Tax season brings many challenges for most businesses. The tax law changes on a regular basis and these changes take place at local, state, and federal levels. Keeping up with tax law can be a full-time job, but you may not be able to afford to hire a tax attorney or tax consultant.
In that case, it’s all up to you. You have to determine whether the items that you purchase count as valid business exemptions. Here are some things you can do to determine whether your purchase falls into this category.
The Purpose of the Item
One of the first things of the IRS looks to is the purpose of the item. That initial evaluation typically revolves around the general perceived purpose. For instance, freelance writers can deduct novels and movie tickets because these are seen as tools of the writing trade. But they may find themselves at an increased risk for auditing because the perceived purpose of these items is typically pleasure rather than business.
Many writers actually refrain from claiming such purchases as deductions for just for that reason. For eCommerce store owners, product samples may fall into this category as well. Luxury items may be classified as a business deduction in some eCommerce store industries, but that deduction runs the risk of being perceived as pleasure rather than business.
What the Item Will Actually Be Used For
In addition to the actual and the perceived purpose of the item, the next question is what will be item actually be used for. In some respects, this question is one of the most important. According to the IRS, it doesn’t matter what the purpose of the item is if you don’t use it for that.
One of the more common instances is a computer that is purchased for work. The computer itself is up to all of the industry specs, ready for shipping Australia, and it’s perfect for the job. However, the business owner uses the computer for games most of the time rather than work. The actual use for games, rather than its stated purpose, will be the controlling factor in this instance.
Evaluating a Mixed Situation
In some cases, you may find yourself in a mixed situation. The work computer is one of the most common instances of a mixed situation because many eCommerce store owners and entrepreneurs use business equipment and personal equipment interchangeably throughout the day.
However, according to the IRS, electronic equipment like this must be specifically and wholly for business. Even playing Angry Birds will remove the business status on the item. In other cases, such as improvements to a home office that benefit the house as well, the deduction may be prorated according to the percentage of it that benefits the home office itself. Often times, if you have a mixed situation, you should look up the item on the IRS website to see if they have specific instructions for how you should estimate the value.
Taxes can be quite complicated to figure out, especially when you are considering business exemptions. Remember that the purpose of the item will help determine whether or not you can deduct it, though what you actually use it for will trump that. In a mixed situation, your best bet is to actually look the item up on the IRS website. However, most electronic equipment and the like must be used only for business.