Braxton Consulting

What is — and isn’t — a tax deductible business expense?

Just about any “ordinary, necessary, and reasonable” expense that helps you earn business income is deductible. What’s ordinary and necessary? The IRS, for example, has defined this as anything that’s “helpful and appropriate” for your business, but the tax authorities of your country may have another definition. For example, buying a computer, or even a sound system, for your office or store can be an ordinary and necessary business expense. Buying the same items for your family room cannot be a business expense, however.

A few things are specifically prohibited by some countries from being deducted even if the expenses are for the purpose of conducting business — for instance, a bribe paid to a public official. Other deduction no allowed for deduction are traffic tickets, your home telephone line, and clothing you wear on the job, unless it is a required uniform.

What is the difference between current and capital expenses?

Current expenses can be deducted from your business’s total income in the year you incur them. They include the everyday costs of keeping your business going, such as office supplies, rent, and electricity.

Expenditures for things that will help generate revenue in future years — a desk, a copier, or a car, for example — are called capital expenses and must be written off over their useful life.

If I buy a new computer system this year, do I have to deduct the cost over a five-year period?

Probably not. In most occidental countries, you can deduct in one year the cost of tangible personal property that you buy for your business (such as computers, office furniture, and equipment). This is a major exception to the general rule that the cost of capital equipment — equipment that has a useful life of more than one year, such as a computer system — must be deducted over a number of years.

There is a limit to the total amount of business property expenses that you can deduct each year. Many small businesses can fit all of their capital expenditures each year into this allotted amount. In most countries, this rule doesn’t apply to land, buildings, inventory, intangible assets, and air conditioning and heating units. It does apply to vehicles, but special rules limit the portion of the cost of a car that you can depreciate each year.

Which are the most important tax deductions for professionals?

Here are the more important tax deductions that every professional business owner should know about:

• Business operating expenses.
• Business entertainment.
• Business travel.
• Long-term assets.

Are child support payments considered taxable income?

No, child support payments generaly are neither deductible by the payer nor taxable to the payee.
When you total your gross income to see if you are required to file a tax return, do not include child support payments received.

I am a U.S. citizen. If I move to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?

United States citizens living abroad:

• Are required to file annual U.S. income tax returns.
• Must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes.
• Must report their worldwide income if they meet the minimum income filing requirements for their filing status and age.
• Will have the option to exclude some or all of your foreign earned income or to claim a foreign tax credit if Canadian taxes must be paid.

I am a U.S. citizen working for a U.S. firm in a foreign country. Is any part of my wages or expenses tax deductible?

U.S. citizens are taxed on their worldwide income. Some taxpayers may qualify for the foreign earned income exclusion, foreign housing exclusion, or foreign housing deduction, if:

• They are physically present in a foreign country or countries for at least 330 full days during any period of 12 consecutive months,
• Their tax home is in a foreign country, or
• They are either a bona fide resident of a foreign country or countries for an uninterrupted period that includes an entire tax year.

The taxpayer may also qualify to deduct away from home expenses (for travel, meals, and lodging), but not against excluded income.

If the taxpayer is temporarily away from his or her tax home in the United States on business (less than a year), he or she may be able to claim a foreign tax credit if required to pay qualifying foreign tax to the foreign country and would not qualify for the foreign earned income exclusion.

Who pays Capital Gains Tax in the UK?
Capital Gains Tax is paid by:

• individuals who are UK resident or UK ordinarily resident
• trustees of a settlement
• executors or administrators – ‘personal representatives’ – responsible for a deceased person’s financial affairs

If you are in a business partnership you must pay Capital Gains Tax on your share of any gain when you sell or otherwise dispose of partnership assets. For limited companies capital gains form part of the total profits of the company on which they pay Corporation Tax.

Special Capital Gains Tax rules may apply if you don’t normally live and work in the UK.