act. FICA tax is
another name for Medicare and Social Security taxes. Self-employed people
pay FICA taxes on their profits, but it is called self-employment tax. Self-
employment tax is not deductible.
Employers: Employers deduct FICA taxes from employees’ paychecks
and also pay an employer’s share. The employer’s share is deductible.
Expense category: Taxes and Licenses (employer’s portion only).
More information: IRS Publication 15, Employer’s Tax Guide; IRS
Publication 15-A, Employer’s Supplemental Tax Guide.
Film and Video Producers
Some film and video producers are eligible for the Domestic Production
Deduction, also known as the Manufacturer’s Deduction. This deduction,
however, is available only to businesses that have employees. See Domestic
Production Deduction.
Finance Charges
Finance charges are usually deductible, but sometimes with restrictions. See
Interest.
Expense category: Interest.
Finders Fees
Finders fees, commissions, and the like are deductible.
Expense category: Commissions and Fees.
Fines
Fines and penalties for violation of the law are not deductible. Penalties for
not meeting contract requirements, and any other fines or penalties that do
not involve breaking the law, are deductible.
Expense category: Other Expenses.

A fine is a tax for doing something wrong. A tax is a fine for doing
something right.
—Journalist Malcolm St. Pier

Fire Protection Systems

Inexpensive fire protection equipment such as a fire extinguisher can be
deducted. See Business Assets. If the system is an integral part of a
building, it can be deducted currently or depreciated along with the
building. See Building Improvements.
Expense category: For minor purchases, Office Expenses. For purchasing
and installing full systems, Depreciation or, if the cost is under $2,500,
Other Expenses. For maintenance, Repairs and Maintenance.
More information: For purchasing a system, IRS Publication 946, How to
Depreciate Property. If the cost is $2,500 or less, see IRS Notice 2015-82,
De Minimis Safe Harbor Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including fire protection in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Fire protection systems are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
First Aid
Medical and emergency supplies are deductible.
Expense category: Office Expenses.
First Year Write-Off
This refers to deducting business assets the year they are purchased. See
Business Assets.
Fish Farming
See Farming.
Fishermen and Fisherwomen
Self-employed fishermen and -women can take the same tax deductions as
all other self-employed individuals. There are no special tax deduction
rules. Everything in this book applies to you.
Fish farming businesses (not people who fish for a living) are considered
farming businesses, and come under special farming rules. See Farming.
Fixed Assets
Fixed assets are machinery, equipment, furniture, fixtures, and most other
assets the business owns. Some fixed assets are fixed in place, where the
term originally came from (not fixed a million times and they still don’t
work); but “fixed” does not mean the assets are permanent parts of a
building, bolted down, unmovable. This is an important distinction, because
building components come under different rules than fixed assets. Fixed
assets are also known as depreciable assets and business assets. Fixed assets
can be deducted the year purchased or depreciated over several years. See
Business Assets.
Expense category: If deducting an asset that costs $2,500 or less, Other
Expenses. If deducting an asset that costs more than $2,500 or if
depreciating the asset, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including fixed assets in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.

Government is a reality of life. Denying it is just letting your own

biases influence your business judgment.
—Bill McGowan, founder of MCI Communications

Fixed Costs
Fixed costs refer to overhead, the dozens of large and small expenses you
pay whether you are generating income or not. Most fixed costs are
deductible. See Overhead.
Expense category: Varies depending on actual expenses.
Fixing-up Expenses
Minor repairs to business property, buildings, and equipment are deductible
as a current expense.
Expense category: Repairs and Maintenance.
Home-based business: Fixing-up costs are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Fixtures
Shop, store, and building fixtures can be deducted the year of purchase or
depreciated over seven years, but there are different rules for different types
of fixtures. For fixtures that are not built in, see Business Assets. For
fixtures that become a permanent part of a building, see Building
Improvements.
Expense category: If deducting fixtures that cost $2,500 or less, Other
Expenses. If deducting fixtures that cost more than $2,500 or if depreciating
the fixtures, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including fixtures in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Built-in office fixtures are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.

People make a mistake when they pay their legislators good

salaries, expect them to work full time, and then complain about all
the government intervention in their lives. The nature of legislators is
to legislate. They work full time introducing new bills that create more
agencies, bureaus, commissions and regulatory functions of
government.
—Former California senator H. R. Richardson

Flexible Spending Accounts

A flexible spending account is an employee fringe benefit plan. See
Cafeteria Plan.
Floor Tax
This is a property tax on inventory, sometimes levied by local and state
governments. Inventory sits on the floor, which is why the tax is sometimes
called a floor tax. Inventory also sits on shelves, but the tax is never called a
shelf tax. Whatever it is or isn’t called, the tax is deductible.
Expense category: Taxes and Licenses.
Flowers
Yes, flowers are deductible—for the office, for the store, for your secretary,
for a customer or client, for an office party.
Expense category: Office Expenses.
Food
Food samples available to the public are fully deductible. Food and
beverages served at business-related events, such as a demonstration or
exhibit, are deductible. Meals are partly deductible; see Meals.
Expense category: If samples of your goods, Cost of Goods Sold. If
refreshments, Advertising.
Businesses that sell food: Food is deducted as inventory. See Inventory.
Foreign Expenses
Payments to companies and individuals outside the United States
(sometimes called offshoring expenses) come under the same laws as
payments to US companies. Payments are fully deductible if they meet the
deduction requirements.
Expense category: Varies depending on actual expenses.
Foreign income taxes: If you pay income taxes to a foreign country, you
may be eligible for a tax credit. See Tax Credits.
More information: If self-employed, IRS Publication 514, Foreign Tax
Credit for Individuals. If a corporation, Instructions for Form 1118, Foreign
Tax Credit—Corporations.
Franchise Fees
Business franchise fees you pay to become a franchisee, licensee, or
distributor may have to be amortized over fifteen years. You should check
with an accountant who has franchise experience. Ongoing franchise fees
are deductible.
Expense category: For initial fees, Depreciation. For ongoing fees, Other
Expenses.
Franchise taxes: Do not confuse franchise fees with franchise taxes. They
are completely different.
Franchise Taxes
Franchise taxes are state taxes on corporations. Every state grants
corporations what they call a franchise to do business in the state, for which
the states charge an annual franchise tax. Some franchise taxes are annual
fees; some take the form of an income tax. They are deductible on your
federal return.
Don’t confuse this franchise tax with taxes on franchise businesses
(McDonald’s, Holiday Inn, those kinds of businesses). The word
“franchise” has two different meanings. All corporations, whether they are
franchises or not, pay state franchise taxes.
 Most states do not impose franchise taxes on unincorporated businesses.
But if your unincorporated business does pay a state franchise tax, it is
deductible if it is not an income tax. Unincorporated businesses cannot
deduct state income taxes on their federal tax returns. See Income Taxes.
Expense category: Taxes and Licenses.

Small businesses bear a disproportionate share of the burden

imposed by all federal regulations, including tax regulations.
—US Small Business Administration

Fraud
If your business is defrauded, you may or may not be entitled to a tax
deduction, depending on what kind of fraud actually occurred. See Casualty
Losses.
Free Agents
“Free agent” is another term for independent contractor. Fees charged by
free agents are deductible. See Independent Contractors.
Expense category: Commissions and Fees.
If you are a free agent, you are self-employed and are entitled to all the
business deductions listed in this book.
Freelancers
Fees charged by freelancers and other independent professionals are
deductible. See Independent Contractors.
Expense category: Commissions and Fees.
If you are a freelancer, you are self-employed and are entitled to all the
business deductions listed in this book.
Freight
Freight costs on goods you sell are deductible. Freight charges for business
assets you are buying (machinery, equipment, furniture) should be added to
the cost of the asset. See Business Assets. Freight charges for inventory you
are buying are added to the cost of the inventory and deducted under cost of
goods sold. See Inventory.
Expense category: If deducting separately, Other Expenses.
 Weekly delivery service charges on a contract with UPS, FedEx, or other
delivery service are deductible.
Expense category: Office Expenses.
Fringe Benefits
Employers can deduct the cost of employee fringe benefits, with some
exceptions and limits. Look up the individual items.
Expense category: Employee Benefit Programs.
More information: IRS Publication 15-A, Employer’s Supplemental Tax
Guide; IRS Publication 15-B, Employer’s Guide to Fringe Benefits.
Also see: Awards, Business Gifts, Dependent Care, Discounts, Education,
Health Insurance, Life Insurance, Medical Expenses, Medical Savings
Accounts, Parking, Bicycles, and Retirement Plans.
Fuel
All fuel costs are deductible. Fuel costs for cars and light trucks are
deducted differently than fuel costs for large trucks and heavy-duty
equipment. See Vehicles.
Expense category: Fuel for cars, vans, and small trucks, Car and Truck
Expenses. Fuel for heavy-duty equipment and large trucks, also for boats
and aircraft, Supplies. Fuel for heating, Utilities.
Fuel tax credits: You may be eligible for a tax credit if you use fuel for
farming, off-highway use, or for export, or if you use alternative non-fossil
fuels. See Tax Credits.
Furniture
Furniture can be deducted the year of purchase or depreciated over seven
years. See Business Assets.
Expense category: If deducting furniture that costs $2,500 or less, Other
Expenses. If deducting furniture that costs more than $2,500 or if
depreciating the furniture, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Home-based business: Furniture used for the business can be deducted
in addition to and separate from the Home Expenses deduction. Furniture is
not subject to the requirements and limitations of the Home Expenses
deduction.

After paying my Social Security, Medicare, and federal and state

income taxes, my wife and I could finally use my $25,000 first year’s
income to splurge on food and housing. Three years later, after
working 80-hour weeks without a single vacation, I reluctantly added
an employee. I quickly discovered I was to become the employee’s
“mother,” legally required to pay worker’s compensation,
unemployment and disability insurance for him, as well as paying for
his Social Security and Medicare benefits. I quickly found out how
badly the government penalizes anyone trying to make a living.
—Business owner Scott Grimshaw, Nation’s Business

Gambling Expenses
Generally, gambling expenses are not deductible as business expenses.
However, if you take a prospective customer gambling, some accountants
think this qualifies as an entertainment expense, if the gambling is legal.
See Entertainment.
Professional gamblers who are in the business of gambling can deduct
gambling expenses as business deductions, just like any other business, as
long as the gambling is legal in your state. Business deductions are not
allowed for illegal activities.
IRS Red Flag Audit Alert: Claiming a deduction for gambling is
inviting an audit. The IRS is very suspicious, often correctly, that gambling
is really a hobby, not a business, and may also be an illegal activity. This is
an area you may want to discuss with an experienced tax accountant
(hopefully not with your criminal defense attorney).
Garbage Service
Garbage service and other utilities are deductible.
Expense category: Utilities.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Gardening Expenses
Gardening, lawn care, and landscaping expenses are deductible. Hiring a
gardener is deductible.
Expense category: Repairs and Maintenance.
Home-based business: If you take the flat rate “safe harbor” deduction
(explained under Home Expenses), you can ignore this warning because it
does not apply to you. If, however, you deduct actual expenses (also
explained under Home Expenses), the IRS prohibits a deduction for most
gardening, landscaping, and lawn care expenses. Read the warning under
Landscaping. It also applies to gardening.
General Business Credit
This is not one but several tax credits lumped under one heading. Look up
individual credits. Also see Tax Credits.
Expense category: Tax credits are taken on Form 1040, not the business
part of the tax return.
Gift Cards and Gift Certificates
There is no tax deduction for gift cards and gift certificates you sell or give
away, other than the cost of producing the cards and certificates. When the
cards or certificates are redeemed, if they are redeemed for merchandise,
you deduct the cost of the merchandise as part of cost of goods sold. See
Inventory. If the cards or certificates are redeemed for services you provide,
there is no tax deduction because the value of your own time is not a
business expense. See Paying Yourself.
If you pay for business goods or services using a gift card or gift
certificate, you deduct what the card or certificate cost you, not what the
product or service normally costs. If the card or certificate was a gift to you,
you have no deduction because you did not pay anything.
Expense category: For items you purchase, the expense category depends
on what was purchased. For the cost of producing cards and certificates,
Office Expenses. For products (not services) your customers get, Cost of
Goods Sold.

How can small businesses be so successful in the United States

when our government appears so unfriendly and unhelpful?
—Former senator Robert Dole

Gifts
Gifts are deductible, with limits. See Business Gifts.
Gig Workers
If you hire gig workers (on-demand workers, sharing economy workers),
they are independent contractors. You deduct the expense as you would for
any other contract work. See Independent Contractors.
Expense category: Contract Labor.
If you are a gig worker, you are self-employed, and eligible for every tax
deduction in this book. Read “On-Demand Workers” in the introduction to
this book. You should also read the Paying Yourself entry.
Going Concern Value
Goodwill
A successful business is worth more than a new business or a failing
business, because satisfied customers will continue to patronize a successful
business. That intangible “worth” is called goodwill or going concern value.
It is also called blue sky. A portion of the purchase price of a business is
often allocated to goodwill and can be amortized over 15 years. See Buying
a Business and Depreciation.
Expense category: Depreciation.
Graphic Design
Deductible, but see Design Costs.
Greeting Cards
Deductible. Good public relations too. People often ignore or never even
look at email and internet greetings. Mail lots of greeting cards.
Expense category: Office Expenses.
Grooming
Personal grooming expenses are not deductible, except when you’re
traveling away from home overnight on business. See Travel. Grooming
expenses related to a show or other promotion are deductible.
Expense category: For a show, Other Expenses. If traveling, Travel.
Gross Receipts Tax
A gross receipts tax is a tax on total business receipts—total sales, total
income—before any deductions for expenses. There is no federal gross
receipts tax. Some states and some cities have gross receipts taxes, but most
don’t. Gross receipts taxes are deductible.
Gross receipts tax is not income tax, although the IRS often refers to it as
income tax, just to confuse the issue. Income taxes are based on net income;
that is, income after all business deductions. Deduction rules for income
taxes do not apply to gross receipts taxes.
Gross receipts tax is not sales tax. Some states call their sales tax a gross
receipts tax, but the tax referred to here is not a sales tax. Sales tax is
collected from your customers. Gross receipts taxes are paid out of your
own pocket.
Expense category: Taxes and Licenses.
Group Health Insurance
The cost of a group health insurance plan for your employees is deductible.
Former employees and families of employees can be included.
Expense category: Employee Benefit Programs.
More information: IRS Publication 15-B, Employer’s Tax Guide to
Fringe Benefits.
Coverage for yourself: If you are covered under a group insurance plan
for your employees, you can deduct the cost for you and your family only if
your business is a corporation. If you are self-employed, you are limited to
the health insurance deductions for self-employed individuals. See Health
Insurance.
Guaranteed Payments to Partners
Some partnerships pay their partners a regular weekly or monthly paycheck,
much like employee wages. The payments, like all profits paid to partners,
are not tax deductible. The payments come under the same rules as
payments to sole proprietors, explained under Paying Yourself.
If your partnership pays health insurance for the partners, the payments
are included as guaranteed payments to partners. See Health Insurance.
Guard Dog
The cost of buying a guard dog can be deducted the year of purchase or
depreciated over seven years. See Business Assets. Veterinary fees and the
cost of feeding and maintaining the animal are deductible.
Expense category: If deducting, Other Expenses. If depreciating,
Depreciation.
More information: If deducting, IRS Notice 2015-82, De Minimis Safe
Harbor Deduction. If depreciating, IRS Publication 946, How to Depreciate
Property.
Guns
If having a gun is an ordinary and necessary expense of your business, it is
deductible. See Business Assets.
Expense category: Other Expenses.
More information: IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Hair Care
See Personal Appearance.
Handicapped Access
See Disabled Access.
Handling Charges
Handling charges added to a shipping or freight bill are deducted like
shipping costs. Handling charges for inventory you are buying are added to
the cost of the inventory, not deducted separately. See Inventory. Handling
charges for business assets you are buying (machinery, equipment,
furniture) are added to the cost of the asset. See Business Assets.

I don’t think government officials are against small business. They

just have other priorities.
 —Jere Glover, US Small Business Administration

Hazardous Material Disposal

See Contamination Cleanup.
Health Benefits
See Health Insurance and Medical Expenses.
Health Insurance
Sole proprietors, partners in partnerships, members of LLCs, and owners of
S corporations can get a tax deduction for the cost of health insurance for
themselves and their spouses and dependents. The health insurance
deduction, however, is not a business expense, is not deducted on the
business part of your tax return, and does not reduce your business profit.
The deduction is taken on your 1040 return.
The deduction may not exceed the net profit from your business. The
deduction is not allowed if you are eligible for employer-paid health
insurance through your own employer (if you have another job) or through
your spouse’s employer.
To get the health insurance deduction, the insurance plan must be either
in the name of the business or in the name of the self-employed individual.
If your spouse is shown as the main insured on your policy, ask your
insurance company to change the name on the policy. The change should
not affect your coverage or premiums.
I also suggest you pay the health insurance premiums from your business
bank account, even if the policy is not in the business’s name. Some tax
experts have stated that this is an IRS requirement. I’ve never found this
requirement in the IRS code or any IRS notices or publications, but it
certainly will help in the unlikely chance that an IRS auditor might
challenge the deduction. If you don’t have a business bank account, or if
you pay by credit card, take the deduction anyway and don’t worry about it.
You cannot take this deduction for medical expenses, just insurance.
Partnerships: The health insurance policy can be purchased by the
partners themselves or by the partnership. But if the partners purchase the
policies, the partnership is required to reimburse the partners and report the
reimbursement as guaranteed payments to partners on the partnership tax
return.
S corporations: The health insurance policy can be purchased by the
owner/employees of the corporation or by the corporation itself. But if the
owners purchase the policies, the corporation is required to reimburse the
owners. In both situations, the corporation reports the cost of the premiums
as taxable wages to the owner/employees.
Expense category: Deducted on the 1040 return.
More information: IRS Publication 334, Tax Guide for Small Business.
Medicare: Medicare premiums—the insurance premiums you pay when
you are on Medicare—are considered health insurance. Medicare tax that
you pay as part of your self-employment tax is not health insurance and is
not deductible.
Long term care insurance: Premiums for long term care insurance can be
included as part of the above health insurance deduction. Long term care
insurance, however, is subject to a dollar limitation, which the IRS changes
from year to year, and which varies depending on your age. There is no
dollar limitation on regular health insurance. For long term care limits, see
IRS Publication 535, Business Expenses.
Disability insurance: Insurance that pays you for lost earnings if you are
disabled is not considered health insurance and is not deductible.
Employers: Health and long term care insurance for your employees,
their spouses, and dependents are 100 percent deductible as a business
expense. Employers can also reimburse employees for actual medical
expenses for the employees and employees’ families: doctor bills, hospitals,
prescriptions, lab tests, and many other medical expenses. The employer
gets a full deduction, and the payments are not taxable to the employees. Be
careful, however, not to reimburse employees for the cost of health
insurance they themselves purchase. The reimbursement may be considered
taxable wages. In addition to the deductions, employers with twenty-five or
fewer full-time workers may also be eligible for a Small Business Health
Care Tax Credit. See Tax Credits.
Spouse on payroll: If your spouse is an employee of your business, on
the payroll with regular employee payroll deductions, your spouse and
family (i.e., you and your children) are eligible for full employee health
benefits, both health insurance and actual medical expenses, and the cost is
fully deductible as a business expense. You come under the 100 percent
deductible employee health insurance rules, not the self-employed
insurance rules, a big tax savings. To get this deduction, all your employees
(if you have other employees) must be covered. Also, according to a recent
IRS court case, the spouse must be the primary insured on the policy, and
premiums must be paid from the business checking account, assuming you
have a business checking account. If you don’t, just pay however you can
and don’t worry about it.
IRS Red Flag Audit Warning: Putting your spouse on the payroll and
deducting your entire family’s health insurance is a loophole in the tax law
that the IRS is often suspicious of. The IRS has often challenged the
deduction on the grounds that the spouse is not really an employee or is
only doing minimal work, and is only on the payroll to get the health
coverage. The IRS considers the cost of the health benefits to be
“unreasonable compensation”; that is, more money than is reasonable for
the amount and type of work your spouse is doing. You may want to talk to
an accountant familiar with this deduction.
Corporations: If you are an employee of your own C corporation (not S
corporation), you, your spouse, and dependents are eligible for full
employee medical coverage, but only if all your employees are covered.
Expense category: Employee Benefit Programs.
More information: IRS Publication 15-B, Employer’s Guide to Fringe
Benefits.
Heating
Heating and other utilities are deductible.
Expense category: Utilities.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Holiday Cards
Deductible. Christmas or Season’s Greetings cards are always noticed and
appreciated. One company I did business with always sent their customers a
Thanksgiving card, the only one I ever got. I always remembered them
because of the card. But then, I once had a dentist who sent his patients
birthday cards. Who wants to hear from your dentist ever, especially on
your birthday!
Expense category: Office Expenses.

