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A Guide for Deducting Business Expenses

Running a small business requires a lot of self-education on a number of topics. We know our product or service, but knowing all of the ins and outs of running a business usually requires a lot of research and a team of advisors. When it comes to understanding the various business deductions that you and your business could be entitled to, including retirement plans, such as self-directed solo 401(k)s, there are many aspects to understand. The IRS has put together a guide to explain the most common expenses that are typically deductible. Continue reading for the full article straight from their site:

Business expenses are the cost of carrying on a trade or business. These expenses are usually deductible if the business operates to make a profit.

  • What Can I Deduct?

  • Cost of Goods Sold

  • Capital Expenses

  • Personal versus Business Expenses

  • Business Use of Your Home

  • Business Use of Your Car

  • Other Types of Business Expenses

Note: If you do not carry on the activity to make a profit, you must report all of the gross income (without deductions) from the activity on Form 1040 or 1040-SR, line 21. Special limits apply to what expenses for a not-for-profit activity are deductible; for detailed information, refer to Publication 535, Business Expenses.

What Can I Deduct?

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. 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 separate business expenses from the following expenses:

  • The expenses used to figure the cost of goods sold,

  • Capital Expenses, and

  • 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 unless you are a small business taxpayer (defined below). Some of your expenses may be included in figuring the cost of goods sold. The cost of goods sold is deducted from your gross receipts to figure your gross profit 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 figuring the cost of goods sold.