8. Business Expenses
Introduction
You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold.
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.
For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses.
If you have an expense that is partly for business and partly personal, separate the personal part from the business part.Useful Items - You may want to see:
Publication
- 463 Travel, Entertainment, Gift, and Car Expenses
- 535 Business Expenses
- 946 How To Depreciate Property
See chapter 12 for information about getting publications and forms.
Bad Debts
If someone owes you money you cannot collect, you have a bad debt. There are two kinds of bad debts, business bad debts and nonbusiness bad debts.
A business bad debt is generally one that comes from operating your trade or business. You may be able to deduct business bad debts as an expense on your business tax return.
Business bad debt
A business bad debt is a loss from the worthlessness of a debt that was either of the following.
- Created or acquired in your business.
- Closely related to your business when it became partly or totally worthless.
Accrual method
If you use an accrual method of accounting, you normally report income as you earn it. You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income.
Cash method
If you use the cash method of accounting, you normally report income when you receive payment. You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income.
More information
For more information about business bad debts, see chapter 10 in Publication 535.
Nonbusiness bad debts
All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Schedule D (Form 1040). For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses.
Car and Truck Expenses
If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. You also may be able to deduct other costs of local transportation and traveling away from home overnight on business.
You may be entitled to a tax credit for an alternative motor vehicle (Form 8910) you place in service during the year. The vehicle must meet certain requirements and you do not have to use it in your business to qualify for the credit. Alternative motor vehicle includes qualified fuel cell motor vehicles, advanced lean burn technology motor vehicles, qualified hybrid motor vehicles, and qualified alternative fuel motor vehicles.Local transportation expenses
Local transportation expenses include the ordinary and necessary costs of all the following.
- Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Tax home is defined later.
- Visiting clients or customers.
- Going to a business meeting away from your regular workplace.
- Getting from your home to a temporary workplace when you have one or more regular places of work. These temporary workplaces can be either within the area of your tax home or outside that area.
Example —
You operate a printing business out of rented office space. You use your van to deliver completed jobs to your customers. You can deduct the cost of round-trip transportation between your customers and your print shop.
Office in the home
Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. For more information, see Business Use of Your Home, later.
Example —
You are a graphics designer. You operate your business out of your home. Your home qualifies as your principal place of business. You occasionally have to drive to your clients to deliver your completed work. You can deduct the cost of the round-trip transportation between your home and your clients.
Methods for Deducting Car and Truck Expenses
For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses.
- Standard mileage rate.
- Actual expenses.
Standard mileage rate
You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. For 2007, the standard mileage rate is 48.5 cents a mile for all business miles. If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls.
Choosing the standard mileage rate
If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. In later years, you can choose to use either the standard mileage rate or actual expenses. If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals).
Standard mileage rate not allowed
You cannot use the standard mileage rate if you:
- Use the car for hire (such as a taxi),
- Operate five or more cars at the same time,
- Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS,
- Claimed a section 179 deduction on the car,
- Claimed the special depreciation allowance on the car,
- Claimed actual car expenses for a car you leased, or
- Are a rural mail carrier who received a qualified reimbursement.
Parking fees and tolls
In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses.)
Actual expenses
If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Actual car expenses include the costs of the following items.
| Depreciation | Lease payments | Registration |
| Garage rent | Licenses | Repairs |
| Gas | Oil | Tires |
| Insurance | Parking fees | Tolls |
Example —
You are the sole proprietor of a flower shop. You drove your van 20,000 miles during the year. 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use. You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense.
More information
For more information about the rules for claiming car and truck expenses, see Publication 463.
Reimbursing Your Employees for Expenses
You generally can deduct the amount you reimburse your employees for car and truck expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 11 in Publication 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement.
Depreciation
If property you acquire to use in your business is expected to last more than one year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. You must spread the cost over more than one tax year and deduct part of it each year on Schedule C. This method of deducting the cost of business property is called depreciation.
