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Part 7 Publication 334 (2009), Guide Small Bussine
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 Posted 12:38 PM Feb. 28, 2010 Table of Contents
You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary. For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. If you have an expense that is partly for business and partly personal, separate the personal part from the business part. The personal part is not deductible.
 Publication
See chapter 12 for information about getting publications and forms. If someone owes you money you cannot collect, you have a bad debt. There are two kinds of bad debts, business bad debts and nonbusiness bad debts. A business bad debt is generally one that comes from operating your trade or business. You may be able to deduct business bad debts as an expense on your business tax return. Business bad debt. A business bad debt is a loss from the worthlessness of a debt that was either of the following.
Business bad debts are mainly the result of credit sales to customers. They can also be the result of loans to suppliers, clients, employees, or distributors. Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt.
Accrual method. If you use an accrual method of accounting, you normally report income as you earn it. You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income.
If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Alternative motor vehicles include qualified fuel cell motor vehicles, advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel motor vehicles. See Form 8834 (Part I only), Form 8936, and Form 8910 for more information.
Local transportation expenses. Local transportation expenses include the ordinary and necessary costs of all the following.
Generally, your tax home is your regular place of business, regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.
Example. You operate a printing business out of rented office space. You use your van to deliver completed jobs to your customers. You can deduct the cost of round-trip transportation between your customers and your print shop.
Office in the home. Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. For more information, see Business Use of Your Home, later.
Example. You are a graphics designer. You operate your business out of your home. Your home qualifies as your principal place of business. You occasionally have to drive to your clients to deliver your completed work. You can deduct the cost of the round-trip transportation between your home and your clients. For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses.
Standard mileage rate. You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. For 2009, the standard mileage rate is 55 cents per mile.
Choosing the standard mileage rate. If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or actual expenses.
If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals).
Standard mileage rate not allowed. You cannot use the standard mileage rate if you:
Parking fees and tolls. In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
Actual expenses. If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses.
 Actual car expenses include the costs of the following items.
If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. You can divide your expenses based on the miles driven for each purpose.
You generally can deduct the amount you reimburse your employees for car and truck expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 11 in Publication 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. If property you acquire to use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year on Schedule C. This method of deducting the cost of business property is called depreciation. The discussion here is brief. You will find more information about depreciation in Publication 946. What property can be depreciated? You can depreciate property if it meets all the following requirements.
Repairs. You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ.
Depreciation method. The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in Publication 946.
Section 179 deduction. You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” The maximum amount you can elect to deduct during 2009 is generally $250,000 (higher limits apply to certain property). This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $800,000. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2009 is $2,960. Special rules apply to trucks and vans. For more information, see Publication 946. It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction.
Listed property. You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property is any of the following.
For more information about listed property, see Publication 946.
Form 4562. Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.
You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services. To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. In addition, the pay must meet both the following tests.
Chapter 2 in Publication 535 explains and defines these requirements. You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business. If you had employees during the year, you must use Schedule C. You cannot use Schedule C-EZ.
Kinds of pay. Some of the ways you may provide pay to your employees are listed below. For an explanation of each of these items, see chapter 2 in Publication 535.
Fringe benefits. A fringe benefit is a form of pay for the performance of services. The following are examples of fringe benefits.
Employee benefit programs include the following.
You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction.
You can generally deduct premiums you pay for the following kinds of insurance related to your business.
Nondeductible premiums. You cannot deduct premiums on the following kinds of insurance.
Self-employed health insurance deduction. You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family.
How to figure the deduction. Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535.
Prepayment. You cannot deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.
You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.
You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Example. In 2009, you paid $600 interest on a car loan. During 2009, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% × $600) for 2009 on Schedule C or C-EZ. The remaining interest of $240 is a nondeductible personal expense. More information. For more information about deducting interest, see chapter 4 in Publication 535. That chapter explains the following items.
Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. However, you usually cannot deduct legal fees you pay to acquire business assets. Add them to the basis of the property. If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. For more information, see Publication 529, Miscellaneous Deductions. Tax preparation fees. You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions.
You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee.
You can set up and maintain the following small business retirement plans for yourself and your employees.
SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement.
Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as a business expense only if the rent is for property you use in your business. If you have or will receive equity in or title to the property, you cannot deduct the rent. Unreasonable rent. You cannot take a rental deduction for unreasonable rents. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Rent is not unreasonable just because it is figured as a percentage of gross receipts.
Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. For a list of the other related persons, see section 267 of the Internal Revenue Code.
Rent on your home. If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home. For more information, see Business Use of Your Home , later.
Rent paid in advance. Generally, rent paid in your business is deductible in the year paid or accrued. If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. You can deduct the rest of your payment only over the period to which it applies.
You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Income taxes. You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Do not deduct federal income tax.
Employment taxes. You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Employment taxes are discussed briefly in chapter 1. You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as taxes.
Self-employment tax. You can deduct one-half of your self-employment tax on line 27 of Form 1040. Self-employment tax is discussed in chapters 1 and 10.
Personal property tax. You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business.
You can also deduct registration fees for the right to use property within a state or local area.
Example. May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. They had to pay $25 for their annual state license tags and $20 for their city registration sticker. They also paid $235 in city personal property tax on the car, for a total of $280. They are claiming their actual car expenses. Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Real estate taxes. You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction.
For more information about real estate taxes, see chapter 5 in Publication 535. That chapter explains special rules for deducting the following items.
Sales tax. Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. For information on the basis of property, see Publication 551, Basis of Assets.
Excise taxes. You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Excise taxes are discussed briefly in chapter 1.
Fuel taxes. Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Do not deduct these taxes as a separate item.
You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. For more information, see Publication 510, Excise Taxes.
This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Table 8-1. When Are Entertainment Expenses Deductible?
Travel expenses. These are the ordinary and necessary expenses of traveling away from home for your business. You are traveling away from home if both the following conditions are met.
The following is a brief discussion of the expenses you can deduct.
Transportation. You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination.
Taxi, commuter bus, and limousine. You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home.
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