Effective Date: June 1, 2024

Previous Policy

General Information

Accept the individual's ledgers, other bookkeeping system or tax return as verification of the allowable expenses. Only request receipts if the individual has no other record keeping system for expenses. Some expenses the individual may claim as business expenses are not allowed as deductions. They include:

· The cost of purchasing income-producing real estate and capital assets such as equipment, machinery and other durable goods, including payments on the principal of a loan to purchase capital goods;

· Expenses and net losses from previous periods;

· Federal, state and local income taxes;

· Money set aside for the individual's retirement. For MAGI programs, however, allow contributions to SEP, SIMPLE and Qualified Plans as self-employment expenses.

· Other work related personal expenses such as transportation to and from work or personal entertainment expenses;

· Repayment on the principal of a bank loan; and

· Debts from a previous business, including bankruptcy payments

1. Self-Employment Expenses (Non-Farm)

a. Advertising - Amounts paid for advertising and promotional fees.

b. Bad Debts - Bad debts are mainly the result of credit sales to customers. They can also be the result of loans to suppliers, individuals, employees, or distributors. A bad debt may be claimed if the income that the debt represents is definitely known to be worthless.

c. Car and Truck Expenses -

i. Mileage Expenses. If the vehicle is used for personal use and for the business, the individual must declare the percentage of mileage used for business. Allow the same percentage of all expenses related to the vehicle.

o Standard Mileage Rate : Rather than using actual expenses, the individual may choose a standard mileage rate of 67 cents a mile for vehicle expenses. In order to use the standard rate, the individual must have owned the vehicle and used the standard mileage rate for the first year it was placed in service. If the vehicle was leased they must have used the standard mileage rate for the entire lease period. (The standard rate is not allowed if the car is used for hire or if they operate two or more cars at the same time.)

o Not Using Standard Mileage Rate: For those who do not use the standard mileage rate, the business portion of expenses for gasoline, oil, repairs, insurance, tires, parking fees, rental fees, garage rent, license plates, etc. are allowable. Also allow a deduction for vehicle registration, prorated for 12 months.

ii. Principal Payments: Do not allow a deduction for payment on the principal for the purchase of the vehicle. Do not allow a deduction for a payment for leasing the vehicle if the payment may also be applied towards purchase of the vehicle. Do not allow costs of driving the car or truck between home and the main regular workplace.

d. Commissions and Fees

e. Depletion - Depletion is the using up of natural resources by mining, quarrying, drilling or felling. Individuals who have an economic interest in mineral property or standing timber may deduct the cost of using up those natural resources

f. Depreciation - Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property which has a useful life beyond one year. It includes improvements made to lease business property. Stock in trade, inventories, or land are not depreciable.

g. Employee benefit programs - Contributions to employee benefit programs that are not a part of a pension or profit sharing plan. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. Do not allow these expenses for contributions made into these plans for the self-employed individual.

h. Insurance - Premiums paid for insurance related to the trade or business. This includes fire, theft, flood or other similar insurance, merchandise and inventory insurance, and liability insurance.

i. Interest - Interest paid to banks or other financial institutions for a mortgage on real property used in the business that is not the individual’s home or the home of any partner in the business. Do not allow a deduction for bills owed but not paid. Do not deduct interest paid or accrued on debts allocable to investment property. Do not allow any deduction for payment on the principal for any land or business. If the property being purchased is a vehicle, see the rules for Car and Truck Expenses above.

i. Business Use of a Home - Not Day Care

If the business is operated in a home of the individual or the individual's partner, determine the percentage of the home that is used regularly and exclusively for business purposes. Do not include any part of the home that is used for both living space and for business. Allow the same percentage of the costs associated with the home.

ii. Business Use of a Home - Day Care

If the day care business is operated in a home of the individual or the individual's partner, determine the percentage of the home that is used on a regular basis for business purposes. It is not necessary for any portion of the home to be used exclusively for business. Allow the same percentage of the costs associated with the home.

j. Legal and Professional services - Legal and professional fees that are ordinary and necessary expenses directly related to operating the business. The cost of tax advice and preparation of the tax forms related to the business are included.

k. Office Expenses - Expenses paid as operating costs of an office. Do not include purchases of office furniture or equipment (these are capital expenditures.)

