|
 |
|
12.7 Small Business/Self-Employed/Other Business : Income & Expenses
I gave my friend a loan to do business, but the business went bankrupt and
she did not pay me back. Can I deduct this bad loan?
If someone owes you money that you cannot collect, you have a bad debt. Bad debts
are deductible only if the amount owed has been previously included in your income.
For a discussion of what constitutes a valid debt, see Publication 535, Business
Expenses and Publication 550, Investment Income and Expenses .
If you are a cash basis taxpayer, as most individuals are, you may not take a bad
debt deduction for expected income you have not received, since it was never included
in your income. There are two kinds of bad debts - business and nonbusiness.
A business bad debt, generally, is one that comes from operating your trade or
business. A business deducts its bad debts from gross income when figuring its taxable
income. Business bad debts may be deducted in part or in full.
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless
to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You
must establish that you have taken reasonable steps to collect the debt and that the
debt is worthless. It is not necessary to go to court if you can show that a judgment
from the court would be uncollectible. You may take the deduction only in the year
the debt becomes worthless. A debt becomes worthless when the surrounding facts and
circumstances indicate there is no longer any chance the amount owed will be paid.
You do not have to wait until the debt comes due.
A nonbusiness bad debt is reported on Form 1040, Schedule D (PDF) , Capital
Gains and Losses, as a short-term capital loss. It is subject to the capital
loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate
return. A nonbusiness bad debt requires a separate detailed statement attached to
the schedule D. For more information on nonbusiness bad debts, refer to Publication 550, Investment
Income and Expenses . For more information on business bad debts, refer to Publication 535, Business Expenses .
References:
How do you distinguish between a business and a hobby?
Since hobby expenses are deductible only to the extent of hobby income, it is important
to distinquish hobby expenses from expenses incurred in an activity engaged in for
profit. In making this distinction, all facts and circumstances with respect to the
activity are taken into account and no one factor is determinative. Among the factors
which should normally be taken into account are the following:
Whether you carry on the activity in a businesslike manner
Whether the time and effort you put into the activity indicate you intend to make
it profitable
Whether you depend on income from the activity for your livelihood
Whether your losses are due to circumstances beyond your control (or are normal
in the startup phase of your type of business)
Whether you change your methods of operation in an attempt to improve profitability
Whether you, or your advisors, have the knowledge needed to carry on the activity
as a successful business
Whether you were successful in making a profit in similar activities in the past
Whether the activity makes a profit in some years, and how much profit it makes
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.
References:
If I pay personal expenses out of my business bank account, should I count
the money used as part of my income, or can I write these expenses off?
You would include the money in income and you would not write the amounts off as
expenses. Only business related expenses can be deducted from your business income.
It is recommended that you not mix business and personal accounts. This makes it easier
to keep records.
References:
For business travel, are there limits on the amounts deductible for meals?
Meal expenses are deductible only if your trip is overnight or long enough that
you need to stop for sleep or rest to properly perform your duties. The amount of
the meal expenses must be substantiated, but instead of keeping records of the actual
cost of your meal expenses you can generally use a standard meal allowance ranging
from $30 to $50 in 2003 depending on where and when you travel.
Generally, the deduction for unreimbursed business meals is limited to 50% of the
cost that would otherwise be deductible.
For more information on business travel expenses and restrictions, refer to Tax Topic 511 , or Publication 463, Travel, Entertainment, Gift, and Car Expenses,
and Publication 1542, Per Diem Rates .
References:
What are the standard mileage rates for 2003, 2002, and 2001?
2003
The standard mileage rate for business use of an automobile declined to 36 cents
per mile for 2003.
The standard mileage rate for moving or medical reasons declined to 12 cents per
mile for 2003.
The standard mileage rate for charitable contributions is unchanged at 14 cents
per mile for 2003.
2002
The standard mileage rate for business use of an automobile was 36.5 cents per
mile for 2002.
The standard mileage rate for moving or medical reasons was 13 cents per mile
for 2002.
The standard mileage rate for charitable contributions was 14 cents per mile for
2002.
2001
The standard mileage rate for business use of an automobile was 34.5 cents per
mile for 2001.
The standard mileage rate for moving or medical reasons was 12 cents per mile
for 2001.
The standard mileage rate for charitable contributions was 14 cents per mile for
2001.
The rates for 2004 will be announced in a new revenue procedure updating revenue
procedure 2002-61 and should be issued in early fall 2003.
References:
Where can I find the per diem rates for foreign countries?
The federal per diem rates for foreign locations (outside the continental United
States, abbreviated as OCONUS, and including the per diem rates for Alaska, Hawaii,
Puerto Rica, the Northern Mariana Islands, U. S. possessions, and all foreign locates)
are published monthly in the Maximum Travel Per Diem Allowances for Foreign Areas.