The discussion here is brief. You will find more information about depreciation in Publication 946.
What property can be depreciated? You can depreciate property if it meets all the following requirements.- It must be property you own.
- It must be used in business or held to produce income. You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business.
- It must have a useful life that extends substantially beyond the year it is placed in service.
- It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up.
- It must not be excepted property. This includes property placed in service and disposed of in the same year.
Repairs
You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ.
Depreciation method
The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). MACRS is discussed in detail in Publication 946.
Section 179 deduction
You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” The maximum amount you can elect to deduct during 2007 is $125,000 ($160,000 for qualified enterprise zone, and renewal community property). This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $500,000. For qualified section 179 Gulf Opportunity Zone property, the maximum deduction is higher than the deduction for most section 179 property. The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2007 is $3,060. Special rules apply to electric vehicles and trucks and vans. For more information, see Publication 946. It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. For more information, see the Instructions for Form 4562 or Publication 946.
Listed property
You must follow special rules and recordkeeping requirements when depreciating listed property. Listed property is any of the following.
- Most passenger automobiles.
- Most other property used for transportation.
- Any property of a type generally used for entertainment, recreation, or amusement.
- Certain computers and related peripheral equipment.
- Any cellular telephone (or similar telecommunications equipment).
Form 4562
Use Form 4562, Depreciation and Amortization, if you are claiming any of the following.
- Depreciation on property placed in service during the current tax year.
- A section 179 deduction.
- Depreciation on any listed property (regardless of when it was placed in service).
Employees' Pay
You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. The pay may be in cash, property, or services.
To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. In addition, the pay must meet both the following tests.
- The pay must be reasonable.
- The pay must be for services performed.
Chapter 2 in Publication 535 explains and defines these requirements.
You cannot deduct your own salary or any personal withdrawals you make from your business. As a sole proprietor, you are not an employee of the business.
If you had employees during the year, you must use Schedule C. You cannot use Schedule C-EZ.Kinds of pay
Some of the ways you may provide pay to your employees are listed below. For an explanation of each of these items, see chapter 2 in Publication 535.
- Awards.
- Bonuses.
- Education expenses.
- Fringe benefits (discussed later).
- Loans or advances you do not expect the employee to repay if they are for personal services actually performed.
- Property you transfer to an employee as payment for services.
- Reimbursements for employee business expenses.
- Sick pay.
- Vacation pay.
Fringe benefits
A fringe benefit is a form of pay for the performance of services. The following are examples of fringe benefits.
- Benefits under qualified employee benefit programs.
- Meals and lodging.
- The use of a car.
- Flights on airplanes.
- Discounts on property or services.
- Memberships in country clubs or other social clubs.
- Tickets to entertainment or sporting events.
- Accident and health plans.
- Adoption assistance.
- Cafeteria plans.
- Dependent care assistance.
- Educational assistance.
- Group-term life insurance coverage.
- Welfare benefit funds.
Insurance
You can generally deduct premiums you pay for the following kinds of insurance related to your business.
- Fire, theft, flood, or similar insurance.
- Credit insurance that covers losses from business bad debts.
- Group hospitalization and medical insurance for employees, including long-term care insurance.
- Liability insurance.
- Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients.
- Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault.
- Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law.
- Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness.
- Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums.
- Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract.
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause.
Nondeductible premiums
You cannot deduct premiums on the following kinds of insurance.
- Self-insurance reserve funds. You cannot deduct amounts credited to a reserve set up for self-insurance. This applies even if you cannot get business insurance coverage for certain business risks. However, your actual losses may be deductible. For more information, see Publication 547, Casualties, Disasters, and Thefts.
- Loss of earnings. You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. However, see item (8) in the previous list.
- Certain life insurance and annuities.
- For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business.
- For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. The disallowance applies without regard to whom the policy covers.
- Insurance to secure a loan. If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt.
How to figure the deduction
Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535.
- You have more than one source of income subject to self-employment tax.