l. Pension and profit sharing plans - Contributions made to pension, profit-sharing, or annuity plans for employees of the business. Do not include contributions made for the self-employed individual.

m. Rent or leases - Amounts paid for the use of property rented or leased for the business.

n. Repairs and Maintenance - Amounts paid for repairs and maintenance to property that does not add to the value or increase the life of the property. Do not deduct amounts spent to restore or replace property (these are capital expenses.)

o. Supplies - Supplies and materials used in the business. Do not include inventory that is maintained for sale.

p. Taxes and licenses - Taxes paid by the business. This includes state and local sales taxes imposed on the individual as the seller of goods or services; real estate and personal property taxes on business assets; licenses and regulatory fees for the trade or business paid each year to state or local governments; Social Security and Medicare taxes paid to match required withholding from the employees’ wages; federal unemployment taxes; and federal highway use taxes.

o Do not allow federal income taxes, including the individual’s self-employment tax; taxes assessed to pay for improvements, such as paving and sewers; State and local sales taxes on property purchased for use in the business; and other taxes and license fees not related to the business.

q. Travel, meals, and entertainment - Expenses for lodging and transportation connected with overnight travel, if they are directly related to or associated with the active conduct of the trade or business. Do not allow expenses paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement or recreation. Do not deduct amounts paid or incurred for membership dues in any club organized for business, pleasure, recreation or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs.

r. Utilities - Utility expenses for the trade or business

i. Business not in a Home

All utility payments made, including telephone, are allowable deductions for a business that is not run in the individual's home or the home of any partner in the business. The payment is an allowable deduction in the month the payment is made.

ii. Business in the home of a individual or individual's Partner

If the business is operated in the home of the individual or the individual's partner, determine the percentage of the home that is used on a regular basis for business purposes. Allow the same percentage of the utility costs, except for the telephone, associated with the home.

If there is more than one telephone in the home, allow the full amount paid for any additional telephone (s) listed in the phone book as business phones. If there is only one telephone or if no additional phone is listed in the phone book as a business phone, allow deductions only for specific telephone calls identified by the individual as business calls. Allow the deductions in the month the bill is paid.

s. Wages - Wages paid to employees of the business. Do not include salaries or wages paid to the self-employed individual.

t. Other Expenses - Donations to business organizations, licenses and regulatory fees, subscriptions to trade or professional publications.

2. Farm Expenses

a. Car and Truck Expenses - If the vehicle is used for personal use and for farming, the individual must declare the percentage of mileage used for farming. Allow the same percentage of all expenses related to the vehicle.

i. Standard Mileage Rate - Rather than using actual expenses, the individual may choose a standard mileage rate of 67 cents a mile for vehicle expenses. In order to use the standard rate, the individual must have owned the vehicle and used the standard mileage rate for the first year it was placed in service. If the vehicle was leased they must have used the standard mileage rate for the entire lease period. (The standard rate is not allowed if the car is used for hire or if they operate two or more vehicles at the same time, such as fleet operations.)

ii. For those who do not use the standard mileage rate, the business portion of expenses for gasoline, oil, repairs, insurance, tires, parking fees, rental fees, garage rent, license plates, etc. are allowable. Also allow a deduction for vehicle registration, prorated for 12 months.

Do not allow a deduction for payment on the principal for the purchase of the vehicle. Do not allow a deduction for a payment for leasing the vehicle if the payment may also be applied towards purchase of the vehicle.

b. Chemicals

c. Conservation Expenses - Deductible soil and water conservation expenses generally are those that are paid to conserve soil and water or to prevent erosion of land used for farming. These expenses include (but are not limited to) the cost of leveling, grading and terracing, contour furrowing, the construction, control, and protection of diversion channels, drainage ditches, earthen dams, watercourses, outlets and ponds, the eradication of brush, and the planting of windbreaks. This deduction may not exceed 25% of the gross income from farming.

d. Custom Hire (Machine Work) - Amounts paid for custom hire or machine work (the machine operator furnished the equipment). Do not include amounts paid for rental or lease of equipment that the farmer operated himself.

e. Depreciation - Depreciation is the annual deduction allowed to recover the cost or other basis of buildings, cars and trucks, machinery, and other farm equipment which have a useful life beyond one year. It includes improvements made to leased business property. Depreciation on the home, furniture or other personal items, land, livestock bought or raised for resale, or other property in inventory are not depreciable.