Self-employed individuals often cheat themselves by considering an

expense personal when it’s really a business expense. In the
corporate world, it’s clear who is a business associate and who is
not. For the self-employed, that line is very wiggly. Just because
someone is a friend or family member doesn’t mean he at she isn’t a
business associate.
—BusinessWeek financial writer June Walker

Home Expenses: Business Use of Your Home

This deduction is for the space in your home that is used for business. The
deduction is not just for home-based businesses. Anyone who has a
business office in the home, sees customers and clients in the home, does
business-related work at home, or has business storage at home may be
eligible for this deduction.
The deduction, often called the “home office deduction,” is not just for an
office in the home. It is for any business space—office, workshop, studio,
warehouse, store, showroom—and the expenses directly related to the
space, including rent or depreciation, utilities, insurance, property taxes,
maintenance, home repairs, remodeling, air conditioning, painting, and
decorating: most everything associated with the office itself (except office
furniture and equipment, which are deducted separately and do not come
under these home expense rules).
The term “home” includes a house, apartment, loft, condominium, trailer,
mobile home, or boat if you are living on it. The term also includes any
separate structure that is part of your residence, such as a garage, shop, or
other building.
 Failure to qualify for the home deduction doesn’t prohibit you from
operating your business out of your home. It only means that one possibly
large expense, the cost of the space itself, is not deductible on your federal
income taxes. You can still deduct all legitimate business expenses other
than those directly related to the business space.
The home expense rules apply to sole proprietors, spousal partnerships,
and one-owner LLCs. Partnerships, corporations, and multi-owner LLCs
may be able to claim a home expense deduction, depending on several
factors (covered below).
The Requirements:
To be eligible for the home deduction, the business space (the office,
workshop, studio, or whatever you are using the building for) needs to meet
two basic rules: (1) a principal place of business, and (2) regular and
exclusive use.
Rule 1: A principal place of business. Your home must meet at least one
of the following four requirements:
1. The home must be your principal place of business, defined by the IRS
as “the most important, consequential, or influential location.”
Or 2. The home must be used regularly (not just occasionally) by your
customers or clients.
Or 3. The home must be used regularly to generate sales, such as making
calls and preparing estimates.
Or 4. The home must be the sole fixed location where you conduct
substantial administrative or management activities for the business: where
you do your paperwork or your research, order supplies, or schedule
appointments. You don’t have to do all your administrative or management
work at home, but it should be the main location for these activities.
Rule 2: Regular and exclusive use. To be eligible for the home deduction,
in addition to meeting Rule #1 above, a specific part of your home must be
used regularly and exclusively for business. It can be a separate room or
even part of a room, as long as it is used for the business and nothing else.
Period. No television in the office. No personal paperwork at the desk. (No
games on the computer?) The business area can’t double as a guest room,
kid’s room, or anything else, even when you are not working.
There are two exceptions to the exclusive rule: (1) If your home is your
sole location for a retail sales business and if you regularly store your
inventory or your samples in your home, the expense of maintaining the
storage area is deductible even if it isn’t exclusive use of the space. (2) If
you operate a licensed day care facility in your home, you do not have to
use the space exclusively for business.
Taking the Home Deduction:
There are two options for taking a home deduction: You can deduct actual
expenses, or you can take a standard flat rate deduction.
Deducting actual expenses involves keeping detailed records of expenses,
making multiple calculations, filing an additional tax form (Form 8829,
Expenses for Business Use of Your Home), and, if it is a home you own,
possible tax problems when you sell the home. By comparison, the flat rate
deduction (the IRS calls it the Safe Harbor Method) is simple to figure,
does not require Form 8829, and eliminates any tax complications when
you sell your home.
Although the flat rate deduction is much easier to calculate and requires
much less paperwork than using actual expenses, it probably will result in a
lower deduction amount. Also, if your business is showing a loss, the flat
rate deduction has some limitations (covered below). You can calculate the
home deduction both ways and then decide which will give you the biggest
deduction and the fewest hassles. Once you select a method, you are not
stuck with it for future years. You can use one method one year, and the
other method the next year if you want.
Option 1, the Flat Rate “Safe Harbor” Deduction: The deduction is $5
per square foot of business space, up to a maximum of 300 square feet. So
the maximum annual flat rate deduction is $1,500. This flat rate option is in
lieu of deducting actual expenses for the space itself. Office furniture and
equipment, as well as all other normal business expenses other than those
directly related to the space, are deductible in addition to the flat rate.
Business loss: The deduction cannot exceed the net profit from your
business. You can take the flat rate deduction only up to the point your
profit drops to zero. If your business is already showing a loss, you cannot
take the deduction at all. Any unused part of the flat rate deduction cannot
be applied to future years. Option 2 below, deducting actual expenses,
allows the deduction to be carried forward to future years if the business is
showing a loss.
Part-year business: If you operate a business for only part of a year—if
you operate a seasonal business or a pop-up business, or if you start or close
the business during the year—you prorate the deduction for how many
months of the year the business is in operation. Any month that you operate
a business for fifteen or more days can be counted as a full month in
making the proration.
More than one business: If you have more than one business, the 300-
square-foot maximum is for all businesses combined. If a spouse or
housemate also has a business, that person is also entitled to a $5-per-
square-foot deduction for up to 300 square feet, but not for the same portion
of the home. If two people share the same space, the combined deduction
cannot be more than $5 per square foot.
 Option 2, Deducting Actual Expenses: If you choose this option,
deductible expenses include a percentage of your rent if you rent your
home, or a percentage of the depreciation if you own your home, and an
equal percentage of home utilities, property tax, building maintenance and
repairs, garbage pickup, mortgage interest, and insurance. You can
determine the percentage based on square footage or, if the rooms in your
home are about the same size, by the number of rooms. Expenses that are
only for the business, such as office cleaning, painting the office, air
conditioning, decorating, or buying extra insurance coverage, are 100
percent deductible if they are 100 percent for the business; you do not
prorate them. The only exceptions to the deductions are for landscaping and
lawn care, which the IRS says are not deductible, although the Tax Court
has overruled the IRS several times. See Landscaping for more information.
Business loss: If your business shows a loss, part of your home expenses
is not deductible this year. You may deduct all your regular business
expenses (other than expenses for the space itself) and may deduct interest
and property taxes on the home, regardless of profit or loss. But the
remaining home expenses may be deducted this year only if your business
shows a profit. Any expenses you cannot deduct due to this limitation can
be carried forward to the next year, and future years if the next year’s
income is not sufficient, and deducted then, again only up to the point
where they do not create a loss next year. This is different than Option 1,
the flat rate deduction. If the business is showing a loss, the flat rate
deduction cannot be carried to future years.
Tax trap for homeowners: If you are deducting actual expenses, you will
run into tax complications when you sell your house. Any depreciation you
were allowed must be “recaptured.” This means that you add up all the
depreciation during all the years you used your home for business, and pay
tax on that depreciation when you sell the house. This is a complicated law,
and an unwelcome tax, that you can avoid by taking the flat rate deduction.
Another tax trap: If you are deducting actual expenses and your home
business is located in a separate structure on the same property—such as a
detached garage, barn, even a structure specially built to house your
business—when you sell your home, this structure is not eligible for the tax
exemption homeowners get when they sell their homes. Any profit on the
sale of the separate business structure is fully taxable. This quirk in the law
applies only to separate structures, not to a business located inside your
main residence or in an attached garage. This problem is also eliminated by
taking the flat rate deduction.
Special Situations (for both the above options):
More than one business location: If your business is also operated out of
another location, such as a store, you are still eligible for a home deduction
in addition to the cost of renting the store, if the home meets the above
requirements. You can have a separate “principal place of business” for
each trade or business you operate.
More than one home: A home deduction is allowed only for your
“principal place of business,” which can’t be two different places. You can’t
run a business out of two homes and get two home deductions. If you move
to a new home during the year, you can have two principal places of
business for different parts of the year, but curiously, the IRS will not allow
you to take the flat rate deduction (Option 1). The IRS will allow you to
take Option 2, itemizing expenses on both homes, part of the year on one
home and part on the other. If you are operating two different businesses out
of two different homes, you can take the home deduction for each business.
You now have two principal places of business independent of each other.
Child care and day care businesses: The home deduction is allowed only
if your business is officially licensed as a child care or day care business
(unless your business is exempt from state licensing rules) and your
business cares for children, or people age sixty-five or older, or people who
are unable to care for themselves. Only the space used for the care activities
can be deducted, and only for the days used. Space used for part of a day is
eligible for a full-day deduction. No need to prorate it for hours of use.
Child care and day care businesses are exempt from the exclusive use rule.
You get a full deduction for rooms used in your business even if they are
also used for non-business purposes.
Lodging businesses: If you operate a separate hotel or inn on your
property, it is not considered a home business. You do not have to meet the
Home Expenses rules. If you operate a bed-and-breakfast, boardinghouse,
or rooming house in your home, only the portion of the home used
exclusively for the business can be deducted. Shared space such as a dining
room and your own private space cannot be deducted. However, you could
have an office in your private space and get a deduction for the office in
addition to the deduction for the lodging space, if the office meets the
requirements.
Sharing economy rentals: Renting out rooms through online platforms
such as Airbnb comes under the same rules as boardinghouses and bed-and-
breakfasts. See “Lodging businesses,” directly above this.
Renting your home to your business: Some business owners rent their
home to their business and take a business deduction for the rent expense.
This is not usually a good idea. While this gives your business a tax
deduction, it saddles you with taxable rental income and a possible loss of
your home tax exemption.
Partnerships, corporations, and multi-owner LLCs cannot take the Home
Expenses deduction, not directly anyway. The owner of the business (the
person whose home is being used for business) can get a reimbursement
from the business for the owner’s home expenses, and then the business
could deduct the reimbursement as a business expense. The IRS requires
that this type of arrangement have an “accountable reimbursement plan,”
which is a written policy that the expenses are business related and that the
expenses are substantiated (you have receipts). Also, the partnership or
LLC agreement or the corporate bylaws should include a clause requiring
you to use your home for business. If your current agreement or bylaws do
not include such a statement, amend them to include this requirement. If
you do not have the reimbursement plan and the written agreements, your
business cannot take the deduction. The owner of the business (not the
business itself) could still deduct some of the home expenses on the owner’s
personal tax return, but the deductions are not considered business
deductions and do not reduce the business profit.
Expense category: Expenses for Business Use of Your Home.
More information: IRS Publication 587, Business Use of Your Home.
Home-based manufacturers and crafts businesses: Indirect costs of
producing goods for sale, including the space used for manufacturing, may
have to be included in the cost of inventory. Most businesses with indirect
costs under $200,000 are exempt from this requirement, but see “Indirect
Costs” under Inventory.
Tax laws are complicated and unfriendly. Figuring out whether a
home office can be deducted is a more difficult question than
balancing the national budget. So most of us just give up and pay
the full tax.
—Tom Person, Laughing Bear Publishing, Houston, Texas

Homeowner Fees / Associations

If you are eligible for the Home Expenses deduction explained above, and if
you are deducting actual expenses (Option 2), a percentage of your
homeowner fees is deductible as part of that deduction. If you are taking the
flat rate “Safe Harbor” deduction (Option 1), these fees are included as part
of the deduction, and no additional deduction is allowed.
Housing Allowances
Housing allowances provided by an employer to employees are a tax-
deductible expense, if the lodging meets the IRS’s “ordinary” and
“necessary” tests. The allowance, however, is taxable to the employees (as
wages) unless it meets three additional requirements: (1) The lodging is on
the employer’s business premises; (2) the lodging is for the employer’s
convenience; and (3) the lodging is required as a condition of employment.
If these three requirements are met, the housing is tax free for the
employees.
Expense category: Employee Benefit Programs.
More Information: IRS Publication 15-B, Employer’s Tax Guide to
Fringe Benefits.
HR 10 Plan
Another name for a Keogh retirement plan, also known as a qualified plan.
See Retirement Plans.
Expense category: Deducted on the 1040 form.
More information: IRS Publication 560, Retirement Plans for Small
Business.
Husband on Payroll
See Spouse.
Illegal Expenses
Not all outlaws are criminals, but it’s illegal to take a deduction for illegal
expenses. Just say no deduction allowed.
Importing
All fees and taxes related to importing can be deducted, although these
expenses can sometimes be added to the cost of the inventory being
purchased and deducted as part of cost of goods sold. You may want to talk
to an accountant with export and import experience.
Expense category: For duties and tariffs, Taxes and Licenses. For non-
government fees, Legal and Professional Services. If adding to the cost of
the inventory, Cost of Goods Sold.

Give me a list of write-offs organized by type of deduction, and

you’re guaranteed to knock half off your tax preparation bill.
—CPA Andrew Blackman, New York City

Improvements
See Building Improvements.
Incentives
Incentive payments to customers, vendors, and other nonemployees are
deductible, within limits. See Prizes.
Expense category: Depends on what the payments are for.
Employers: Incentive payments to employees, other than token
nonmonetary gifts, are considered wages, taxable to the employee and
subject to regular payroll taxes. However, employees can receive
“employee achievement awards” that are not considered taxable wages. See
Awards.
Income Taxes
Federal income taxes are not deductible. State and local income taxes are
not deductible for sole proprietorships, partnerships, S corporations, or
LLCs, but are deductible for C corporations.
Expense category: For C corporations only, Taxes and Licenses.
 State tax returns: Some states allow businesses, both corporations and
non-corporations, to deduct federal income taxes (and sometimes local
income taxes) on their state income tax returns.
Foreign income taxes: If you pay income taxes to a foreign country, you
may be eligible for a tax credit. See Tax Credits.
More information: For corporations, Instructions for Form 1118, Foreign
Tax Credit. For self-employed people, IRS Publication 514, Foreign Tax
Credit for Individuals.
 IRS Service Center, Ogden, Utah

Incorporation Fees
If you are incorporating an existing business, fees to incorporate the
business are deductible. If you are incorporating a new business, the
deductions are limited. See Organizational Costs.
Expense category: Taxes and Licenses.
Brilliant deduction, Dr. Watson.
—Sherlock Holmes

Independent Contractors
Independent contractors are people who sell their services on a contract
basis, usually for a temporary time or for a specific project. Independent
contractors are self-employed, in business for themselves. The cost of
hiring an independent contractor is deductible.
Independent contractors are not employees. Employment laws and
regulations do not apply to independent contractors. When you hire an
independent contractor, you do not withhold taxes, pay employment taxes,
provide health insurance, or file payroll tax returns. When you hire an
independent contractor, you pay the contractor his or her fee in full. The fee
is fully deductible.
“Contractor” has a much broader meaning in tax law than just building
contractors and similar trades. Most freelancers, consultants, free agents,
and self-employed professionals are independent contractors. On-demand
workers (gig workers, sharing economy workers) are independent
contractors. Independent contractors are also called outside contractors (not
because they work outdoors, but because they work outside the regular
employment system).
Expense category: Contract Labor.
IRS Red Flag Audit Warning: Businesses and the IRS have been
arguing for years over who should be classified as an employee and who
should be classified as an independent contractor. There are serious risks to
businesses that misclassify employees as independent contractors, and
significant costs may be at stake. If you are unsure how to classify a worker,
get advice from an experienced accountant. (I devote an entire chapter in
my book Small Time Operator to the differences between independent
contractors and employees.)
Indirect Costs: Manufacturing and Crafts
Inventory that you produce or manufacture has two components: direct
costs, the materials, supplies and paid labor that go into making the product;
and indirect costs, all other costs associated with producing or
manufacturing your products. How you deduct these costs is explained in
Inventory.
Individual Retirement Arrangement (IRA)
This is a tax-deferred retirement plan for individuals. Contributing to an
IRA is not a deductible business expense. See Retirement Plans.
Expense category: Deducted on the 1040 form, not on the business part
of the tax return.
Employers cannot deduct contributions to an employee’s IRA but can
deduct contributions to an employee’s SEP-IRA, which is different than an
IRA. See Retirement Plans.

Lots of things can happen if you don’t keep the right records, and
none of them are good.
—CPA Dan Smogor

Installation Costs
Minor installation costs can be deducted currently. The cost to install
machinery or equipment, if significant, is added to the cost of the asset
being installed, not deducted separately. See Business Assets.
Expense category: If deducting currently, Other Expenses.
Installment Purchases
If you are buying business assets such as buildings, equipment, vehicles,
furniture, fixtures, and machinery, you can deduct or depreciate the full
cost, even though you haven’t paid all of it yet. This is allowed even if you
are on the cash method of accounting. See Business Assets.
Insurance
For a price, there is insurance for just about everything: fire, extended
coverage, earthquake, riot, flood, earth movement, lightning, glass
breakage, general liability, fire, legal liability, property damage liability,
products liability, malpractice, errors and omissions, professional liability,
theft, business interruption, workers’ compensation, medical, vehicle,
environmental impairment, pollution liability, vandalism and malicious
mischief, patent protection, disability, key person life insurance, equipment
breakdown, tax audit insurance, credit (accounts receivable) insurance,
copyright insurance, export insurance, computer meltdown insurance,
employment practices insurance, bad weather insurance (if the weather
ruins an outdoor event) and—a sad sign of the times—sexual harassment
insurance. There’s even insurance that insures your insurance, called
umbrella insurance, in case you aren’t covered when you thought you were.
Most business insurance premiums are deductible, though with several
exceptions explained below.
Expense category: Insurance.
Exceptions:
Prepaid insurance: Prepaid insurance, if it does not extend beyond
twelve months, is deductible when paid. Prepaid insurance beyond twelve
months is prorated between years.
Vehicle insurance: Deductible only if you don’t take the Standard
Mileage Rate. See Vehicles.
Workers’ compensation insurance: Deductible for your employees. For
self-employed individuals, workers’ compensation premiums for yourself
are deductible only if your state requires you to cover yourself. If your own
coverage is not required by state law, it is not deductible.
Disability insurance: Deductible for your employees. Disability
insurance for yourself is not deductible unless you are an employee of your
corporation.
Life insurance: Self-employed individuals cannot deduct the cost of life
insurance on themselves. Premiums for group term life insurance paid by an
employer on behalf of employees are deductible, but only if the employer is
not a beneficiary. If coverage exceeds $50,000, the premiums are added to
the employee’s compensation as additional wages, subject to payroll taxes.
Business interruption insurance: Insurance that covers business overhead
while you are disabled or unable to work is deductible. Insurance that pays
you for lost earnings while you are disabled or unable to work is not
deductible.
Health insurance: Health insurance has so many rules, it has its own
category. See Health Insurance.
Self-insurance: Some businesses, in lieu of buying insurance, set aside
funds to cover possible losses such as fire or theft or a liability claim
against the business. Some people call these funds a “reserve.” The money
set aside or put into a reserve is not considered a business expense and is
not tax deductible.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including insurance on the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Homeowner insurance and renter insurance are
part of the Home Expenses deduction, not deducted separately. See Home
Expenses.

Who does their own business taxes? Why would you do that? I don’t
even do my personal taxes, and they would probably take thirty
seconds.
—Unidentified New Jersey advertising executive, Inc. magazine

Intangibles
Intellectual Property
Intangibles, also called intellectual property, are business assets you cannot
see, such as copyrights, trademarks, patents, and goodwill. Most intangibles
are amortized over a period of years. Some trademark expenses can be
written off when paid. Software is considered an intangible, but software
can be deducted currently or can be amortized over three years; see
Software. Look up individual items for specific rules.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Interest Expense
Interest paid on business debts, interest on credit card purchases, and
interest on purchases of business assets is deductible, with a few important
exceptions.
Interest on loans to construct real estate (as opposed to buying a structure
already built) are capitalized; that is, added to the cost of the property and
depreciated. See Depreciation.
 Points and other loan origination fees are deductible, but the deduction is
spread out over the length of the loan.
Interest on back taxes is not deductible, except for corporations, even if
the back taxes are business related.
Interest on a personal loan is deductible as a business expense if the loan
was used for your business. Be sure to keep good records showing that the
money was really put into your business.
On some real estate and equipment, you have the option to capitalize the
interest (add it to the cost of the building or equipment) and depreciate it
over a period of years rather than deduct it currently. This may be
advantageous to you if you are just starting out in business and do not need
the immediate tax deduction. I suggest you discuss this with an experienced
accountant.
Prepaid interest: The IRS says that prepaid interest is not deductible until
the year it applies to. Some Tax Courts disagree. Unless there is a
significant tax savings for you, I suggest staying with the IRS rules on
prepayments. You’ll get the deduction next year and not risk an IRS audit.
Buying a business: If you borrow money to purchase an existing
business, the laws can get complicated. Part of the interest may be
deductible as a current business expense, but part may have to be
capitalized, depending on what you are purchasing (assets or corporate
stock). You will probably need an experienced accountant’s help.
Corporations: If you get a personal loan to purchase business assets, the
interest is not deductible as a business expense. If the corporation itself
borrows the money, the interest is deductible. If you are a personal
guarantor of the loan, the corporation can deduct the interest as long as the
loan is on the corporation’s name.
Expense category: Interest. If added to the cost of real estate or
equipment, Depreciation.
Internet Access
The cost of internet access is fully deductible if used only for business. If
used partly for business, you prorate the cost and deduct only the business
portion. Also see Domain Name and Web Page.
Expense category: Office Expenses.
I give all the papers to my tax accountant and just say, Here. I pay a
lot of money for that privilege.
—Unidentified New York management consultant, Inc. magazine

Inventory
Inventory is merchandise—goods, products, parts—that you sell or
manufacture. Inventory also includes repair shop parts and manufacturing
parts, “raw materials” and supplies that will go into the making of a
finished product, and work in process (partly finished goods you are
making). Display items are considered inventory if you plan to eventually
sell them. Samples you give away are considered inventory. The cost of
inventory includes any freight or shipping charges you pay to have the
goods delivered to you; these charges are added to the cost of the goods in
calculating inventory costs.
Not all your inventory purchases can be deducted as current-year
expenses. Only the cost of those goods actually sold is deductible. This is
called “cost of goods sold” (CGS). There is a very important distinction
between inventory and cost of goods sold. The cost of inventory unsold at
year end is an asset owned by you and will not be a deductible expense until
sold (or until it becomes worthless; covered below).
For sales and manufacturing businesses, cost of goods sold is your most
important and usually your largest item of expense. The federal income tax
form has two main categories of expense: (1) cost of goods sold, and (2)
everything else. You will be required to show on your tax return how you
calculated your cost of goods sold.
Calculating cost of goods sold is a three-step procedure:
Step 1: You start with the cost of your inventory on hand at the beginning
of the year.
Step 2: You add all the inventory purchases during the year. Beginning
inventory (from Step 1) plus your purchases during the year gives you the
total inventory available for sale during the year.
If you are starting a new business and already have inventory on hand
that you will be putting into the business—inventory you purchased before
going into business—you can add the cost of that inventory (or the market
value if less than cost) to the current year’s purchases, even though you
didn’t buy it this year, and include it in your inventory for computing the
cost of goods sold.
Step 3: Subtract the ending inventory: the cost of inventory still on hand
at the end of the year. The resulting figure is your cost of goods sold:
Inventory at January 1, plus purchases during the year, minus inventory on
hand December 31, equals cost of goods sold.
To accomplish Step 3, make a list of inventory on hand at the end of the
year. This is called “taking inventory” or “taking a physical inventory.” The
word “inventory” refers to both the goods and the procedure of counting the
goods. Inventory on hand at year end is usually valued at its cost to you and
not at its sales price.
If for any reason your year-end inventory is worth less than what you
paid, the inventory should be valued at this lesser amount. “Worth” refers to
its retail value, what you can sell it for. If year-end inventory is totally
worthless, it should be valued at zero. This inventory valuation method is
known as “lower of cost or market”: You value your year-end inventory at
its cost or at its market value, whichever is less. Lowering the value of
(“writing down”) damaged or unsalable merchandise increases your cost of
goods sold, thereby decreasing your profits—and decreasing your taxes.
That is why savvy business owners take a very close look when valuing
their year-end inventory.
If you do value your inventory at less than its cost, the IRS requires you
to offer the devalued inventory for sale at the lower-than-market price,
either before year end or within thirty days after the year ends. You don’t
have to actually sell the inventory, but you do need to offer it for sale. If you
have worthless inventory (valued at zero dollars), the IRS has stated that
you must dispose of the inventory to get the deduction. You could instead
put a low scrap-value price on it and offer it for sale. Even if no one buys it,
you have met the IRS requirements.
Inventory missing, stolen, or given away: The cost of stolen or missing
inventory and the cost of samples given away are deductible as part of cost
of goods sold. This missing inventory is not on hand at year end, so it is not
included in your year-end inventory count. It automatically becomes part of
your cost of goods sold (even though it really wasn’t sold—the term “cost
of goods sold” really should be “cost of goods sold, lost, stolen, given away,
damaged, unsalable, etc.”).
 Consignment: Consigned inventory is merchandise one business or self-
employed individual places with another business for the other business to
try to sell. Consigned inventory belongs to the consignor (the business that
produced the inventory), not the consignee (the business trying to sell the
inventory). The inventory, if unsold at year end, is part of the consignor’s
ending inventory. See Consignment.
Manufacturers and crafts businesses: The cost of inventory on hand at
the end of the year includes not just your materials and manufacturing
supplies (inventory you have not yet worked on) but also any finished and
partially finished goods. Value your finished and partly finished inventory
at its cost to you. That cost includes materials and paid labor. It does not
include your own labor, unless you are an employee of your own
corporation. It may or may not include some indirect costs; see next
paragraph.
Indirect costs (manufacturers and crafts businesses): Inventory that is
produced by manufacturers and crafts businesses has two components: the
direct costs, which are the materials that go into the products, the shipping
or freight costs to deliver the inventory to you, and the paid labor to
produce the products; and the indirect costs, all of the other expenses
incurred to manufacture a product, including the cost of the building,
utilities, manufacturing equipment and machinery, maintenance, and
anything else involved in production.
The problem with indirect costs for manufacturers and crafts businesses
involves an important (and very nasty) law known as the Uniform
Capitalization Rules or UNICAP, a law that requires you to make lengthy
and confusing calculations to determine how much of your indirect costs
can be deducted currently, a law that hopefully you can avoid.
For starters, you are exempt from the UNICAP rules if you have no
finished or partly finished goods on hand at December 31. The rules do not
apply to inventory you haven’t worked on. The rules also do not apply to
original works (not reproductions or copies) of artists, authors, composers,
photographers, and designers.
You are also exempt from the UNICAP rules if you meet two other
requirements: (1) Your total indirect costs are $200,000 or less; and (2) your
goods are produced, to quote the IRS, “on a routine and repetitive basis.”
Many craftspeople create original one-of-a-kind products that may or may
not qualify as being made “on a routine and repetitive basis.” That is
something you will have to determine for yourself. I will tell you that I
don’t know any crafts business that has ever calculated UNICAP (most
crafts businesses haven’t even heard of UNICAP). I have never figured
UNICAP for any of my small clients, and, to my knowledge, no crafts
business has ever been challenged by the IRS. IRS auditors are rarely
interested in small-dollar deductions, and for most crafts businesses, the
UNICAP calculations result in insignificant amounts.
Hopefully, you’ve concluded that UNICAP doesn’t apply to you. If your
business is not exempt from UNICAP, uniform capitalization is a struggle.
Under UNICAP, your indirect costs of manufacturing or creating a product
are added to the cost of the inventory unsold at December 31. The cost of
whatever it is you’re manufacturing or crafting includes not only the parts
and materials but also the electricity for the lights, the rent on the building,
the cost of the machinery used to manufacture your products, and
everything else it costs to run the manufacturing operation! If, for example,
10 percent of the goods you manufactured this year are still on hand at the
end of the year, then 10 percent of the indirect costs of manufacturing are
“still on hand” at the end of the year, and included in the year-end
inventory. Calculating this cost, as you can imagine, is not easy, and . . .
well, we will not go any further here. Just decide you’re exempt from
UNICAP. What a horrible law.
Expense category: Cost of Goods Sold.
More information: IRS Publication 538, Accounting Periods and
Methods.

