Taxes For Online Business Owners – Review of Business Expenses
Posted on July 30, 2010 | No Comments
Mike J. Filsaime asked:
Taxes for online business owners can be a bit tricky. If you get involved with the wrong people, you might end up taking some unnecessary risks. Therefore, it is always best to get your tax advice from the IRS website. Here we are highlighting what IRS dot gov says about business expenses; however this is not intended to be tax advice.
What is a Business Expense
When you have a for-profit business, you can deduct expenses from the gross income. This is defined as a cost of carrying on a trade or business.
What Are Legitimate Deductions
The key words in the definition appear to be ordinary and necessary.
Ordinary – An ordinary expense is what most people would consider common and accepted. Think of this as your “average man” expense. Would the average man say yeah, you need that to do business?
For example, office supplies such as paper, pens, and broadband service would be considered ordinary.
Necessary – A necessary expense is an expense that is helpful and considered appropriate for your business. It does not have to be absolutely needed but it does need to be considered helpful and appropriate.
For example, a keyword research tool is not absolutely necessary for Internet marketing, but it sure is helpful and definitely appropriate for an online business.
The next thing you need to determine is where the expenses fall. The IRS gives three broad categories:
Cost of Goods Sold Capital Expenses Personal Expenses
Cost of Goods Sold
When you manufacture or buy products for resale, the chances are high you will need to determine your cost of goods sold. Some of your regular expenses may be included in this cost and this is where people tend to fudge. If you deduct your expense in cost of goods sold, you cannot deduct it again under business expense.
General expenses included in cost of goods sold:
Cost of product- This will include the price you paid to manufacture, purchase and ship the product. Storage cost- Storage is the cost of warehousing and refrigeration of products and product materials. Direct Labor Cost – This is the salary you pay employees to produce your product. It does include contributions to annuities and pensions. Factory Cost- Factory overhead is the price of rent, electricity, water, and other necessary utilities.
Capital Expenses
Assets in your business cannot be deducted. They must be capitalized and are referred to as capital expenses.
Capital Expenses include:
Business assets (although some can be amortized) Business start-up Improvements
Personal Expenses
Personal expenses are another place people get into trouble. The line between personal expense and business expense can be kind of fuzzy and you must be extra careful not to cross the line.
For example, part of your mortgage can be deducted if you have a home office. However, the home office can only be used for business work–otherwise it does not count.
The same can be said for broadband services. Now if your family uses the broadband too, then the amount you can deduct will be the percent your business uses it as compared to your family.
Taxes for online business owners can be complicated. However, with the right software and the right information, you can easily get everything in line and ready to go.
Create a video blog…instantly.
Taxes for online business owners can be a bit tricky. If you get involved with the wrong people, you might end up taking some unnecessary risks. Therefore, it is always best to get your tax advice from the IRS website. Here we are highlighting what IRS dot gov says about business expenses; however this is not intended to be tax advice.
What is a Business Expense
When you have a for-profit business, you can deduct expenses from the gross income. This is defined as a cost of carrying on a trade or business.
What Are Legitimate Deductions
The key words in the definition appear to be ordinary and necessary.
Ordinary – An ordinary expense is what most people would consider common and accepted. Think of this as your “average man” expense. Would the average man say yeah, you need that to do business?
For example, office supplies such as paper, pens, and broadband service would be considered ordinary.
Necessary – A necessary expense is an expense that is helpful and considered appropriate for your business. It does not have to be absolutely needed but it does need to be considered helpful and appropriate.
For example, a keyword research tool is not absolutely necessary for Internet marketing, but it sure is helpful and definitely appropriate for an online business.
The next thing you need to determine is where the expenses fall. The IRS gives three broad categories:
Cost of Goods Sold Capital Expenses Personal Expenses
Cost of Goods Sold
When you manufacture or buy products for resale, the chances are high you will need to determine your cost of goods sold. Some of your regular expenses may be included in this cost and this is where people tend to fudge. If you deduct your expense in cost of goods sold, you cannot deduct it again under business expense.
General expenses included in cost of goods sold:
Cost of product- This will include the price you paid to manufacture, purchase and ship the product. Storage cost- Storage is the cost of warehousing and refrigeration of products and product materials. Direct Labor Cost – This is the salary you pay employees to produce your product. It does include contributions to annuities and pensions. Factory Cost- Factory overhead is the price of rent, electricity, water, and other necessary utilities.
Capital Expenses
Assets in your business cannot be deducted. They must be capitalized and are referred to as capital expenses.
Capital Expenses include:
Business assets (although some can be amortized) Business start-up Improvements
Personal Expenses
Personal expenses are another place people get into trouble. The line between personal expense and business expense can be kind of fuzzy and you must be extra careful not to cross the line.
For example, part of your mortgage can be deducted if you have a home office. However, the home office can only be used for business work–otherwise it does not count.
The same can be said for broadband services. Now if your family uses the broadband too, then the amount you can deduct will be the percent your business uses it as compared to your family.
Taxes for online business owners can be complicated. However, with the right software and the right information, you can easily get everything in line and ready to go.
Create a video blog…instantly.