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This 9 page Class Notes was uploaded by Emmanuel McDermott on Tuesday October 20, 2015. The Class Notes belongs to BUS209 at Solano Community College taught by Staff in Fall. Since its upload, it has received 26 views. For similar materials see /class/225404/bus209-solano-community-college in Business at Solano Community College.
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Date Created: 10/20/15
Publication 535 2007 Business Expenses V 90 Internal Revenue SerV lee Lumrd 3mm Ucpmtnt of Lhc 39mesuq 1 Deduding Business Expenses mlemcmems mvuducuun W WW 0 o W 0 can a y s sneu c be menses o PevsunmvevsusEusmessExgenses Huwmucucamoeuum o NUHuvrgvum umus SK 0 0 mm un Deuucuuns Inlrnduclinn T TarIts rThis chapter discusses WuaWuucanueuuu Huwmucwuucanueuuu Whenvuucandeduct NuHuVrpmm acmmes Usetul nems rYnu may mm 07 se Puhllmllnn 336TaxGumeVqumaHEusmess bBSTvaveL Emenamment em and Ca Expenses 525 meme and Numaxame meme 525MwsceHaneuusDedumuns 530 Ne onevaunu Lusses N05 101 ndwmua s Esmes and Tms15 aaaAccuummuPeuuusanumemms aucumuvauuns 5w Casuames Dwsa evs andThe s 587EusmessuseuWuuvHume muuumu Use bv Dmave Pvuwuevsu 925 Passwe Acw v and Amsk Ru es http wwwirsgovpublica onspSIi5ch01html 10202003 Publication 535 2007 Business Expenses Page 2 of9 I 936 Home Mortgage Interest Deduction I 946 How To Depreciate Property Form and Instructions I Sch AForm 1040 Itemized Deductions I 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity ls Engaged in for Pro t See chapter 12 for information about getting publications and forms What Canl Deduct To be deduct ble a business expense must be both ordinary and necessary An ordinary expense is one that is common and accepted in your industry A necessary expense is one that is helpful and appropriate for your trade or business An expense does not have to be indispensable to be considered necessary It is important to distinguish business expenses from I The expenses used to gure cost of goods sold I Capital expenses and I Personal expenses Cost of Goods Sold If your business manufactures products or purchases them for resale you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold Some of your business expenses may be included in guring cost of goods sold Cost of goods sold is deducted from your gross receipts to gure your gross pro t for the year If you include an expense in the cost of goods sold you cannot deduct it again as a business expense The following are types of expenses that go into guring cost of goods sold I The cost of products or raw materials including freight I Storage I Direct labor including contributions to pension or annuity plans for workers who produce the oducts I Factory overhead Under the uniform capitalization rules you must capitalize the direct costs and part of the indirect costs for certain production or resale activities Indirect costs include rent interest taxes storage purchasing processing repackaging handling and administrative costs This rule does not apply to personal property you acquire for resale if your average annual gross receipts or those of your predecessor for the preceding 3 tax years are not more than 10 million For more information see the following sources I Cost of goods sold chapter 6 of Publication 334 I Inventories Publication 538 I Uniform capitalization rules Publication 538 and section 263A of the Internal Revenue Code and the related regulations httpwwwirsgovpublicationsp535ch01html 10202008 Publication 535 2007 Business Expenses Cath Exuams Vuumu capna myval Hhandeductsu ccus1s These cus1savcapan uvyuunmcs1mcm myuuv nusmcssanuavccaucu apnaycypcnscs Cam a ExpensesavecunsmevedassetsmvuuvbusmessThem avey m ccncvaL mvcc Wpes 0120515 yuu camahze Eusmess an39up cus15See Trpbehw Eusmessassels mpvuyemems yuu can cyccnu deduct m amumzc ccnam busmess a rup cus1s S22 chamevs7 and a Cast rcmvcvy AHhquh yuu ccncvaw cannm take a cuncm ucuucan my a camta Expensey yuu may be amcm vecuyenhe armumvuu Spend muugh ucpvccyauum amumzauum uvdamehun These vecuyEN mcmcusauwyuumucuuc panuvyuuvcmcachycav ntmsway yuuaveamemvecuyavyuuvcap Expense S22 Ammzanon chamev 8 and 099900quot chamev a m W5 pummeth yuu may a su be auuwcu a sccan 17a ucuucnun Fm Muvmauun an we sccnun 17a ucuucan and ucmccyauum scc Pubhcauun ace omnmmn Busnvss y m y n n canna cypcnscs UsuawyuuVecuyev205151013pamcmavassenmuughdemema un Genevawyyuucannmvecwevumev cus1s unm yuu scu We busmess m mhewse gu uu m busmess Huwcycc