Doing taxes is not an effective use of a business owner’s time.

—Jane Wesman, Wesman Public Relations

Inventory Tax
Some local and state governments impose an inventory tax, sometimes
called a floor tax, a property tax on business inventory. This tax is
deductible.
Expense category: Taxes and Licenses.
Investment Credit
This is not one, but several tax credits lumped under one heading. Look up
individual credits. Also see Tax Credits.
Expense category: Tax credits are taken on Form 1040, not on the
business part of the tax return.
Investment Expenses
Money you invest in your own business may or may not be tax deductible,
depending on what you spend the money on. Look up the actual expenses.
Also see Start-up Costs and, if your business is a corporation,
Organizational Costs.
Investing (stocks, bonds): Investing, other than investing in your own
business, is not considered a business activity by the IRS. Investment
expenses, including broker fees, publications, and consultants, are not
deductible as business expenses.

The Statue of Liberty stands for this country, and this country stands
for making money. So what’s wrong with it? We’ve gone through
three Miss Libertys and four Uncle Sams. The Uncle Sams keep
quitting after a day or two. And meanwhile, nobody’s coming in to get
their taxes done. I wish I knew what we’re doing wrong.
—Susie Kavanaugh, publicity director of Liberty Tax Service, who
hired people to walk the street dressed as the Statue of Liberty and
Uncle Sam, handing out $20 coupons to get their taxes done, as
reported in the San Francisco Chronicle

IRA
See Individual Retirement Arrangement.
Janitorial Service
Janitorial and cleaning services are deductible.
Expense category: Office Expenses.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including janitorial service in the manufacturing area, may have to
be included in the cost of inventory. Most businesses with indirect costs
under $200,000 are exempt from this requirement, but see “Indirect Costs”
under Inventory.
Home-based business: Janitorial service is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Job Credits
“Work opportunity” tax credits are available for employers who hire certain
disadvantaged employees and who hire Native Americans. See Tax Credits.
Judgments
See Lawsuits.
Keogh Plan
A Keogh Plan, also known as an HR-10 plan or a qualified plan, is a tax-
deferred retirement plan. See Retirement Plans.
Expense category: Deducted on the 1040 form.
More information: IRS Publication 560, Retirement Plans for Small
Business.
Kickbacks
Kickbacks often refer to illegal payoffs, bribes, and other wonderful stuff.
But sometimes the term kickback refers, rather crudely, to rebates to
customers or suppliers, or commissions or rewards paid for referrals. Some
states outlaw some kinds of kickbacks. Illegal expenses are not deductible.
If a payment is illegal in your state, it is not deductible on your state or
federal return. If the kickbacks are legal, they are deductible.
Expense category: Depends on how the money is actually spent.
Land
Land is not deductible until you sell it. Only the cost of a structure can be
depreciated. For deducting or depreciating the cost of a building, you
separate the cost of the building from the cost of the land.
Some land improvements, especially parking lots and major landscaping,
can be depreciated. When purchasing land, separate out the depreciable
items and any architect and engineering fees, which may be deductible. See
Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
 Real estate developers: Predevelopment costs, such as planning and
design, blueprints, building permits, engineering studies, landscape plans,
and the like, are capitalized. They cannot be deducted currently. Some land
developers may be eligible for the Domestic Production Deduction.
Landscaping
Landscaping, gardening, and lawn care expenses are deductible.
Expense category: Repairs and Maintenance.
Real estate developers: Landscape plans are capitalized. They cannot be
deducted currently. See Depreciation.
Home-based business: If you take the flat rate “safe harbor” home
business deduction (explained under Home Expenses), you can ignore this;
it does not apply to you.
If you deduct actual expenses for the Home Expenses deduction (also
explained under Home Expenses), the IRS prohibits deductions for most
landscaping, lawn care, and gardening. According to the IRS, landscaping,
gardening, and lawn care are not deductible for home-based businesses,
even if done solely to enhance the image of the business. The only
exception to this rule has been for home-based landscapers, if they are using
the landscaping to demonstrate or advertise their services.
The Tax Courts have disagreed with the IRS on the landscaping
deduction for home-based businesses and have allowed a tax deduction for
landscaping, gardening, and lawn care costs if the business has clients
visiting on a regular basis and if the appearance of the residence and the
grounds would be of significance to the business operations. If the
landscaping expenses are not significant, I suggest not deducting them.
Why encourage an audit if there is little to be gained?

Accountants are boring. We hire people who have more personality.

—John T. Hewitt, founder, Jackson Hewitt Tax Service, on hiring tax
preparers without requiring them to have extensive backgrounds in
tax preparation, as reported in Entrepreneur magazine

Late Charges
Late charges are deductible, except for government penalties. Penalties for
late filing of government forms and tax returns are not deductible.
Expense category: Other Expenses.
Laundry Services
Laundry services for clothing used exclusively for work are deductible, but
only if the clothing meets IRS requirements for deducting clothing. See
Clothing. Laundry service for your regular clothing is deductible if you are
traveling away from home overnight on business.
Expense category: For work clothes, Other Expenses; for travel, Travel.
Lawn Care
Lawn care, landscaping, and gardening expenses are deductible.
Expense category: Repairs and Maintenance.
Home-based business: If you take the flat rate “safe harbor” home
business deduction (explained under Home Expenses), you can ignore this
warning; it does not apply to you. If, however, you deduct actual expenses
for the Home Expenses deduction (also explained under Home Expenses),
the IRS prohibits a deduction for most lawn care, gardening, and
landscaping. Read the warning under Landscaping. It also applies to lawn
care.

Just remember, the business belongs to you, not your accountant.

—Business columnist and CPA Gloria Gibbs Marullo

Lawsuits
The cost of a lawsuit is deductible in certain situations and not in others.
The IRS has ruled differently at different times. Because of this, the
information here should be used only as a guideline, as it may or may not
apply in your own situation.
It appears from prior rulings that you can deduct your legal expenses for a
business or contractual dispute that does not go to court, for a lawsuit that
goes to trial but is settled between the litigants before a trial is completed,
or if you do go to court and win the lawsuit.
 If you lose a lawsuit, it appears that actual damages (compensatory
damages) awarded to a plaintiff are deductible. Punitive damages (money
you are required to pay as a punishment, not as a reimbursement or to cover
a loss) are not deductible, at least not in prior rulings. Statutory damages
(those specified by law or statute) may be deductible, but again, there have
been conflicting rulings.
However, all these prior rulings may be moot. In a recent ruling, the IRS
stated, “Liabilities incurred to settle a lawsuit, including legal fees and other
expenses attributable to the lawsuit, are deductible as ordinary and
necessary business expenses.” This seems to contradict the prior rulings that
disallowed deductions for punitive damages and judgments.
I do not have a definitive answer, but the wording of the new ruling
sounds clear to me. I would take the deduction. I suggest you talk to an
experienced accountant.
Expense category: For attorney fees, Legal and Professional Services. For
damages, Other Expenses. If settling a business dispute, whatever the costs
are actually for.
Winning a lawsuit: This has nothing to do with tax deductions, but you
should be aware that proceeds from a lawsuit may or may not be taxable
income, depending on what the proceeds are for: reimbursement for
expenses or for a loss, or awards for different types of damages. A lot of tax
money could be at stake here, and some pretrial planning with your attorney
is advised.
Lawyers
See Attorneys. Or maybe don’t see attorneys.
(I learned all the lawyer jokes from a friend who is a very successful and
highly regarded attorney. She said a sense of humor is necessary to
counterbalance the serious, and often ridiculous, legal issues she faces
every day.)

Millions of small businesses contribute daily to the economic

success of our nation. They pay taxes.
—Former senator Robert Dole
Leasehold Improvements
Components of a building that you are leasing that are not structural, such
as portable air conditioning, some fixtures, support for heavy machinery,
partitions, and awnings, are known as leasehold improvements. If you, the
tenant, are paying for leasehold improvements, you may be able to deduct
them currently, or you can depreciate them over fifteen years. See Building
Improvements.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including leasehold improvements in the manufacturing area, may
have to be included in the cost of inventory. Most businesses with indirect
costs under $200,000 are exempt from this requirement, but see “Indirect
Costs” under Inventory.
Home-based business: Leasehold improvements are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.

Some tax cutting strategies make good financial sense. Other tax
strategies are simply bad ideas, often because tax considerations
are allowed to override basic economics.
—CPA Jim Angell, Willits, California

Leases and Rent

Business leases and rentals for buildings, vehicles, and equipment are
deductible, but with the following exceptions:
Prepayment: The IRS says that prepaid lease and rent payments are not
deductible until the year they apply to. Some Tax Courts disagree. Unless
there is a significant tax savings for you, I suggest staying with the IRS
rules on prepayments. You’ll get the deduction next year and not risk an
IRS audit.
Cancellation: A payment made to cancel a lease is deductible. A payment
made to cancel a lease in order to get a more favorable lease is deducted
over the term of the new lease.
 Lease-purchase: This is considered a purchase, not a lease, and handled
like any other purchase. A lease where you can purchase the equipment for
a nominal fee at the end of the lease period is also considered a purchase.
See Business Assets.
Automobile leases: There are limitations on automobile leases that are
thirty days or longer. See Vehicles.
Leasing or renting equipment from employees: Payments to employees
for use of their equipment, sometimes referred to as tool allowances, are a
red-flag issue to the IRS, as the payments are often an attempt to disguise
wages as something else. See Tool Allowances.
Expense category: Rent or Lease.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including rent or lease of the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: A home lease or rental is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Legal Fees
Most legal fees, paralegal fees, filing fees, and related expenses are
deductible.
Expense category: Legal and Professional Services.
Starting or buying a business: Legal fees associated with starting or
buying a business cannot always be deducted the year paid. See Buying a
Business, Start-up Costs, and, if you are starting a corporation,
Organizational Costs.
Also see Lawsuits.
Licenses
Business licenses and permits, and licenses for any business property, are
deductible.
Vehicle licenses are deductible if you don’t take the Standard Mileage
Rate. See Vehicles.
Expense category: Taxes and Licenses.
Licensing Fees
Fees paid for the rights to use someone else’s work, such as a trademark or
an artist’s photograph, are deductible, with some restrictions. See the listing
for whatever it is you are licensing.
Expense category: Other Expenses.
Life Insurance
Self-employed individuals cannot deduct the cost of life insurance on
themselves.
Employers: Premiums for group term life insurance paid by an employer
on behalf of employees are deductible, but only if the employer is not a
beneficiary. If coverage exceeds $50,000, the premiums are added to the
employee’s compensation as additional wages, subject to payroll taxes.
Expense category: Insurance.
Limousine Service
Deductible, if it meets the IRS’s “ordinary” and “necessary” tests for your
type of business. Be careful if this expenditure is considered an
entertainment expense, which is only 50 percent deductible. See
Entertainment.
Expense category: Other Expenses; possibly Entertainment.
Lists
Fees paid to rent or acquire mailing, email, telephone, or other lists are
deductible. Did you know that it is against federal law to make unsolicited
telephone calls to people who signed up for the Do Not Call list? Ha-ha-ha.
I get two or three a day. Last year the Federal Trade Commission received
more than 300,000 complaints about unsolicited telephone calls.
Expense category: Advertising.
Amounts paid to acquire customer accounts are amortized over fifteen
years.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Livestock
Deductions for livestock vary depending on what kind of animals are being
raised and what the animals are used for. Horses come under different rules
than pigs. Dairy cattle come under different rules than meat cattle.
Generally, livestock that will be sold in the normal course of business, such
as meat animals, is considered inventory. Animals that are producers, such
as egg-laying hens, are considered business assets. This is a complicated
area of tax law. I highly suggest getting help from an accountant who
regularly works with farmers and ranchers.
More information: IRS Publication 225, Farmer’s Tax Guide.
Loan Fees
Some loan fees are deductible. See Loans and Interest.
Expense category: Interest.
Loans
A loan is not income when received and not an expense when paid.
Repayment of a loan (principal) is not deductible.
Interest, loan fees, and closing costs may be deductible. See Interest.
Points and other loan origination fees are deductible, but the deduction is
spread out over the length of the loan.
 Expense category: Interest.
Lobbying Expenses
If you spend money to try to influence a federal or state legislator or a
federal or state election, you can deduct up to $2,000, but only if the money
is spent “in house,” meaning you cannot hire an outside professional
lobbyist.
Lobbying and similar expenses to try to influence local (as opposed to
federal or state) legislation do not come under the above restrictions. You
are allowed a deduction for lobbying, petitioning, and meeting with your
county supervisors, city council members, zoning commissioners, building
inspectors, fire marshals, and all those fine local folks who often have a lot
of power over local businesses.
Expense category: Legal and Professional Services.
Political contributions are not deductible.
Lodging
Lodging is deductible while you’re traveling away from home overnight on
business. See Travel.
Corporations: Corporations can deduct actual lodging expenses or use a
per diem rate. Non-corporate businesses cannot use the per diem. See Per
Diem.
Expense category: Travel.
Employers: Lodging provided by an employer to employees is a tax-
deductible expense, if the lodging meets the IRS’s “ordinary” and
“necessary” tests. The cost of the lodging, however, is taxable to the
employees (as wages) unless it meets three additional requirements: (1) The
lodging is on the employer’s business premises; (2) the lodging is for the
employer’s convenience; and (3) the lodging is required as a condition of
employment. If these three requirements are met, the lodging is tax free for
the employees. Owner/employees of S corporations are not eligible for this
employer deduction for themselves.
Expense category: Employee Benefit Programs.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
Not taking a legitimate tax deduction is like walking into a store and
paying more for the merchandise than the store wants.
—Business owner Sam Leandro, Willits, California

Logo
The cost of creating a company or product logo is deductible. Graphic
designs and package designs are also deductible. However, if the cost is
substantial, it may have to be amortized over several years. You might want
to ask an experienced accountant about this (or you might just go ahead and
deduct the cost like most small businesses).
Expense category: Other expenses. Or if you amortize the cost,
Depreciation.
Long Term Care Insurance
Long term care insurance comes under the same eligibility rules as health
insurance. See Health Insurance. Long term care insurance, however, is
subject to a dollar limitation, which the IRS changes from year to year, and
which varies depending on your age.
Expense category: For self-employed, deducted on the first page of the
1040 return; for employers, Employee Benefit Programs.
More information: For employers, IRS Publication 15-B, Employer’s Tax
Guide to Fringe Benefits. For dollar limits, IRS Publication 535, Business
Expenses.
Losses
Casualty and theft losses are deductible, with some limitations. See
Casualty Losses.
Business losses (showing a loss on your tax return) can be used to offset
other income this year, and can also be used to offset profits from other
years. See Net Operating Loss (NOL).
Lost income: If a customer or client does not pay you for your work,
there is no tax deduction for lost income. You simply don’t report any
income on your tax return. You have lost the value of your time and effort,
but the value of time and effort is not deductible. If your loss includes
goods and materials, you do get a deduction for the cost of the inventory,
not the sales price you charged the customer. The deduction is part of cost
of goods sold. See Inventory.

If you want to know how anyone can stop paying taxes, the answer
seems to be: the same way porcupines make love. Very, very
gingerly.
—Sam Thesham, Accountant of the Wild West

Machinery
Machinery can be deducted the year of purchase or depreciated over seven
years. See Business Assets.
Expense category: If deducting machinery that costs $2,500 or less, Other
Expenses. If deducting machinery that costs more than $2,500 or if
depreciating the machinery, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including the cost of machinery used in manufacturing, may have
to be included in the cost of inventory. Most businesses with indirect costs
under $200,000 are exempt from this requirement, but see “Indirect Costs”
under Inventory.
Magazines
Books, magazines, newsletters, newspapers, and all other publications that
are in any way related to your business are deductible.
Expense category: Office Expenses.
Mailbox Store Rentals
Mailbox store rents (“suites,” as the mail-order connoisseurs call them) are
deductible.
Expense category: Office Expenses.
Mailing Lists
Mailing list rentals and purchases are deductible.
Expense category: Advertising
Mailing Supplies and Expenses
Deductible.
Expense category: Office Expenses
Maintenance
Maintenance and minor repairs are deductible.
Expense category: Repairs and Maintenance
Also see Repairs.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including maintenance of manufacturing equipment and of the
manufacturing area, may have to be included in the cost of inventory. Most
businesses with indirect costs under $200,000 are exempt from this
requirement, but see “Indirect Costs” under Inventory.
Home-based business: Home maintenance is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Makeup
See Personal Appearance.
Management Fees
The fees charged by consultants you hire for management help are
deductible.
Managers who work for musicians and entertainers usually deduct their
fees from whatever pay is coming to you. But if you pay any management
fees, or any other fees out of your pocket, the fees are deductible.
Expense category: Commissions and Fees
Manufacturer’s Deduction
Manufacturers, and many other businesses, are eligible for this important
tax deduction, which is officially called the Domestic Production
Deduction. This deduction, however, is available only to businesses that
have employees. See Domestic Production Deduction.
Manufacturing Overhead
See Overhead.
Manufacturing Supplies
Manufacturing supplies that go into the product being manufactured are
part of your inventory and cannot be deducted until sold. See Inventory.
Expense category: Cost of Goods Sold
Marketing
Marketing is a broad term that includes advertising, promotion, news
releases, catalogs, you name it. Marketing expenses are deductible. Look up
each item that contributes to your marketing expenses to see if there are any
limitations.
Expense category: Depends on what is being deducted.
Market Research
Market research expenditures may be deductible currently, or they may
have to be capitalized and deducted over a period of years, depending on
their nature and the cost. Unless the expenditures are a large dollar amount,
most businesses deduct them when incurred.
Market research for a business you haven’t yet started cannot be deducted
until you are actually running the business. See Start-up Costs. If you are
starting a corporation, also see Organizational Costs.
Market research is not eligible for the Research Tax Credit.
Expense category: Other Expenses
Materials and Supplies
See Supplies.

61% of self-employed individuals under-report their incomes.

—US Government Accountability Office

Meals
Regular meals at work for yourself are generally not deductible. Meals with
current or prospective customers are 50 percent deductible, but only if
business is specifically discussed at the meal and the cost is not “lavish or
extravagant.” The IRS requires that you have a receipt and write on it who
you took out and why. Tips are considered part of the meal and are also 50
percent deductible. Travel to and from the restaurant, including parking, is
100 percent deductible. Meals while traveling away from home on business
are 50 percent deductible. Interstate truck drivers whose work hours are
regulated by the US Department of Transportation can deduct 80 percent of
the cost of meals, instead of 50 percent, while on the road.
Expense category: Meals and Entertainment; also Travel.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
Also see Per Diem and Standard Meal Allowance.
IRS Red Flag Audit Warning: Meals, along with travel and
entertainment, are often suspicious to auditors, especially if the dollar
amounts are significant. If you aren’t going to save a lot of money on taxes,
I suggest you don’t take a deduction for meals unless meals are a common
cost for your type of business.
Food samples available to the public are fully deductible. Food and
beverages served at business-related events, such as a demonstration or
exhibit, are deductible.
Expense category: Advertising.
Businesses selling meals (restaurants, caterers, food preparers): The cost
of meals sold to your customers is 100 percent deductible. The food itself is
considered inventory. See Inventory.
Child care and day care businesses: You can deduct the full cost of
meals provided, not just 50 percent, or you can take a special Standard Meal
Allowance. If your own child is one of the children, you are not allowed a
deduction for the cost of food for your child. The IRS audit manual for
child care businesses instructs auditors to investigate this flagrant violation
of federal law. What about the crayons?
Employers: Regular meals provided by an employer to employees are
not deductible unless the meals are on the business premises and are for
“the convenience of the employer.” There must be a substantial business
reason for providing the meals, such as requiring employees to be on call. If
these requirements are met, the cost of employee meals is 100 percent
deductible. Employers can deduct the cost of a company cafeteria if more
than 50 percent of the meals eaten there were for the employer’s
convenience.
Meals served to food service employees (restaurants, hotels, and the like)
during or just before or after their shifts are 100 percent deductible to the
employer and not taxable to the employees.
 Snacks, bottled water, cold drinks, coffee and doughnuts (or coffee and
gluten-free not-doughnuts), and the like are 100 percent deductible.
Occasional meals provided to employees, such as a pizza party, the annual
company picnic, or Thanksgiving turkeys you give your employees, are 100
percent deductible.
Taking employees out to lunch on a regular basis, not just occasionally or
for special occasions, is deductible for the employer but taxable to the
employees as wages, with payroll taxes and withholding. Your employees
will just love that, won’t they?
S corporations: If you are an owner-employee of your own S
corporation, you are not eligible for the employee deductions for yourself.
This rule does not apply to owner-employees of C corporations.
Expense category: Employee Benefit Programs.
More information: IRS Publication 15-B, Employer’s Guide to Fringe
Benefits.
Medical Expenses
Sole proprietors, partners in partnerships, member/owners of LLCs, and
owners of S corporations are not allowed a deduction for medical expenses
for themselves or their families. One exception to this rule is a medical
expense or a drug test required by law for work, which most accountants
say is fully deductible.
Medical insurance comes under a different set of rules. See Health
Insurance.
Employers are allowed a full deduction for employees’ medical
expenses, and for medical expenses of employees’ spouses and dependents.
Medical expenses refer to actual medical costs paid to doctors, hospitals,
dentists, eye doctors, and other medical providers (including some
alternative treatments) and for prescription drugs.
Spouse on the payroll: If you hire your spouse as an employee, you
possibly may be able to deduct your medical expenses on your business tax
return. Read “Spouse on the payroll” under Health Insurance.
C Corporations: If you or your spouse are an employee of your own C
corporation (not S corporation), your and your family’s medical expenses
can be deducted as a corporation business expense, but only if you offer the
same medical coverage to all your employees.
 Expense category: Employee Benefit Programs.
More information: IRS Publication 15-B, Employer’s Guide to Fringe
Benefits.

Pay your taxes. Al Capone didn’t get busted for all the murders he
was responsible for. Like Heidi Fleiss, he was convicted for tax
evasion.
—Advice to prostitutes from Catherine La Croix, author of “Working
Girl”

Medical Insurance
Medical insurance is the same thing as health insurance. See Health
Insurance.
Medicare Tax
For self-employed people, Medicare tax is part of the self-employment tax
and is not a deductible business expense. See Self-employment Tax.
Medicare premiums for business owners (that is, the insurance premiums
you pay when you are on Medicare) are deductible under the same rules as
health insurance. See Health Insurance. Note that Medicare tax and
Medicare premiums are two different things.
Expense category: Taxes and Licenses.
Employers: All employees are subject to Medicare. Employers pay half
the employees’ Medicare tax, and the employees pay half. The employer’s
portion of the tax is deductible.
Expense category: Taxes and Licenses.
Meetings
Business meetings are deductible, although you are allowed only a 50
percent deduction for meals. See Travel.
Expense category: For the cost of attending a meeting, Other Expenses.
For the travel and lodging, Travel.
Membership Fees
Membership fees and dues for clubs, associations, and organizations may or
may not be deductible, depending on the nature of the organization and
what it spends its money on. See Associations.
Merchandise
Merchandise is another word for inventory, goods for sale. Generally,
merchandise cannot be deducted until sold. See Inventory.
Expense category: Cost of Goods Sold.
Merchant Associations
Dues and meetings are deductible.
Expense category: Other Expenses.
If part of your merchant association dues is for political lobbying, that
portion of the dues is not deductible.
Messenger Service
Messenger services are deductible. (This item is dedicated to the memory of
John Cipollina.)
Expense category: Office Expenses.
Mileage Allowance
Mileage Rate
The IRS has a Standard Mileage Rate (standard mileage allowance) for cars
and some trucks for every business mile driven. See Vehicles.
Miscellaneous
Although there are probably a hundred or more miscellaneous expenses a
business can legitimately deduct, it is not a good idea to label anything
“miscellaneous” on your tax return. The word “miscellaneous” is vague and
can easily invite all kinds of questions from a suspicious auditor, especially
if the dollar amounts are significant. It is better to use several smaller, more
specific categories and individually list them on your tax return under Other
Expenses.

