Small Business/Self-Employed/Other Business

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Frequently Asked Tax Questions

Small Business/Self-Employed/Other Business - Income & Expenses

Rev. date: 1/2009

How do you distinguish between a business and a hobby?

Activity not for profit
Business Expenses
Hobby Expenses
Home Used for Business
New trade or business

Hobby expenses:

Are deductible only to the extent of hobby income.
Distinguished 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 alone is decisive. 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.

Rev. date: 1/2009

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?

Business Expenses
Personal versus Business Expenses
Recordkeeping
Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

You would include the money in your income.
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 as this makes it easier to keep records.

Rev. date: 1/2009

Where can I find the per diem rates for foreign countries?

Per Diem
Per Diem Rates
Publication 1542

Per diem rates 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: 1/2009

Are excise taxes for a vehicle deductible?

Business Expenses
Deduction, Itemized
Property Taxes
Travel, Entertainment, Gift, and Car Expenses

You can deduct as a business expenses all excise taxes that are ordinary and necessary expenses of carrying on your trade or business.

Rev. date: 1/2009

If you lease a vehicle, can you deduct the cost of the lease payments plus the standard mileage rate?

Business Expenses
Employee Business Expenses
Net Profit from Business (Sole Proprietorship)
Profit or Loss from Business (Sole Proprietorship)
Standard Mileage Rate
Standard mileage rate not allowed.
Travel, Entertainment, Gift, and Car Expenses

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.

Rev. date: 1/2009

I use my home for business. Can I deduct the expenses?

Business Expenses
Business Use of Your Home (Including Use by Day-Care Providers)
Expenses for Business Use of Your Home
Home Used for Business

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.
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.
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 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:

Your business use must be for the convenience of your employer.
You do not rent any part of your home to your employer and use the rented portion to perform services as an employee.

Employees claim deduction for business use of home 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: 1/2009

For business travel, are there limits on the amounts deductible for meals?

Business Expenses
Employee Business Expenses
Meals and Entertainment
Out-of-town Transportation
Standard Meal Allowance
Travel, Entertainment, Gift, and Car Expenses

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.
However, instead of keeping records of the actual cost of your meal expenses you can generally use a standard meal allowance. The amount allowed varies, depending on where and when you travel.
The deduction for unreimbursed business meals is limited to 50% of the cost that would otherwise be deductible.

Rev. date: 1/2009

If you lease purchase a piece of equipment, like a forklift or boom truck, do you deduct the lease or do you depreciate it?

Business Expenses
Depreciation Deduction
How to Depreciate Property
Publication 551
Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)

You must first determine whether your agreement is a lease and deducted as rent or a conditional sales contract and will be considered as a purchase of the property.

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:

A conditional sales contract exists when part of the payments apply to the purchase or entitle the taxpayer a reduced purchase price.
Payments made under a conditional sales contract are not deductible as rent expense.
The costs related to a conditional sales contract must be capitalized and depreciated.

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 parts of the payments are easy to recognize as interest.

Rev. date: 1/2009

Are business gifts deductible?

Business Expenses
Gift
Travel, Entertainment, Gift, and Car Expenses

If you give business gifts in the course of your trade or business:

You can deduct the cost subject to special limits and rules.
You can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year.
You need to have records that prove the business purpose of the gift as well as the details of the amount spent.

NOTE: There are certain items whose cost does not have to be included in the $25 limit.


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