yuu can chuuse m amumzc ccnam 00515101 scmnc up yuuv busmess S22 60mg mo Husmess m meme 7 my mac Muvmahun un usmcss anrup cus1s 1 Thecus15yuuhadb21012makmgademsmnmamweuvbaumaSpecmcbusmess Thcsccus1savc pcvsunay and nunucuucnmc THEV mc ude any cus1smcuncu uunnc a ueneva seachuL m Pvehmmaw Wesmahun at a busmess m ymcs1mcm pussymuw The cus1su1any asselsamwed duvm yuuvunsuccess ancmpnucu mm busmessave a pan myuuv nasys m we assets yuu cannu ake a ucuucan 101 these cus1s yuu mu vecuyev We cus1s 0101252 asse s Wnenvuu mspusc U hem Buslnvss Asses Them ave many mucch kmds mnusmcss 3552 my examma Wendy nuuumcs macmnENy Vumnquy tvucksy Pa emsy anuwancmsc was yuu musuuw capnahzeme cus u hese assets mc udmu emmand ms1auaan themes ocnam pmch yu rm u an nvm lrrl39lmvemmls The cus1s my mama mpvuyememsm a busmess asset ave canna cypcnscs Wc meemems and m we ya ue umc asscL aPpVEmab y cncmcn me me yuu can usc u m auam u m a mucch usc Wmuyemems y avcccncvauymaymcypcnuuuvcs Sumezxammesave ncwcyccmcmmu anewmmyanw uuvynew http39 wwwirsgovpublica onspSIi5ch01html 10202003 Publication 535 2007 Business Expenses Page 4 of9 plumbing bricking up windows to strengthen a wall and lighting improvements However you can currently deduct repairs that keep your property in a normal ef cient operating condition as a business expense reat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition Restoration plan Capitalize the cost of reconditioning improving or altering your property as part of a general restoration plan to make it suitable for your business This applies even if some of the work would by itself be classi ed as repairs Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses different examples are given below Motor vehicles You usually capitalize the cost of a motor vehicle you use in your business You can recover its cost through annual deductions for depreciation There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business See Publication 463 Generally repairs you make to your business vehicle are currently deductible However amounts 0 to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation Roads and driveways The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concre e one are capital expenses you may e able to depreciate The cost of maintaining a private road on your business property is a deductible expense Tools Unless the uniform capitalization rules apply amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor Machinery parts Unless the uniform capitalization rules apply the cost of replacing shortlived parts of a machine to keep it in good working condition but not add to its life is a deduct ble expense Heating equipment The cost of changing from one heating system to another is a capital expense Personal versus Business Expenses Generally you cannot deduct personal living or family expenses However if you have an expense for something that is used partly for business and partly for personal purposes divide the total cost between the business and personal parts You can deduct the business part For example if you borrow money and use 70 of it for business and the other 30 for a family vacation you generally can deduct 70 of the interest as a business expense The remaining 30 is personal interest and generally is not deductible See chapter 4 for information on deducting interest and the allocation rules Business use of your home If you use part of your home for business you may be able to deduct expenses for the business use of your home These expenses may include mortgage interest insurance utilities repairs and depreciation To qualify to claim expenses for the business use of your home you must meet both of the following tests 1 The business part of your home must be used exclusively and regularly for your trade or business 2 The business part of your home must be a Your principal place of business or b A place where you meet or deal with patients clients or customers in the normal course of your trade or business or c A separate structure not attached to your home used in connection with your trade or business You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples or as a daycare facility Your home of ce quali es as your principal place of business if you meet the following requirements httpwwwirsgovpublicationsp535ch01html 10202008 Publication 535 2007 Business Expenses I You use the of ce exclusively and regularly for administrative or management activities of your trade or business 0 have no other