CAPITAL EXPENSES vs OTHER COSTS

Costs of assets that will be used in your business for more than a year, the costs of getting started in your business, and the costs of improvements that add to the value of assets are "capital" expenditures. For tax purposes, these expenses are usually deducted over a number of years. Operating expenses, i.e., advertising, office supplies, etc., are deductible currently. Try to keep records for capital expenses separate from those for the general operating expenses.

EXPENSING NORMALLY DEPRECIABLE COSTS

Under some circumstances, the costs of depreciable business assets can be deducted all in one year on your tax return (up to a yearly maximum). While this can be a real advantage, tax-wise, it also has a negative side - if you dispose of the assets before the end of their normal depreciable life, you may have to "recapture" (i.e., report additional income for) some of the costs you expensed. Be sure to check with your tax advisor before you dispose of assets you previously expensed.

AUTOMBILE EXPENSES

Many business people are uncertain about what car expenses they can deduct. Those expenses you have for traveling between business locations are deductible. However, COMMUTING expenses, i.e., the car costs of going between your home and your office each day, aren't deductible. But when you travel to TEMPORARY locations away from your regular business location, you can deduct the costs of those trips regardless of the distance. Be sure to keep good records of your business driving by logging for each trip: where you went, your business purpose for going there, who you met with, and the number of business miles you traveled.

You will only be able to deduct expenses for the business portion of your car expense. However, you can choose one of two ways to do this: (1) You can deduct your expenses using actual cost of gas, oil, insurance, repairs, depreciation, etc., or (2) You can multiply your business miles by a standard mileage rate to figure your expense (this rate varies from year-to-year).

"ORDINARY AND NECESSARY EXPENSES"

The tax law only allows you to deduct expenses that are "ordinary" and "necessary" for your business. Taxpayers and IRS auditors often dispute over the meaning of these two terms. Their definitions are somewhat general:

An "ordinary" expense is one which is common and accepted in your type of business. On the other hand, a "necessary" expense is one that is helpful and appropriate in your business; it does not have to be indispensable.

By doing all you can to make certain that your expenses are ordinary, necessary, not overly lavish and are backed up with a good paper trail, you will have a head start on every year's tax return!

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