BUSINESS EXPENSES: IRS PUBLICATION #535
What Can You Deduct?
To be deductible, a business expenses must be ordinary, necessaey, and an allowed expense deduction under the tax code.
An ordinary expense is one that is common and accepted in your industry or line of business.
A necessary expense if one that is helpful and appropriate for your business.
An expense allowed under the tax code is an expense the tax code does not specifically disallow.
Different Types of Business Expenses
The tax treatment of a business expense depends on the specific expense and the proper tax treatment under the tax code.
Some expenses are deductible in full immediately, when paid or incurred.
Other expenses must be deducted over a specific period of time per the tax code.
And, some business expenses are never allowed as a deduction.
When Can You Deduct An Expense?
All businesses must choose a method of accounting to accurately (properly) record revenue and expenses.
The two most common are the cash method and the accrual method.
The cash method allows you to deduct the expenses when it is actually paid.
The accrual method allows you to deduct the expense when it is incurred, even if not yet paid.
Chart of Accounts
Every business is different and thus will have expenses tailored to their operations and to meet their reporting and tax preparation needs.
A chart of accounts will list all the different types of accounts pertaining to the specific business (and can change over time should the business itself change).
Setting up a bookkeeping or recordkeeping system will help with the financial and tax responsibilites the business must comply with.
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