When to deduct expenses from your business for tax and accounting purposes

 Expenses are only deductible for tax purposes if you are trying to make a profit

start a businessThe mission of the Saafenet corporation is to help individuals gain knowledge to start their own businesses. When you work for some multi-level and network marketing organizations typically, you are either their employee or an independent consultant.  This is not the same as opening your own business. In those situations, some expenses may not be tax deductible.  Each of those situations must be examined individually to determine what might be deductible.

If you are involved in a hobby or other activity which is not carried on to make a profit, none of the expenses may be deductible for tax purposes.  You must report all of the gross income (without deductions) of that activity on Form 1040, line 21. Special limits apply to what expenses for a not-for-profit activity are deductible. One goal of your accounting, be it for profit or not, is aimed at determining the cost of performing that activity. Accounting rules should not be confused with tax reporting rules. Understanding both are

If you are in a for-profit business you must still account for your expenses properly

You should account for your activities in accordance with Generally Accepted Accounting Principles (GAAP) when you are involved in a for-profit business. Furthermore,tax reports and filings. The IRS accepts reports of the results of your operations on a cash, modified cash or accrual method.  Use of those methods may or may not be in conformity with GAAP.

In addition, there must be a determination as to whether the expenses you are reporting are ordinary and necessary. An ordinary expense is defined as one that is common and accepted in your type of business. A necessary expense is one that is helpful and appropriate for your business.  Under no circumstances may personal expenses be reported as business expenses. For example, if you used your car 70% for business and 30% personally.  You could only deduct 70% of the cost of the car and its upkeep.

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