FAQ - Frequently Asked Questions

Question 1: I started a business this year but did not make any money. Do I need to report this on my tax return?

Example: A taxpayer incorporates his business in the middle of 2004. The taxpayer files his personal tax return with a Schedule C on the transactions that took place up until the time of incorporation. The transactions that took place after he incorporated are reported on the company's corporate tax return.

Question 4: I lose money on my business every year. Is there a problem showing a business loss year after year?

Answer: If a business never makes money, the IRS can disqualify it as a proper business and consider it a hobby. If this happens, the ability to deduct losses is greatly reduced. Generally speaking, a business that loses money three years in a row is likely to be considered a hobby.

Example: A taxpayer starts a business in 2003. The business is slow to take off and the taxpayer loses money in 2003 and 2004. In 2005 the taxpayer should make at least a small profit to avoid the IRS labeling his business a hobby.

Question 5: Is there an upper limit of business revenue that can be reported on a personal tax return?

Answer: According to the IRS rules you are allowed to report any amount of business income on your personal tax return. There are non-regulatory reasons, however, why it may be advantageous to incorporate your business and report the income on a corporate tax return. Some of these reasons include tax savings and a lower chance of an audit.

Example: A taxpayer starts a business in January 2004 earns $1,500,000 in gross receipts. The taxpayer reports this activity on his personal 2004 tax return. For the 2005 tax year the taxpayer incorporates his company because he wants to reduce his chance of being audited.

Question 6: Do I need to report receivables in a business I am reporting on my personal tax return?

Answer: Business income can be reported using the cash method, accrual method or a combination of the two. When using the cash method receivables need not be reported. When using the accrual method receivables need to be reported.

Example: A taxpayer starts a business where he has to wait up to six months for payment on completion of a job. The taxpayer chooses to use the cash method of reporting income on his tax return. By using this method the taxpayer does not have to pay taxes on receivables before he receives payment.

Question 7: Can I report home office expenses incurred on a business that I am reporting on my personal tax return?

Answer: House or apartment expenses related to a business are valid expenses. There is a special form on the tax return where these expenses must be included. Where there is a loss, these expenses will not help offset income earned from other sources, but excess expenses can be carried over to future years

Example: A taxpayer uses the second bedroom in her house to run a small business. The taxpayer uses the square footage of her office to allocate expenses. Her office is 100 square feet and her house in 1,000 square feet so 10% of house expenses can be used as a business expense.

Question 8: Can I report automobile expenses incurred for my business on my personal tax return?

Answer: Automobile expenses related to a business are valid expenses. Careful record keeping must be maintained contemporaneously to separate business use of the automobile and personal use of the automobile. The valid expense can be calculated either based on mileage or actual expenses.

Example: A taxpayer uses her truck exclusively for her business and uses a car for all of her personal traveling. The taxpayer can use all of the truck expenses for the business because that vehicle was used exclusively for her work.

Question 9: I often take clients out for business lunches. Can these meal expenses be used on my tax return?

Answer: 50% of your meal expenses can be used on your tax return. However, in order to be deductible, a substantial portion of the entertainment must be business related and it must be established that there was a clear business purpose in making the expenditure.

Example: An owner of a public relations firm takes different individuals out for dinner and lunch most days of the week. At the end of the year the meals have a cost of $30,000. Only $15,000 of this is allowed as a valid business expense.

Question 10: I often travel for my business. Can travel expenses be used on my tax return?

Answer: Travel expenses are fully deductible. The only expenses related to travel that can not be taken in full are meal and entertainment expenses.

Example: A business owner travels to a trade show in Las Vegas. While in Las Vegas the business owner takes a client to a show. The airline ticket, hotel room and other traveling expenses are fully deductible. The show is only 50% deductible.

Question 11: Can I deduct start up costs incurred for a business?

Answer: Start up costs relate to future years, making them a capital expenditure. Capital expenditures can not be expensed immediately, but rather must be expensed over future years. An exemption does exist and some start up costs can usually be expensed right away.

Example: A taxpayer spends $10,000 to set up a small business. $5,000 may be expensed immediately and the other $5,000 needs to be amortized over the next 15 years.

Question 12 : I just bought new furniture for my business? Can these expenses be used on my tax return?

Answer: New furniture costs relate to future years making them a capital expenditure. Capital expenditures can not be expensed immediately, but rather must be expensed over future years. An exemption does exist and furniture costs can often be expensed right away.

Example: A taxpayer spends $10,000 on new furniture for his business. The entire $10,000 can be expensed right away, but because of tax planning reasons the taxpayer chooses to depreciate the cost of the furniture over the next five years.

Question 13 : I just bought new equipment for my business. Can these expenses be used on my tax return?

Answer: The new equipment costs will benefit the business for a number of years, making them a capital expenditure. Capital expenditures can not be expensed immediately, but rather must be depreciated over future years. An exemption does exist and equipment costs can often be expensed right away.

Example: A taxpayer spends $10,000 on new equipment for his business. The entire $10,000 can be expensed right away, but because of tax planning reasons the taxpayer chooses to depreciate the cost of the equipment over the next five years.

Question 14 : I just bought a new automobile for my business? Can this expense be used on my tax return?

Answer: New vehicle costs relate to future years making them a capital expenditure. Capital expenditures can not be expensed immediately, but rather must be depreciated over future years. Exceptions to this rule are not as generous for automobiles as they are for other assets but in some instances new vehicle costs can be expensed right away.

Example: A taxpayer spends $30,000 on a new automobile for his business. The taxpayer depreciates the automobile over the next five years.

Question 15 : I just renovated my business office. Can this expense be used on my tax return?

Answer: Renovations relate to future years making them a capital expenditure. Capital expenditures can not be expensed immediately, but rather must be expensed over future years. The exemptions that allow other capital expenditures to be expensed immediately do not apply to renovations.

Example: A taxpayer spends $100,000 on office renovations. The taxpayer depreciates the renovation over the next 15 years