Business expenses are amounts that are ordinary and necessary to carry on a business.
Advertising – All advertising expenses can generally be deducted if the expense is related to the business. Advertising for purposes of swaying legislation is not deductible.
Bad debts from sales or services – Deductible only when debts become worthless. Bad debts cannot be deducted under the cash method of accounting unless the amount was previously included in income.
Car and truck expenses – The taxpayer may choose between using actual expenses or the standard mileage rate. Actual costs must be used if five or more vehicles are used simultaneously in the trade or business. The standard mileage rate can be used on leased vehicles if the lease originated after 12/31/1997. The taxpayer is required to use the standard mileage rate for the entire lease period of the vehicle. The standard mileage rate for 2019 is 58 cents per mile.
For Schedule C taxpayers, there are three items that can be included in vehicle expenses, whether the standard mileage rate or actual expenses are claimed for a vehicle.
Parking fees and tolls
Vehicle loan interest
Personal property tax
The vehicle loan interest and personal property tax are limited to the business percentage use of the vehicle.
Commissions and fees – Expenses paid for services rendered by a nonemployee are considered commissions or fees. Examples include fees to prospect for customers or clients, telemarketer fees, finder’s fees, fees paid to a mall, based on a percentage of sales, etc. If $600 or more is paid to one individual, Form 1099-MISC must be filed and a copy issued to the individual by January 31st of the year following the tax year.
Contract labor – Payments to entities the taxpayer does not treat as employees for services performed for his trade or business are considered contract labor. If these payments are made to an individual, the taxpayer must file Form 1099-MISC for each to report the total annual payment of $600 or more to that individual. Note that if the services are provided in direct connection with the production of merchandise or product for the business, this expense should be included as a cost of goods sold in Part III of Schedule C.
Depletion – Depletion is only deducted when a taxpayer has an economic interest in mineral property such as oil or gas and standing timber.
Depreciation – Depreciation is allowed or allowable on all qualified business property.
Employee benefit programs – Expenses for employees such as accident, health plans, dependent care expenses, and group-life insurance can be deducted.
Education expenses – Ordinary and necessary expenses paid for the cost of the education and training of the taxpayer’s employees are deductible. In addition, the taxpayer can also deduct the cost of his own education (including certain related travel) related to his trade or business. He must be able to show the education maintains or improves skills required in his trade or business, or that it is required by law or regulations for keeping his license to practice, status, or job.
Insurance – The following business insurance premiums may be deducted:
Casualty insurance (e.g., fire or theft)
Workers’ compensation insurance
Disability insurance that covers the business overhead expenses if the sole proprietor becomes unable to work
Insurance to cover inventory/merchandise
Business interruption insurance
Interest – The following are examples of deductible interest:
Auto loan interest
Interest on business purchases
Legal and professional fees – The following are examples of deductible expenses:
Bookkeeping or accounting fees
Tax preparation fees for business tax preparation (Schedule C and other forms necessary for the business); fees for the rest of the return should be reported on Schedule A if the taxpayer itemizes.
Office expense – Office expenses that are not included in office-in-home expenses are deducted here. The following are examples of deductible expenses:
Pension and profit-sharing plans – Deduct the portion of an employee’s pension or profit-sharing plan that is paid as a benefit to the employee.
Rent or lease – Schedule C, line 20a is used for the lease of vehicles, machinery, and equipment rentals. Line 20b is used for the rent or lease of other business property such as rent for an office, building, or warehouse.
Start-up costs – Start-up costs are incurred when starting or purchasing a business. These expenses are incurred before business begins. Taxpayers can elect to deduct up to $5,000 of start-up costs. However, the $5,000 allowance is reduced (but not below zero) by the amount by which the total start-up costs exceed $50,000. Remaining start-up costs that are not deductible in the year in which the trade or business begins must be capitalized and amortized over 180 months (15 years) on a straight-line basis (the same treatment as for Section 197 intangibles). Examples of start-up costs include:
Survey of market
Expenses incurred to secure distributors, suppliers, etc.
Consulting fees and professional fees connected with starting a business
The deduction for start-up costs will be calculated on Form 4562 and carried to Schedule C as an expense on line 27a.