If I take out a loan for the purpose of starting up a business, can I deduct the interest on my taxes?
No. No immediate deduction is allowed for startup expenditures. However, once you begin to operate your business (when it becomes an active trade or business) you may amortize your interest expense over a period of 60 months.
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I gave my friend a loan to do business, but the business went bankrupt and she did not pay me back. Can I deduct this bad loan?
If someone owes you money that you cannot collect, you have a bad debt. There are two kinds of bad debts - business and nonbusiness.
Bad debts are deductible only if the amount owed has been previously included in your income. If you are a cash basis taxpayer, as most individuals are, you may not take a bad debt deduction for expected income you have not received, since it was never included in your income. A business bad debt, generally, is one that comes from operating your trade or business. A business deducts its bad debts from gross income when figuring its taxable income. Business bad debts may be deducted in part or in full.
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish that you have taken reasonable steps to collect the debt and that the debt is worthless. It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due.
A nonbusiness bad debt is reported on Form 1040, SCHEDULE D, Capital Gains and Losses, as a short-term capital loss. It is subject to the capital loss limit of $3,000 per year. This limit is $1,500 if you are married filing a separate return. A nonbusiness bad debt requires a separate detailed statement attached to the schedule D. For more information on nonbusiness bad debts, refer to Publication 550, Investment Income and Expenses. For more information on business bad debts, refer to Publication 535, Business Expenses.
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How do you distinguish between a business and a hobby?
Generally, a hobby is an activity that is carried on for personal pleasure or recreation. It is not an activity entered into with the intention of making a profit. In determining whether you are carrying on an activity for profit, all the facts are taken into account. No one factor alone is decisive. Among the factors to consider are whether:
- You carry on the activity in a businesslike manner
- The time and effort you put into the activity indicate you intend to make it profitable
- You depend on income from the activity for your livelihood
- Your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business)
- You change your methods of operation in an attempt to improve profitability
- You, or your advisors, have the knowledge needed to carry on the activity as a successful business
- You were successful in making a profit in similar activities in the past
- The activity makes a profit in some years, and how much profit it makes
- You can expect to make a future profit from the appreciation of the assets used in the activity
The importance of knowing whether you are involved in an activity for profit or as a hobby is that the amount of expenses you can deduct if the activity is a hobby are limited to the amount of income from the same activity.
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If I pay personal expenses out of my business bank account, should I count the money used as part of my income, or can I write these expenses off?
You would include the money in income and you would not write the amounts off as expenses. Only business related expenses can be deducted from your business income. It is generally recommended that you not mix business and personal accounts. It simply makes it easier to keep records.
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For business travel, are there limits on the amounts deductible for meals?
Meal expenses are deductible only if your trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Generally, the deduction for unreimbursed business meals is limited to 50% of the cost.
Instead of keeping records of your meal expenses and deducting the actual cost, you can generally deduct a standard meal allowance ranging from $30 to $46 in 1999 depending on where and when you travel. For more information on business travel expenses and restrictions, refer to Tax Topic 511, or Publication 463, Travel, Entertainment, Gift, and Car Expenses.
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What are the standard mileage rates for 1999, 2000, and 2001?
For 1/1/99 - 3/31/99 and for 2000, the standard mileage rate is 32.5 cents a mile for all business miles. For 4/1/99 - 12/31/99 the rate is 31 cents per mile. The rate for moving or medical reasons is 10 cents a mile. The rate for travel for charitable volunteer work is 14 cents a mile.
For 2001, the standard mileage rate for all business miles is increased to 34.5 cents per mile per Revenue Procedure 2000-48. The standard mileage rate for moving or medical reasons is increased to 12 cents a mile. The rate for travel for charitable volunteer work remains at 14 cents a mile.
For more information, refer to Tax Topic 510, Business Use of Car, and Publication 463, Travel, Entertainment, and Gift Expenses.
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Where can I find the per diem rates for foreign countries?
Foreign Per Diem Rates are available at this location.
The federal per diem rates for foreign locations are also published monthly in the Maximum Travel Per Diem Allowances for Foreign Areas. Your employer may have these rates available, or you can purchase the publication from the:
Superintendent of Documents
U.S. Government Printing Office
P.O. Box 371954
Pittsburgh, PA 15250-7954
You can also order it by calling the Government Printing Office at (202) 512-1800 (not a toll-free number) or if you have a computer and modem, you can check rates at the U.S. Department of State Office of Allowances.
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I use my home for business. Can I deduct the expenses?
If you use part of your home exclusively and regularly and, if an employee, for the convenience of your employer as the principal place of business or as a place where you meet or deal with customers, you may deduct expenses for use of part of your home. If you deduct your business expenses on Form 1040, SCHEDULE C, you must figure your deduction on Form 8829, Expenses for Business Use of Your Home, and attach it to Form 1040 with Schedule C. For more information refer to Tax Topic 509, Business Use of Home, or Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).
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I use part of my living room as an office. Can I take a deduction for business use of my home?
In general, if you use a part of your home for both personal and business purposes, no expenses for business use of that part are deductible. Exceptions apply for qualified day-care providers and for the storage of inventory or product samples used in the business. For additional information on business use of your home, refer to Tax Topic 509, or Publication 587, Business Use of Your Home (Including Use by Day-Care Providers).
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If you lease a vehicle, can you deduct the cost of the lease payments plus the standard mileage rate?
