What Can Be Deducted? To be deductible, a business expense must be both ordinary andnecessary. An ordinary expense is one that is common andaccepted in your trade or business. A necessary expense isone that is helpful and appropriate for your trade or business. Anexpense does not have to be indispensable to be considered necessary. It is important to separate business expenses from the following. The expenses used to figure the cost of goods sold. Capital expenses. Personal expenses. TaxTip: If you have an expense that is partly for business and partlypersonal, separate the personal part from the business part. Cost of Goods Sold If your business manufactures products or purchases them forresale, some of your expenses are for the products you sell. You usethese expenses to figure the cost of the goods you sold during theyear. You deduct these costs from your gross receipts to figure yourgross profit for the year. You must maintain inventories to be able todetermine your cost of goods sold. If you use an expense to figure thecost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring cost ofgoods sold. The cost of products or raw materials in your inventory,including the cost of having them shipped to you. The cost of storing the products you sell. Direct labor costs (including contributions to pension orannuity plans) for workers who produce the products. Factory overhead expenses. Under the uniform capitalization rules, you may have to includecertain indirect costs of production and resale in your cost of goodssold. Indirect costs include rent, interest, taxes, storage,purchasing, processing, repackaging, handling, and administrativecosts. This rule on indirect costs does not apply to personal propertyyou acquire for resale if your average annual gross receipts (or thoseof your predecessor) for the preceding 3 tax years are not more than$10 million. For more information, see the following. Cost of goods sold--chapter 6 of Publication 334. Inventories--Publication 538. Uniform capitalization rules--section 1.263A of theregulations. Capital Expenses You must capitalize, rather than deduct, some costs. These costsare a part of your investment in your business and are called"capital expenses." There are, in general, three types of costsyou capitalize. Going into business. Business assets. Improvements. Recovery.Although you generally cannot take a current deduction for acapital expense, you may be able to take deductions for the amount youspend through a method of depreciation, amortization, or depletion.These methods allow you to deduct part of your cost each year over anumber of years. In this way you are able to "recover" yourcapital expense. See Amortization (chapter 12)andDepletion Granada cheap hotels(chapter 13) in this publication. For informationon depreciation, see Publication 946. Reservaciones online de hoteles baratos KeszthelyGoing Into Business The costs of getting started in business, before you actually beginbusiness operations, are capital expenses. These costs may includeexpenses for advertising, travel, or wages for training employees. If you go into business.When you go into business, treat all costs you had to get yourbusiness started as capital expenses. Usually you recover costs for a particular asset throughdepreciation. Generally, you cannot recover other costs until you sellthe business or otherwise go out of business. However, you can chooseto amortize certain costs for setting up your business. See GoingInto Business in chapter 12for more information on businessstart-up costs. If you do not go into business.If you are an individual and your attempt to go into business isnot successful, the expenses you had in trying to establish yourselfin business fall into two categories. The costs you had before making a decision to acquire orbegin a specific business. These costs are personal and nondeductible.They include any costs incurred during a general search for, orpreliminary investigation of, a business or investmentpossibility. The costs you had in your attempt to acquire or begin aspecific business. These costs are capital expenses and you can deductthem as a capital loss. If you are a corporation and your attempt to go into a new trade orbusiness is not successful, you may be able to deduct allinvestigatory costs as a loss. The costs of any assets acquired during your unsuccessful attemptto go into business are a part of your basis in the assets. You cannottake a deduction for these costs. You will recover the costs of theseassets when you dispose of them. Business Assets The cost of any asset you use in your business is a capitalexpense. There are many different kinds of business assets, such asland, buildings, machinery, furniture, trucks, patents, and franchiserights. You must capitalize the full cost of the asset, includingfreight and installation charges. If you produce certain property for use in your trade or business,capitalize the production costs under the uniform capitalizationrules. See section 1.263A-2 of the regulations for informationon those rules. Improvements The costs of making improvements to a business asset are capitalexpenses, if the improvements add to the value of the asset,appreciably lengthen the time you can use it, or adapt it to adifferent use. You can deduct repairs that keep your property in anormal efficient operating condition as a business expense. Improvements include new electric wiring, a new