Keeping personal and business taxes separate can be difficult, especially for a sole proprietor or a partner. You generally cannot deduct personal, living, or family expenses. However, sometimes expenses cross the line between personal and business purposes. These expenses may be divided between their components, and the business part of the expense can be deducted if it qualifies as an "ordinary and necessary" business expense.
For example, if a sole proprietor borrows money and uses 60 percent of it for her business and 40 percent of it to remodel her home, 60 percent of the interest on the loan may be deductible as a business expense. Below are some rules of thumb in how to deduct certain expenses which often are incurred both for personal and business purposes.
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Legal and Professional Fees
Legal and professional fees, such as for accounting or legal services, which are directly related to operating a business can be deducted as business expenses. However, legal fees incurred in acquiring business assets usually are not deductible; the fees paid for defending or perfecting title, acquiring or selling property, or developing and improving property must be capitalized and added to the property's basis. The personal portion of legal fees for producing or collecting taxable income, for keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. The cost of preparing the portion of your income tax return relating to your business as a sole proprietor or a partner can be deducted as a trade or business expense.
Business Use of Your Home
If you use part of your home in your business, you may be able to claim part of the expenses of maintaining your home as a business expense. These expenses may include mortgage interest, depreciation, insurance, utilities, and repairs. You must meet strict requirements before you can take any portion of these home expenses as business deductions. Your home office qualifies as your principal place of business for deducting expenses if:
- You use it regularly and exclusively to manage or administer your trade or business, and
- You have no other fixed location where you conduct substantial administrative or management activities for your trade or business.
Note: You do not have to meet the exclusive use test if:
- You use part of your home for the storage of business inventory or samples, or
- Part of your home is used as a day care facility.
Business Use of Your Car
Car expenses are deductible if you use your car in your business. However, if you use the car for personal as well as business purposes, you must divide your expenses based on the mileage traveled for each use. You may only deduct as a business expense the miles driven for business purposes.
You can take either a mileage deduction at the rate per mile prescribed by the IRS, or you can deduct the business use percentage of actual car expenses, which include depreciation, lease payments, gas, oil, tires, repairs, tune-ups, insurance, and registration fees. Self-employed taxpayers can deduct the business part of interest on car loans, parking fees and tolls, and property tax on the car.
Let an Experienced Tax Attorney Help You with Your Small Business
Keeping your business and personal taxes separate is complicated and the risks of getting it wrong could prove quite costly. That's where an experienced tax attorney can play a very helpful role, both in advising you and in filing any required documents with the IRS. Avoid problems tomorrow by speaking with a local tax attorney today.