Business Expenses
The IRS allows you to deduct business and unreimbursed employee business expenses. Schedule C is used to report income and expenses from a sole proprietorship. Independent contractors and statutory employees also use schedule C. Schedule F is used to report income and expenses from farming. Form 2106 is used to report unreimbursed expenses by employees.
Deductions for employees are limited; see the employee business expenses page for details about these limits. Deductions for Schedule C and F taxpayers are not limited and will also reduce your AGI.
Here are the details on expenses not including the business use of your home:
Commuting from home to work is not deductible, but commuting from your place to work to meet clients or to another place of work is. You can either take the standard mileage (55 cents a mile for 2009, 50 cents for 2010) for your business miles, or depreciation plus actual expenses on the business use of your car. In some cases, you have to use one method or the other.
Furthermore, in both methods you get to deduct tolls and parking fees. However, you can't deduct these expenses at or on your way to your normal place of work. Remember to save receipts in case the IRS asks. If you have a device in your car to let you pass the toll gate quickly (such as FasTrak in the Bay Area), the monthly statement from that device is itself a receipt.
Actual expenses include gasoline and repairs, and are preferable if your car is not gas efficient. In any case, even if you use actual expenses, you still need to keep track of your mileage because the IRS form asks for 3 totals: total business mileage, total commuting mileage, total personal mileage.
You can use the business expenses worksheet below to help you track your employee business expenses.
For the total business mileage, you should keep a diary of the number of miles traveled. You may track the beginning and ending mileage for each trip by noting the number on your odometer, as in page 1 of the worksheet below. However, this can get tedious if you have a lot of repeating trips, such as trips from your office to UPS. In this case, you can use page 2 of the worksheet to track your mileage by the trip description. In this method you use your odometer or google/yahoo maps to determine the mileage for one trip, then multiply by the number of trips. You may also save gasoline and repair receipts for additional documentation, even if taking standard mileage.
Use page 3 of the worksheet to keep track of your line item expenses such as office supplies. Don't include assets such as computers and office furniture here, as assets have to be depreciated over a number of years. As always, save the actual receipts, not credit/debit card statements or voided checks.
Use page 4 of the worksheet to keep track of recurring line item expenses such as a second business telephone line, the business use of your cell phone, the business use of the interest on your auto loan.
Meals and entertainment while away from home are 50% deductible for most employees as long as the cost is not extravagant. Remember to save the actual receipts from the restaurant as the IRS requires this. Also keep a diary or log of all your business meals. You may use page 5 of the worksheet below to help you keep track of all your meals.
The cost of assets, such as cameras or computers, has to be depreciated over a period of years. Section 179 can be used to write off the cost more quickly, but restrictions apply. Page 6 of the worksheet helps you to keep track of your asset expenditures. The last column of the worksheet is only an approximation of your annual depreciation; your actual depreciation is usually reduced in the first year of service because of the mid-year convention, and could be increased because of Section 179.
For details about the business use of your home, refer to the home office page.
Official documentation:
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IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses)
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Schedule C (Profit or Loss From Business)
© 2008, Pacific Tax Inc