Small Business and Real Estate Expenses

Small Business Expenses are listed on Schedule C. It is good practice to keep these expenses categorized throughout the year. See www.irs.gov for more information.

• Advertising
• Car and truck expenses
• Commissions and fees
• Contract labor
• Depletion
• Depreciation and section 179 expense deduction
• Employee benefit programs
• Insurance
• Interest (Mortgage)
• Legal and professional services
• Office expense
• Pension and profit sharing plans
• Rent or lease
• Repairs and maintenance
• Supplies
• Taxes and licenses
• Travel
• Meals and Entertainment
• Utilities
• Wages
• Other expenses

Computer supplies and automobiles used for business will be "listed property" in section V of Form 4562. For example, if you purchased a computer for $832 and used it for business 50% of the time, the basis would be $832, of which $416 would be used for business, to be recovered over a 5 year period. This would allow a depreciation deduction of $84 using the HY convention. The categories for "Business use of your home" for Form 8829 are:

• Real estate taxes
• Interest (Mortgage)
• Insurance
• Rent
• Repairs and maintenance
• Utilities
• Other expenses

This expense will be determined based on the square footage of your home and the area designated for business use (such as an office). The percentage will be used to determine the expense used for business.

For rental properties, there are three categories: real estate professionals, active activities and passive activities. If you search for tenants and screen them yourself, and are called in the middle of the night to fix plumbing, you are most likely active in your real estate venture. In general, the more active you are, the better the deductions when the property doesn't make a profit. For example, an active investment can be used to reduce active income. On the other hand, if you use a property manager, you will have to carry the loss over into future years waiting for a profit, by using Worksheets 3, 5 and 6 from Form 8562.

The categories are:

• Advertising
• Auto and travel
• Cleaning and maintenance
• Commissions
• Insurance
• Legal and other fees
• Management fees
• Interest (Mortgage)
• Repairs
• Supplies
• Taxes
• Utilities
• Depreciation expense or depletion
• Other (Amortization)

Typically, Stamp Taxes, Title Fees and Recording Fees, all found in sections 1100 and 1200 of the HUD should be added to the basis of the home. These are added to the original purchase price of the home and include any "improvements" made to the home. The basis for a home is typically depreciated using Depreciation and Amortization Form 4562, using MACRS Depreciation over 27.5 years. See sizusfinlit.blogspot.com for more information about the HUD sections and what is not included in the basis.

Typcially, points on a home or refinance costs, should be amortized over the life of the loan (for example, 30 years for a 30 year loan).

If this article, helped, please leave comments and let us know how we are doing. We are glad to help promote small business and help stimulate the economy.

This post was reposted from http://finlit.biz/estate-planning/small-business-and-real-estate-expenses/, originally written on December 28th, 2013.