- You file Form 2555 or Form 2555-EZ (relating to foreign earned income).
- You are using amounts paid for qualified long-term care insurance to figure the deduction.
Prepayment
You cannot deduct expenses in advance, even if you pay them in advance. This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year.
Example —
In 2007, you signed a 3-year insurance contract. Even though you paid the premiums for 2007, 2008, and 2009 when you signed the contract, you can only deduct the premium for 2007 on your 2007 tax return. You can deduct in 2008 and 2009 the premium allocable to those years.
More information
For more information about deducting insurance, see chapter 6 in Publication 535.
Interest
You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Interest relates to your business if you use the proceeds of the loan for a business expense. It does not matter what type of property secures the loan. You can deduct interest on a debt only if you meet all of the following requirements.
- You are legally liable for that debt.
- Both you and the lender intend that the debt be repaid.
- You and the lender have a true debtor-creditor relationship.
You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. If a loan is part business and part personal, you must divide the interest between the personal part and the business part.
Example —
In 2007, you paid $600 interest on a car loan. During 2007, you used the car 60% for business and 40% for personal purposes. You are claiming actual expenses on the car. You can only deduct $360 (60% × $600) for 2007 on Schedule C or C-EZ. The remaining interest of $240 is a nondeductible personal expense.
More information
For more information about deducting interest, see chapter 4 in Publication 535. That chapter explains the following items.
- Interest you can deduct.
- Interest you cannot deduct.
- How to allocate interest between personal and business use.
- When to deduct interest.
- The rules for a below-market interest rate loan. (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate.)
Legal and Professional Fees
Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. However, you usually cannot deduct legal fees you pay to acquire business assets. Add them to the basis of the property.
If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. For more information, see Publication 529, Miscellaneous Deductions.
Tax preparation fees
You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee.
Pension Plans
You can set up and maintain the following small business retirement plans for yourself and your employees.
- SEP (Simplified Employee Pension) plans.
- SIMPLE (Savings Incentive Match Plan for Employees) plans.
- Qualified plans (including Keogh or H.R. 10 plans).
SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. You can also deduct trustees' fees if contributions to the plan do not cover them. Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension.
Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan.
For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement.Rent Expense
Rent is any amount you pay for the use of property you do not own. In general, you can deduct rent as a business expense only if the rent is for property you use in your business. If you have or will receive equity in or title to the property, you cannot deduct the rent.
Unreasonable rent
You cannot take a rental deduction for unreasonable rents. Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Rent is not unreasonable just because it is figured as a percentage of gross receipts. Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. For a list of the other related persons, see Publication 538, Accounting Periods and Methods.
Rent on your home
If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. You must meet the requirements for business use of your home. For more information, see Business Use of Your Home, later.
Rent paid in advance
Generally, rent paid in your business is deductible in the year paid or accrued. If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. You can deduct the rest of your payment only over the period to which it applies.
More information
For more information about rent, see chapter 3 in Publication 535.
Taxes
You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business.
Income taxes
You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Do not deduct federal income tax.
Employment taxes
You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Employment taxes are discussed briefly in chapter 1. You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Deduct these payments as taxes. Self-employment tax. You can deduct one-half of your self-employment tax on line 27 of Form 1040. Self-employment tax is discussed in chapters 1 and 10.
Personal property tax
You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. You can also deduct registration fees for the right to use property within a state or local area.
Example —
May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. They had to pay $25 for their annual state license tags and $20 for their city registration sticker. They also paid $235 in city personal property tax on the car, for a total of $280. They are claiming their actual car expenses. Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense.
Real estate taxes
You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. For more information about real estate taxes, see chapter 5 in Publication 535. That chapter explains special rules for deducting the following items.
- Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines.
- Real estate taxes when you buy or sell property during the year.
- Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period.
Sales tax
Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. For information on the basis of property, see Publication 551, Basis of Assets. Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Do not include these taxes in gross receipts or sales.
