You've probably heard that one of the many benefits of owning your own business are the tax deductions associated with business ownership. But what are those deductions and which effect you? Learn the basics from these questions and answers, which have been excerpted from my Home Office and Small Business Answer Book. Please note, the material is copyrighted and may not be reprinted or reproduced in any way.
What expenses for starting my business are deductible?
Prior to October 22, 2004, startup expenses weren't immediately deductible. They had to be amortized over time, or treated as part of the basis (starting value) of the business.
Now, however, under Section 195 of the Internal Revenue code, business owners can deduct up to $5,000 in startup expenses, in the year the business is launched.
These startup costs include costs of studying a prospective business and the costs for actually launching it such as initial advertising expense, employee training, equipment, etc. To take the deduction, you have to fill out Form 4562, Depreciation and Amortization form and included it with your tax return.
From a tax standpoint, when does my business actually begin? Is it with the first customer?
You can be in business if you are ready to accept customers. The actual event that triggers you being in business (as opposed to starting a business) will vary by the type of business and your own personal way of operating. Something as simple as registering a business name, or having business cards made up, or even accepting money for something you have done for free up to now (teach friends to use computers, for instance) can be the "grand opening" of a homebased business.
Remember: while you don't have to have acquired any customers or made a profit to be in business, if you don't make a profit in three out of five years you could trigger the hobby-loss rule.
What expenses can I deduct?
Any product or service purchased for use by or in your business is deductible if it is ordinary and reasonable for the type of business you run. Schedule C filers will generally find their deductions fall into these broad categories:
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deductible business expenses
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depreciable business property
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the home office deduction
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cost of goods sold (if you are a manufacturer or sell products)
*Excerpted from The Home Office and Small Business Answer Book, published by Henry Holt & Company.
Copyright 1993, 2000 Janet Attard
All Rights Reserved
May not be reprinted or redistributed.