Your employer may have these rates available, or you can purchase the publication
from the:
Superintendent of Documents
U.S. Government Printing
Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
You can also access the federal per diem rates for CONUS localities on the Internet
at http://www.policyworks.gov/perdiem .
This website also provides a link to rates for localities OCONUS..
References:
I use my home for business. Can I deduct the expenses?
To deduct expenses related to the business use of part of your home, you must meet
specific requirements. Even then, your deduction may be limited.
Your use of the business part of your home must be:
Exclusive (see *exceptions below),
Regular,
For your trade or business, AND
The business part of your home 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, or
A separate structure (not attached to your home) you use in connection with your
trade or business.
Additional tests for employee use. If you are an employee and
you use a part of your home for business, you may qualify for a deduction use. You
must meet the tests discussed above plus:
Your business use must be for the convenience of your employer, and
You do notrent any part of your home to your employer and
use the rented portion to perform services as an employee.
Whether the business use of your home is for your employer's convenience depends
on all the facts and circumstances. However, business use is not considered to be
for your employer's convenience merely because it is appropriate and helpful.
*exceptions
You do not have to meet the exclusive use test if either of the following applies.
You use part of your home for the storage of inventory of product samples.
You use part of your home as a day-care facility.
Form 1040, Schedule C (PDF) filers calculate the business
use of home expenses and limits on Form 8829 (PDF) . The
deduction is claimed on line 30 of Schedule C. Employees claim deduction for business
use of home as an itemized deduction on Form 1040, Schedule A (PDF) .
For more information refer to Tax Topic 509 , Business Use of Home,
or Publication 587 , Business Use of Your Home (Including Use
by Day-Care Providers).
References:
I use part of my living room as an office. Can I take a deduction for business
use of my home?
In general, if you use a part of your home for both personal and business purposes,
no expenses for business use of that part are deductible. Exceptions apply for qualified
day-care providers and for the storage of inventory or product samples used in your
business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587, Business Use of Your Home (Including Use
by Day-Care Providers).
References:
If you lease a vehicle, can you deduct the cost of the lease payments plus
the standard mileage rate?
No, if you lease a car you use in business, you may use either the standard mileage
rate or claim actual expenses, which would include lease payments. You cannot use
both the standard mileage rate and the lease payments.
References:
Is the state sales tax paid on the purchase of an automobile an allowed
deduction?
State and local sales tax paid on personal items is no longer an allowable itemized
deduction on Form 1040, Schedule A (PDF), Itemized
Deductions. If the auto is a business asset it is generally added to the basis
and recovered through depreciation.
References:
Are excise taxes for a vehicle deductible?
It has to be a personal property tax, not an excise tax, in order to deduct it.
Deductible personal property taxes are only those based on the value of personal property
such as a boat or car. The tax must be charged to you on a yearly basis, even if it
is collected more than once a year or less than once a year. To be deductible, the
tax must be charged to you and must have been paid during your tax year. Taxes may
be claimed only as an itemized deduction on Form 1040, Schedule A (PDF), Itemized
Deductions.
References:
We leased an auto for a small business. How much (if any) of the down payment
is tax deductible in the year the automobile is leased?
You must spread any advance lease payments over the entire lease period. You cannot
deduct any payments you make to buy a car even if the payments are called lease payments.
If you lease a car that you use in your business, you can deduct the part of each
lease payment that is for the use of the car in your business. You cannot deduct any
part of a lease payment that is for commuting to your regular job or for any other
personal use of the car.
References:
If I buy down the lease (pay a lump sum up-front) of a vehicle for my new
business, how would this up-front payment be treated for tax purposes?
You must spread any advance lease payments over the entire lease period. You cannot
deduct any payments you make to buy a car even if the payments are called lease payments.
If you lease a car that you use in your business, you can deduct the part of each
lease payment that is for the use of the car in your business. You cannot deduct any
part of a lease payment that is for commuting to your regular job or for any other
personal use of the car.
References:
If you lease purchase a piece of equipment, like a forklift or boom truck,
do you deduct the lease or do you depreciate it?
There may be instances in which you must determine whether your payments are for
rent or for the purchase of the property. You must first determine whether your agreement
is a lease or a conditional sales contract. If, under the agreement, you acquired
or will acquire title to or equity in the property, you should treat the agreement
as a conditional sales contract. Payments made under a conditional sales contract
are not deductible as rent expense.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement.
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true:
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 contract.
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 make
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 lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
If you lease office equipment and machinery with the option to buy, when
do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you must first
determine whether your agreement is a lease agreement or a conditional sales contract.