Excise taxes
You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Excise taxes are discussed briefly in chapter 1.
Fuel taxes
Taxes on gasoline, diesel fuel, and other motor fuels 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. You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. For more information, see Publication 510, Excise Taxes.
Travel, Meals, and Entertainment
This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ.
Table 8-1. When Are Entertainment Expenses Deductible?
(Note. The following is a summary of the rules for deducting entertainment expenses. For more details about these rules, see Publication 463.)
| General rule | You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. |
| Definitions |
|
| Tests to be met | Directly-related test
|
Associated test
| |
| Other rules |
|
Travel expenses
These are the ordinary and necessary expenses of traveling away from home for your business. You are traveling away from home if both the following conditions are met.
- Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work.
- You need to get sleep or rest to meet the demands of your work while away from home.
Transportation
You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination.
Taxi, commuter bus, and limousine
You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home.
Baggage and shipping
You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations.
Car or truck
You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses.
Meals and lodging
You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. In most cases, you can deduct only 50% of your meal expenses.
Cleaning
You can deduct the costs of dry cleaning and laundry while on your business trip.
Telephone
You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices.
Tips
You can deduct the tips you pay for any expense in this list.
More information
For more information about travel expenses, see Publication 463.
Entertainment expenses
You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. In most cases, you can deduct only 50% of these expenses. The following are examples of entertainment expenses.
- Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events.
- Providing meals, a hotel suite, or a car to business customers or their families.
Reimbursing your employees for expenses
You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. For details, see chapter 11 in Publication 535. That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement.
Business Use of Your Home
To deduct expenses related to the part of your home used for business, you must meet specific requirements. Even then, your deduction may be limited.
To qualify to claim expenses for business use of your home, you must meet the following tests.
- Your use of the business part of your home must be:
- Exclusive (however, see Exceptions to exclusive use, later),
- Regular,
- For your business, and
- The business part of your home must be one of the following:
- Your principal place of business (defined later),
- A place where you meet or deal with patients, clients, or customers in the normal course of your business, or
- A separate structure (not attached to your home) you use in connection with your business.
Exclusive use
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition. You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.
Example —
You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your profession, so you cannot claim a business deduction for its use.
Exceptions to exclusive use
You do not have to meet the exclusive use test if you use part of your home in either of the following ways.
- For the storage of inventory or product samples.
- As a daycare facility.
Regular use
To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose.
Principal place of business
You can have more than one business location, including your home, for a single trade or business. To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. To determine your principal place of business, you must consider all the facts and circumstances. Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements.
- You use it exclusively and regularly for administrative or management activities of your business.
- You have no other fixed location where you conduct substantial administrative or management activities of your business.
- The relative importance of the activities performed at each location.
- If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location.
Deduction limit
If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following.
- The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)).
- The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself.
More information
For more information on deducting expenses for the business use of your home, see Publication 587.
Other Expenses You Can Deduct
You may also be able to deduct the following expenses. See Publication 535 to find out whether you can deduct them.
- Advertising.
- Bank fees.
- Donations to business organizations.
- Education expenses.
- Energy efficient commercial buildings deduction expenses.
- Environmental cleanup costs.
- Impairment-related expenses.
- Interview expense allowances.
- Licenses and regulatory fees.
- Moving machinery.
- Outplacement services.
- Penalties and fines you pay for late performance or nonperformance of a contract.
- Repairs that keep your property in a normal efficient operating condition.
- Repayments of income.
- Subscriptions to trade or professional publications.
- Supplies and materials.
- Utilities.
Expenses You Cannot Deduct
You usually cannot deduct the following as business expenses. For more information, see Publication 535.
- Bribes and kickbacks.
- Charitable contributions.
- Demolition expenses or losses.
- Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs.
- Lobbying expenses.
- Penalties and fines you pay to a governmental agency or instrumentality because you broke the law.
- Political contributions.
- Repairs that add to the value of your property or significantly increase its life.