We don’t pay taxes. Only the little people pay taxes.

—Billionaire hotel operator Leona Helmsley (1920–2007), who spent
19 months in prison for federal tax evasion
Mobile Home
A deduction for a mobile home used for business depends on how it is
licensed and taxed.
There are two categories of tangible assets: real property and personal
property. Real property refers to real estate, such as buildings and land.
Personal property refers to all tangible property other than real estate. Real
property comes under different tax rules than personal property.
A mobile home can be either real property or personal property,
depending on several factors. If the mobile home is permanent, mounted on
a foundation, and hooked up to utilities, it is usually considered real
property. If the mobile home is in a temporary location, still on wheels, and
easily movable, it is usually considered personal property.
An important consideration is how the mobile home is licensed and taxed
by your state and county. If the mobile home is registered with the
department of motor vehicles, licensed as a movable trailer, it is usually
considered personal property. If the mobile home is on the county property
tax rolls as a structure, it is usually considered real property.
All real property is depreciated. Personal property can be depreciated, or,
at your option, part or all of the cost can be deducted the year of purchase.
So a permanent mobile home is depreciated. A movable, licensed mobile
home can be either depreciated or deducted the year of purchase.
Since personal property can give you a much bigger deduction this year
than real property, it may at first appear beneficial to have your mobile
home licensed by the department of motor vehicles and declared to be
personal property. But most personal property is subject to sales tax, and
most real property is exempt from sales tax. You may save a lot of money in
sales tax if the mobile home is considered real property.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Also see Trailers.
Home-based business: A mobile home used as a home-based business is
part of the Home Expenses deduction, not deducted separately. See Home
Expenses.
The only thing that hurts more than having to pay income tax is not
having to pay income tax.
—Sir Thomas R. Duwar (1864–1930), founder, Duwar’s Scottish
Whiskey

Mobile Phones
Mobile phones and smartphones come under the same rules as cell phones.
See Cell Phones.
Mortgages
The mortgage on business property must be split into its components:
buildings, land, taxes, insurance, interest. Each component comes under
different rules. Look up each item.
Home-based business: All the costs associated with a mortgage are part
of the Home Expenses deduction, not deducted separately. See Home
Expenses.
Motorcycles
The cost of a motorcycle used for business can be deducted the year of
purchase or depreciated over five years. Operating and maintenance
expenses can be deducted. Assuming the motorcycle is not used 100
percent for business, you prorate the expenses, business versus non-
business use.
Expense category: If deducting a motorcycle that costs $2,500 or less,
Other Expenses. If deducting a motorcycle that costs more than $2,500 or if
depreciating the motorcycle, Depreciation. For operating and maintenance
expenses, Repairs and Maintenance.
More information: For purchasing, IRS Publication 946, How to
Depreciate Property. If the cost is $2,500 or less, see IRS Notice 2015-82,
De Minimis Safe Harbor Deduction.

Taxes have a negative impact on taxpayers.

—Martin Regalia, vice president, US Chamber of Commerce,
speaking before the House Committee on Small Business
Moving Expenses
You may deduct all the expenses of moving your business from one
location to another.
Employers: Employers can deduct moving expenses paid for employees
or reimbursed to employees, if the move meets IRS requirements for
distance and length of stay, covered in the IRS publication listed below.
You may also be able to deduct moving expenses for yourself (personal
non-business expenses) if you meet IRS requirements for distance and
length of stay. This deduction is taken on your 1040 tax return. It is not a
business deduction.
Expense category: For costs related to the business, Other Expenses.
More information: IRS Publication 521, Moving Expenses.
Home-based business: The business portion of the move is fully
deductible, if you are allowed the Home Expenses deduction. See Home
Expenses.
Multi-Level Marketing
“Multi-level marketing” refers to a type of business, not to marketing
expenses. If you are starting a multi-level marketing business, see Start-up
Expenses. If you are setting up a corporation, also see Organizational Costs.
Musical Instruments and Equipment
If you are in business as a musician, band, or songwriter, the cost of your
instruments and equipment can be deducted the year of purchase or
depreciated over seven years. See Business Assets.
If you buy a musical instrument to keep in your office just to use for your
own enjoyment and relaxation, is it deductible? There are guitars in a lot of
business offices, so I guess it meets the IRS’s “ordinary” test. It helps you
get through the business day, so I guess it meets the “necessary” test. And
since it isn’t a Prewar Martin D-28 originally owned by Hank Williams, it
probably meets the “not lavish” test. Me, I’d take the deduction.
Expense category: If deducting musical instruments or equipment that
costs $2,500 or less, Other Expenses. If deducting musical instruments or
equipment that costs more than $2,500 or if depreciating the musical
instruments or equipment, Depreciation.
 More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

All taxes discourage something. Why not discourage bad things like
pollution rather than good things like working?
—Former Secretary of the Treasury Lawrence Summers

Music System
The office music system can be deducted the year of purchase or
depreciated over five years. See Business Assets.
Expense category: If deducting a system that costs $2,500 or less, Other
Expenses. If deducting a system that costs more than $2,500 or if
depreciating the system, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
The cost of CDs, DVDs, music downloads, and music subscriptions is
deductible.
Expense category: Office Expenses.
Net Operating Loss (NOL)
If your business suffers a loss this year, you will owe no income taxes on
the business, which I’m sure you know. You may not know that this loss
will also offset other income, such as a salary from an outside job or your
spouse’s wages or other taxable income, and reduce this year’s income tax.
You can also use this year’s loss to offset income and reduce taxes from
other years. You are allowed to carry back what the IRS calls a Net
Operating Loss (NOL) to apply against prior income and receive a refund
of prior years’ taxes, even if you were not in business then. The loss can be
carried back two years. And if your taxable income for the two prior years
is not sufficient to absorb the entire loss, you may carry the balance forward
to apply to as many as twenty future years. At your option, you can forego
the two-year carry-back period and apply your NOL entirely to the twenty
future years (and avoid filing amended returns, which starts the IRS audit
statute of limitations running again).

Net Operating Loss is not simply the business loss shown on your tax
return. It is a complicated combination of business and non-business
income and deductions. I don’t include the NOL calculations because they
are quite complex, and there’s no way to simplify the procedure. They are
explained in IRS Publication 536, Net Operating Losses. Don’t be put off
by their complexity. The NOL deduction may save you a bundle in income
taxes.
Expense category: For carryforward, individuals use Other Income;
corporations use the Net Operating Loss deduction.
More information: IRS Publication 536, Net Operating Losses.
Network Marketing
“Network marketing” refers to a type of business, not to marketing
expenses. If you are starting a network marketing business, see Start-up
Expenses. If you are setting up a corporation, also see Organizational Costs.

Thousands of people across the country have paid tax scheme

promoters for the “secret” of not paying taxes or have bought “untax”
packages. Then they find out that following the advice can result in
civil and criminal penalties.
—Internal Revenue Service

Networking
Networking usually refers to interacting with people to promote your
business. Networking expenses are deductible, although you want to be
careful that the expenses are not considered entertainment, which is only 50
percent deductible and which is a “red flag” to IRS auditors.
Expense category: Advertising (unless there is an obvious other
designation).
New Businesses
Expenses incurred before starting your business and expenses associated
with buying a business come under special rules. Tax deductions are
limited. See Buying a Business, Start-up Costs, and, if starting a
corporation, Organizational Costs.
As soon as you start operating your business, these start-up limitations no
longer apply. It’s always a good idea to postpone as many expenses as
possible until you’re actually earning some income.
Newsletters
Newspapers
Books, magazines, newsletters, newspapers, and all other publications are
deductible.
Expense category: Office Expenses.
NOL
“NOL” stands for Net Operating Loss. See Net Operating Loss.
Notary Fees
Deductible.
Expense category: Legal and Professional Services.
Notes
Promissory notes and notes payable, like loan payments, are not deductible.
The interest is deductible.
Expense category: Interest.
OASDI
“OASDI” stands for Old Age, Survivors, and Disability Insurance. OASDI
is another name for the combined Medicare and Social Security payroll
taxes deducted from every employee’s paycheck and collected from every
employer. OASDI is also known as FICA.
OASDI for self-employed individuals is part of the self-employment tax
and is not a deductible business expense. See Self-employment Tax.
Employers: OASDI paid by employers on behalf of employees is
deductible.
Expense category: Taxes and Licenses.
Occupational
Occupational licenses, fees, registrations, and the like are deductible.
Expense category: Taxes and Licenses.
Occupational training is deductible, with certain restrictions. See
Education Expenses.
“Off the Books” Payments
“Books” is another term for ledgers, your record of business income and
expenditures. “Off the books” refers to a payment, in cash, that you
intentionally chose not to record in your ledgers. And now you want to find
out if it is deductible? Was the payment legal? If it was legal, it probably is
deductible. If it was illegal it is not deductible. If it is paying an employee
that is not on the payroll and should be, you are asking for serious trouble.
See Under the Table, which means the same thing.
Expense category: Varies depending on actual expenses.

There is universal reluctance to voluntarily pay taxes.

 —Society of California Accountants

Office
The cost of renting an office is deductible. The cost of an office building
you own can be depreciated. See Buildings.
Expense category: If renting, Rent or Lease. If buying, Depreciation.
More information: For property you own, IRS Publication 946, How to
Depreciate Property.
Home-based business: The cost of an office in your home comes under
the Home Expenses rules. See Home Expenses.
Office Equipment
Office equipment can be deducted the year of purchase or depreciated over
five years. See Business Assets.
Expense category: If deducting equipment that costs $2,500 or less, Other
Expenses. If deducting equipment that costs more than $2,500 or if
depreciating the equipment, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Here is a partial list of common office equipment:
Adding machines
Answering machines
Cabinets
Calculators
Carts
Cash registers
Chairs
Chair mats
Clocks
Coatracks
Coffeemakers
Computers
Copiers
Credit card terminals
Desks
 Fans
Fax machines
File cabinets
Humidifiers
Lamps
Microwave
Mirrors
Music systems
Phones
Portable heaters
Postage meters
Printers
Racks
Refrigerators
Rugs
Scales
Shelves
Tables
Typewriters (what are those?)
Vacuum cleaners
Wastebaskets
Water dispensers
Office Expenses
Most office expenses are deductible. See listings for individual items. Also
see Office Equipment above and Office Supplies below.
Office in the Home
See Home Expenses.
Office Supplies
“Office supplies” is a catch-all term. I tend to lump all kinds of low-cost
business purchases in this category. It is a reasonably accurate description,
and sure sounds better and less dubious than Miscellaneous or Other
Expenses. Office supplies are deductible.
This is one deduction where inexpensive purchases can add up to a
significant tax savings, if you keep track of everything you buy during the
year.
Expense category: Office Expenses.
Office supplies include:
Account books
Bank checks
Batteries
Beverages
Blades
Books
Bottled water
Boxes
Brooms
Business cards
Carpal tunnel wrist supports
Calendars
CDs
Cleaning supplies
Clipboards
Coffee
Coffee
Coffee
Computer disks
Directories
Dust covers
Dust pans
Envelopes
Erasers
Fasteners
File holders
Fire extinguisher
First-aid kit
Flashlight
Folders
Forms
Glue
Goldfish bowl
Greeting cards
Hole punchers
Ink cartridges
Invoices
Kleenex
Knives
Labels
Ledger paper
Ledgers
Letter openers
Lightbulbs
Magazines
Maps
Moisteners
Mops
Newsletters
Notebooks
Organizers
Paper
Paper clips
Pencils
Pens
Periodicals
Plants
Plant hangers
Post-Its
Postage stamps
Printer ribbons
Rubber bands
Rubber stamps
Rulers
Safety glasses
Scissors
Signs
Soap
Small tools
 Stamp pads
Staple removers
Staplers
Staples
Stationery
Tape
Tape dispensers
Toner
Towels
Videos
Wite-Out
And, most important, emergency rations:
Emergency bag of peanuts
Emergency bottle of brandy
Offshoring
See Foreign Expenses.
On-Demand Workers
If you hire on-demand workers (gig workers, sharing economy workers),
they are independent contractors; you deduct the expense as you would for
any other contract work. See Independent Contractors.
If you are an on-demand worker, you are self-employed, and eligible for
every tax deduction in this book. Read “On-Demand Workers” in the
introduction to this book. You should also read the Paying Yourself entry.
Operating Expenses
“Operating expenses” is a general term for the day-to-day costs of running a
business. Look up the individual expenses to see what is and isn’t
deductible.
Operating Losses
Business losses (showing a loss on your tax return) can be used to offset
other income this year, and can also be used to offset profits from other
years. See Net Operating Loss.
Orchards
See Farming.
Frivolous and false tax arguments say that paying taxes is
“voluntary.” That’s just plain wrong. The U.S. courts have continually
rejected this.
—Internal Revenue Service

Organizational Costs
This is a tax deduction that applies only to corporations. If you are not
starting a corporation, this does not apply to you. Instead, see Start-up
Costs.
Business expenses incurred before you start operating your business
come under different tax rules than expenses incurred once you are
officially open for business. The IRS has two categories of costs associated
with starting a business: start-up costs, which apply to all businesses; and
organizational costs, which apply only to businesses being set up as
corporations. Corporations are eligible for both deductions.
Organizational costs are the legal and accounting services and
government filing fees to set up a corporation (though not the cost of selling
stock). Up to $5,000 of organizational costs can be deducted the first year
the business opens, including costs incurred in previous years before the
business was actually operating. Total deduction for organizational costs,
current and previous years combined, is $5,000. Expenses in excess of the
$5,000 maximum are amortized over fifteen years. The $5,000 deduction
phases out, dollar for dollar, if organizational costs exceed $50,000.
The organizational cost deduction is optional. You can, if you prefer,
amortize the costs over fifteen years. If your new corporation hasn’t earned
much money and will owe little or no taxes for the current year, by
spreading out the organizational costs over fifteen years, you will save on
future years’ taxes.
Organizational costs end the day you start your business. All expenses
after “opening day” come under regular tax deduction rules.
Organizations
Membership fees and dues for organizations, associations, and clubs may or
may not be deductible, depending on the nature of the organization and
what it spends its money on. See Associations.
Other Expenses
There is a category on the tax return called “Other Expenses,” which is a
catch-all category for expenses that don’t fit any other category on the tax
return.
All the deductions you include in Other Expenses need to be individually
listed on the tax return. The tax form has eight or nine lines to write in what
you are including. If you have a lot of items, you may have to do some
squeezing, or some judicious combining, or maybe pick a different expense
category for some of the expenses.
Expense category: Other Expenses.
Outside Contractors
“Outside” refers not to the great outdoors but to outside the business; that
is, not an employee. The terms “outside contractor” and “independent
contractor” are used interchangeably. Fees paid to outside contractors are
deductible. See Independent Contractors.
Expense category: Contract Labor.
Outstanding Checks
Outstanding checks are checks you have written that have not been
deposited or cashed yet. The IRS says that you can deduct checks the year
the checks were mailed or delivered. Sooner or later, the checks almost
always get deposited or cashed.
If a check is lost, destroyed, or put on stop payment, if it is from the
current year, reverse it out (make a minus entry) or delete the entry in your
expenditure records. If the check is from the previous year, either increase
the new year’s income or decrease the new year’s expenses by the amount
of the check. No need to go back and change the prior year’s records.

The IRS’s primary task is to collect taxes under a voluntary

compliance system.
—IRS Official Annual Report to Congress.
Telephone conversation between Irwin Schiff, tax crusader, and the
IRS National Office:
Mr. Schiff: “Is filing an income tax return based on voluntary
compliance?”
IRS: “It is.”
Mr. Schiff: “In that case, I don’t want to volunteer.”
IRS: “You have to volunteer.”

Overhead
“Overhead” is a broad term and usually refers to your “fixed” costs, the
dozens of large and small expenses you pay whether you are generating
income or not: rent, utilities, phone, insurance, office supplies, permits and
licenses, payroll, and the cost and maintenance of tools and equipment and
other business assets. These costs cannot be tied directly to a product or
service.
Most overhead is deductible, but not as a lump sum. Look up each item
that contributes to your overhead to see what is and isn’t deductible.
Manufacturers and crafts businesses: The overhead costs of producing
goods for sale may have to be included in the cost of inventory. Most
businesses with indirect costs under $200,000 are exempt from this
requirement, but see “Indirect Costs” under Inventory.
Owner’s Draw
The owner of an unincorporated business (sole proprietorship, partnership,
or LLC) cannot get a tax-deductible salary or wage. Payments to owners are
known as “draw.” See Draw and Paying Yourself.
Package Design Costs
See Design Costs.
Packaging Materials
Cartons, boxes, bottles, and other containers and packaging materials that
hold the goods you sell are considered inventory. See Inventory. If,
however, the cost of the containers or packaging is not significant or
containers are used only occasionally, most businesses write them off
currently as shipping supplies.
Expense category: Supplies.
There is no such thing as a simple answer to a complex problem if
you wish to be fair. But if any solution becomes too complex,
voluntary compliance becomes impossible.
—Vern Hoven, Vern Hoven Tax Seminars

Pagers
The cost of a pager for business is deductible. See Business Assets.
Expense category: Other Expenses.
More information: IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Painting
A minor or inexpensive paint job can be deducted currently.
Expense category: Repairs and Maintenance.
A major paint job, such as an entire building, can be deducted as a current
expense or depreciated over a period of years. See Building Improvements.
Manufacturers and crafts businesses: The cost of painting inventory,
including manufactured and crafted goods, is included as part of the cost of
the goods. See Inventory.
Home-based business: Painting is part of the Home Expenses deduction,
not deducted separately. See Home Expenses.
Paralegal Fees
Paralegal fees are deductible. But see Start-up Costs.
Expense category: Legal and Professional Fees.
Parents on Payroll
For children who hire their parents, the parents are considered regular
employees subject to all regular employment and income taxes except
Federal Unemployment Tax (FUTA). Parents are exempt from FUTA tax.
Expense category: Wages.
Five million tax returns, Sacramento, California

Corporations: The FUTA exemption does not apply to corporations.

Family members employed by your corporation are treated like all other
employees.
Parking
Parking at your regular place of work is not deductible. The IRS considers
this a commuting expense. All other business parking costs are deductible.
If you take the Standard Mileage Rate, parking (other than parking at your
regular place of work) is deductible in addition to the mileage rate. Parking
tickets are not deductible.
Expense category: Car and Truck Expenses.
 Employers: If you provide parking to employees, the costs are
deductible. You can also pay up to $255 per month per employee for
parking near the business. The payments are not taxable to the employees as
long as the employer pays for the parking and does not pay the employees
directly (and as long as the employees are not also getting an employer-paid
transit pass or employer-paid van pooling or employer reimbursement for
bicycling).
S corporations: Owner/employees of S corporations cannot take the
employer parking deductions for themselves.
Expense category: Employee Benefit Programs.

Americans have the impression that understanding the tax laws will
only serve to increase the amount of taxes they must pay.
—Mike Mares, American Institute of Certified Public Accountants,
Washington DC

Parking Lots
You can deduct the costs of maintaining a parking lot or parking area on
your business property. The cost of constructing a parking lot or area is
depreciated. See Depreciation.
Expense category: For maintenance, Repairs and Maintenance. For
construction, Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: A parking lot (if you actually have one at your
home) is part of the Home Expenses deduction, not deducted separately.
See Home Expenses.
Parking Tickets
Fines for breaking the law are not deductible.
Parties
A company or holiday party where all employees are invited is 100 percent
deductible. They don’t all have to show up, but they all have to be invited to
get the deduction. Any other business parties are considered entertainment
and are 50 percent deductible. See Entertainment. A sales meeting or a
show, if it is primarily a business event, is 100 percent deductible.
Expense category: For holiday party, Office Expenses. For a sales
meeting, Advertising. If just having fun, Entertainment.
Entertainment businesses: If you are in the business of throwing parties,
these rules do not apply to you. The cost of entertainment provided to
paying customers is 100 percent deductible.
Partners
Payment to partners in your business is not deductible. See Paying Yourself.
Also see Guaranteed Payments to Partners.
Parts
Inexpensive parts that a repair shop sells or uses, and parts that you use in a
trade such as a plumber or electrician, can be deducted. Expensive
replacement parts stocked by repair businesses, however, must be added to
inventory and deducted when sold.
Expense category: If minor, Supplies or Repairs and Maintenance. If
inventory, Cost of Goods Sold.
Patents
Patent costs are amortized over fifteen years.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Paying Yourself
If your business is a sole proprietorship, partnership, or LLC, you, the
owner (or co-owner), are not an employee of your business. You cannot hire
yourself as an employee. This is a point of law often misunderstood by new
businesspeople. You cannot pay yourself a wage and deduct it as a business
expense.
You may withdraw (that is, pay yourself) as much or as little money as
you want, but this “draw” is not a wage, you do not pay payroll taxes on it,
and you cannot claim a business deduction for it. The profit of your
business, which is computed without regard to your draws, is your “wage”
and is included on your personal income tax return.
Partnerships: Also see Guaranteed Payments to Partners.
 Corporations: If your business is a corporation, you are an employee of
your business. Your salary is a deductible expense of your business. See
Wages.
If your corporation is not making any money, or is losing money, you
may not want to pay yourself a salary until the corporation is making a
taxable profit. Otherwise you’ll be paying payroll taxes and personal
income taxes on the salary but getting no tax breaks for your corporation.
This is an area of tax law you should discuss with an experienced
accountant. There could be a lot of money at stake.
Expense category: Wages.

There is something un-American about a tax system that cannot be

understood by an intelligent American.
—Tax expert and Stanford University professor George Marotta

Payroll
See Wages.
Payroll Services
Hiring a payroll service to process your payroll is deductible.
Expense category: Legal and Professional Services.
Payroll Taxes
Payroll tax on self-employed individuals (the self-employment tax) is not
deductible. See Self-employment Tax.
Employers: Payroll taxes that an employer pays, such as Social Security,
Medicare, and other federal, state, or local government requirements (the
employer’s portion of the taxes), are deductible. Payroll taxes you withhold
from employees’ wages (the employee’s portion of the taxes) are not
deductible, because you are not paying those taxes; your employees are.
If this sounds confusing, keep in mind that payroll taxes have two
components: (1) the part paid by the employer, and (2) the part paid by the
employee that the employer deducts from the employee’s paycheck.
Employers pay the government what they withhold from their employees
(all employers are actually unpaid tax collectors), but the withheld money is
part of the employees’ wages. The employer sends the government both the
employees’ portion and the employer’s portion, but only gets a deduction
for the employer’s portion.
Corporations: If your business is a corporation, you are an employee of
your business like any other employee. You come under the rules for
employers, not for self-employed.
Expense category: Taxes and Licenses.
More information: IRS Publication 15, Employer’s Tax Guide.
Penalties
Tax penalties and fines for violation of the law are not deductible.
Penalties for not meeting contract requirements, and any other penalties
or fines that do not involve breaking the law, are deductible.
Expense category: Other Expenses.
Pension Plans
Pension plans are set up by employers for employees. Many employee
pension plans are deductible, but you should discuss your plans with an
experienced accountant before making any decisions. Employers may also
be eligible for the Small Employer Pension Plan Start-up Costs Credit. See
Tax Credits.
Expense category: Pensions and Profit Sharing Plans.
More information: IRS Publication 560, Retirement Plans for Small
Business.
If you are not an employer, there are several tax-deductible retirement
plans you can choose. These are different than pension plans. See
Retirement Plans.
Per Diem
“Per diem” is French, or maybe Latin, for “by the day,” a daily allowance.
For people traveling away from home overnight on business, the IRS has
established two per diem rates: a rate just for meals and tips, called Meals
and Incidental Expenses, or M&IE (also known as the Standard Meal
Allowance); and a rate that includes lodging along with meals and tips,
called Lodging Plus M&IE.
Self-employed people can use the meals (M&IE) per diem. Self-
employed people cannot use the Lodging Plus M&IE per diem. The
Lodging Plus M&IE per diem can only be used by corporations and by
employers reimbursing employees. Self-employed people can deduct actual
lodging expenses, just not the per diem.
And just to add to the confusion, you can only deduct 50 percent of the
M&IE per diem rate, because meals are only 50 percent deductible.
However, businesses using the Lodging Plus M&IE per diem can deduct the
total amount of the per diem rate, even though it includes meals that are
normally only 50 percent deductible. (Nobody said tax laws are supposed to
make sense.)
You are not required to use per diem rates. At your option, you can take
either the per diem (if you are eligible) or the actual costs. If the per diem is
higher, deduct the per diem. If actual costs are higher, deduct the costs. Nice
deal, or, to use another French (or maybe Latin) expression, C’est la vie.
Also see Travel.
Expense category: Travel.
More information: For the current per diem rates, see IRS Publication
1542, Per Diem Rates.