If, under the agreement, you acquired or will acquire title to or equity in the property,
you should treat the agreement as a conditional sales contract. Payments made under
a conditional sales contract are not deductible as rent expense. You would start depreciating
the equipment on the date you acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent of
the parties. Determine intent based on the facts and circumstances that exist when
you make the agreement
In general, an agreement may be considered a conditional sales contract rather
than a lease if any of the following is true.
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 contract.
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 make
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 lease.
The lease designates some part of the payments as interest, or part of the payments
are easy to recognize as interest.
References:
Are business gifts deductible?
If you give business gifts in the course of your trade or business, you can deduct
the cost subject to special limits and rules. In general, you can deduct no more than
$25 for business gifts you give directly or indirectly to any one person during your
tax year. Exceptions may apply. For additional information, refer to Tax Topic 512 and
Chapter 28 of Publication 17, Your Federal Income Tax .
For additional information on this subject seeGifts.
References:
Can I deduct my investment expenses as business expenses?
In order to properly determine the correct treatment income and expenses, it is
first necessary to classify the type of investment activity occurring.
An Investor buys and sells securities solely for their own
account. They are not engaged in a trade or business. An investor's investment expenses
are taken as miscellaneous itemized deductions on Form 1040, Schedule A (PDF) , subject to the 2% AGI limitations (with the exception of
investment interest which is not a miscellaneous deduction but subject to its own
special limitations). An investor's sale of securities results in capital gains and
losses.
A Dealer in securities has inventories of securities that
they hold for sale to customers in the ordinary course of their trade or business.
Their business expenses are deductible as ordinary business expenses. A dealer doing
business as a sole proprietor would deduct their expenses on 1040 Schedule C. A Dealer's
sale of securities is reported as ordinary income.
A third classification is Trader . A Trader is in the trade
or business of buying and selling securities for their own account. You are a trader
in securities if you meet all of the following conditions:
You must seek to profit from daily market movements in the prices of securities
and not from dividends, interest, or capital appreciation.
Your activity must be substantial.
You must carry on the activity with continuity and regularity.
The following facts and circumstances should be considered in determining if your
activity is a securities trading business:
Typical holding periods for securities bought and sold.
The frequency and dollar amount of your trades during the year.
The extent to which you pursue the activity to produce income for a livelihood
The amount of time you devote to the activity.
:
A trader's business expense are reported on Form 1040, Schedule C (PDF) ,
not as itemized deductions on 1040 Schedule A. The deductions are not subject to the
limitations that apply to Schedule A (2% AGI limitation and special limits on investment
interest). A trader gain or loss on sale of securities is reported as capital gain
or loss on Form 1040, Schedule D (PDF) unless they have
made the mark-to-market election.
If a trader has made a mark-to-market election, gains and losses are reported on
part II of Form 4797 (PDF) as ordinary income. For information
regarding the manner and timing of making the mark-to-market election, see Publication 550 , Investment Income and Expense or Revenue
Procedure 99-17, 1999-1 CB 503.
The proper classification of your investment activities is important to determine
how income and expenses are to be reported. Investors trade solely for their own account
and do not carry on a trade or business. Their securities sales result in capital
gain or loss and their deductible expenses are itemized deductions. Dealers sell securities
to customers in the ordinary course of trade or business. Their sales result in ordinary
gain or loss and their deductible expenses are trade or business expenses. Traders
buy and sell securities frequently but have no customers. Their purchases and sales
result in capital gain and loss, and their deductible expenses are trade or business
expenses.
Even if you engage in extensive securities activities, you are an investor, not
a dealer or trader, if you do not seek profit primarily in swings in daily market
movements, and do not personally engage in or direct the purchases or sales. An investor
trades for profit-motivated reasons such as long-term appreciation, dividends and
interest. Whether the activities of an individual constitute trade or business or
investment is determined from the facts in each case. These distinctions have been
established through court cases.
If your trading activity is a business, your trading expenses would be reported
on Form 1040, Schedule C (PDF), Profit or Loss from
Business (Sole Proprietorship) instead of Form 1040, Schedule A (PDF), Itemized Deductions. Your gains or losses, however,
would be reported on Form 1040, Schedule D (PDF), Capital
Gains and Losses, unless you file an election to change your method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market
method of accounting, you would report both your gains or losses on Part II of Form 4797 (PDF), Sales of Business Property .
A change in your method of accounting requires the consent of the Commissioner
and can not be revoked without the consent of the Secretary. Though there is no publication
specific to day traders, the details for traders in securities and commodities are
covered in Internal Revenue Code Section 475 (f) and Revenue Procedure 99-17.
References:
|
|
|
|
