This article will explore business in a very general term. For tax purposes of are engaged in a trade or business if your activity is entered into with the expectation of making a profit, and if you devote a substantial amount of your time to the activity. Also if you operate through an agent or an employee who devotes a substantial amount of their time to your activity, then you are considered to be in a trade or a business.
It is possible for, an individual to be engaged in more than one trade or business at the same time. I need to point out here that if you merely hold securities or other property for investment purposes, although you devote some time to the management, you are not considered to be engaged in a trade or business However in some cases, the ownership and management of rental property can be considered a trade or business.
Normally when starting a business you will have what is referred to as start up expenses. These are expenses incurred to decide whether to go into business, and which business to enter. You can expense up to $5,000; the balance must be amortized over a period of 180 months. If the start-up expenses exceed $50,000, the immediate deduction is reduced dollar for dollar, so that no immediate deduction can be claimed if start-up costs exceed $55,000.
Please note that start-up costs incurred before October 23, 2004 continue to be amortized over a period of 60 months if an amortization election was made.
When looking at expenses, it is necessary to distinguish between capital expenditures and current expenses because capital expenditures are not deductible, but may be recovered through depreciation over a period of years.
A capital expenditure represents an investment of capital either to acquire property having a useful life of more than one year or to increase the value of such property or to prolong its life.
Some examples of capital expenditures would be the costs of acquiring a building or an addition to an existing structure, installing a new roof, installing a new heating system. Commissions and legal fees incurred in buying or constructing property are also capital expenditures.
The area in which the distinction between capital and current expenses is of importance is where money is expended on repairs, replacements, or improvements. The latter two are capital expenditures that can be recovered only through depreciation, (if they can be at all) while the former is an expense that entitles the taxpayer to a full current deduction.
A "repair" is defined as an expenditure made to maintain your business property in an ordinary, efficient operating condition, whereas an improvement materially adds to the value or utility of the property or appreciably prolongs its useful life.
Some examples of repairs are, repainting the insides and outsides of buildings, repairing roofs, or fixing leaks.
Expenditures for replacements of parts of a machine, merely to maintain it in efficient operating condition, are deductible as repairs. However, if the machine is extensively overhauled, it is considered an improvement and should be capitalized. Other examples of capital items are new electric wiring, new roofs, new floors, new plumbing, and lighting improvements.
The IRS rules are such that if you make both repairs and improvements at the same time, you should segregate the repair and improvement items; otherwise, capitalization of the entire cost may be required.
I have touched on these few subjects when looking at a business because my experience is that there is great confusion here. There is much more to consider when starting or acquiring a business and you should consider the many resources available and educate yourself about small business before you make any major decisions...
To your success!
