When you prepare your income taxes, the general rule is that you write off your daily operating business purchases, such as office supplies or mileage on your business vehicle, as expenses and your purchases of long-term business assets, such as plant and equipment, as depreciation.
Daily Operating Expenses
An excellent guide to the daily operating expenses that you can deduct is Federal Schedule C. The expenses must be necessary and ordinary to the operation of the business. They must also be reasonable and directly related to the business. Operating expenses that are deductible on Schedule C are the following:
- Advertising
- Car and Truck Expenses
- Commissions and Fees
- Contract Labor
- Depletion
- Depreciation (transferred from Federal Tax Form 4562)
- Employee Benefit Programs
- Insurance (other than health)
- Interest on Mortgages or Other Interest
- Legal and Professional Services
- Office Expense
- Pension and Profit-Sharing Plans
- Rent or Lease (Vehicles, Machinery, Property)
- Repairs and Maintenance
- Supplies
- Taxes and Licenses
- Travel, Meals, and Entertainment]
- Utilities
- Wages
- Home Office Deduction
- Other expenses
Schedule C is used for sole proprietorships and limited liability companies. For partnerships, use IRS Form 1065, IRS Form 1120 for C Corporations and IRS Form 1120S, plus Schedule C, for S Corporations.
Depreciation
Depreciation is often confusing because it is an accounting entry and doesn't involve a direct movement of funds. Depreciation is the allocation of the cost of an asset over the life of the asset. These assets are long-term assets, called capital assets, such as buildings and equipment.
Depreciation is calculated and deducted on Federal Tax Form 4562. Section 179 depreciation allows a business to deduct up to $250,000 of the total cost of small capital assets in full. There are special rules in 2009 for depreciation.
There is also a provision in the Economic Stimulus Plan for accelerated depreciation for 2008. Federal Tax Publication 946 gives complete instructions on how to depreciate property.
