Tax Quarry

So, you lost your job and you’re not sure what to do next.  You have been posting your resume on-line and networking profusely.  But, nothing!  Well, all is not lost.  You may want to consider starting your own business.  There is no better time to start a business than when you have all the time in the world to start your own business. 

There are a number of advantages to starting your business.  First, when you go to an interview six months after being let go from your last job and you are asked to explain the “gap period” in your employment, you can respond enthusiastically with, “I started a successful (blank) business during that time and developed the following skills”.  Second, in the event the business does take off before the standard three year break even target date, you will have income to supplement your cost of living until you get back in the workforce.  In fact, you may actually develop a profitable concept and not need to go back to work.  Third, you will develop a sense of self confidence and keep the creative energy juices flowing.  Finally, and very importantly you will be able to deduct your business expense, including things such as rent for the space you conduct your business in and supplies which will allow you to extend your dollars while you are still unemployed.    

Well, what are business expenses?  The IRS defines business expenses as the cost of carrying on a trade or business. These expenses are usually deductible if the business is operated to make a profit.  According to the IRS website, to be deductible, a business expense must be both “ordinary” and “necessary”. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business.

Keep in mind, though, that you may not be able to deduct some costs. Costs which are considered to be your investment in your business are called capital expenses. Capital expenses are considered assets in your business, such as business assets and business start up costs. 

The IRS also notes that, generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.  For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible.

Further, if you use part of your home for business, you may be able to deduct expenses for the business use of your home. These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation.  Also, if you use your car in your business, you can deduct car expenses. If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage.

Rental expenses are also deductible as are interest expenses, taxes and insurance.  The IRS defines rent as any amount you pay for the use of property you do not own.  In general, you can deduct rent as an expense only if the rent is for property you use in your trade or business.  You can deduct interest expenses if the amount charged is for the use of money you borrowed for business activities.  Also, you can deduct various federal, state, local, and foreign taxes directly attributable to your trade or business as business expenses.  Finally, you can deduct the ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession.

This list is not all inclusive of the types of business expenses that you can deduct.  For more information, talk to a tax professional or visit the IRS website:  http://www.irs.gov/businesses/small/article/0,,id=109807,00.html