xed location where you conduct substantial administrative or management Y u activities of your trade or business If you have more than one business location determine your principal place of business based on the following factors I The relative importance of the activities performed at each location I If the relative importance factor does not determine your principal place of business consider the time spent at each location For more information see Publication 587 Business use of your car If you use your car exclusively in your business you can deduct car expenses If you use your car for both business and personal purposes you must divide your expenses based on actual mileage You can deduct actual car expenses which include depreciation or lease payments gas and oil tires repairs tuneups insurance and registration fees Or instead of guring the business part of these actual expenses you may be able to use the standard mileage rate to gure your deduction For 2007 the standard mileage rate is 485 cents a mile for all business miles If you are selfemployed you can also deduct the business part of interest on your car loan state and local personal property tax on the car parking fees and tolls whether or not you claim the standard mileage rate For more information on car expenses and the rules for using the standard mileage rate see Publication 463 HowMuch Can I Deduct You can deduct the cost of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense Recovery of amount deducted tax bene t rule If you recover part of an expense in the same tax year in which you would have claimed a deduction reduce your current year expense by the amount of the recovery If you have a recovery in a later year include the recovered amount in income in that year However if part of the deduction for the expense did not reduce your tax you do not have to include that part of the recovered amount in income For more information on recoveries and the tax bene t rule see Publication 525 Payments in kind If you provide services to pay a business expense the amount you can deduct is limited to your outofpocket costs You cannot deduct the cost of your own labor Similarly if you pay a business expense in goods or other property you can deduct only what the property costs you If these costs are included in the cost of goods sold do not deduct them as a business expense Limits on losses If your deductions for an investment or business activity are more than the income it brings in you have a loss There may be limits on how much ofthe loss you can deduct Notforpro tlimits If you carry on your business activity without the intention of making a pro t you cannot use a loss from it to offset other income See Notfor Pro t Activities later Atrisk limits Generally a deductible loss from a trade or business or other incomeproducing activity is limited to the investment you have at riskquot in the activity You are at risk in any activity for the following 1 The money and adjusted basis of property you contr bute to the activity 2 Amounts you borrow for use in the activity if a You are personally liable for repayment or b You pledge property other than property used in the activity as security for the loan For more information see Publication 925 httpwwwirs g0Vpublicati0nsp535ch01html Page 5 of9 10202008 Publication 535 2007 Business Expenses Passive activities Generally you are in a passive activity if you have a trade or business activity in which you do not materially participate or a rental activity In general deductions for losses rom passive activities only offset income from passive activities You cannot use any excess deductions to offset other income In addition passive activity credits can only offset the tax on net passive income Any excess loss or credits are carried over to later years Sus ended passive losses are fully deductible in the year you completely dispose of the activity For more information see Publication 925 Net operating loss If your deductions are more than your income for the year you may have a net operating lossquot You can use a net operating loss to lower yourtaxes in other years See Publication 536 for more information See Publication 542 for information about net operating losses of corporations When Can I Deduct an Expense When you can deduct an expense depends on your accounting method An accounting method is a set of rules used to determine when and how income and expenses are reported The two basic methods are the cash