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Frequently Asked Tax Questions

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

  1. How do you distinguish between a business and a hobby?
  2. If I, a sole proprietor, pay personal expenses out of my business bank account, should I count the money used as part of my income? Can I write these expenses off?
  3. For business travel, are there limits on the amounts deductible for meals?
  4. Where can I find the per diem rates for foreign countries?
  5. I use my home for business. Can I deduct the expenses?
  6. If you lease a vehicle, can you deduct the cost of the lease payments plus the standard mileage rate?
  7. Are excise taxes for a vehicle deductible?
  8. If you lease-purchase a piece of equipment, like a forklift or truck, do you deduct the lease payments or do you depreciate the cost of the equipment?
  9. Are business gifts deductible?

Rev. date: 1/29/2010

How do you distinguish between a business and a hobby?

In 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:
Additional information on this topic is available in section 1.183-2 (b) of the federal tax regulations.

Rev. date: 1/1/2011

If I, a sole proprietor, pay personal expenses out of my business bank account, should I count the money used as part of my income? Can I write these expenses off?


Rev. date: 1/1/2011

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

  1. Actual cost. If you use this method, you must keep records of your actual cost.
  2. The standard meal allowance which is the federal M&IE rate. These rates are listed in Publication 1542.                                                                                                          

Rev. date: 1/1/2010

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

Per diem rates are on the Internet. You will find links to per diem rate at usa.gov. Search "Per Diem Rates" for links to:

Rev. date: 1/1/2011

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

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.

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: 1/1/2011

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

If you lease a car you use in business, you may may not deduct both lease costs and the standard mileage rate.  You may either:

Rev. date: 3/9/2010

Are excise taxes for a vehicle deductible?

Additional Information
Publication 535 Business Expenses

Rev. date: 1/1/2011

If you lease-purchase a piece of equipment, like a forklift or truck, do you deduct the lease payments or do you depreciate the cost of the equipment?

You 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.
Additional Information
Publication 535 Business Expenses

Rev. date: 1/1/2011

Are business gifts deductible?

If 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:
  1. If you and your spouse both give gifts to the same person, both of you are treated as one taxpayer.
  2. Incidental costs such as engraving, packing or shipping do not have to be included in the $25 limit.
  3. 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.