roof, anew floor, new plumbing, bricking up windows to strengthen a wall, andlighting improvements. Restoration plan.Capitalize the cost of reconditioning, improving, or altering yourproperty as part of a general restoration plan to make it suitable foryour business. This applies even if some of the work would by itselfbe classified as repairs. Replacements.You cannot deduct the cost of a replacement that stopsdeterioration and adds to the life of your property. Capitalize thatcost and depreciate it. Treat amounts paid to replace parts of a machine that only keep itin a normal operating condition like repairs. However, if yourequipment has a major overhaul, capitalize and depreciate the expense. Capital or Deductible Expenses To help you distinguish between capital and deductible expenses,several different items are discussed below. Business motor vehicles.You usually capitalize the cost of a motor vehicle you buy to usein your business. You can recover its cost through annual deductionsfor depreciation. There are dollar limits on the depreciation you may claim each yearon passenger automobiles used in your business. See Publication 463. Repairs you make to your business vehicle are deductible expenses.However, amounts you pay to recondition and overhaul a businessvehicle are capital expenses. Roads and driveways.The costs of building a private road on your business property andthe cost of replacing a gravel driveway with a concrete one arecapital expenses you may be able to depreciate. The cost ofmaintaining a private road on your business property is a deductibleexpense. Tools.Unless the uniform capitalization rules apply, amounts spent fortools used in your business are deductible expenses if the tools havea life expectancy of less than one year. Machinery parts.Unless the uniform capitalization rules apply, the cost ofreplacing short-lived parts of a machine to keep it in good workingcondition and not to add to its life is a deductible expense. Heating equipment.The cost of changing from one heating system to another is acapital expense and not a deductible expense. Personal Expenses Generally, you cannot deduct personal, living, or family expenses.However, if you have an expense for something that is used partly forbusiness and partly for personal purposes, divide the total costbetween the business and personal parts. You can deduct as a businessexpense only the business part. For example, if you borrow money and use 70% of it for business andthe other 30% for a family vacation, generally you can deduct as abusiness expense only 70% of the interest you pay on the loan. Theremaining 30% is personal interest that is not deductible. See chapter 8for information on deducting interest and the allocation rules. Business use of your home.If you use part of your home in your business, you may be able toclaim part of the expenses of maintaining your home as a businessexpense. These expenses include mortgage interest, insurance,utilities, repairs, and depreciation. The business use of your home must meet specific requirementsbefore you can take any of these expenses as business deductions. To qualify to claim expenses for the business use of your home, youmust meet the following tests. Your use of the business part of your home must be: Exclusive, Regular, For your trade or business, AND The business part of your home must be one of thefollowing: Your principal place of business, A place where you meet or deal with patients, clients, orcustomers in the normal course of your trade or business, or A separate structure (not attached to your home) you use inconnection with your trade or business. You do not have to meet the exclusive use test if you use part ofyour home in either of the following ways. For the storage of inventory or product samples. As a day-care facility. Beginning in 1999, your home office will qualify as your principalplace of business if you meet the following requirements. You use the office exclusively and regularly foradministrative or management activities of your trade orbusiness. You have no other fixed location where you conductsubstantial administrative or management activities of your trade orbusiness. For more information, see Publication 587. Business use of your car.If you use your car in your business, you can deduct car expenses.If you use your car for both business and personal purposes, you mustdivide your expenses based on mileage. Only your expenses for themiles you drove the car for business are deductible as businessexpenses. You can deduct actual car expenses, which include depreciation (orlease payments), gas and oil, tires, repairs, tune-ups, insurance, andregistration fees. Instead of figuring the business part of theseactual expenses, you may be able to use the standard mileage rate tofigure your deduction. For 1999, the standard mileage rate is 32 1/2 cents a mile for all business miles driven before April1. The rate is 31 cents a mile after March 31. If you are self-employed, you can also deduct the business part ofinterest on your car loan, state and local personal property tax onthe car, parking fees, and tolls, whether or not you claim thestandard mileage rate. You can use the nonbusiness part of thepersonal property tax to determine your deduction for taxes onSchedule A (Form 1040) if you itemize your deductions. For more information on car expenses and the rules for using thestandard mileage rate, see Publication 463.