f. Employee Benefits - Contributions made to employee benefit programs that are not an incidental part of a pension or profit-sharing plan. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. Do not deduct any contributions made on behalf of the farmer to an accident and health plan or for group-term life insurance.

g. Feed Purchases - Expenses for feed that was consumed by the livestock in the current year, including prepaid farm supplies. Prepaid farm supplies are amounts paid during the tax year for feed, seed, fertilizer, and similar farm supplies not used or consumed during the year. Prepaid farm supplies do not include any amount paid for farm supplies on hand at the end of the tax year that would have been consumed if not for a fire storm, flood, or casualty, disease, or drought. Deduct the expense for prepaid farm supplies that does not exceed 50% of the other deductible farm expenses in the year of payment.

h. Fertilizers and lime - Cost of fertilizer, lime, and other materials applied to farm land to enrich neutralize or condition it.

i. Freight and Trucking - Costs of freight and trucking. Do not include the cost of transportation incurred in purchasing livestock held for resale.

j. Gasoline, fuel and oil - Cost of gasoline, fuel and oil used for farming.

k. Insurance - Premiums paid for farm business insurance. Do not deduct amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for the farmer’s lost earnings due to sickness or disability.

l. Interest - Interest paid to banks or other financial institutions for a mortgage on farmland or other obligations incurred in the farm business. If the proceeds of a loan are used for more than one purpose (for example, personal and business), allocate the interest on that loan to each use. Only allow the portion of the interest payment that is the farm expense.

m. Labor Hired - Amounts paid for farm labor. Do not deduct amounts paid to the owner of the farm. Allow reasonable wages or other compensation paid to the children or the spouse of the farmer if a true employer-employee relationship exists. Do not deduct wages paid to hired help for the construction of new buildings or other items.

n. Pension and Profit-Sharing Plans - Contributions made to employee pension, profit-sharing, or annuity plans for employees of the farm. Do not include contributions made for the self-employed farmer.

o. Rent or Lease Payments - Business portion of the rental cost for rented or leased vehicles, machinery, or equipment. Do not deduct rent for property which the farmer will receive equity in or title to.

p. Repairs and Maintenance - Amounts paid for repairs and maintenance of farm buildings, machinery, and equipment. This includes the cost of tools of short life or minimal cost, such as shovels and rakes. Do not deduct repairs or maintenance on the farmer’s home.

q. Seeds and Plants Purchased - Costs of seeds and plants purchased for further development and cultivation before sale. Do not deduct the purchase price and seeds and young plants for Christmas trees and timber.

r. Storage and warehousing - Costs for storage and warehousing.

s. Supplies purchased - Costs of supplies and materials used in the farming. Do not include inventory that is maintained for sale.

t. Taxes - Taxes paid by the Farm. This includes real estate and personal property taxes on the farm business assets, Social Security and Medicare taxes paid to match what was required to be withheld from farm employees’ wages, federal unemployment taxes, and federal highway use taxes.

Do not deduct federal income taxes, including self-employment tax; estate and gift taxes; taxes assessed for improvements such as paving and sewers; taxes on the home or personal use property and state and local sales taxes on property purchased for use in the farm business; or other taxes not related to the farm business.

u. Utilities - Amounts paid for gas, electricity, water, etc., for business use on the farm. Do not include personal utilities. Do not deduct the base rate (including taxes) of the first telephone line into the farmer’s residence, even if used for business.

v. Veterinary, Breeding, and Medicine - Veterinary, breeding and medicine costs.

w. Other Expenses - Other necessary farm expenses such as advertising office supplies, cost of qualified clean-fuel vehicle property, legal and professional fees, etc. Do not include fines or penalties paid to a government for violating any law.

Note : You may allow expenses for business use of the home only if the home is used exclusively and regularly for the administrative or management activities of the farm and there is no other fixed location where the farmer can conduct these activities. If part of the home is used for business, determine the percentage of the home that is used regularly and exclusively for business purposes. Allow the same percentage of the expenses association with the home. These expenses include utilities, deductible mortgage interest, real estate taxes, and casualty and theft losses.