Every year, Money magazine asks 50 different tax preparers to

prepare a 1040 form for a sample family. No two preparers arrived at
the same result.
—Tax Simplification Advisory Group, US House of Representatives

Periodicals
Business periodicals, magazines, newsletters, newspapers, and all other
publications related to your business are deductible.
Expense category: Office Expenses.
Permits
Business permits and licenses are deductible. Some building permits,
however, may have to be added to the cost of the building and depreciated.
See Depreciation. Permits obtained before starting your business cannot be
deducted until the business is actually in operation. See Start-up Costs. If
you are starting a corporation, also see Organizational Costs.
Expense category: Taxes and Licenses.
The present system will not be abolished until all the members of
Congress are forced to fill out their tax returns alone, without the
help of an accountant.
—Columnist Nicholas von Hoffman

Personal Appearance
Personal Products
Generally, expenses incurred to enhance your personal appearance
(makeup, hair care, skin care) are not deductible, even if the expenses are
incurred solely to present a business image. However, people who are in the
business of selling personal products such as makeup can deduct the cost of
using those products on themselves, because they are demonstrating or
modeling the products. Tattoo artists may be able to deduct the cost of
having themselves tattooed, using the same logic—you’re sort of a walking
billboard for your business—though that is not clear from any IRS rulings I
can locate. If it was me, I would take the deduction.
This deduction does not extend to clothing. You cannot deduct the cost of
clothing for yourself even if you are in the business of selling that clothing,
unless the clothing is a costume or a uniform or clothing with your business
name or logo on it. See Clothing.
Expense category: For the cost of the products themselves, Cost of Goods
Sold. For paying someone to apply the products, Advertising.
Performers: Actors and others who are required to change their personal
appearance for a specific job, such as needing a haircut to fit a role, have
been able to deduct the expenses, but only because the change in
appearance was required for a specific part and not the general appearance
an actor wanted to create. The IRS usually denies deductions for cosmetic
surgery, though there have been exceptions for performers who would not
be able to find work without changing their appearance. This is an area
where you will benefit from talking to an accountant with experience in the
entertainment industry.
Personal Property
In tax law, “personal property” refers to tangible business assets other than
real estate. Business machinery, equipment, vehicles, tools, and furniture
are personal property. In this context, the word “personal” does not refer to
non-business. Personal property can be deducted the year acquired or
depreciated over several years. See Business Assets.
Expense category: If deducting an asset that costs $2,500 or less, Other
Expenses. If deducting an asset that costs more than $2,500 or if
depreciating the asset, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

Needless tax complexity erodes confidence in our tax system and is

a significant contributor to the public mistrust and cynicism about the
IRS.
—Mike Mares, American Institute of Certified Public Accountants

Personal Property Tax

This is a tax on business assets that you own. Although the tax uses the
word “personal,” this is not a tax on non-business property. See Personal
Property above.
Personal property tax is levied on the value of business assets such as
machinery and equipment and furniture, similar to the property tax on real
estate. Some states and localities have a personal property tax, and some
don’t.
Personal property taxes can be quite high if your assets are assessed at a
high value. You should examine the personal property tax bill, and make
sure retired or sold assets are not included and that older assets are not
overvalued.
Expense category: Taxes and Licenses.
Petty Cash
Petty cash is a small fund of cash some businesses keep on hand to pay
small expenses. Putting money in a petty cash fund is not an expense, since
the money hasn’t been spent. When you spend the money, you get the
deduction.
 Expenses from petty cash are like the baby calf the farmer picked up
every day. It wasn’t much at first, but before he knew it, the calf had grown
into a big animal. Those tiny expenses out of petty cash, and all the other
dollar-here-dollar-there cash expenses, aren’t much at first, but before you
know it, they’ve grown into a big tax savings—if you remember to write
them down.
Expense category: Whatever you spend the money on, once you spend it.
Photocopies
Deductible.
Expense category: Office Expenses.
Plantations
See Farming.
Plants
Office plants (the growing kind, not boilers and electricity-generating
plants) and their upkeep are fully deductible.
Expense category: Office Expenses.
Plants (the industrial kind) are depreciated like buildings. See Buildings.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Nurseries: Plants are considered inventory. See Inventory. Some plant
production costs, however, are currently deductible. There are specific IRS
laws for businesses (other than farms) that grow plants. I suggest that you
consult an accountant familiar with the nursery business, as there are
special IRS rules for nurseries.
Points
Points are loan fees and cannot be deducted immediately. They are spread
out over the length of the loan.
Expense category: Interest.
Political Contributions
Political campaign contributions, to a candidate or to a political party, are
not deductible. Advertising in a political program or buying tickets to a
political event are not deductible. So how do all these huge corporations
funnel hundreds of thousands of dollars into political campaigns to try to
buy elections?
Lobbying expenses are sometimes deductible. See Lobbying Expenses.

Congress today is more bought than it ever has been. Every night in
Washington, there are five or six fundraisers to collect money from
lobbyists. That’s one reason we haven’t been able to deal with the
question of tax justice. The people who want preferences buy them
with their tremendous campaign contributions.
—Former Representative Charles A. Vanik

Pollution Cleanup
See Contamination Cleanup.
Postage
Postage, post office box rents, and postal permits are deductible.
Expense category: Office Expenses.
Post Office Box
Post office box rents and mailbox store rents are deductible.
Expense category: Office Expenses.
Prepayments
Prepaid expenses that do not extend beyond twelve months, with some
important exceptions (noted below), can be deducted when paid, even
though the expenses may be for part or all of next year. For example, you
could pay for an insurance policy this year that ran from December of this
year to December of next year and deduct the entire amount this year. You
could pay for a policy this year that covered January through December of
next year, and get the full deduction this year even though the entire period
covered is next year, because the coverage is for no more than twelve
months.
Prepaid expenses that cover more than twelve months, and prepaid
expenses that extend beyond December 31 of next year (not this year),
cannot be deducted until the year the expenses apply to. Only the current
year’s portion can be written off this year.
 The exceptions: The IRS says that prepaid interest, rent, leases, and
prepaid taxes are not deductible until the year they apply to. Some Tax
Courts disagree and have applied the twelve-month rule to these expenses.
Unless there is a significant tax savings for you, I suggest staying with the
IRS rules on prepayments. You’ll get the deduction next year and not risk
an IRS audit.
Expense category: Varies depending on actual expenses.

It has become popular to call the Tax Code, “The IRS Code,”
suggesting that the IRS is responsible for it. The IRS didn’t write it.
Congress did. Congress is responsible for the tax mess,
Republicans and Democrats alike. After eight years of GOP rule, the
tax code is in the same sad shape it was after decades of fiddling by
Congresses run mostly by Democrats.
—Kiplinger Tax Letter

Presentations
The costs of planning and giving business presentations are deductible.
Travel and costs associated with travel are also deductible, though with
limitations. See Travel.
Expense category: Office Expenses. For travel, Travel.
Prizes
Prizes and awards given to customers that generate sales or publicity for
your business are deductible. There is an important difference between
prizes and gifts: Business gifts are limited to $25 per recipient per year;
prizes and awards do not have that limit. For the IRS, the distinction is
whether it is “an incentive to generates sales” (a prize) or a thank-you after
a sale (a gift, limited to $25). To me, a thank-you after a sale is an incentive
to do business again—it would be to me if I got a nice thank-you—so I
suggest you deduct the prize as a prize, especially if the amount is not
significant.
The real problem here is that prizes are considered taxable income to the
recipient. Few people know that when they win the TV monitor giveaway at
the local appliance store, they will owe income tax on the retail value of the
prize. Or when a real estate agent gives a homebuyer a new washer or
refrigerator as part of the sales deal, it’s taxable to the recipients. And often,
they’re pretty angry when they find out. Especially, if they find out by
getting an IRS form in the mail (1099-MISC) reporting the prize, which
you, the merchant, are required to prepare for any prize that has a value of
$600 or more. If the prize is under $600, you do not have to file the 1099
form; you do not have to report anything to the IRS. The prize is taxable to
the recipient no matter what the amount, but at least you don’t have to do
the dirty work of reporting it to the IRS.
If you are giving prizes, how you deduct them depends on what you are
giving. You deduct merchandise the same way as if you had sold it, as part
of cost of goods sold; see Inventory. If the prizes are not your regular
merchandise, you can deduct them currently. If you are providing a free
service, there is no tax deduction, because you cannot deduct the value of
your own time.
Expense category: For merchandise given away, Cost of Goods Sold. For
prizes that are not your regular merchandise, Other Expenses. For the cost
of putting on a promotion (such as advertising and banners), Advertising.
Employers: For prizes given to employees, see Awards.
Product Development
Product development expenses are usually deductible, and they may also be
eligible for the Research Tax Credit. See Tax Credits.
Some development expenses that will benefit future years may have to be
capitalized and deducted over a period of at least five years. See
Depreciation. If you have significant product development expenses, I
suggest you talk to an experienced accountant.
Expense category: Other Expenses.
Professional Associations and Organizations
Dues and meetings are deductible.
Expense category: Other Expenses.
If part of your dues to a trade or professional association is for political
lobbying, that portion of the dues is not deductible.
Travel to attend meetings is deductible, with some exceptions. See
Travel.
Blaming the IRS is a lot like blaming the doctor whose patient has an
incurable disease. Tax reform, not IRS bashing, is the only way to
liberate the American people from a system that is grotesquely
burdensome and monstrous.
—Former IRS Commissioner Fred Goldberg

Professional Services
Professional, legal, and accounting services are deductible.
Expense category: Legal and Professional Services.
New businesses: Deductions for expenses incurred before you open your
business are limited. See Start-up Costs. If you are starting a corporation,
also see Organizational Expenses.
Profit Sharing Plans
Self-employed people cannot set up profit sharing plans for themselves, but
they can have one or more retirement plans. See Retirement Plans.
Employers: Profit sharing plans for employees are deductible.
Expense category: Pension and Profit Sharing Plans.
Promissory Notes
A promissory note is a promise to pay money you owe, basically a loan
agreement. The promissory note itself is not deductible, but the interest is.
Expense category: Interest.
Promoter’s Fees
For musicians and entertainers, promoters usually deduct their fees from
whatever pay is coming to you. But if you pay any fees out of your pocket,
the fees are deductible.
Expense category: Commissions and Fees.

The thing is a colossal mess.

—Former US Treasury Secretary Paul O’Neill

Promotion
Promotional expenses are deductible. These may include brochures, audio
and video productions, premiums, small gifts, greeting cards, or some
service, performance, or show.
How you write off the cost of sales promotions depends on what the
promotion actually is. If you have a special sale, there really is nothing to
deduct; you simply record the amount you receive as income. If you have
something like a buy-one-get-one-free sale, again you record the amount
you receive as income. The product you gave away is deducted as part of
cost of goods sold. If you have a contest, the prize (if it is merchandise) is
also deducted as part of cost of goods sold. Free samples are deducted as
part of cost of goods sold.
See Inventory for how to deduct merchandise. See Prizes for a warning
about IRS rules for giveaways.
Sometimes there may be a fine line between what is promotion and what
is entertainment. Promotion expenses are fully deductible; entertainment is
limited to a 50 percent deduction. The wise taxpayer carefully defines the
expenses.
Expense category: For the cost of the promotion and small prizes,
Advertising. For the cost of merchandise given away (other than small
gifts), Cost of Goods Sold.
Property Taxes
Payments for current year’s property taxes are deductible. The IRS says that
prepaid property taxes are not deductible until the year they apply to. The
Tax Courts disagree. See Prepayments.
Real estate taxes: In some cases you can choose to capitalize real estate
property taxes instead of writing them off, adding the taxes to the cost of
the real estate and depreciating them along with the real estate. If you
choose to capitalize the property taxes (which in truth very few businesses
do), I suggest you talk to an experienced accountant about the methods and
options.
 Personal property taxes: Some states and localities impose a property tax
on business assets such as equipment, furniture, and tools. This is known as
a personal property tax, although the property is not personal property but
business property. The word “personal” refers to property that is not real
estate. See Personal Property Tax.
Inventory taxes: Some states impose a property tax on inventory, called
an inventory tax or a floor tax. This tax is deductible.
Expense category: Taxes and Licenses.
Real estate developers: If you purchase land that you plan to build on
and sell, the property taxes are not currently deductible. The taxes are
capitalized.
Home-based business: Property taxes are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Protective Gear
Cost of gear is deductible. Cost of cleaning is deductible.
Expense category: Supplies.
Publications
Books, magazines, newsletters, newspapers, and all other business-related
publications are deductible.
Expense category: Office Expenses.
Punitive Damages
Punitive damages imposed by a government agency for breaking the law
are not deductible. Any other punitive damages, such as for breach of
contract, late charges, and the like, are deductible. See Lawsuits.
Expense category: Other Expenses.
Qualified Plans
See Retirement Plans.
R&D, R&E
“R&D” stands for Research and Development. “R&E” stands for Research
and Experimentation. Expenses are deductible, and may be eligible for a tax
credit. See Research.
Railroads
A tax credit for track maintenance expired at the end of last year, but
Congress could reinstate it retroactively, which they’ve done several times
in the past. See Tax Credits.
Ranches
See Farming.
Raw Materials
“Raw materials” is a manufacturing term for the parts that go into whatever
is being manufactured. Raw materials are inventory and cannot be deducted
until sold. See Inventory.
Expense category: Cost of Goods Sold.

Postal Service, Civil Service, Selective Service, Internal Revenue

Service. Confusing. Then one day I heard two farmers talking, and
one said that he was having a bull service a few of his cows. Bingo!
It all came into perspective. Now I understand what all of those
‘service’ agencies are doing to me.
—Professor Iver Mindel, “At Your Service”

Razing a Building
The cost to demolish a building is added to the cost basis of the land. It
cannot be deducted until you sell the land. See Land.
Real Estate
Real estate is buildings and land. Buildings can be depreciated or, in a few
cases, written off the year of purchase. Land cannot be written off until
sold. See Buildings and Land.
Expense category: Depreciation (for buildings).
More information: IRS Publication 946, How to Depreciate Property.
Real Estate Taxes
Deductible, but with limitations. See Property Taxes.
Home-based business: Property taxes are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Rebates
Rebates paid out are deductible if they are legal. Many states outlaw
kickbacks and bribes, however, and some types of rebates may fall into this
legal swamp. If rebates are outlawed in your state, they are not deductible
on your federal return, even if there is no federal law outlawing the
expenditure. State law controls the deductibility.
Rebates received are not income. They are price reductions and reduce
the cost of what you purchased.
Also see Refunds.
Expense category: Depends on how the money is actually spent.

The IRS is using social networking as a tax enforcement tool by

having their revenue agents track down tax evaders on Facebook.
—Kiplinger Tax Letter

Reconditioning
See Building Improvements.
Recordkeeping
Recordkeeping, bookkeeping, accounting, and similar services are
deductible. Accounting and tax software that you lease or subscribe to can
be deducted currently. Software that you purchase can be deducted
currently or can be amortized over three years; see Software.
Expense category: For services, Legal and Professional Services. For
internet subscriptions or access, Office Expenses. For software you
purchase, Depreciation.
Also see Accountants.
Recreation Facilities and Equipment
Recreation and athletic facilities on the business premises that are open to
all employees are deductible. Recreation equipment can be deducted the
year of purchase or depreciated over seven years.
Recreation facilities located away from the business premises (the
company condo in Hawaii?) may or may not be deductible. The IRS says
there are restrictions; the Tax Courts disagree and say the facilities are
deductible. If you own or lease such a facility, I suggest you talk to an
experienced accountant.
Dues and memberships paid to recreational clubs are not deductible.
Expense category: If deducting an asset that costs $2,500 or less, Other
Expenses. If deducting an asset that costs more than $2,500 or if
depreciating an asset, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Also see Vacation Facilities.
IRS Red Flag Audit Alert: To paraphrase those new-age bumper
stickers, Visualize Audit.
Recreational businesses: Businesses that are in the business of operating
recreational facilities are exempt from these restrictions.

Low income taxpayers are being singled out for audits. I visited the
homes of audit targets, some of whom were so poor they couldn’t
afford air conditioning in the sweltering Houston climate. What are
we looking for with someone who does not have air conditioning?
—Houston IRS agent Jennifer Long, testifying before the Senate

Recreational Vehicles (RVs)

You can deduct the cost of using an RV for business, but with limitations.
See Vehicles.
If you are using an RV for an office or business space (permanent,
parked, not on the road), it no longer comes under vehicle rules. It can be
deducted or depreciated like any other business asset. See Business Assets.
Mobile businesses and touring entertainers: If you are staying in an
RV while traveling, your travel and living expenses are deductible (the cost
of meals is 50 percent deductible). If, however, you are constantly traveling,
living in your RV, the IRS considers the RV to be your home and will
disallow most travel expenses, including the costs of operating the RV. This
is a major issue with IRS auditors. See Travel.
 Home-based business: A recreational vehicle used as a home-based
business is part of the Home Expenses deduction, not deducted separately.
See Home Expenses.
Recycling
Recycling pickup services are deductible.
Expense category: Utilities.
Home-based business: Recycling pickup is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Referrals
Commissions or fees paid for referrals are deductible.
Commissions paid to acquire new customers who sign long-term
contracts may have to be capitalized, and amortized over the average
number of years new customers stay with the business—however you
determine that. If the amounts are minor, I would just write them off and
not worry about it.
Expense category: If deducting, Commissions and Fees. If amortizing,
Depreciation.
More information: If amortizing, IRS Publication 946, How to Depreciate
Property.
Refresh Expenses
“Refresh” is a tax term for remodeling or renovating a building. See
Building Improvements.
Refunds
Money you refund to a customer is deductible. On the tax return, sales
refunds are shown in the income section as a reduction to income.
Expense category: Returns and Allowances.
Rehabilitation of Buildings
See Building Improvements. Also see Tax Credits for information about the
Rehabilitation Tax Credit.
Reimbursements
Self-employed individuals who get reimbursed by clients for out-of-pocket
expenses include the reimbursements as part of total income and deduct the
expenses as regular business expenses.
Businesses reimbursing the business owners: If you are a partner in a
partnership, an owner of a multi-owner LLC, or an owner of a corporation,
your business can reimburse you for your out-of-pocket expenses, and the
business gets the deduction. But the IRS requires you to have an
“accountable reimbursement plan,” which is a written policy that the
expenses are business related and substantiated (you have receipts). If you
are a sole proprietor or the owner of a one-person LLC, you are exempt
from this reimbursement rule. Any money you spend for your business is a
business deduction, whether you spend it from your personal funds or from
your business funds. There is no need to reimburse yourself.
Employers: When an employer reimburses an employee for out-of-
pocket business expenses, the employer is entitled to a tax deduction for the
expenses, but only if you have an accountable reimbursement plan, as
explained above. If the employer’s reimbursement exceeds the employee’s
actual expenses, the excess is considered wages and subject to payroll taxes.
IRS Red Flag Audit Warning: The IRS often considers employee
reimbursements as wages in disguise, an attempt to avoid payroll taxes.
Tool reimbursement plans, and what some employers call “salary reduction
programs,” often lead to audits.
Expense category: Depends on how the money actually is spent.

Never tell the IRS anything you don’t have to.

—CPA Martin S. Kaplan

Relocation Costs
Deductible, with limitations. See Moving Expenses.
Remodeling and Renovations
See Building Improvements.
Rent
Rentals and leases for buildings, vehicles, and equipment are deductible,
but with some exceptions. See Leases and Rent.
Expense category: Rent or Lease.
Rental Businesses
Businesses that rent out any type of products—vehicles, equipment,
furniture, videos, clothing, party things like kiddie rides and bounce houses,
or any other reusable goods—can deduct or depreciate the rental equipment
just like other business assets. See Business Assets.
Expense category: If deducting an asset that costs $2,500 or less, Other
Expenses. If deducting an asset that costs more than $2,500 or if
depreciating an asset, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

Under an IRS pilot program, companies will have a chance to

volunteer for IRS audits.
—Kiplinger Tax Letter
From the small business owner’s perspective, helping the IRS
improve the audit process is like a mouse helping to build a better
mousetrap.
—Paul Gada, CCH Tax Publications
A fool and his money are soon parted.
—Attributed to British farmer Thomas Tusser (1524–1580)

Repairs
Minor repairs to buildings, machinery, and equipment are deductible as a
current expense. Generally, the IRS considers any repair that costs $2,500
or less to be minor, and deductible. For repairs to buildings, the maximum
increases to $10,000 for buildings that cost $1 million or less. These
deduction limits are actually rules that apply to Building Improvements, but
it appears the rules also apply to repairs.
Major repairs (other than the ones above) are deductible if they do not, to
quote the IRS, “add to the value or appreciably prolong the useful life” of
an asset. Such repairs are depreciated over a period of years. Whether a
repair “adds to the value” or “prolongs the useful life” of an asset is, like
beauty, in the eye of the beholder—or in the eye of the Tax Court, which
has often overruled the IRS on the deductibility of repairs. If you have
significant repair expenses, you may want to talk to an experienced
accountant about this deduction.
Vehicle repairs are deductible if you are not using the Standard Mileage
Rate. See Vehicles.
Expense category: Repairs and Maintenance. If depreciating,
Depreciation. For vehicle repairs, Car and Truck Expenses.
More information: If depreciating, IRS Publication 946, How to
Depreciate Property.
IRS Red Flag Audit Warning: As I mention above, businesses
deducting expensive repairs (in the thousands of dollars) have often been
challenged by the IRS.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including repairs to manufacturing equipment and to the
manufacturing area, may have to be included in the cost of inventory. Most
businesses with indirect costs under $200,000 are exempt from this
requirement, but see “Indirect Costs” under Inventory.
Home-based business: Home repairs are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.

The truth is that we have such a limited budget, such limited

manpower to enforce the income tax laws and collect the revenue,
that the only way we can keep them honest and paying their taxes is
to keep them afraid.
—Former IRS Commissioner Donald Alexander Research
For this deduction, research is defined as “developing, testing, refining, or
improving a product or service,” a broad definition that can include many
different expenses. Research expenses, also known as Research and
Development (R&D) or Research and Experimentation (R&E), are usually
deductible.
Some research expenses that will benefit future years may have to be
capitalized and deducted over a period of at least five years. This has been a
confusing area of tax law for years, since almost all research will benefit
future years (at least you hope so). Unless your research expenses are in the
thousands of dollars, I suggest deducting them currently. Generally, the IRS
considers any expense under $2,500 to be deductible: not worth their time
to audit. If you do have substantial research expenses, you may want to
discuss them with an experienced accountant.
Expense category: If deducting currently, Other Expenses. If deducted
over five years, Depreciation.
Research and development expenditures, including some software
development, are eligible for a Research Tax Credit. See Tax Credits.
New businesses: Research expenditures cannot be deducted until the
business is actually up and running. See Start-up Costs.

