When preparing for your income tax, the general rule is that you write off your daily business purchases, such as office supplies or utility vehicle mileage, as expenses, and purchases of long-term business assets—term, such as factories and equipment, such as depreciation.
Daily Operating Expenses
A great guide to the daily operating expenses that you can deduct is the Federal Schedule C. The IRS recommends that these expenses be necessary and ordinary to run the business. They must also be flexible and directly related to the business. The operating expenses that the IRS lists as deductible on Schedule C include the following:
Advertising
Expenses for cars and trucks
Commissions and fees
Employment contract
Depletion
Depreciation (transferred from federal tax form 4562)
Employee benefit programs
Insurance (excluding health)
Mortgage interest or other interest
Legal and professional services
Office expenses
Retirement and profit-sharing plans
Rental or leasing (vehicles, machines, goods)
Repairs and maintenance
Supplies
Taxes and licenses
Travel, food, and entertainment
Utilities
Wages
The exclusion of expenses that are not ordinary and necessary prevent a taxpayer in a budget-oriented car rental business, from purchasing a pleasure boat and expensing its maintenance and operation costs.
Since the company's customers are relatively low-income people who see price as a criterion for car rental, it is unlikely that in the ordinary course of business, the company will take them on a leisure cruise.
If the company were a very sophisticated leasing company that rents the most expensive cars and other recreational vehicles, including boats, the argument that this type of entertainment expense was necessary to gain the favor of its wealthy customers might be defensible.
The other limitation of these expenses, which must be reasonable and directly related to the business, is illustrated by the same example. It probably wouldn't be unreasonable for the budget-conscious leasing company to bear the costs of maintaining a boat that its customers could never see. In addition, the boat is not directly related to the business of a low-budget car rental company. Still, it can be directly related to selling to a high-end customer on the pleasures of a yacht.
Some depreciation exceptions
It is better to spend an item than to write it down as a general rule because money is valuable over time. If you spend the item, you will receive the deduction in the current fiscal year, and you can immediately use the money that the expense deduction freed from taxes. If you do depreciation instead, it may take several years before receiving the full tax benefit of the annual depreciation series.
In this regard, the tax legislation incorporated into federal tax form 4562 offers small businesses an exceptional advantage. Depreciation under section 179 allows a business to deduct up to $250,000 from the total cost of the entire small capital asset. Certain restrictions and qualifications apply. The most significant requirement is that the decision to spend rather than write off must be made in the fiscal year the item is put into service.
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