method and the accrual method Whichever method you choose must clearly re ect income For more information on accounting methods see Publication 538 Cash method Under the cash method of accounting you generally deduct business expenses in the tax year you pay them Accrual method Under an accrual method of accounting you generally deduct business expenses when both of the following apply 1 The allevents test has been met The test is met when a All events have occurred that x the fact of liability and b The liability can be determined with reasonable accuracy 2 Economic performance has occurred Economic performance You generally cannot deduct or capitalize a business expense until economic performance occurs If your expense is for property or services provided to you or for your use of property economic pe ormance occurs as e property or services are provided ort e property is use your expense is for property or services you provide to others economic performance occurs as you provide the property or services Example Your tax year is the calendar year In December 2007 the Field Plumbing Company did some repair work at your place of business and sent you a bill for 600 You paid it by check in January 2008 If you use the accrual method of accounting deduct the 600 on your tax return for 2007 because all events have occurred to x the fact of liability in this case the work was completed the liability can be determined and economic performance occurred in that year If you use the cash method of accounting deduct the expense on your 2008 return Prepayment You generally cannot deduct expenses in advance even if you pay them in advance This rule applies to both the cash and accrual methods It applies to prepaid interest prepaid insurance premiums and any other 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 Example In 2007 you sign a 10year lease and immediately pay your rent for the first 3 years Even though you paid the rent for 2007 2008 and 2009 you can only deduct the rent for 2007 on your 2007 tax return You can educt the rent for 2008 and 2009 on your tax returns for those years Contested liability Under the cash method you can deduct a contested liability only in the year you pay the liability Under the accrual method you can deduct contested liabilities such as taxes except foreign or US possession income war pro ts and excess pro ts taxes either in the tax year you pay the liability or transfer money or other property to satisfy the obligation or in the tax year you settle the contest However to take the deduction in the year of ayment or transfer you must meet certain conditions See Contested Liabilityin Publication 538 for more information httpwwwirs g0Vpublicati0nsp535ch01html Page 6 of9 10202008 Publication 535 2007 Business Expenses Page 7 of9 Related person Under an accrual method of accounting you generally deduct expenses when you incur them even if you have not yet paid them However if you and the person you owe are related and that person uses the cash method of accounting you must pay the expense before you can deduct it Your deduction is allowed when the amount is includible in income by the related cash method payee See Related Persons in Publication 538 NotforPro t Activities If you do not carry on your business or investment activity to make a pro t you cannot use a loss from the activity to offset other income Activities you do as a hobby or mainly for sport or recreation are often not entered into for pro t The limit on notforpro t losses applies to individuals partnerships estates trusts and S corporations It does not apply to corporations other than S corporations In determining whether you are carrying on an activity for pro t several one factor alone is decisive Among the factors to consider are whether factors are taken into account No I You carry on the activity in a businesslike manner The time and effort you put into the activity indicate you intend to make it pro table I You depend on the income for your livelihood Your losses are due to circumstances beyond your control or are normal in the startup phase of your type of business You change your methods of operation in an attempt to improve pro tability You or your advisors have the knowledge needed to carry on the activity as a successful business I You were successful in making a pro t in similar activities in the past The activity makes a pro t in some years and You can expect to make a future pro t from the appreciation ofthe