What Can I Deduct in a Sole Propietorship?

Home Office

The tax law allows you to deduct a portion of personal housing expenses if you use a portion of the home exclusively to conduct business, to regularly meet with clients or to store inventory. The use of a home office will not qualify for the deduction if you use it intermittently for convenience and there is another location where you can conduct business. Eligible expenses include homeowner's insurance, utilities, general repairs and rent. To calculate the deduction, you apply the business percentage to the total annual expenses. You calculate the business percentage using the ratio of the home's square footage you use solely for business purposes to the total square footage of the home.

A deduction is available for interest payments you make to finance purchases and expenses that relate solely to the business. To qualify, you must be personally liable for the debt and a true creditor-debtor relationship must exist between you and the lender. The agreement must make repayment of the loan unconditional and be free of contingencies. For example, if you obtain a loan that requires you to remit 10 percent of business profits for five years, a true-creditor debtor relationship does not exist. The IRS treats the lender as making an investment in the business rather than a loan.

You can deduct all professional fees that are an ordinary and necessary expense for a business. Examples of ordinary and necessary fees include hiring an accountant to prepare the business portion of a tax return, retaining legal counsel to review contracts and outsourcing the employee payroll function to a third party. However, if you hire an accountant to prepare an entire tax return, you must allocate the fee between nondeductible personal and business activities.

If you extend credit to clients and customers for the goods or services you provide, you can deduct the amount of any debt you are unable to collect. You can take the deduction when you determine the debt is worthless. A debt becomes worthless when, after reasonable collection efforts, it becomes unlikely that the debtor will make payments. You need not wait for a payment default to determine that a debt is noncollectable if you become aware of other information that leads to the same conclusion. If the credit sale is included in income for a prior tax year, you can take a deduction for the noncollectable amount in the current year.