Accounting Rules for Tax Deductible Items

• Car expenses may be deductible in some circumstances.a car in a car show image by Gary from Fotolia.com
  
  When running a business it is important to understand what items are deductible business expenses. Costs of goods sold are essential deductible items. Although capital expenses are not deductible there are methods to recover a portion of these expenses. Personal expenses are not deductible on your taxes. However, there are special rules for items used for both personal and business purposes.
  
  

Cost of Goods Sold

• You must deduct the cost of goods sold in order to calculate gross profit for a business that manufactures products or purchases them for resale. In order to determine your cost of goods sold you must value inventory at the beginning and end of the each tax year, according to IRS Publication 525. Expenses included in calculating cost of goods sold may include the cost of products or raw materials, which also includes freight costs. Cost of storage, direct labor, and factory overhead are other types of expenses included in cost of goods sold.
  
  

Capital Expenses

• Some business-related costs are not deductible, but are considered "capital expenses." These expenses are considered business assets, according to IRS Publication 535. Although you cannot take a deduction for capital expenses, there are methods for you to deduct a portion of the costs of depreciable property. These deductions are known as section 179 deductions. Many business start-up costs are considered capital expenses. Business assets such as land, buildings, machinery, furniture, patents, and franchise rights must be fully capitalized. Costs of making improvements to business assets must also be capitalized. However, repairs necessary to keep property in operating condition can be deducted as a business expense.
  
  

Personal vs. Business Expenses

• You usually are not allowed to deduct personal, living, or family expenses, according to IRS Publication 535. However, you may have an expense for an item partially used for business endeavors as well as personal purposes. In this case you should divide total cost between business and personal parts, while deducting the business portion.
  
  

Business Use of Home

• Business use of part of your home may be deductible in the form of mortgage interest, insurance, utilities, repairs, and depreciation. To qualify for deduction the business part of your home must be used exclusively and regularly for business, according to IRS Publication 535. This portion of your home must also be your principal place of business or where you conduct business meetings. A structure separate from your home can also qualify.
  
  

Business Use of Car

• Car expenses may also be deductible in some circumstances. If you use your car exclusively for business all of your car expenses are deductible, according to IRS Publication 535. Expenses for mixed use cars must be divided based upon actual mileage. Commuting between your home and your business location is not tax deductible.