“You have reached the Internal Revenue Service. Due to the high
volume of calls currently in our system, our representatives are
unable to take your call.”
—Recorded response, IRS help line 800-TAX-1040

Reserves
Reserves are funds set aside for some future use or an unplanned expense or
loss. Nothing is actually spent, and no tax deduction is allowed. This
includes reserves for bad debts (funds set aside in anticipation of bad debts)
and reserves for self-insurance (funds set aside in anticipation of having a
loss).
Restoration
See Building Improvements.
Retirement Plans
You may invest a portion of your profit in a special tax-deferred retirement
plan and pay no income taxes on the money invested or the interest earned
until you retire and withdraw the funds.
Retirement contributions that business owners or self-employed
individuals make for themselves are not considered business deductions
(except for some corporate plans) and do not reduce the taxable profit of the
business. The contributions reduce the owner’s personal income taxes.
 There are several tax-deferred retirement plans available to business
owners and their employees. Each plan has different options, different
contributions, different deadlines for making contributions, and, most
important to employers, different requirements for including your
employees in the plans. You can choose just one plan, or you may be able to
set up multiple plans. The different retirement plans include Individual
Retirement Arrangement (IRA); Self-employed Pension Plan (SEP or SEP-
IRA); Savings Incentive Match Plan for Employees (SIMPLE); Qualified
Plan, also known as an HR-10 Plan or a Keogh Plan; Deferred
Compensation Plan, more commonly called a 401(k) Plan; and Corporate
Retirement Plan, also known as an ERISA (Employee Retirement Income
Security Act) Plan.
You should talk to an experienced accountant, a bank or insurance
company, or someone knowledgeable about retirement plans to learn the
different options and the benefits and drawbacks of each. However, be
cautious if the person giving you advice is trying to sell you a plan,
particularly an investment type of plan. Salespeople are not always
unbiased.
Employers: If you have employees, some retirement plans require that
any coverage for yourself also include your employees. Retirement
contributions an employer makes on behalf of employees are deductible as
a business expense.
Expense category: For employees, depending on the type of plan,
Employee Benefit Programs or Pensions and Profit Sharing Plans.
More information: IRS Publication 590, Individual Retirement
Arrangements; Publication 560, Retirement Plans for Small Business.
Also see Pension Plans.
Returned Checks
A polite term for bounced (bad) checks. Bounced checks are deductible as a
bad debt expense. See Bounced Checks.
Expense category: Bad Debts.
Returned Goods
Refunds on returned goods are deducted from your income in figuring your
taxes. Expense category: Returns and Allowances.
 Returned goods should be added back into inventory if they are still
salable or left off the inventory if they are unsalable. At the end of the year,
the cost of the returned goods becomes part of your cost of goods sold
calculations. See Inventory.
Expense category: Cost of Goods Sold.
If you sell goods as returnable, you cannot take a deduction in
anticipation of future returns. You may reduce your income after the goods
are actually returned.
Rewards
Rewards to customers, vendors, and other nonemployees are deductible,
within limits. See Prizes.
Expense category: Other Expenses.
Employers: Rewards to employees, other than token nonmonetary gifts,
are usually considered wages, taxable to the employee and subject to
regular payroll taxes. However, employees can receive “employee
achievement awards” that are not considered taxable wages. See Awards.

We would collect more money if we audited more returns, but I don’t

think anyone would want a tax system where the audit coverage was
really very high. That would be a very intrusive, burdensome kind of
system. If more people knew what a small percentage we actually
audit, we’d have an enormous number of taxpayers playing audit
roulette.
—Former IRS Commissioner Jerome Kurtz

Roads
You can deduct the costs of maintaining a private road or driveway on your
business property. The cost of constructing a road is depreciated. See
Depreciation.
Expense category: Repairs and Maintenance. For construction,
Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: A private road or driveway is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Robbery Losses
Robbery and theft losses are deductible to the extent they are not covered
by insurance. However, there are different rules for different types of losses
and different types of businesses. See Casualty Losses.

Many women tell me, “I’d rather pay more taxes than risk an audit.” I
never hear it from men. This is clearly a problem.
—Enrolled Agent and tax adviser Jan Zobel, Oakland, California

Robots
The new hospital in the town where I live has a robot that roams the halls
and visits patients. It has a video screen where its head should be, and it
says it is a real doctor. Or whoever is on the screen says it’s a real doctor. Or
something like that. Robots can be deducted the year of purchase or
depreciated over seven years. See Business Assets.
Expense category: If deducting a robot that costs $2,500 or less, Other
Expenses. If deducting a robot that costs more than $2,500 or if
depreciating the robot, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including robots in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Royalties
Royalties you pay are deductible.
Expense category: Other Expenses.
RV
See Recreational Vehicle.
Safe
A safe (the kind you lock stuff in) can be deducted the year of purchase or
depreciated over seven years. See Business Assets.
Expense category: If deducting a safe that costs $2,500 or less, Other
Expenses. If deducting a safe that costs more than $2,500 or if depreciating
the safe, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Safe Deposit Box
Safe deposit boxes are deductible.
Expense category: Office Expenses.

The majority of errors on tax returns have nothing to do with the

complexity of tax laws. They have more to do with carelessness or
problems with the basics: reading, writing, arithmetic. You get to
multiply, add, subtract and divide. It’s not really difficult math. And
among the returns with simple errors were one million signed by tax
practitioners.
—Tom Short, Director for Tax Policy, US Government Accounting
Office

Safe Harbor
Just as a ship in the harbor is safe from winter storms, a business that stays
within certain expense limits (meets the “safe harbor” requirements) is safe
from the IRS’s own version of winter storms: They won’t audit you.
There are two important deductions for small businesses that are
considered “safe harbor.” The De Minimis Safe Harbor Deduction is a
method for writing off the cost of business assets. See Business Assets. The
Flat Rate Safe Harbor Home Business Deduction is a method for deducting
home-based business expenses. See Home Expenses.
Safety Equipment
Safety equipment, first-aid kits, fire extinguishers, and the like are
deductible. Portable safety equipment can be deducted or depreciated. See
Business Assets. Large structural safety equipment may have to be added to
the cost of the building. See Building Improvements.
Expense category: For supplies and small items, Supplies. For purchase
of equipment, if the cost is $2,500 or less, Other Expenses; if the cost is
more than $2,500, Depreciation.
More information: If not deducting as supplies, IRS Publication 946,
How to Depreciate Property. If portable and if the cost is $2,500 or less, see
IRS Notice 2015-82, De Minimis Safe Harbor Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including safety equipment in the manufacturing area, may have to
be included in the cost of inventory. Most businesses with indirect costs
under $200,000 are exempt from this requirement, but see “Indirect Costs”
under Inventory.

From the IRS’s “Top Ten Filing Errors and their Solutions for Small
Businesses”:
Filing Error #1: Wrong name.
Solution: Enter correct name.

Salaries
Any salary you pay to yourself is not deductible, unless your business is a
corporation. See Paying Yourself.
Employers: Employee salaries are deductible. See Wages.
Expense category: Wages.
Sales Expenses
Most sales expenses are deductible. Look up the individual expenses, or
pick an expense category that best seems to fit the expense.
Expense category: Office Expenses.
Also see Sales Reps.
Sales Refunds
Money you refund to a customer is deductible. On the tax return, sales
refunds are shown in the income section as a reduction to income.
Expense category: Returns and Allowances.
Sales Reps
Sales reps (representatives) need to be carefully handled regarding their
employment status, your legal responsibilities, and how you deduct the
costs of having sales reps. Depending on the arrangement, a sales rep might
be an employee, might be an independent agent, or might come under a
quasi-employment category the IRS calls “statutory employee.”
If a sales rep is in fact an employee (as defined by the IRS), the person
must be on your payroll like any other employee. How an employee is paid
is not relevant. Even a commission-only rep might legally be an employee
if the arrangement meets IRS guidelines for employees.
Independent sales reps who meet IRS requirements for independent
contractors are not employees. However, certain sales reps are considered
“statutory employees” and come under regular employment laws for Social
Security, Medicare, and FUTA taxes: traveling salespeople who work full-
time for one company getting orders from businesses (not from individuals)
or selling life insurance, and commission salespeople who deliver food,
beverages, laundry, or dry cleaning. (Do you ever wonder where your tax
dollars are going? Some IRS attorney actually wrote these rules.)
How you classify and pay people who work for you is one of the most
important areas of tax law. Penalties for misclassifying employees can be
steep, and your liability if the person is injured on the job could be
extensive. I highly encourage you to research the IRS requirements or get
qualified help.
Expense category: If an employee, Wages. If an outside contractor,
Commissions and Fees. If a statutory employee, Wages. If a statutory
nonemployee, Commissions and Fees.
More information: IRS Publication 15, Employer’s Tax Guide.

“Print neatly.” That’s the kind of advice that the IRS labels a
“dynamite tax tip.” If you ask them a real tax question, such as how
you can cheat, they’re useless.
—Columnist Dave Barry

Sales Returns
Money you refund to a customer is deductible. On the tax return, sales
refunds are shown in the income section, as a reduction to income, rather
than in the expense section.
Expense category: Returns and Allowances.
Returned goods should be added back into inventory if they are still
salable or left off the inventory if they are unsalable. At the end of the year,
the cost of the returned goods becomes part of your cost of goods sold
calculations. See Inventory.

Business people often underestimate the number of able,

conscientious and zealous people working for government in
Washington—and Albany, Springfield, and Sacramento. They’re
usually overworked and underpaid. And motivated primarily by pride
and faith in what they’re doing. Try treating them that way. Walk in
and say, “You’re my government, help me.” And they will, and love
you for asking. It’s a refreshing change for them.
—Robert Townsend, Up the Organization

Sales Tax
Sales tax paid on business assets should be added to the cost of the assets
and deducted or depreciated as part of the cost of the asset. Do not deduct
the sales tax separately. See Business Assets.
Sales tax paid on supplies and similar purchases should be added to the
cost of the goods purchased. Again, do not deduct the sales tax separately.
Sales tax collected from your customers is usually included as part of
your income and is deducted as a business expense. If you exclude the sales
tax you collect from your customers (if you don’t include it in the income
shown on your tax return), you cannot take a deduction when you remit the
tax to the government. Either way, the net effect is the same, the taxable
profit is the same.
Expense category: If the sales tax collected from customers is included in
income, the expense is shown under Taxes and Licenses. If the sales tax
collected from customers is not included in income, the expense (when you
pay the tax to the government) is not deducted.
 Gross receipts tax: Some states call their sales tax a gross receipts tax,
but there is a different tax levied by a few states also called a gross receipts
tax. These are two different taxes. See Gross Receipts Tax.
Samples
Samples of your merchandise, given to prospective buyers or to people who
might review or publicize your products, are deductible. You deduct the
cost of the samples (not the retail or market value) as part of cost of goods
sold. See Inventory.
Expense category: Cost of Goods Sold.
Scholarships
Scholarships given to members of the community as a gesture of goodwill
may be deductible as a promotional expense, especially if the scholarship is
tied to a sales event. See Prizes.
Expense category: Advertising.
Employers: Scholarships given to employees are deductible, but with
restrictions. See Education Expenses.
SECA Tax
“SECA” stands for Self-employment Contributions Act and refers to the
self-employment tax. It is not deductible. See Self-employment Tax.
Section 179 Deduction
This refers to the tax law that allows a business to deduct assets the year of
purchase rather than depreciate them over several years. Also known as the
First Year Write-Off. See Business Assets.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Security
Security services and patrols are deductible. Permanent and built-in security
systems can be deducted currently or depreciated over a period of years; see
Building Improvements.
Expense category: For services and inexpensive systems, Office
Expenses. For permanent built-in systems, Depreciation.
More information: For built-in systems, IRS Publication 946, How to
Depreciate Property.
 Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including security in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Self-employment Tax
Self-employment tax, also known as SECA (Self-employment
Contributions Act), is combined Social Security and Medicare tax for self-
employed individuals. Sole proprietors, partners in partnerships, and owners
of LLCs are subject to self-employment tax.
You cannot deduct self-employment tax as a business expense. However,
you are allowed a tax deduction on your personal 1040 return.
Expense category: Taken on Form 1040.
Corporations: Self-employment tax is not imposed on owners of small
corporations, who are employees of the business and pay regular employee
payroll taxes.

Government isn’t religion. It shouldn’t be treated as such. It’s not

God. It’s humans, fallible people, feathering their nests most of the
time.
—California governor Jerry Brown

Self-Insurance
Self-insurance is not really insurance at all, because no insurance policy is
purchased. Not deductible.
Putting money aside in a separate account or reserve to self-insure for a
possible emergency or loss is not deductible until you actually spend the
money.
Seminars
Most business seminars are deductible. See Education.
Expense category: Other Expenses.
SEP / SEP-IRA
“SEP” (also known as SEP-IRA) stands for Simplified Employee Pension
plan, a tax-deferred retirement plan. As a self-employed person,
contributing to a SEP for yourself is not a deductible business expense. See
Retirement Plans.
Expense category: Deducted on the 1040 form, not on the business part
of the tax return.
Employers: SEP contributions for your employees are deductible, within
limits.
Corporations: Contributions for yourself as an owner/employee of your
own corporation are a deductible business expense, within limits, but only if
you include all eligible employees.
Expense category: Employee Benefit Programs.
More information: IRS Publication 560, Retirement Plans for Small
Business.
Service Charges
Service Contracts
Service contracts and extended warranties are deductible. If the contract is
for more than twelve months, see Prepayments. Weekly delivery service
charges on a contract with UPS, FedEx, or other delivery service are
deductible.
Expense category: Office Expenses.
Service Mark
A service mark is a trademark that applies to a service (trademarks apply to
goods). Service marks are amortized over a fifteen-year period. See
Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Settlements
See Lawsuits.
Sewer Service
Sewer charges are deductible. Sewer assessments, if for construction of new
sewers, may have to be added to the cost of the building and depreciated as
part of the building. See Depreciation.
 Expense category: Utilities. For new construction, Depreciation.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Sharing Economy Workers
If you hire sharing economy workers (gig workers, on-demand workers),
they are independent contractors, and you deduct the expense as you would
for any other contract work. See Independent Contractors.
Expense category: Contract Labor.
If you are a sharing economy worker, you are self-employed and eligible
for every tax deduction in this book. Read “On-Demand Workers” in the
introduction to this book. You should also read the Paying Yourself entry.

Government in the United States today is a senior partner in every

business in the country.
—Political journalist Norman Cousins (1915–1990)

Shipping
Shipping costs on goods you sell are deductible. Shipping costs for
inventory you are buying are added to the cost of the inventory. See
Inventory. Shipping costs for business assets you are buying (machinery,
equipment, furniture) are added to the cost of the asset. See Business
Assets.
Expense category: If deducting separately, Other Expenses.
Weekly delivery service charges on a contract with UPS, FedEx, or other
delivery service are deductible.
Expense category: Office Expenses.
Shipping Supplies
Shipping supplies are deductible unless they are an integral part of the
product you are shipping. If they are, the cost of the supplies is added to the
cost of the inventory. See Inventory.
Expense category: If deductible, Supplies. If added to the cost of
inventory, Cost of Goods Sold.
Shoplifting Losses
Shoplifting losses are deductible as part of cost of goods sold. See
Inventory.
Expense category: Cost of Goods Sold
Showroom
The cost of renting a showroom is deductible. The cost of a building you
own can be depreciated. See Buildings.
Expense category: If rented or leased, Rent or Lease. If owned,
Depreciation.
More information: For buildings you own, IRS Publication 946, How to
Depreciate Property.
Home-based business: The cost of a home-based showroom is part of
the Home Expenses deduction, not deducted separately. See Home
Expenses.
Shows
Shows you put on to promote your business are deductible. Food and
beverages served are fully deductible.
Expense category: Advertising.
Shows you attend are deductible, though with limitations. See Travel.
Sick Pay
You cannot deduct your own sick pay, unless you are an employee of your
own corporation. See Paying Yourself.
Employers: Employee sick pay is deductible. It is considered taxable
wages.
Expense category: Wages.
Signs
Signs can be deducted the year of purchase or depreciated over seven years
(fifteen years if large billboards).
 Expense category: If deducting a sign that costs $2,500 or less, Other
Expenses. If deducting a sign that costs more than $2,500 or if depreciating
the sign, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.

A small business person has Uncle Sam as a partner, a partner who

puts up no money, does no work, and wants 30 or 40 percent.
—Tax crusader Irwin Schiff

SIMPLE Plan
“SIMPLE” stands for Savings Incentive Match Plan for Employees, a tax-
deferred retirement plan. And I know you’re going to be surprised, not all
that simple. For self-employed people, contributing to a SIMPLE for
yourself is not a deductible business expense. See Retirement Plans.
Expense category: Deducted on the 1040 form, not on the business part
of the tax return.
Employers: SIMPLE contributions for your employees are deductible,
within limits.
Corporations: Contributions for yourself as an owner/employee of your
own corporation is a deductible business expense, within limits, but only if
you include all eligible employees.
Expense category: Employee Benefit Programs.
More information: IRS Publication 560, Retirement Plans for Small
Business.
Simplified Employee Pension Plan
See SEP / SEP-IRA.
Skin Care
See Personal Appearance.
Smallwares for Restaurants and Bars
Glasses, plates, utensils, bar supplies, and the like are deductible.
Expense category: Supplies.
Smartphones
Smartphones and mobile phones come under the same rules as cell phones;
see Cell Phones. Business products and services that are ordered on a
smartphone and billed by your cellular company are deductible.
Expense category: Depends on what is being purchased.
Snacks
I looked this one up. Nowhere in the IRS Code does it mention snacks or
say whether snacks are deductible. Ooh, the peanuts are salty. The IRS does
allow a deduction for expenses that are ordinary and necessary. Ah, the root
beer is cold. And everybody knows that snacks are ordinary and necessary.
Absolutely. We’re out of chips. Do we get to deduct the mileage driving to
the store to get more?
Expense category: Office Expenses.

Just be glad you aren’t getting all the government you’re paying for.
—Cowboy philosopher Will Rogers (1879–1935)

Social Security Tax

For self-employed people, Social Security tax is part of the self-
employment tax and is not a deductible business expense. See Self-
employment Tax.
Employers: All employees are subject to Social Security tax. Employers
pay half the employees’ Social Security tax, and the employees pay half.
The employer’s portion of the tax is deductible.
Expense category: Taxes and Licenses.
More information: IRS Publication 15, Employer’s Tax Guide.
Software
It’s amazing how many different tax rules there are for deducting the cost of
software. Software bundled with hardware (such as software that is
preinstalled on a computer) is deducted as part of the cost of the hardware.
Software you lease or subscribe to, such as cloud software, is deductible
currently. Software you purchase (not custom designed for you) can be
deducted currently, which most businesses do, or amortized over three
years. If you purchase an app (application software), the cost is deductible
currently. A custom-designed software system specifically created for your
business is amortized over fifteen years, although if the cost is not
significant, most businesses deduct the cost currently. See Business Assets.
Expense category: If leasing or subscribing, Office Expenses. If
purchasing, Depreciation.
More information: If amortizing, IRS Publication 946, How to Depreciate
Property.
Software developers: If you develop software programs for yourself or
for sale to others, you can either write off the development costs as current
expenses or depreciate the costs over three years or five years, your option.
See Business Assets. Software you develop may be eligible for the
Research Tax Credit. See Tax Credits. Some software developers are
eligible for the Domestic Production Deduction, also known as the
Manufacturer’s Deduction. This deduction, however, is available only to
businesses that have employees. See Domestic Production Deduction.

The awful truth is that every program is defective. There is no

product out there that doesn’t have bugs. Our favorite flub was a Tax
Mate bug that always printed the total tax owed as zero.
—PCWorld magazine
We’re not perfect.
—Gene Goldenberg, Kiplinger’s TaxCut software

Solar Power
If you purchase a solar electric system, you can depreciate the system over
five years. See Depreciation. You may also be eligible for an Energy Tax
Credit. See Tax Credits.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Home-based business: Solar electric systems are part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Sponsorships
“Bob’s Laundromat All Stars.” Sponsor a Little League team, a race car, a
rodeo rider, an event, or an individual in a show or competition, and get a
full deduction for your business.
Expense category: Advertising.

It can probably be shown by facts and figures that there is no

distinctly native American criminal class except Congress.
—Mark Twain

Sport Utility Vehicles

You can deduct the cost of using an SUV for business, but with limitations.
See Vehicles.
Spouse
For federal income tax laws, the IRS defines a spouse as anyone who is
legally married. The IRS allows spousal deductions for any legally married
couple. The IRS does not allow spousal deductions for couples who are not
legally married. Different states have different definitions of “legally
married.” Some states recognize common law marriage; some don’t. If your
state says you are legally married, the IRS accepts that ruling.
Spouse’s business expenses: In many states, spouses are legally
considered equal owners of all property and assets acquired by either
spouse while married, including businesses. Even though only one spouse
may own the business, the other spouse can make business purchases and
pay business bills and get the deduction for the business. A spouse cannot
get a deduction for any travel unless he or she is a partner or employee of
the business.
Expense category: Varies depending on actual expenses.
Spouse as employee: You can hire your spouse as an employee of your
business and get a full payroll deduction like you would for any other
employee. See Wages. Putting your spouse on the payroll will also make
your spouse and family (including you) eligible for employee health
insurance and medical expense coverage, all fully deductible. You will no
longer be subject to the self-employed health insurance limitations. See
Health Insurance, and Medical Expenses.
 Expense category: For pay, Wages. For health coverage, Employee
Benefit Programs.
IRS Red Flag Audit Warning: The IRS believes, at times correctly, that
some business owners put their spouse on the payroll as an employee solely
to get the generous health insurance deduction. The IRS has often ruled in
audits that the spouse is not doing real work, or is not doing enough work to
justify the deduction. There is a big tax break if your spouse can qualify as
a legitimate employee. I suggest you discuss this issue with an experienced
tax accountant.
Standard Meal Allowance
You are allowed a 50 percent deduction for meals while traveling away
from home overnight on business. You can keep track of actual meal
expenses, or you can use a per diem standard meal allowance. If you use
per diem rates, the per diem rates for meals are only 50 percent deductible,
because meals are only 50 percent deductible. Whatever per diem meal rate
the IRS lists, you can deduct only half. See Per Diem.
Expense category: Meals and Entertainment.

We hang the petty thieves, but appoint the great ones to public
office.
—Aesop, 600 B.C.

More information: IRS Publication 1542, Per Diem Rates.

Child care and day care providers: You can use the standard meal
allowance or deduct the actual cost of meals. You can deduct 100 percent of
the meals or the per diem. The 50 percent limitation does not apply to child
care or day care businesses.
Standard Mileage Allowance
Standard Mileage Rate
The IRS has a Standard Mileage Rate, also called a standard mileage
allowance, for cars and some trucks, which can be taken in lieu of
deducting actual expenses. See Vehicles.
In a recent study, U.S. Treasury inspectors found that a large number
of CPAs and tax attorneys who were surveyed failed to file returns,
underreported income or owed back taxes.
—Kiplinger Tax Letter

Start-up Costs
Business expenses incurred before you start operating your business come
under different tax rules than expenses incurred once you are officially open
for business. The IRS has two categories of costs associated with starting a
business: Start-up Costs and Organizational Costs.
Organizational Costs apply only to businesses being set up as
corporations, and are limited to legal and accounting services and
government filing fees to set up the business. See Organizational Costs. All
other costs of starting a new business—that is, before you actually open the
business—come under the Start-up Costs rules.
Up to $5,000 of start-up costs can be deducted the first year the business
opens, including costs incurred in previous years before the business was
actually operating. The total deduction for start-up costs, current and
previous years combined, is $5,000. Expenses in excess of the $5,000
maximum are amortized over fifteen years. The $5,000 deduction phases
out, dollar for dollar, if start-up costs exceed $50,000.
The start-up cost deduction is optional. You can, if you prefer, forego part
or all of the $5,000 deduction and instead amortize the costs over fifteen
years. If your new business hasn’t earned much money and will owe little or
no taxes for the current year, you will save on future years’ taxes by
spreading out the organizational costs over fifteen years.
Start-up costs end the day you start your business. All expenses after
“opening day” come under regular tax deduction rules. The term “start-up
costs” should really be “pre-start-up costs.”
If you do incur start-up expenses but never actually start a business, the
expenses may be deductible as a capital loss under the IRS’s capital gains
and loss rules.
Expense category: If deducting, Other Expenses. If amortizing,
Depreciation.
 IRS Red Flag Audit Warning: The IRS has often wrangled with
taxpayers over which costs are and aren’t “start-up” and at what point a new
venture is actually “in business.” The IRS says that start-up costs are those
that are incurred before opening day, before, to quote the IRS, “active trade
or business begins.” I suggest you put off as many expenses as possible
until the business is operating.
One way around some of the start-up deduction limitations is to start your
business at home, if that’s feasible, just as small an operation as possible to
meet IRS requirements. Once you have generated a little income, then
spend your money on finding a new location, on furniture and equipment,
and on accounting and legal advice. Since you are now officially in
business, the expenses are deductible as regular business expenses, no
longer subject to the start-up rules.
Corporations: Corporations can deduct start-up costs and organizational
costs. They are two separate deductions, each with $5,000 maximums. See
Organizational Costs.

