4 Ways to
Safeguard Your Tax Records +
7 Guidelines for Deducting Business Expenses
we're relatively safe here in Utah, it
is tornado season in the Midwest and hurricane season recently started.
And since you never know when mother nature
will strike or an accident will happen, I along with the Internal Revenue Service advises individuals and businesses to
safeguard their records against natural disasters by taking a few simple
Create an Electronic Additional
Set of Records
Taxpayers should keep a duplicate set of records including bank statements,
tax returns, identifications and insurance policies in a safe place such as
a waterproof container, and away from the original set.
Keeping an additional set of records is easier now that many financial
institutions provide statements and documents electronically, and much
financial information is available on the Internet. Even if the original
records are only provided on paper, these can be scanned into an electronic
format. This way, taxpayers can save them to the cloud, download them to a
storage device such as an external hard drive or USB flash drive, or burn
them to a CD or DVD.
Another step a taxpayer can take to prepare for a disaster is to photograph
or videotape the contents of his or her home, especially items of higher
value. The IRS has a disaster loss workbook, Publication 584, which can help
taxpayers compile a room-by-room list of belongings.
A photographic record can help an individual prove the fair market value of
items for insurance and casualty loss claims. Ideally, photos should be
stored with a friend or family member who lives outside the area.
Emergency plans should be reviewed annually. Personal and business
situations change over time as do preparedness needs.
When employers hire new employees or when a company or organization changes
functions, plans should be updated accordingly and employees should be
informed of the changes.
Make your plans ahead of time and practice them.
Check on Fiduciary Bonds
Employers who use payroll service providers should ask the provider if it
has a fiduciary bond in place. The bond could protect the employer in the
event of default by the payroll service provider.
IRS Ready to Help
If disaster strikes, an affected taxpayer can call 1-866-562-5227 to speak
with an IRS specialist trained to handle disaster-related issues.
Back copies of previously-filed tax returns and all attachments, including
Forms W-2, can be requested by filing Form 4506, Request for Copy of Tax
Alternatively, transcripts showing most line items on these returns can be
ordered by calling 1-800-908-9946 or by using Form 4506T-EZ, Short Form
Request for Individual Tax Return Transcript or Form 4506-T, Request for
Transcript of Tax Return.
for Deducting Business Expenses
expenses are the cost of carrying on a trade or business.
These expenses are usually deductible if the business operates
to make a profit.
- What Can I Deduct?
- Cost of Goods Sold
- Capital Expenses
- Personal versus Business Expenses
- Business Use of Your Home
- Business Use of Your Car
- Other Types of Business Expenses
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. An expense does not have to be indispensable to
be considered necessary.
It is important to separate business expenses from the
- The expenses used to figure the cost of goods sold,
- Capital Expenses, and
- Personal Expenses.
Cost of Goods Sold
If your business manufactures products or purchases
them for resale, you generally must value inventory at the
beginning and end of each tax year to determine your cost of
goods sold. Some of your expenses may be included in figuring
the cost of goods sold. The cost of goods sold is deducted
from your gross receipts to figure your gross profit for the
year. If you include an expense in the cost of goods sold, you
cannot deduct it again as a business expense.
The following are types of expenses that go into
figuring the cost of goods sold.
- The cost of products or raw materials, including
- Direct labor costs (including contributions to
pensions or annuity plans) for workers who produce the
- Factory overhead
Under the uniform capitalization rules, you must
capitalize the direct costs and part of the indirect costs for
certain production or resale activities. Indirect costs
include rent, interest, taxes, storage, purchasing,
processing, repackaging, handling, and administrative costs.
This rule does not apply to personal property you
acquire for resale if your average annual gross receipts (or
those of your predecessor) for the preceding 3 tax years are
not more than $10 million.
For additional information, refer to the chapter on
Cost of Goods Sold, Publication 334, Tax Guide for Small
Businesses and the chapter on Inventories, Publication 538,
Accounting Periods and Methods.
You must capitalize, rather than deduct, some costs.
These costs are a part of your investment in your business and
are called capital expenses. Capital expenses are considered
assets in your business. In general, there are three types of
costs you capitalize.
- Business start-up cost (See the note below)
- Business assets
Note: You can elect to deduct or amortize certain
business start-up costs. Refer to chapters 7 and 8 of
Publication 535, Business Expenses.
Personal versus Business Expenses
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.
Refer to chapter 4 of Publication 535, Business Expenses, for
information on deducting interest and the allocation rules.
Business Use of Your Home
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. Refer to Home Office
Deduction and Publication 587, Business Use of Your Home, for
Business Use of Your Car
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. Refer to Publication 463, Travel,
Entertainment, Gift, and Car Expenses. For a list of current
and prior year mileage rates see the Standard Mileage Rates.
Other Types of Business Expenses
- Employees' Pay: You can generally deduct the
pay you give your employees for the services they perform for
- Retirement Plans: Retirement plans are savings
plans that offer you tax advantages to set aside money for
your own, and your employees' retirement.
- Rent Expense: Rent is 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. If you have or will receive equity in
or title to the property, the rent is not deductible.
- Interest: Business interest expense is an
amount charged for the use of money you borrowed for business
- Taxes: You can deduct various federal, state,
local, and foreign taxes directly attributable to your trade
or business as business expenses.
- Insurance: Generally, 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 additional information,
refer to Publication 535, Business Expenses.
If you have comments or
questions on the information in these articles, as usual feel
free to call our offices at 801-521-4538.
Ray Clark, CPA, MBA