No, if you lease a car you use in business, you may use either the standard mileage rate or claim actual expenses, which would include lease payments. You cannot use both the standard mileage rate and the lease payments.
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Is the state sales tax paid on the purchase of an automobile an allowed deduction?
State and local sales tax paid on personal items is no longer an allowable itemized deduction on Form 1040, SCHEDULE A, Itemized Deductions. If the auto is a business asset it is generally added to the basis and recovered through depreciation.
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Are excise taxes for a vehicle deductible?
It has to be a personal property tax, not an excise tax, in order to deduct it. Deductible personal property taxes are only those based on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year. To be deductible, the tax must be charged to you and must have been paid during your tax year. Taxes may be claimed only as an itemized deduction on Form 1040, SCHEDULE A, Itemized Deductions.
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We leased an auto for a small business. How much (if any) of the down payment is tax deductible in the year the automobile is leased?
You must spread any advance lease payments over the entire lease period. You cannot deduct any payments you make to buy a car even if the payments are called lease payments. If you lease a car that you use in your business, you can deduct the part of each lease payment that is for the use of the car in your business. You cannot deduct any part of a lease payment that is for commuting to your regular job or for any other personal use of the car.
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If I buy down the lease (pay a lump sum up-front) of a vehicle for my new business, how would this up-front payment be treated for tax purposes?
You must spread any advance lease payments over the entire lease period. You cannot deduct any payments you make to buy a car even if the payments are called lease payments. If you lease a car that you use in your business, you can deduct the part of each lease payment that is for the use of the car in your business. You cannot deduct any part of a lease payment that is for commuting to your regular job or for any other personal use of the car.
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If you lease purchase a piece of equipment, like a forklift or boom truck, do you deduct the lease or do you depreciate it?
There may be instances in which you must determine whether your payments are for rent or for the purchase of the property. You must first determine whether your agreement is a lease or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement.
In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true:
- The agreement applies part of each payment toward an equity interest that you will receive.
- You get title to the property upon the payment of a stated amount required under the contract.
- The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.
- You have an option to buy the property at a nominal price compared to the total amount you have to pay under the lease.
- The lease designates some part of the payments as interest, or part of the payments are easy to recognize as interest.
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If you lease office equipment and machinery with the option to buy, when do you depreciate the purchase price?
If you lease equipment with the option to later buy the equipment, you must first determine whether your agreement is a lease agreement or a conditional sales contract. If, under the agreement, you acquired or will acquire title to or equity in the property, you should treat the agreement as a conditional sales contract. Payments made under a conditional sales contract are not deductible as rent expense. You would start depreciating the equipment on the date you acquired the equipment.
Whether the agreement is a conditional sales contract depends on the intent of the parties. Determine intent based on the facts and circumstances that exist when you make the agreement
In general, an agreement may be considered a conditional sales contract rather than a lease if any of the following is true.
- The agreement applies part of each payment toward an equity interest that you will receive.
- You get title to the property upon the payment of a stated amount required under the contract.
- The amount you pay to use the property for a short time is a large part of the amount you would pay to get title to the property.
- You pay much more than the current fair rental value for the property.
- You have an option to buy the property at a nominal price compared to the value of the property when you may exercise the option. Determine this value when you make the agreement.
- You have an option to buy the property at a nominal price compared to the total amount you have to pay under the lease.
- The lease designates some part of the payments as interest, or part of the payments are easy to recognize as interest.
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Are business gifts deductible?
If you give business gifts in the course of your trade or business, you can deduct the cost subject to special limits and rules. In general, you can deduct no more than $25 for business gifts you give directly or indirectly to any one person during your tax year. Exceptions may apply. For additional information, refer to Tax Topic 512 and Chapter 28 of Publication 17, Your Federal Income Tax.
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Can I deduct my investment expenses as business expenses?
The proper classification is important to determine how income and expenses are to be reported. Investors trade solely for their own account and do not carry on a trade or business. Their securities sales result in capital gain or loss and their deductible expenses are itemized deductions. Dealers sell securities to customers in the ordinary course of trade or business. Their sales result in ordinary gain or loss and their deductible expenses are trade or business expenses. Traders buy and sell securities frequently but have no customers. Their purchases and sales result in capital gain and loss, and their deductible expenses are trade or business expenses.
Even if you engage in extensive securities activities, you are an investor, not a dealer or trader, if you do not seek profit primarily in swings in daily market movements, and do not personally engage in or direct the purchases or sales. An investor trades for profit-motivated reasons such as long-term appreciation, dividends and interest. Whether the activities of an individual constitute trade or business or investment is determined from the facts in each case. These distinctions have been established through court cases.
If your trading activity is a business, your trading expenses would be reported on Form 1040, SCHEDULE C, Profit or Loss from Business (Sole Proprietorship) instead of Form 1040, SCHEDULE A, Itemized Deductions. Your gains or losses, however, would be reported on Form 1040, SCHEDULE D, Capital Gains and Losses, unless you file an election to change you method of accounting.
If your trading activity is a business and you elect to change to the mark-to-market method of accounting, you would report both your gains or losses on Part II of Form 4797, Sales of Business Property.
A change in your method of accounting requires the consent of the Commissioner and can not be revoked without the consent of the Secretary. Though there is no publication specific to day traders, the details for traders in securities and commodities are covered in Internal Revenue Code Section 475(f) and Revenue Procedure 99-17.
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