Last year, a dozen IRS employees who also own sideline small
businesses were fired or disciplined for taking bogus deductions on
their Schedule C tax returns. The IRS is now looking at 800 more
IRS employees who file Schedule C returns.
—Internal Revenue Service

State Taxes
The list of state taxes on businesses is virtually endless. There is a tax on
just about anything the states think they can get away with. If your state has
a tax on something, you can be sure you will hear about it. Most state taxes
are deductible. Special rules apply to sales tax and income tax:
Sales tax: Sales tax on purchases is added to the cost of whatever you are
purchasing, not deducted separately. For sales tax you collect from your
customers, see Sales Tax.
State income taxes: Only C corporations can deduct state income taxes on
their federal returns. See Income Tax.
Expense category: Taxes and Licenses.
Stationery
Stationery, envelopes, and other office supplies can be deducted.
Expense category: Office Expenses.
Stock
If you are buying a corporation and acquiring corporate stock, as opposed to
buying the assets of a corporation, you may be able to deduct some of the
cost. This is a complicated area of tax law, and a lot of tax money may be at
stake. You should definitely talk to an experienced accountant before
buying a business. See Buying a Business.
The cost of issuing your own corporate stock may have to be amortized
over a period of years. This is another area you should discuss with an
experienced accountant.
Inventory: The term “stock” is also used to describe inventory, goods for
sale. See Inventory.
Livestock on farms may or may not be deductible, depending on many
factors. See Livestock.

Stolen Property
Deductible, but with limitations. See Casualty Losses.
Storage Costs and Storage Facilities
Storage costs are deductible. Rent of a storage facility is deductible. The
cost of a storage facility can be depreciated or, in many cases, deducted the
year of purchase. See Buildings.
Expense category: For incidental costs, Other Expenses. For rent or lease,
Rent or Lease. For purchase of a facility, Depreciation.
Home-based business: A storage space in the home is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.

Willie Foster, a minister and investigator for the NAACP in Fort

Worth, Texas, filled out IRS form #3800, requesting a $43,209 “Black
Tax Credit.” Mr. Foster stated, “It’s about time they gave us
something for that lost time in slavery.” The IRS sent him the money.
There is no such thing as a Black Tax Credit.
—Reported in the Fort Worth Star-Telegram

Store
The cost of renting a store is deductible. The cost of a building you
purchase can be depreciated. See Buildings. Also see Building
Improvements.
Expense category: If rented or leased, Rent or Lease. If purchased,
Depreciation.
More information: For buildings you own, IRS Publication 946, How to
Depreciate Property.
Home-based business: A store in the home is part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Store Fixtures
See Fixtures.
Storm Losses
Deductible, but with limitations. See Casualty Losses.
Expense category: Depends on kind of property lost, damaged, or
destroyed.
Structures
See Buildings.
Studio
The cost of renting a studio is deductible. The cost of a building you own is
depreciated. See Buildings.
Expense category: If rented or leased, Rent or Lease. If purchasing,
Depreciation.
More information: For buildings you own, IRS Publication 946, How to
Depreciate Property.
Home-based business: A studio in the home is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.

A few years ago, the IRS started requiring people to list the Social
Security numbers of all dependents over the age of two claimed on
their tax returns. This caused several million dependents to
disappear from the tax rolls.
—Michael Graetz, former Secretary for Tax Policy, US Treasury

Subcontractors
If you are hiring subcontractors to work with building contractors you are
also hiring, you deduct the cost as you would for a building contractor. See
Contractors.
Building contractors: Contractors who hire subcontractors to work on
their jobs may be able to deduct the cost as contract labor if the
subcontractor is self-employed; or they may have to put the subcontractor
on the payroll as an employee, depending on the nature of the job. This is
an extremely important tax and liability issue for contractors. If you are
unsure how to treat your subcontractor, I urge you to talk to an experienced
accountant.
Expense category: If the subcontractor is not an employee, Contract
Labor. If the subcontractor is an employee, Wages.
Subscriptions
Subscriptions are deductible.
 Expense category: Office Expenses.
Supplies
Office supplies and miscellaneous business supplies are deductible.
Manufacturing supplies are added to the cost of the goods being
manufactured and included in inventory. See Inventory.
Shipping supplies are deductible unless they are an integral part of the
product you are shipping. If they are, the cost of the supplies is added to the
cost of the inventory. See Inventory.
Expense category: For office supplies, Office Expenses. For other
deductible supplies, Supplies. For supplies that are considered part of
inventory, Cost of Goods Sold.
Surveys
The cost of conducting surveys (getting people’s opinions, not surveying
property) is deductible. Surveying costs related to land or buildings may
have to be capitalized. See Buildings; also Land.
Expense category: Legal and Professional Services.
SUVs (Sport Utility Vehicles)
You can deduct the cost of using an SUV for business, but with limitations.
See Vehicles.
Tablets
Tablets such as iPads are deducted like computers. See Computers.
Tariffs
Tariffs and all fees and taxes related to importing and exporting can be
deducted, although these expenses can sometimes be added to the cost of
the inventory being purchased or sold and deducted as part of cost of goods
sold. See Inventory. You may want to talk to an accountant with export and
import experience.
Expense category: For duties and tariffs, Taxes and Licenses. For non-
government fees, Legal and Professional Services. If adding to the cost of
the inventory, Cost of Goods Sold.
Tattoos
See Personal Appearance.
Joseph Nunan occupies a unique place in the history of the Internal
Revenue Service. Nunan, who was IRS commissioner from 1944
through 1947, was convicted in 1952 on five counts of income tax
evasion.
—Reported by the Associated Press

Tax Credits
Tax credits are special tax incentives created by Congress to stimulate the
economy, to encourage businesses to act in socially or environmentally
responsible ways, or (I’m sure you’ll be shocked) to slip a tax break to a
favorite corporation or lobbyist.
Tax credits should not be confused with tax deductions. A tax deduction
is an item of expense that reduces your business profit. A tax credit, by
comparison, does not reduce your business profit. It reduces your taxes
directly, dollar for dollar. For example, a tax deduction of $100 may save
you $30 or $40 in taxes, depending on your tax bracket. A tax credit of
$100 will save you a full $100 in taxes, regardless of your tax bracket. Tax
credits are a real gold mine.
Some expenses can be taken as both tax deductions and tax credits. You
get the deduction to reduce your taxable profit, and you get the tax credit to
reduce your taxes! Tax credits come and go, available one year and not the
next. If you fail to take a tax credit you are entitled to, the IRS will not tell
you.
Several tax credits are included in what the IRS calls General Business
Credits, but there is no “general” business tax credit; there are only specific
credits for specific situations. Likewise, the IRS has an Investment Credit,
which is not one but several credits, each with different requirements. Last
year’s business tax credits (including the General Business Credits and the
Investment Credits) included:
Alternative Fuels Credit. For using or producing non-fossil fuels and for
fuels used off-highway and in farming.
Alternative Motor Vehicle Credit. For purchasing fuel cell vehicles.
Plug-in Electric Vehicle Credit.
Disabled Access Credit. For making your business premises, equipment,
and services more accessible to disabled people.
 Energy Credit. For solar electric installations.
Foreign Income Tax Credit. For taxes paid to another country.
Research Credit. For increasing research, experimentation, and
development expenses.
Low Income Housing Credit. For construction of certain low-income
housing.
Rehabilitation Credit. For rehabilitating a certified historic building or a
building built before 1936.
Railroad Track Maintenance Credit.
Credit for Employer-Paid Social Security Taxes on Employee Tips (FICA
Tax Credit).
Work Opportunity Credit. For hiring certain disadvantaged employees.
Small Employer Health Insurance Credit. For employers under five feet
tall. (That was a joke.)
Small Employer Pension Plan Start-up Credit.
Employer-Provided Child Care Facilities and Services Credit.
More information: A list of credits can be found in IRS Publication 334,
Tax Guide for Small Business.

The IRS sends out more than 250,000 incorrect collection bills each
year to individuals who have paid up.
—General Accounting Office, US Congress

Taxes
Most taxes other than income tax and self-employment tax are deductible.
See the listings of specific taxes for more details.
The IRS says that prepaid taxes are not deductible until the year they
apply to. Some Tax Courts disagree. See Prepayments.
Expense category: Taxes and Licenses.
 Sales tax: Sales tax you pay when you purchase goods is added to the
cost of the goods, not deducted separately. See Sales Tax.
Tax Penalties
Tax penalties are not deductible. Interest charges on late tax payments are
deductible for corporations only. See Interest.
Tax Return Preparation
Fees paid to prepare business tax returns are deductible. For sole
proprietors, only the cost of preparing the business part of your 1040 tax
return (schedule C or C-EZ and related schedules) is deductible. Ask your
accountant to give you a separate bill for the business part of the tax
preparation fee. Tax software can be deducted currently; see Software.
Expense category: For tax preparation, Legal and Professional Services.
For software you lease or subscribe to, Office Expenses. For software you
purchase, Depreciation.
Telephone
All business telephone services, fees, and taxes for land lines and cell
phones are deductible.
Expense category: Office Expenses.
 The cost of buying a telephone can be deducted or depreciated. See
Business Assets.
Expense category: Other Expenses.
More information: IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Home-based business: For home businesses, there are different tax
deduction rules for land line phones than for cell phones and smartphones.
If your phone is a land line phone, you may not deduct the basic monthly
rate for the first land line into the home.
And therein lies an interesting story (interesting to me anyway). Long
before cell phones were invented, some angry congressman decided that
home businesses should not be able to deduct the cost of the home
telephone as a business expense, even though it was being used for
business. Write off the home phone? $35 a month? No way. If you want a
tax deduction, snarled the congressman, put in a second telephone line just
for the business. Congress liked getting tough on those tax-cheating home
businesses, the law passed, and the IRS wrote it into the tax code, stating
that a home business could not deduct the cost of “the first line into the
home” (to use the exact words in the law). You could deduct business-
related long-distance calls, as long as you itemized them separately, but not
the basic monthly rate. Any additional “lines” into the house after the first
telephone line, if used exclusively for business, were fully deductible.
Then something happened. Cell phones got popular. Many small
businesses, including home-based businesses, switched to cell phones and
smartphones. Those phones are not connected to a “line” into the home or
anywhere else. And a clever tax lawyer said, “Hey, the IRS prohibition on
the ‘first line into the home’ doesn’t apply to cell phones.” And the IRS
agreed!
If you use your cell phone or smartphone 100 percent for business, you
can deduct the entire cost. If you use the phone partly for business and
partly for non-business use, you can deduct the business portion of the cost
of the phone and all related charges. The cell phone rule also applies to a
“cellular home phone,” a regular telephone that’s connected to your cell
service, not to land line wires.
If you are using a land line phone, the old rules still apply. The basic rate
for the first land line phone into your home is not deductible even if it is
listed as a business phone, even if it is used 100 percent for business.
Telephones using VOIP (Voice Over Internet Protocol) probably come
under the land line rules, since the signal is coming into the home on a
wired line. The IRS rules haven’t yet caught up with this technology, so no
telling what they’ll decide when they get around to it. As those highway
construction signs say, Your Tax Dollars at Work.
Expense category: Office Expenses.
Temporary Help Agency
Fees paid to an agency or service that provides temporary workers are fully
deductible. The workers are not your employees, they are employees of the
agency, so this is not a payroll expense.
Be careful when contracting with a temporary help agency that the
workers are in fact employed by the agency, and not able to be considered
your employees. Don’t pay the workers directly or any of the workers’
payroll taxes or health insurance. Examine the contract with the agency to
be sure you are not liable for any employer responsibilities.
Expense category: Legal and Professional Services.

Laws are like sausages, it is better not to see them being made.
—Chancellor Otto von Bismarck (1815–1898)

Thank-You Cards
Deductible. (Yes, this is the third mention of greeting cards in the book. It’s
just a nice gesture. What’s more, little details like thank-you cards bring
customers back. And customers generate sales. And without sales, who
needs to fill out tax returns? And without tax returns, I’m out of a job.)
Expense category: Office Expenses.
Theft Losses
Theft losses are deductible to the extent they are not covered by insurance.
However, there are different rules for different types of losses and different
types of businesses. See Casualty Losses.
This Book
That’s right. The money you paid for this book is 100 percent deductible. In
fact, you can deduct twice as much, just by going out and buying a second
copy.
Expense category: Office Expenses.
Tickets
Tickets to events such as sports, music, and theater are considered
entertainment. Only 50 percent of the cost can be deducted, and only if
there is a valid business reason to buy the tickets. What’s more, the
deduction must be based on the face value of the ticket. If you paid a
scalper or ticket broker $500 for a $100 Beyoncé ticket, you only get to
deduct 50 percent of the $100 face value.
Expense category: Meals and Entertainment.
If you buy tickets to give away to a client or prospect, the tickets are no
longer entertainment expenses, they are gift expenses. The maximum gift
deduction is $25 per recipient per year. See Business Gifts.
Expense category: Other Expenses.
Raffle tickets are usually not deductible. Parking tickets, speeding tickets,
and other citations for illegal activities are not deductible.
IRS Red Flag Audit Warning: Tickets to entertainment events may be
legitimate business expenses, but don’t take the deduction.

National Small Business United conducted a study of 21 sections of

tax law that treat small and large businesses unequally, providing
very generous benefits to large businesses or their employees, while
reducing the benefits to small business or excluding them
completely.
—US Small Business Administration

Tips
Tip #1: Don’t open any email attachments from Nigeria.
Tip #2: Don’t tell the IRS auditor that income taxes are unconstitutional.
Tip #3: Tips paid for meal service or entertainment are only 50 percent
deductible.
Expense category: Meals and Entertainment.
Tip #4: Tips for services other than food are fully deductible.
Expense category: Other Expenses.
Restaurant and tavern employers: There is a tax credit for payroll taxes
paid on employee tips. See Tax Credits.
Tolls
Vehicle tolls are deductible. If you take the Standard Mileage Rate, tolls are
deductible in addition to the mileage allowance. See Vehicles.
Expense category: Car and Truck Expenses.
Tool Allowances / Reimbursements
Payments to employees for use of their tools or equipment are considered
taxable wages, unless the payments are part of a formal “accountable
reimbursement plan,” which is a written policy that the expenses are
business related and that they are substantiated (you have receipts).
IRS Red Flag Audit Warning: Tool allowances and similar
arrangements that attempt to avoid paying wages—and to avoid payroll
taxes—invite audits. Even with an accountable reimbursement plan, the IRS
is likely to challenge the deduction. This is definitely a hot-button issue
with the IRS.

What the mindless politicians and the equally mindless media don’t
take into account is that the country is run by the great financial
powers and corporate interests, and they send their lawyers to
Congress to make laws so that they don’t have to pay taxes.
—Writer Gore Vidal

Tools
Inexpensive tools and tools with a life of a year or less are deductible. More
expensive tools can be deducted the year of purchase or depreciated over
seven years. See Business Assets.
Expense category: If low cost, Supplies. If deducting tools that cost up to
$2,500, Other Expenses. If more expensive, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including tools used in manufacturing, may have to be included in
the cost of inventory. Most businesses with indirect costs under $200,000
are exempt from this requirement, but see “Indirect Costs” under Inventory.
Tour Bus
See Bus.
Touring Expenses
See Travel.
Tractors
Tractors and construction equipment can be deducted the year of purchase
or depreciated over seven years. See Business Assets. Renting or leasing
can be deducted. Operating and maintenance expenses can be deducted.
Expense category: If deducting a tractor that costs $2,500 or less, Other
Expenses. If deducting a tractor that costs more than $2,500 or if
depreciating the tractor, Depreciation. If renting, Rent or Lease. For
operating costs, Other Expenses.
More information: If buying, IRS Publication 946, How to Depreciate
Property. If the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis
Safe Harbor Deduction.

The rich are there to make all the money and pay none of the taxes.
The middle class are there to do all the work and pay all the taxes.
The poor are there to scare the daylights out of the middle class so
they’ll keep working and paying the taxes.
—George Carlin

Trade
Trade, as in exchange or barter, is a taxable transaction. See Barter.
Expense category: Depends on what is acquired in trade.
Trade Association
Dues and meetings are deductible.
 Expense category: Other Expenses.
If part of your dues to a trade or professional association are for political
lobbying, that portion of the dues is not deductible.
Trade Dress
Trade dress is a form of trademark. The cost is amortized over a fifteen-year
period. See Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.
Trademark
The cost of obtaining a trademark—or a service mark, trade name, or trade
dress—is amortized over a fifteen-year period. See Depreciation. Licensed
trademarks can be deducted currently if you will not be using the license for
more than a year.
Expense category: For your own trademark, Depreciation. For licenses,
Other Expenses.
More information: IRS Publication 946, How to Depreciate Property.
Trade Name
Trade names are similar to trademarks. The cost is amortized over a fifteen-
year period. See Depreciation.
Expense category: Depreciation.
More information: IRS Publication 946, How to Depreciate Property.

The single most striking change in American life during the past
twenty years is the redistribution of income from the working and
middle class to the rich. It is not an act of God or even the inevitable
workings of capitalism. It is caused by deliberate government tax
policies.
—The late Molly Ivins, Fort Worth Star Telegram

Trade Show
Admission fees to trade shows are deductible. Travel and lodging are
deductible. Meals are 50 percent deductible. See Travel.
Expense category: For admission, Other Expenses. For travel, Travel.
 Write off your horse. Work your horse into your act and
deduct all its touring costs, including the truck and trailer,
boarding, feed, veterinary fees, horseshoeing, and the
saddle. You can even depreciate the horse. Back in the
saddle again.

Trailers
Travel trailers, utility trailers, and movable mobile homes can be deducted
the year of purchase or depreciated over five years. See Business Assets.
Permanent mobile homes are usually considered real property and are
depreciated. See Mobile Home.
Expense category: If deducting a trailer that costs $2,500 or less, Other
Expenses. If deducting a trailer that costs more than $2,500 or if
depreciating the trailer, Depreciation.
More information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Mobile businesses and touring entertainers: If you are staying in a
trailer while traveling, your travel and living expenses are deductible (the
cost of meals is 50 percent deductible). If, however, you are constantly
traveling, living in your trailer, the IRS considers the trailer to be your home
and will disallow travel expenses. This is a major issue with IRS auditors.
See Travel.
Home-based business: A trailer used as a business space is part of the
Home Expenses deduction, not deducted separately. See Home Expenses.
Training
Training expenses, seminars, videos, and manuals are deductible, but with
limitations. See Education Expenses.
Expense category: Other Expenses.

Working people pay more in U.S. taxes than the 40,000-plus foreign-
controlled corporations operating in this country. The General
Accounting Office, the investigative arm of Congress, reported that
tax loopholes allowed a majority of those companies to escape any
taxes last year.
—Reported in the San Francisco Chronicle

Transit Passes
See Commuting.
Transportation
Local transportation expenses are deductible except commuting expenses
(home to your regular place of work and back), which are not deductible.
See Commuting.
Expense category: For a vehicle you own, rent or lease, see Vehicles. For
other local transportation, Office Expenses. Do not put local transportation
expenses under Travel, which is for overnight travel.
Travel
This deduction, and the lengthy IRS rules for travel, apply only to overnight
travel. For local transportation, see Transportation and Commuting.
Self-employed individuals are allowed deductions for meals and lodging
and miscellaneous expenses if you are away from home overnight. The
definition of home is important here. According to the IRS, “home” is your
place of business, not where you live. People who work far from home and
stay overnight near work cannot deduct the cost. Self-employed itinerant
workers, traveling contractors, and salespeople who are continually on the
road are often denied travel deductions, the IRS claiming that the road is
home, so nothing is allowed. This has been an issue of contention for years,
one that the IRS sometimes wins and sometimes doesn’t. If you make your
living on the road, I suggest you talk to an experienced accountant. A lot of
money may be at stake here. If you are working away from home for over
one year, the IRS automatically considers the road to be home and disallows
travel expenses.
If you are eligible for travel deductions, there are a lot of rules. Not
everything is deductible. The rules vary depending on where you are going,
why you’re going, how you get there, how long you’re staying, and how
much of the trip is for business versus non-business.
100 percent business: A business trip that is entirely for business, in or
outside the United States, is deductible. Round-trip travel, lodging,
transportation, and incidental expenses are 100 percent deductible. Meals
are 50 percent deductible. Tax deductions for travel on cruise ships, unless
the cruise is a seminar or convention or business meeting, is subject to
maximum daily limits.
There are restrictions on overseas travel to attend a convention, seminar,
or meeting outside North America. If it is “reasonable” (to quote the IRS) to
hold the meeting in that country, the deduction is allowed. The IRS has
provided no guidelines as to what they mean by “reasonable,” so I guess
you get to make your own. An opportunity like that sounds reasonable to
me.
Business and vacation combined: What about a trip that is part business
and part vacation? You may be able to deduct some of it, and you may be
able to deduct all of it, if you follow the rules.
If the reason for your trip is primarily personal (more than half the days
are for vacation), none of the traveling expenses to and from your
destination are deductible. Only expenses directly related to your business
can be deducted.
If your trip is primarily for business (more than half the days are for
business) and it is within the United States, the cost of the round-trip travel
is fully deductible, even if some of the trip is for pleasure. So you can tack a
short vacation onto a business trip, and the only costs that aren’t deductible
are the non-business expenses, such as the extra days’ lodging, meals, and
entertainment.
When counting business versus vacation days, a “business day” does not
require you to do business all day. Any day you put in at least four hours of
work is considered a business day. Any day your presence is required, for
any amount of time, is considered a business day. And travel days also
count as business days.
If you have a business trip that overlaps a weekend, requiring you to be
there Friday and the following Monday, lucky you: You can write off the
weekend as a business expense as well, even though all you did was sit on
the beach and dance in the clubs (as long as it is less expensive to stay the
weekend than to go home Friday and come back Monday morning).
If you travel outside the United States, more stringent rules apply. If the
trip is no more than one week or the time spent for pleasure is less than 25
percent, the same basic rules apply as a trip within the United States. But if
the trip is more than a week, or if the vacation days are 25 percent or more
of the trip, you allocate travel expenses between the business and personal
portions of your trip.
Deductible expenses: Travel expenses include cost of transportation to
and from your destination; lodging and 50 percent of the cost of meals,
including tips; cost of transportation while away from home such as taxi
fares or auto rentals; incidental expenses such as fax or internet service;
personal services such as laundry and hair care; and entertainment, subject
to the 50 percent limit. For meals and lodging, you can keep a record of
actual expenses, or, for some businesses, you can use a standard “per diem”
rate set by the IRS: so much per day. See Per Diem and Standard Meal
Allowance.
Spouse, family, friend. Travel expenses are not deductible for your
spouse, dependent, friend, or anyone else, unless he or she is an employee
or co-owner of the business and there is a bona fide business purpose for
accompanying you. You can still deduct what it would cost you to travel
alone.
Expense category: Travel.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses; IRS Publication 1542, Per Diem Rates.
 Travel agents: Travel agents often claim they need to travel in order to
be able to better advise their clients, that such travel expenses are
“ordinary” and “necessary” expenses of their business and are therefore
fully deductible. The IRS does not always agree, especially if the travel
expenses are significant compared to the income generated from the
business. In audits, the IRS sometimes allows travel deductions and
sometimes disallows the deductions.
Employers can reimburse employees for travel expenses and get a
deduction, but be careful to follow the rules. See Reimbursements.
IRS Red Flag Audit Warning: The IRS does not like business trips. As
you can tell from the generous way the law is written, it’s a bit too easy to
write off a business trip that is really a disguised vacation. The IRS knows
this, and they are forever suspicious of business travel expenses,
particularly sole proprietorships, where the owner is accountable to no one
else: You feel like taking a business trip (and you can afford it), you take it.
The IRS wants to be sure it’s not a vacation in disguise. You want to be sure
you can prove, if audited, that the trip wasn’t a vacation. A log of daily
activities and business contacts is not required by law, but it may help
convince a skeptical IRS auditor that your trip to the Bahamas really was
for business. Take photographs of businesses you visited or goods you want
to carry.

