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prosecuting traffickers. Victims are crucial to in- vestigations and prosecutions; each case and every conviction changes lives. DHS under- stands how difficult it can be for victims to come forward and work with law enforcement due to their trauma. DHS is committed to helping vic- tims feel stable, safe, and secure. To report suspected human trafficking, call the DHS domestic 24-hour toll-free number at 866-DHS-2-ICE (866-347-2423) or 802-872-6199 (non-toll-free international). For help from the NHTRC, call the National Human Trafficking Hotline toll free at 888-373-7888 or text HELP or INFO to BeFree (233733). The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) has is- sued a public advisory to financial institutions that contains red flag indicators for potential suspicious financial activity associated with hu- man trafficking. If warranted, financial institu- tions should file a Suspicious Activity Report (FinCEN 112) with FinCEN to report these ac- tivities. For more information, go to Fincen.gov/ Sites/default/files/advisory/FIN-2014-A008.pdf 1. Deducting Business Expenses What’s New Form 1040 redesigned. Form 1040 has been redesigned for 2018. See Form 1040 and its in- structions for more information. Forms 1040A and 1040EZ no longer availa- ble. Forms 1040A and 1040EZ aren't available to file your 2018 taxes. If you used one of these forms in the past, you will now file Form 1040. Deduction for qualified business income. For tax years beginning after 2017, you may be entitled to take a deduction of up to 20% of your qualified business income from your qualified trade or business, plus 20% of the aggregate amount of qualified real estate investment trust (REIT), and qualified publicly traded partnership income. Small business taxpayers. For tax years be- ginning after 2017, more small business taxpay- ers may qualify to use the cash method of ac- counting and be exempt from capitalizing certain expenses under section 263A. In addi- tion, small business taxpayers may not be re- quired to account for inventories under section 471 and are not subject to the business interest expenses limitation. Introduction This chapter covers the general rules for de- ducting business expenses. Business expen- ses are the costs of carrying on a trade or busi- ness, and they are usually deductible if the business is operated to make a profit. Topics This chapter discusses: • What you can deduct • How much you can deduct • When you can deduct • Not-for-profit activities Useful Items You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 583 Starting a Business and Keeping Records 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 13 for information about getting publications and forms. What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. An ordinary ex- pense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or busi- ness. An expense does not have to be indis- pensable to be considered necessary. Even though an expense may be ordinary and necessary, you may not be allowed to de- duct the expense in the year you paid or 334 463 525 529 536 538 542 547 583 587 925 936 946 Schedule A (Form 1040) 5213 incurred it. In some cases, you may not be al- lowed to deduct the expense at all. Therefore, it is important to distinguish usual business ex- penses from expenses that include the follow- ing. • The expenses used to figure cost of goods sold. • Capital expenses. • Personal expenses. Cost of Goods Sold If your business manufactures products or pur- chases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your business expenses may be included in figuring cost of goods sold. Cost of goods sold is deducted from your gross re- ceipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. The following are types of expenses that go into figuring cost of goods sold. • The cost of products or raw materials, in- cluding freight. • Storage. • Direct labor (including contributions to pen- sion or annuity plans) for workers who pro- duce the products. • Factory overhead. Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repack- aging, handling, and administrative costs. This rule does not apply to small business taxpayers. You qualify as a small business tax- payer if you (a) have average annual gross re- ceipts of $25 million or less for the 3 prior tax years, and (b) are not a tax shelter (as defined in section 448(d)(3)). If your business has not been in existence for all of the 3-tax-year period used in figuring average gross receipts, base your average on the period it has existed, and if your business has a predecessor entity, include the gross receipts of the predecessor entity from the 3-tax-year period when figuring aver- age gross receipts. If your business (or prede- cessor entity) had short taxable years for any of the 3-tax-year period, annualize your business’ gross receipts for the short tax years that are part of the 3-tax-year period. See Pub. 538 for more information. For more information, see the following sources. • Cost of goods sold—chapter 6 of Pub. 334. • Inventories—Pub. 538. • Uniform capitalization rules—Pub. 538 and section 263A and the related regulations. Capital Expenses You must capitalize, rather than deduct, some costs. These costs are a part of your investment in your business and are called “capital expen- ses.” Capital expenses are considered assets Chapter 1 Deducting Business Expenses Page 3