In the following article, Optima Tax Relief reviews how business expenses are deducted properly from Form 1040 or Form 1040-SR.
Business expenses must be expenditures that are the result of conducting routine business practices; they must be common to your industry and they must have been necessary for the health of your business. However, a deductible expense, while necessary, does not necessarily have to be crucial. For example, a cleaning service is necessary for keeping a customer-serving business presentable and tidy, but the business could still technically function without it. Nevertheless, it is considered a legitimate business expense.
If you work from home, however, business expenses and personal expenses can become blurred if you aren’t vigilant about keeping them separate. Here are a few things to consider if you have a home-based business.
Personal Expenses Vs. Business Expenses
Personal expenses are any monies spent on you or your family apart from the business you conduct. It is extremely important to isolate any crossover expenses carefully so as not to be in violation of tax law. For example, if you borrow funds and use 80 percent of them for purely business purposes, but use the remaining 20 percent for home renovations, you can only claim the 80 percent as a business expense.
If you wish to claim a home office deduction, be aware of the principle requirements:
- A portion of your home is used exclusively for your business.
- Your home is your primary place of business.
Your home office might be considered deductible if it is the only location where your administrative activities are performed. However, if you have a home office you use to conduct supplementary work in addition to a dedicated place of business, it is not appropriate to deduct business expenses for your use of your home office.
You may deduct expenses for the business use of your car, even if you also use it for personal reasons – you just have to carefully isolate the mileage used for business purposes. The cost of car maintenance, insurance, taxes, and registration fees are deductible, as is the gas mileage for work-related trips. To calculate the appropriate deduction, you apply the 57.5 cents per mile rate for your business use.
For more IRS guidelines on business deductions, please visit the IRS.gov publication for home businesses.