Scores of highly profitable U.S. corporations pay little or no federal

tax despite ringing up billions in profits and facing a tax rate of 35%.
How? By aggressively using tools as diverse as tax shelters,
deferred taxes, balancing current income against past-year losses,
and handing out stacks of stock options. 52 of the 250 biggest U.S.
companies paid effective tax rates of 10% or less last year. Nearly
half of those paid no tax or got refunds.
—BusinessWeek magazine

Trips, Business
For overnight business trips, see Travel. For local travel, see Transportation.
Trucks
You can deduct the cost of using a truck for business. Different types of
trucks, however, come under different rules. See Vehicles.
Tuition
Some tuition is deductible. See Education Expenses.
Uncashed Checks
A check mailed or delivered by December 31 can be deducted the year it
was written, even though it was not cashed until the new year.
If a check never gets cashed—if it is lost, destroyed, or put on stop
payment—and if it is from the current year, reverse it out (make a minus
entry) or delete the entry in your expenditure records. If the check is from
the previous year, either increase the new year’s income or decrease the
new year’s expenses by the amount of the check. No need to go back and
change the prior year’s records.
Uncollectible Accounts
Uncollectible accounts are deductible as bad debts, but only if they were
included in your income when you made the sale. Businesses using the cash
method of accounting (recording income when the money comes in) cannot
take a deduction for uncollectible accounts, because the income was not
recorded in the first place. See Bad Debts.
Expense category: Bad Debts.
Your own time: Unless you are an employee of your own corporation,
you are not allowed a tax deduction for your own time. If you are unable to
collect from a client for your time billed to the client, you cannot take a
deduction for this lost income. See Paying Yourself.

In the 1990s, the corporate income tax was 25% of the federal
outlay. It’s now about 6% or 7%. This is in a period of record
corporate profits, record stock market prices, record executive
compensation. It is hard to find a major fortune in America that hasn’t
benefited by special-interest tax legislation. So when people ask,
“Why should the rich pay a larger percent of their income than
middle-income people,” my answer is not an answer most people
get: It’s because their wealth developed from laws that enriched
them.
—Ralph Nader

“Under the Table” Payments

“Under the table” means that a payment has been made, secretly, in cash,
and no record is made of the payment. Under-the-table payments are
sometimes made (so I’m told) to workers who are not officially on the
payroll to avoid payroll taxes and workers’ compensation insurance
premiums, which is illegal and very risky and not a good idea at all.
But is an under-the-table payment deductible? If the payment was illegal,
no deduction is allowed. If the payment was legal (stranger things have
happened in the business world), it is deductible. There is nothing wrong
with paying someone in cash and keeping it quiet, other than paying
someone who should be an employee. But if you don’t record the payment,
you have no record, and no proof of what transpired. If you are audited, the
IRS can disallow any deduction that isn’t recorded, even legal ones.
The term “off the books” means the same thing as “under the table.”
Expense category: If legal, depends on what the expense was for.

The tax code has become so riddled with loopholes that tax
avoidance has become a profit center of its own. The Loophole
Houdinis are devising ever more inventive ways to devise exotic tax
shelters, enriching corporate clients under the nose of the Internal
Revenue Service.
—BusinessWeek magazine

Unemployment Insurance /
Unemployment Tax
Unemployment insurance and unemployment tax are the same thing. The
federal government calls it a tax (FUTA, which stands for Federal
Unemployment Tax Act), but many states call it insurance.
Sole proprietors, partners in partnerships, and members (owners) of LLCs
are not subject to federal unemployment tax. If you are required to pay state
unemployment tax (or insurance) for yourself, it is deductible.
Employers pay federal unemployment tax for their employees. Some
family employees are exempt from FUTA. See Family Employees.
Employers also may be required to pay a separate state unemployment tax
(or insurance) for their employees. These taxes are deductible.
Expense category: Taxes and Licenses.
UNICAP
Uniform Capitalization Rules
See “Indirect Expenses” under Inventory.
Uniforms
Uniforms used exclusively for work are deductible. This includes costumes
and protective gear. Clothing with your company’s logo or advertising is
considered a uniform and is therefore deductible. Cost of cleaning is
deductible.
Expense category: Supplies.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including special work clothing required in the manufacturing area,
may have to be included in the cost of inventory. Most businesses with
indirect costs under $200,000 are exempt from this requirement, but see
“Indirect Costs” under Inventory.

Attorneys and accountants should be pillars of our system of

taxation, not the architects of its circumvention.
—Former IRS Commissioner Mark Everson

Unions
Dues and meetings are deductible.
Expense category: Other Expenses.
If part of your union dues is for political lobbying, that portion of the
dues is not deductible.
Unsalable Goods
Unsalable goods can be deducted as part of cost of goods sold. See
Inventory.
 Expense category: Cost of Goods Sold.
Use Tax
Use tax is a type of sales tax. In states that collect sales tax, buyers pay
sales tax when making purchases from in-state sellers. Buyers usually do
not pay sales tax when purchasing from out-of-state companies doing
business online, or through an app, or by telephone or mail order. But in
most states, the buyer is required to pay sales tax on purchases from out-of-
state vendors—not to the business selling the goods, but directly to the state
where you, the buyer, reside (unless the purchases are for resale).
No, I’m not kidding. When you buy a computer or office supplies from
an out-of-state company, your own state wants you to pay sales tax on the
purchase. It is called a use tax.
On your sales tax return, you will find a line where you calculate the use
tax you owe, and pay it along with the sales tax you collected from your
customers. If you do not file sales tax returns, you will find a line on your
state income tax return where you are asked to report and pay use tax.
Use tax is also collected from businesses that made purchases tax free, for
inventory, and then later used the goods for a purpose other than resale,
such as personal use.
Use tax is deductible. Normally, sales tax, which the use tax really is, is
added to the cost of the goods. But since the use tax is paid after the fact,
most businesses deduct it as a business tax.
Highway Use Tax: There is a federal excise tax on truckers called a
Highway Use Tax. This is a completely different tax than the use tax
described above. It also is deductible.
Expense category: Taxes and Licenses.

The tax avoidance game has become a major industry.

—BusinessWeek magazine

Utilities
Utilities, including electricity, gas, heating fuel, water, sewer service, and
garbage pickup, are deductible.
Expense category: Utilities.
 Renewable resources: You may be eligible for a tax credit if you
produce or use electricity from alternative sources. See Tax Credits.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Home utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses. Utilities do not
include telephone, which can be deducted with limitations in addition to the
home expenses. See Telephone.
Vacation
Can you write off part of your vacation as a business expense? Yes, if it is
combined with a legitimate business trip and if you follow the rules. See
Travel.
Vacation Facilities
The IRS has restrictions on vacation facilities, especially when made
available to business owners and employees. If you own or lease a vacation
facility, I suggest you talk to your accountant (who certainly will need to
visit and examine the facility firsthand to be sure it meets all IRS
requirements).
Expense category: Depends on what is being deducted.
IRS Red Flag Audit Warning: I doubt anything will catch an auditor’s
eye more quickly than a deduction for a vacation facility.
Businesses that operate vacation facilities do not come under these
restrictions.

God bless our brave billionaires in these trying times.

—Professor and business writer Howard Karger, University of
Houston

Vacation Pay
Vacation pay for employees is treated as regular taxable wages. See Wages.
 Expense category: Wages.
Vandalism
Deductible to the extent not covered by insurance. See Casualty Losses.
Vans
You can deduct the cost of using a van for business, or you can take a
Standard Mileage Rate, but with limitations. See Vehicles.
Vehicles
As confusing and complicated as some tax laws are, the IRS has outdone
itself when it comes to tax deductions for vehicles. The vehicle laws are a
monstrous mess of minutiae, as Spiro Agnew might have said. (Mr. Agnew
was a vice president of the United States, famous for calling people he
didn’t like, “nattering nabobs of negativism.” Vice President Agnew was
forced to resign from office after pleading guilty to . . . tax fraud.)
The many deduction rules for vehicles depend on what kind of vehicles
you drive, how many vehicles you use, what percentage the vehicles are
used for business, who owns the vehicles, how much the vehicles weigh,
how much the vehicles cost, how long a lease if you’re renting, whether you
are commuting to work, how much time you spend traveling, how detailed
are the mileage logs, even how many seats there are in the vehicle.
Your options: Generally (which means there are exceptions, covered
below), a business can deduct the cost to purchase or rent a vehicle, and the
costs of operating and maintenance. You are allowed a deduction for a
personally owned vehicle used for business, although there are restrictions
if your business is a partnership, corporation, or multi-owner LLC,
explained below.
There are two deduction methods allowed by the IRS: Deduct actual
expenses, or take the Standard Mileage Rate.
Actual expenses: All types of vehicles are eligible for the “actual
expenses” deduction. These expenses include the cost of the vehicle, which
can be deducted the year of purchase or depreciated over five years, though
there is a maximum deduction limit for some vehicles, explained below. If
you are renting or leasing a vehicle, you can deduct the payments, though
there are restrictions for leases that run thirty days or longer, also explained
below. You can also deduct the costs to operate and maintain the vehicle,
including fuel, oil, repairs, insurance, parking, tolls, garage rents, licenses,
registration fees, even auto club dues.
Keeping itemized records of all your vehicle expenses is tedious work.
The IRS realizes this also. In one of their rare helpful moods, they have
come up with . . .
The Standard Mileage Rate: This simple method, also known as the
standard mileage allowance, is permitted, according to the IRS, only for
“cars, vans, pickup trucks, and panel trucks.” No panel trucks have been
manufactured in the last forty years, but most accountants feel that Sprinter-
type vehicles meet that description, and most accountants feel that SUVs
also qualify. You would think the IRS would update their rules every forty
years or so, but I guess they’re too busy doing more important things, like
not answering their phones.
The Standard Mileage Rate is 53½¢ per mile. This mileage rate is in lieu
of all vehicle expenses except parking, tolls, interest (if you are paying an
auto loan), and state and local taxes (other than sales tax on the vehicle),
which are deductible in addition to the mileage rate. The rate changes, up or
down a few cents, every year.
You cannot use the Standard Mileage Rate for large trucks, RVs, busses,
motorcycles, or construction equipment. You cannot use the Standard
Mileage Rate if your business operates more than four vehicles at a time.
You can use the Standard Mileage Rate for taxicabs and ride-hailing
vehicles, as long as you are not operating a fleet of five or more vehicles.
You might want to figure your deduction under both methods to see
which option gives you the highest tax write-off. If you have a new or
expensive vehicle, keeping track of actual expenses will probably bring a
bigger deduction than using the Standard Mileage Rate.
Selling your vehicle: If you use the Standard Mileage Rate, when you
sell the vehicle, you reduce the “cost basis” of the vehicle (for figuring
profit or loss when you sell the vehicle) by 25¢ per mile for every business
mile driven, all years combined. The amount goes up a few pennies every
year.
Switching methods: The deduction method you choose the first year you
use your vehicle for business determines what method you can use in future
years (for that vehicle). If you deduct actual expenses the first year, you
must stay with the actual-expenses method as long as you use that vehicle.
If you use the Standard Mileage Rate the first year, you can switch back and
forth if you want, using the Standard Mileage Rate some years and using
the actual-expenses method other years, though with two exceptions: (1) If
you want to use the Standard Mileage Rate for a vehicle you lease, you
must use the Standard Mileage Rate for the entire lease period. (2) If you
switch to the actual-expense deduction after using the Standard Mileage
Rate, you cannot take the Section 179 first year write-off or use
depreciation other than the straight-line method (a confusing issue you can
avoid by staying with the Standard Mileage Rate).
Part business use: Vehicles used partly for business are prorated
between business and non-business use, based on mileage. If you are using
the Standard Mileage Rate, you can take the rate for every business mile
driven. But keep in mind that commuting, driving from home to work and
back, is considered non-business and is not deductible. If you are deducting
actual expenses, you can deduct a percentage of costs based on the
percentage of business miles driven. If, for example, 75 percent of the miles
driven in a year are for business, 75 percent of the costs can be deducted.
However, if you use the vehicle 50 percent or less for business, you cannot
take a Section 179 deduction (explained under Business Assets), and you
must use the straight-line depreciation method. This limitation is for the
actual-expense method, not the Standard Mileage Rate. I warned you that
these laws are a mess.
If you do use a vehicle partly for business and partly for non-business, the
IRS requires you to keep a record of business versus non-business miles
driven. For the business miles, the record needs to include the date, time of
day, destination, and business purpose. If you are audited and you don’t
have a logbook, or if you only have estimates or summaries, the IRS will
disallow your deduction.
More exceptions:
Vehicle ownership: If your business is a sole proprietorship, a one-person
LLC, or a spousal partnership or joint venture, you can take a deduction for
the business use of your personal vehicle. There is no need for the business
to own the vehicle or register or insure the vehicle in the business name. If,
however, your business is a partnership, corporation, or multi-owner LLC,
you should have what the IRS calls an “accountable reimbursement plan,”
which is a written policy that the vehicle use is business related and that the
expenses are substantiated (you have receipts). Also, the partnership or
LLC agreement or the corporate bylaws should include a clause requiring
you to use your vehicle for business.
Maximum deduction for cost of a vehicle: This limitation applies to the
actual-expense deduction method, not to the Standard Mileage Rate. If you
are depreciating a vehicle, there is a maximum deduction limitation for cars
and a different (and slightly higher) maximum deduction limitation for
trucks and vans rated at 6,000 pounds gross vehicle weight (GVW) or less,
both of which change from year to year. Vehicles with a gross vehicle
weight of 6,000 pounds or more are exempt from these maximums, except
for SUVs. There is a maximum first year write-off for SUVs, including
heavy ones. There is a long chart of maximums in IRS Publication 463.
Leased automobiles: Automobile leases, if thirty days or longer, are not
100 percent deductible. The IRS has a table, called “Inclusion Amounts for
Cars,” that shows how much of an auto lease can and cannot be deducted.
See IRS Publication 463. This rule does not apply to trucks, vans, or heavy
SUVs, which are fully deductible.
Tax Credits: Plug-in electric vehicles and fuel cell–powered vehicles are
eligible for a tax credit. See Tax Credits.
Expense category: If you take the Standard Mileage Rate, Car and Truck
Expenses. If you are deducting actual expenses, Car and Truck Expenses
for all vehicle expenses except the cost of the vehicle itself: for buying a
vehicle, Depreciation; if renting or leasing, Rent or Lease.
More information: IRS Publication 463, Travel, Entertainment, Gift, and
Car Expenses.
Employers: Personal use of a company-owned vehicle by an employee is
considered taxable wages to the employee, subject to all payroll taxes.
IRS Red Flag Audit Warning: See the logbook requirement under “Part
business use.” This is one of the few things the IRS almost always checks
when auditing small businesses. Also, IRS agents know that it’s rare for an
individual to actually use a vehicle 100 percent for business, so people who
claim 100 percent business use of a vehicle increase their audit chances.

Taxes are going up so fast that government is likely to price itself

right out of the market.
 —Dan Bennett, PhD

Vending Machines
Vending machines can be deducted the year of purchase or depreciated over
seven years. See Business Assets.
Expense category: If deducting a vending machine that costs $2,500 or
less, Other Expenses. If deducting a vending machine that costs more than
$2,500 or if depreciating the machine, Depreciation.
More Information: IRS Publication 946, How to Depreciate Property. If
the cost is $2,500 or less, see IRS Notice 2015-82, De Minimis Safe Harbor
Deduction.
Video and Film Producers
Some video and film producers are eligible for the Production Deduction,
also known as the Manufacturer’s Deduction. This deduction, however, is
available only to businesses that have employees. See Domestic Production
Deduction.
Vineyards
See Farming.
Voided Checks
I hope it’s obvious that you do not get a deduction for a voided check you
wrote and then tore up. If you don’t void the check immediately, and you’ve
already taken a deduction for it, reverse the deduction out of your records.
Also see Bounced Checks.
Wages
If your business is not a corporation, your own wages—that is, the wages
you pay yourself if you pay yourself a wage—are not a deductible business
expense. See Draw and Paying Yourself. If your business is a partnership,
also see Guaranteed Payments to Partners. If your business is a corporation,
you are an employee of your business like any other employee, and your
salary is deductible.
Employers: Employee wages are deductible. See Fringe Benefits; also
Payroll Taxes.
Expense category: Wages.
 More information: IRS Publication 15, Employer’s Tax Guide.
Tax credit: A Work Opportunity tax credit is available for hiring certain
disadvantaged employees. See Tax Credits.
Manufacturers and crafts businesses: Wages paid to employees who
are manufacturing or building products are deducted as part of the cost of
the inventory. See Inventory.

Why does a slight tax increase cost you $200, and a substantial tax
cut saves you 30 cents?
—Business owner Peg Bracken

Warehouse
The cost of renting a warehouse is deductible. The cost of a building you
own can be depreciated. Some storage buildings can be deducted the year of
purchase. See Buildings.
Expense category: If rented or leased, Rent or Lease. If owned,
Depreciation.
More information: For buildings you own, IRS Publication 946, How to
Depreciate Property.
Home-based business: A warehouse in the home is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.
Warranties
Extended warranties that cost additional money are deductible if they do not
extend beyond twelve months. If they exceed twelve months, see
Prepayments.
Expense category: Repairs and Maintenance.

Whatever the revenue may be, there will always be the pressing
need to spend it.
—Parkinson’s Second Law, Prof. C. Northcote Parkinson

Watchdog
Deductible. See Guard Dog.
Water
Water and other utilities are deductible.
Expense category: Utilities.
Also see Drilling.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including utilities in the manufacturing area, may have to be
included in the cost of inventory. Most businesses with indirect costs under
$200,000 are exempt from this requirement, but see “Indirect Costs” under
Inventory.
Home-based business: Utilities are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.
Watercraft
See Boats.
Website
The cost of designing and setting up a website is deductible. If the initial
design cost is significant, it may have to be amortized over three years. See
Depreciation. Domain name registration, hosting fees, and costs of
maintaining a website are deductible.
The cost of internet access is fully deductible if used only for business. If
used partly for business, you prorate the cost and deduct only the business
portion.
Expense category: Office Expenses. If amortizing, Depreciation.
More information: If amortizing, IRS Publication 946, How to Depreciate
Property.
Wells
See Drilling.

The power to tax involves the power to destroy.

—Chief Justice of the Supreme Court John Marshall, 1819

Wife on Payroll
See Spouse.
Work Clothes
Deductible only if unsuitable for street wear, or if it is a uniform. See
Uniforms.
Clothing with your company’s logo or advertising is fully deductible,
even though the clothing may be suitable for street wear.
Cost of cleaning work clothes is deductible.
Expense category: Supplies.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including special work clothing required for manufacturing, may
have to be included in the cost of inventory. Most businesses with indirect
costs under $200,000 are exempt from this requirement, but see “Indirect
Costs” under Inventory.
Work Opportunity Credit
See Job Credits.
Workers’ Compensation Insurance
Workers’ compensation insurance (also known as workers’ comp) for
yourself is deductible only if your state requires you to have workers’
compensation insurance on yourself. If the coverage is voluntary, the
premiums are not deductible.
Employers: Workers’ compensation insurance an employer pays to cover
employees is deductible.
Expense category: Insurance.
Work in Process
“Work in process,” also called “work in progress,” is a manufacturing term
for a product that is partially completed. Work in process is part of your
inventory and cannot be deducted until sold. See Inventory.
Expense category: Cost of Goods Sold.

The best thing Congress can do is go home for a couple of years.

—Will Rogers

Workshop
The cost of renting a workshop is deductible. The cost of a building you
own can be depreciated. See Buildings.
Expense category: If rented or leased, Rent or Lease. If owned,
Depreciation.
More information: For buildings you own, IRS Publication 946, How to
Depreciate Property.
Manufacturers and crafts businesses: Indirect costs of producing goods
for sale, including the cost or rent of the manufacturing area, may have to
be included in the cost of inventory. Most businesses with indirect costs
under $200,000 are exempt from this requirement, but see “Indirect Costs”
under Inventory.
Home-based business: A workshop in the home is part of the Home
Expenses deduction, not deducted separately. See Home Expenses.

Politics is about the redistribution of wealth, and I’m not talking about
communism. Rich corporations redistribute some wealth to
politicians. After the election, the politicians redistribute your income,
generally in the direction of the corporations who gave them the
campaign contributions. It’s what you might call a closed system.
Closed to you, anyway.
—Columnist Rob Morse
The most delicious of all privileges is spending other people’s
money.
—US Senator John Randolph (1773–1833)
Every year, an estimated $150 billion, in the form of direct federal
subsidies, is funneled to large American corporations. Critics call it
corporate welfare. It’s more than all of the annual payments for Aid
to Families with Dependent Children (AFDC), student aid, housing
assistance, food and nutrition, and all direct public assistance
combined.
—Boston Globe
It’s not really a subsidy. It’s a cost share program.
—Gladys Horiuchi, Wine Institute, explaining the federal government
contribution of $90 million per year to the wine industry
The Federal Market Promotion Program has handed $1.2 billion of
your tax dollars to giant corporations. Gallo Wine received $4.3
million. $10 million went to Sunkist, with annual sales of $1 billion.
Pillsbury received $2.9 million. McDonald’s got $465,000. Supporters
argue that these corporations need your money to compete against
foreign companies. Poor little McDonald’s, with annual revenues of
$7 billion, can’t compete without your dough. Members of Congress
take your money and give it to somebody else, little guys like
McDonald’s and Gallo.
—Syndicated columnist Debra J. Saunders
It’s corporate welfare of the worst kind.
—Former House Majority Leader Richard Armey
 The Internal Revenue Service

Worthless Goods
Worthless inventory can be written off as part of cost of goods sold. See
Inventory.
Expense category: Cost of Goods Sold.
Worthless business assets that have already been fully deducted cannot be
deducted a second time. If the assets are being depreciated, the remaining
undepreciated balance can be deducted. For example, let’s say you bought a
piece of equipment a few years ago for $4,000, and you’ve already taken
$2,500 depreciation on it. It dies and isn’t worth fixing. Since you’ve
already deducted $2,500, you can only deduct $1,500, which is the
undepreciated balance.
 Expense category: Depreciation.
Yellow Pages
Yellow Pages listings and advertising are deductible.
Expense category: Advertising.
Zoning
Costs of zoning permits, filings, hearings, appeals, and petitions are
deductible, with two important exceptions: Zoning costs associated with
building construction are added to the cost of the building and depreciated.
Zoning costs associated with land rezoning, such as residential to industrial,
are added to the cost of the land and cannot be deducted until the land is
sold.
Expense category: If not part of building construction or land rezoning,
Taxes and Licenses.
Home-based business: Any zoning costs are part of the Home Expenses
deduction, not deducted separately. See Home Expenses.

It is our Patriotic Duty to keep as much money out of the hands of

our government as we can.
—Philosopher Walter Camp
Small business is where we have the most trouble.
—Former IRS Commissioner Charles O. Rossotti
 About the Author

Bernard B. Kamoroff is a certified public accountant with more than thirty

years’ experience, specializing in small business.
Mr. Kamoroff has worked directly with hundreds of businesses, taught
classes on small business for the University of California, and been a guest
speaker at business, professional, and trade association meetings and
conventions.
He is the author of five business guidebooks, including Small Time
Operator: How to Start Your Own Business, Keep Your Books, Pay Your
Taxes, and Stay Out of Trouble, now in its fourteenth edition.
In addition to helping other businesses, Mr. Kamoroff has started and
successfully operated three of his own small businesses.
Bernard Kamoroff lives in Mendocino County, California. If you have
any questions or comments, send them to the author at PO Box 1240,
Willits, California 95490, or email [email protected].