Frequently Asked Tax Questions
Small Business/Self-Employed/Other Business - Income & Expenses
Rev. date: 1/29/2010In making the distinction between a hobby or business activity, all facts and circumstances with respect to the activity are taken into account. No one factor alone is decisive. The most common factors which should normally be considered to establish that the activity is a business engaged in to make a profit are the following:
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Whether you carry on the activity in a businesslike manner.
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Whether the time and effort you put into the activity indicate you intend to make it profitable.
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Whether you depend on income from the activity for your livelihood.
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Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
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Whether you change your methods of operation in an attempt to improve profitability.
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Whether you, or your advisors, have the knowledge needed to carry on the activity as a successful business.
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Whether you were successful in making a profit in similar activities in the past.
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Whether the activity makes a profit in some years, and how much profit it makes.
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Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.
Rev. date: 1/1/2011-
You would include the money used to pay personal expenses in your business income when it was earned by your business.
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You would not write off these expenses because they are not ordinary and necessary costs of carrying on your trade or business.
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Personal, living, or family expenses which are not specifically provided by law are not deductible.
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It is recommended that you not mix business and personal accounts as this makes it easier to keep records.
Rev. date: 1/1/2011- Meal expenses are deductible only if your travel requires you to be away from home over night or if the meal is business-related entertainment.
- You can figure all your travel meal expenses using either of the following methods:
- Actual cost. If you use this method, you must keep records of your actual cost.
- The standard meal allowance which is the federal M&IE rate. These rates are listed in Publication 1542.
- The deduction for unreimbursed business meals is generally subject to a 50% limitation.
Rev. date: 1/1/2010Per diem rates are on the Internet. You will find links to per diem rate at usa.gov. Search "Per Diem Rates" for links to:
- CONUS per diem rates
- Per diem rates for areas outside the continental United States (OCONUS), such as Alaska, Hawaii, Puerto Rico, and U.S. possessions
- Foreign per diem rates
Rev. date: 1/1/2011To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.
Your business use of part of your home must be:
• Exclusive (see *exceptions below)
• Regular
• For your trade or business, and
The part of your home used for business must be one of the following:
• Your principal place of business.
• A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.
• A separate structure (not attached to your home) you use in connection with your trade or business.
NOTE: You do not have to meet the exclusive use test if you satisfy the rules that apply in either of the following circumstances:
You use part of your home for the storage of inventory or product samples.
Form 1040, Schedule C (PDF) filers calculate the business use of home expenses and deduction limitations on
Form 8829 (PDF). The deduction is then claimed on line 30 of Schedule C.
If you are an employee and you use a part of your home for business, you may qualify for a deduction. You must meet the tests discussed above plus:
Employees claim the deduction for business use of home expenses as an itemized deduction on
Form 1040 Schedule A (PDF). There is a worksheet in
Publication 587 to calculate the amount of the deduction.
NOTE: Whether the business use of your home is for your employer’s convenience depends on all the facts and circumstances. Business use is not considered to be for your employer’s convenience merely because it is appropriate and helpful.
Rev. date: 1/1/2011If you lease a car you use in business, you may may not deduct both lease costs and the standard mileage rate. You may either:
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Deduct the product of the business miles driven and the standard mileage rate. If you choose this method then you must use the standard mileage rate method for the entire lease period (including renewals).
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Claim actual expenses, which would include lease payments. If you choose this method only the business-related portion of the lease payment is deductible. This deduction is reduced by an income inclusion amount.
Rev. date: 3/9/2010- Excise Tax is not deductible as a business expenses. Taxes on gasoline, diesel fuel, and other motor fuels that you use in your business are usually included as part of the cost of the fuel. Do not deduct these taxes as a separate item.
- Only qualified new car, light truck, motor home or motor cycle purchased after Feb. 16, 2009 and prior to January 1, 2010 qualify for a deduction of both state and local sales tax, and excise tax paid on up to $49,500 of the purchase amount.
Rev. date: 1/1/2011You must first determine whether your agreement is a lease or a conditional sales contract. If the agreement is a lease, you may deduct the payments as rent. If the agreement is a conditional sales contract, you are treated as the outright purchaser of the equipment.
If, under the agreement, you have acquired or will acquire title to or equity in the equipment, you should treat the agreement as a conditional sales contract.
• A conditional sales contract exists when part of the payments apply to the purchase or entitle the taxpayer to a substantially reduced purchase price.
• Payments made under a conditional sales contract are not deductible as rent expense.
• The costs related to a conditional sales contract generally must be capitalized and depreciated.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine the parties' intent based on the facts and circumstances that exist when you enter into the agreement.
In general, an agreement may be considered a conditional sales contract rather than a lease if one or more of the following conditions exist:
• The agreement applies part of each payment toward an equity interest that you will receive.
• You get title to the property upon the payment of a stated amount required under the agreement.
• The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
• You pay much more than the current fair rental value for the property.
• You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you enter into the agreement.
• You have an option to buy the property at a nominal price compared to the total amount you have to pay under the agreement.
• The agreement designates some part of the payments as interest, or parts of the payments are easy to recognize as interest.
Rev. date: 1/1/2011If you give business gifts in the course of your trade or business you can deduct all or part of the costs subject to the following limitation:
- If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
- Incidental costs such as engraving, packing or shipping do not have to be included in the $25 limit.
- Gifts costing $4.00 or less that have your business name permanently engraved on the item, and which you distribute on a regular basis are excluded from the $25 per person limit.
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