If, like many folks, you use credit to finance business purchases, the interest and carrying charges are fully tax-deductible. The same is true if you take out a personal loan and use the proceeds for your business. But be sure to keep good records showing that the money was really put into your business. Otherwise, if you're audited later, the interest expense deduction could be disallowed because it's considered a personal expense.
10. Moving Expenses
If you move because of your business or job, you may be able to deduct certain moving costs that would otherwise be non-deductible personal living expenses. To qualify, you must have moved in connection with your business (or job, if you're an employee of your own corporation or someone else's business). The new workplace must be at least 50 miles farther from your old home than your old workplace was. (Technically, moving expenses aren't business expenses; there's a special place to list them on your Form 1040 tax return.)
As a general rule, software bought for business use must be depreciated over a 36-month period. But there are three important exceptions:
- Software with a useful life of less than a year -- and given the rapid change in technology, this could apply to a lot of programs -- can be deducted as a business expense in the year you buy it.
- When software comes with a computer, and its cost is not separately stated, it's treated as part of the hardware and is depreciated over five years.
- You can write off a whole computer system, including bundled software, in the first year (under a special provision, IRC § 179) if the total cost is less than a certain amount ($24,000 in 2002; $25,000 in 2003).
12. Charitable Contributions
If your business is a partnership, limited liability company or S corporation (a corporation that has chosen to be taxed like a partnership), your business can make a charitable contribution and pass the deduction through to you, to claim on your individual tax return. If you own a regular (C) corporation, the corporation can deduct the charitable contributions.
Tip: If you've got some old computers or office furniture, giving it to a school or nonprofit organization can yield goodwill plus a tax benefit. But if the equipment has been fully depreciated (written off), you can't claim a deduction.
Taxes incurred in operating your business are generally deductible. How and when they are deducted depends on the type of tax.
- Sales tax on items you buy for your business's day-to-day operations is deductible as part of the cost of the items; it's not deducted separately. But tax on a big business asset, such as a car, must be added to the car's cost basis; it isn't all deductible in the year the car was bought.
- Excise and fuel taxes are separately deductible expenses.
If your business pays employment taxes, the employer's share is deductible as a business expense. Self-employment tax is paid by individuals, not their businesses, and so isn't a business expense.
- Federal income tax paid on business income is never deductible. State income tax can be deducted on your personal return as an itemized deduction, not as a business expense.
- Real estate tax on property used for business is deductible, along with any special local assessments for repairs or maintenance. If the assessment is for an improvement -- for example, to build a sidewalk -- it isn't immediately deductible; instead, it is deducted over a period of years.
14. Advertising and Promotion
The cost of ordinary advertising of your goods or services -- business cards, yellow page ads and so on -- is deductible as a current expense. Promotional costs that create business goodwill -- for example, sponsoring a peewee football team -- are also deductible as long as there is a clear connection between the sponsorship and your business. For example, naming the team the "Southwest Auto Parts Blues" or listing the business name in the program is evidence of the promotion effort.
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