Business deductions and credits reduce the taxes that a business must pay. Direct sellers may have to travel long distances for trade shows, must often keep product inventories, and must promote their products. These activities incur heavy expenses. Keeping accurate business records ensures good accounting practices and substantiates business deductions. Only the business portion of equipment can be deducted if the same equipment is used for personal purposes.
Inventory Expense Deductions
The cost of goods sold (COGS), the cost of labor paid for inventory services and production costs should be included in the inventory costs. To accurately reflect these costs, inventory must be taken at the beginning and end of each year. Inventory withdrawn for personal use cannot be included in the COGS.
Common Business Deductions
Boxes, packing supplies, tape, labels, envelopes, fasteners, pens, paper, organizers, bookkeeping supplies and cleaning supplies used for business are deductible expenses. Traveling supplies such as log books, atlases and maps can be deducted. Shipping expenses such as postage, freight and travel to and from the shipping office are deductible business expenses as well.
Expenses for promotional items such as business cards, product catalogs, demonstration products, samples, kits and gifts to clients can be deducted. Expenses paid for legal, accounting, and other professional services can be deducted as business expenses. Fees paid for printing and copy services, inventory storage, advertising, and phone services can also be deducted as business expenses.
Bank-related service charges; utilities (electric, water, Internet, and gas); insurance premiums paid to protect your business assets from loss (excluding health and auto); business and professional licenses; subscriptions for business-related publications; state and local income taxes; and excise, real estate, property and employment taxes are deductible expenses.
Depreciation allows you to deduct the cost of assets over several years. In some cases, you may claim outright expenses for assets. Depreciation can be taken for display tables, office furniture, computers, computer equipment, software, fax machines, copiers and small electronic devices.
Transportation and Travel Deductions
Car expenses such as gas, oil, repairs, maintenance, lease payments, insurance, depreciation, taxes, licenses and fees can be deducted as business expenses. A standard mileage rate of (set by the IRS) can be used instead. Additionally, transportation expenses for airplane, bus, limousine, train and taxi services can be deducted.
Lodging, meals and entertainment expenses incurred to attend seminars and trade shows may be deducted. incidental expenses such as parking, tolls, dry cleaning, laundry, tips, phone calls and the cost of sending baggage and supplies ahead of time are business deductions also. Meals and entertainment can be claimed at 50 percent in most cases. Expenses paid to rent space in public areas to present and sell your products can be deducted as well.
Other Business Deductions
Interest paid on loans; rent or lease paid for property, equipment or temporary vehicles; and compensation paid to employees (wages, salaries, gifts, awards, commissions, benefits) can be deducted. A home business deduction may be taken under certain conditions.
Form 1040 and Personal Deductions
One-half of the self-employment tax, contributions to qualified SIMPLE, SEP and Keogh retirement plans, and a self-employed health insurance deduction reduce the amount of the total income. A standard deduction plus an exemption for you and each dependent can be claimed to reduce taxes.
Other business and personal credits include the Form 3800, General Business Credits; Form 8826, Disabled Access Credit (up to $5,000); Form 8908, Energy Efficient Home Credit; and Form 8909, Energy Efficient Appliance Credit.
Kevin Boone is a current student at Chattanooga College and graduated from Pellissippi State in 2000 with an associate degree in electrical engineering. He has written safety-related procedures and documents for organizing power system components and holds his A+ Certification for Computers.