assets used in the activity Presumption of profit An activity is presumed carried on for pro t if it produced a pro t in at least 3 of the last 5 tax years including the current year Activities that consist primarily of breeding training showing or racing horses are presumed carried on for pro t if they produced a pro t in at least 2 of the last 7 tax years including the current year The activity must be substantiallythe same for each year within this period You have a pro t when the gross income from an activity exceeds the deductions If a taxpayer taxpayer s dies before the end of the 5year or 7year period the test period ends on the date of the death If your business or investment activity passes this 3 or 2 yearsofpro t test the IRS will presume it is carried on for pro t This means the limits discussed here will not apply You can take all your busi ess deductions from the activity even for the years that you have a loss You can rely on this presumption unless the IRS later shows it to be invalid Using the presumption later If you are starting an activity and do not have 3 or 2 years showing a profit you can elect to have the presumption made after you have the 5 or 7 years of experience allowed by the ou can elect to do this by ling Form 5213 Filing this form postpones any determination that your activity is not carried on for profit until 5 or 7 years have passed since you started the activity The bene t gained by making this election is that the IRS will not immediately question whether your is engaged in or pro t Accordingly it will not restrict your deductions Rather you will gain time to ea n pro t in the required number of years If you show 3 or 2 years of pro t at the end of this period your deductions are not limited under these rules If you do not have 3 or 2 years of pro t the limit can be applied retroactively to any year with a loss in the 5year or 7year period activity r a Filing Form 5213 automatically extends the period of limitations on any year in the 5year or 7year period to 2 years after the due date of the return for the last year of the period The period is extended only for deductions of the activity and any related deductions that might be affected httpwwwirsgovpublicationsp535ch01html 10202008 Publication 535 2007 Business Expenses Vuu musms Fuvm 5m mm 3 veavs a enhe due date UWuuv 12mm delevmmed wnhum mensmns 1m heveavwmmhvuu m named Emma ac wnv uv quotsemen mmquot an uavsanevvecewuwvmen mm mm me mevna Rwenue Samoa pvupusmg m msauuw deducuuns am bmame m me saw Umn on Demcnms vuuv saw 5 nm named an m mum ake usuucuuns m me Vuuuwmg nude and cm m me 2mm smsu m me twee categunss Hvuu ave an mummuaL mess usuucuuns maV be taken umv Wvuu NENIZE These deducuuns NW betaken un SchedmeA rmmmw czmaamy 1 Dsuucuuns vuu can ake 1m psvsunax aswsu asmv busmess acmmes ave aHWed m mu Fm mmvmua s au nunbusmess dedumuns such asmssmv hume mungags mevest mas and casuaW usses new m mscatEuUN Deduc hem u vaupnate nnssmsmsumeA rmmmw Vuu can suuuacasuanwussunpmpe vuuuwn uvpevsuna useunw m ssmmmsmmsmanwnam Exceeds1 Mvuuvamu edgmssmcume SeePubhcauun5671mmuveMuvmahununcasua v usses Fm me hmnsma amw m mungags mevea sss Pubhcahun 930 Cmmmyz Deducuunsthaldunmvesunmanamu mennuthebaswqupvupEVWaveaHuWEdnEbem mm m me 2mm vuuv gmss mcume quotmm mm s mare man vuuv usuucnuns undev me ms1 categurv Mus1 busmessdeductmns such asmussmvamsmsm msuvance pvemmms mevest ummes andwagES be unu m ms ca EEUN czmaamy 1 ausmsss usuucuuns m1 decvease me basws m pmpenv ave aHWed West um mm mm mm themussmcume umt eacw vexceedst 2deducuunsvuu akeundevmew no egunss Deductmns 1m dEmemauun amumzauun and ms pan 0 a casuaW 055 an mmvmua mum nm mm m ca EEUN1beunumtms catEEUN Where we man une asset s mvuwsm aHuca e dEpvemauun 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ave ve ec ed h the ndwdua shavehu dev s eh panhersemchuhveshaces Whmlhm nne anmly Wvuu have seveva uhuenahmea each mav he a 5213va acmwv DY seveva uheenahmes may he cemmhee The Tehehhe are the mus1 swgnmcan ac s aha cwvcum ances m mahme W5 de evminatwun The degvee Utmgamzatmna and Ecunumm MEVVE a mnSNP mvanuus undenakmus The sumava uuhe undenakmus 9 Wm ave EaYMng Em Mu DY mme dmevem acmeS keep he deducuuns ahe WEDNE hem each ehe sepava e Hume sEpavale v Whethev each T a henchmen acmw Theh heme the hm eh eeeuchehs aha Tesses sepaca1eh Tm each ecuW Mal Ts hm Tm mum vev 1 5f LS E http39 wwwirsgovpublica onspSSSch01html 10202003
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