Page 65 - Small Business Taxes

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• You have no other fixed location where For more information on car expenses and In addition, passive activity credits can only off-
you conduct substantial administrative or the rules for using the standard mileage rate, set the tax on net passive income. Any excess
management activities of your trade or see Pub. 463. loss or credits are carried over to later years.
business. Suspended passive losses are fully deductible
If you have more than one business loca- How Much Can I in the year you completely dispose of the activ-
tion, determine your principal place of business ity. For more information, see Pub. 925.
based on the following factors. Deduct? Net operating loss (NOL). If your deduc-
• The relative importance of the activities tions are more than your income for the year,
performed at each location. you may have an NOL. You can use an NOL to
• If the relative importance factor does not Generally, you can deduct the full amount of a lower your taxes in other years. See Pub. 536
business expense if it meets the criteria of ordi-
determine your principal place of business, for more information.
consider the time spent at each location. nary and necessary and it is not a capital ex- See Pub. 542 for information about NOLs of
pense.
Optional safe harbor method. Individual corporations.
taxpayers can use the optional safe harbor Recovery of amount deducted (tax benefit
same tax year in which you would have claimed When Can I
method to determine the amount of deductible rule). If you recover part of an expense in the
expenses attributable to certain business use of
a residence during the tax year. This method is a deduction, reduce your current year expense Deduct an Expense?
an alternative to the calculation, allocation, and by the amount of the recovery. If you have a re-
substantiation of actual expenses. covery in a later year, include the recovered
The deduction under the optional method is amount in income in that year. However, if part When you can deduct an expense depends on
limited to $1,500 per year based on $5 per of the deduction for the expense did not reduce your accounting method. An accounting
square foot for up to 300 square feet. Under this your tax, you do not have to include that part of method is a set of rules used to determine when
and how income and expenses are reported.
method, you claim your allowable mortgage in- the recovered amount in income.
terest, real estate taxes, and casualty losses on For more information on recoveries and the The two basic methods are the cash method
and the accrual method. Whichever method
the home as itemized deductions on Sched- tax benefit rule, see Pub. 525.
ule A (Form 1040). You are not required to allo- you choose must clearly reflect income.
cate these deductions between personal and Payments in kind. If you provide services to For more information on accounting meth-
business use, as is required under the regular pay a business expense, the amount you can ods, see Pub. 538.
method. If you use the optional method, you deduct is limited to your out-of-pocket costs.
cannot depreciate the portion of your home You cannot deduct the cost of your own labor. Cash method. Under the cash method of ac-
used in a trade or business. Similarly, if you pay a business expense in counting, you generally deduct business expen-
Business expenses unrelated to the home, goods or other property, you can deduct only ses in the tax year you pay them.
such as advertising, supplies, and wages paid what the property costs you. If these costs are
to employees, are still fully deductible. All of the included in the cost of goods sold, do not de- Accrual method. Under the accrual method
requirements discussed earlier under Business duct them again as a business expense. of accounting, you generally deduct business
use of your home still apply. expenses when both of the following apply.
For more information on the deduction for Limits on losses. If your deductions for an in- 1. The all-events test has been met. The test
business use of your home, including the op- vestment or business activity are more than the is met when:
tional safe harbor method, see Pub. 587. income it brings in, you have a loss. There may
If you were entitled to deduct deprecia- be limits on how much of the loss you can de- a. All events have occurred that fix the
fact of liability, and
duct.
! tion on the part of your home used for
CAUTION business, you cannot exclude the part Not-for-profit limits. If you carry on your b. The liability can be determined with
of the gain from the sale of your home that business activity without the intention of making reasonable accuracy.
equals any depreciation you deducted (or could a profit, you cannot use a loss from it to offset 2. Economic performance has occurred.
have deducted) for periods after May 6, 1997. other income. For more information, see
Not-for-Profit Activities, later. Economic performance. You generally
Business use of your car. If you use your car At-risk limits. Generally, a deductible loss cannot deduct or capitalize a business expense
exclusively in your business, you can deduct from a trade or business or other income-pro- until economic performance occurs. If your ex-
car expenses. If you use your car for both busi- ducing activity is limited to the investment you pense is for property or services provided to
ness and personal purposes, you must divide have “at risk” in the activity. You are at risk in you, or for your use of property, economic per-
your expenses based on actual mileage. Gen- any activity for the following. formance occurs as the property or services are
erally, commuting expenses between your provided, or the property is used. If your ex-
home and your business location, within the 1. The money and adjusted basis of property pense is for property or services you provide to
area of your tax home, are not deductible. you contribute to the activity. others, economic performance occurs as you
provide the property or services.
You can deduct actual car expenses, which 2. Amounts you borrow for use in the activity
include depreciation (or lease payments), gas if: Example. Your tax year is the calendar
and oil, tires, repairs, tune-ups, insurance, and year. In December 2022, the Field Plumbing
registration fees. Or, instead of figuring the a. You are personally liable for repay- Company did some repair work at your place of
business part of these actual expenses, you ment, or business and sent you a bill for $600. You paid
may be able to use the standard mileage rate to b. You pledge property (other than prop- it by check in January 2023. If you use the ac-
figure your deduction. For 2022, the standard erty used in the activity) as security for crual method of accounting, deduct the $600 on
mileage rate is 58.5 cents per mile before July the loan. your tax return for 2022 because all events
1, 2022, and 62.5 cents per mile on or after July have occurred to “fix” the fact of liability (in this
1, 2022. To find the standard mileage rate for For more information, see Pub. 925. case, the work was completed), the liability can
2023, go to IRS.gov/Tax-Professionals/ Passive activities. Generally, you are in a be determined, and economic performance oc-
Standard-Mileage-Rates. passive activity if you have a trade or business curred in that year.
If you are self-employed, you can also de- activity in which you do not materially partici- If you use the cash method of accounting,
duct the business part of interest on your car pate, or a rental activity. In general, deductions deduct the expense on your 2023 tax return.
loan, state and local personal property tax on for losses from passive activities only offset in-
the car, parking fees, and tolls, whether or not come from passive activities. You cannot use Prepayment. You generally cannot deduct ex-
you claim the standard mileage rate. any excess deductions to offset other income. penses in advance, even if you pay them in ad-
vance. This applies to prepaid interest, prepaid
Page 6 Chapter 1 Deducting Business Expenses