In the last entry of this series of Legal Log entries, we began a review of how to organize usual expenses to simplify reporting deducible business expenses in a typical balloon-related business. In this entry, we continue this review.
8. The cost of shipping fees for Freight is a deductible expense if directly related to the business. This could include the cost of shipping a hot air balloon to a repair station for repairs or annual inspection, or for transportation to a "work site" through a freight carrier.
9. The cost of Insurance premiums. This includes automobile and other motor vehicle insurance, aircraft insurance and other business insurance premiums. For the commercial balloonist, this might include the hot air balloon, the chase vehicle, the office, hangar and storage space (due to fire, theft, storm, burglary, accident, liability, and business interruption), workers’ compensation and a group medical plan for employees.
10. Any Interest paid or accrued on one’s Business Indebtedness is deductible, except interest on loans to buy tax-exempt securities or life insurance. Discounted notes, that is, the amount of funds deducted by a bank when it buys a business note is treated as interest and is deductible. Finance charges on credit card accounts, or installment loans, are deductible. Thus, a loan to borrow the funds to purchase a hot air balloon, a chase vehicle, or other equipment, or the use of a credit card to purchase supplies, equipment, fuel, or other items, or seller-financed purchases all generate deductible interest, even if the interests could not be deducted as a personal deduction.
11. The payment of fees for Professional Services, like an attorney or accountant, for services related to the business are deductible. Certain professional fees, such as fees concerning the acquisition of property, restructuring the capital structure of a large business, or other fees concerning property subject to depreciation are not. Further, all payments to attorneys, certified public accountants, physicians, or other professional persons by a business entity must be reported to the Internal Revenue Service on Form 1099-MISC.
12. All appropriate Office Expenses for the business are deductible, including office supplies (paper, pens, typewriter ribbons, floppy disks, printer toner, etc.), stationery and envelopes, and so forth. Postage, express mail fees, courier services, and facsimile services, printing and photocopying could all be included in this category.
13. Deductions are available for Pension, Profit-Sharing and Employee Benefit Plan contributions. Most aeronauts in a business will find that they can make contributions to either individual retirement arrangements (IRAs) up to $2,000 each year, or to a Keogh plan, provided all employees are covered, or both if the contributions meet the legal requirements for each type of plan.
14. Payments of Rent for Business Property, either real property, equipment, or machines, is deductible if used directly in the trade or business. If the arrangement involves a multi-year lease, only the rent expense for that year may be deducted in any year. For the aeronaut, this includes rent for office space, hangar space, storage areas, vehicles, office and other equipment, telephone equipment, and so forth.
15. One may deduct the costs of Repairs and Maintenance to any property used in a business. These costs, made so that the property remains in an ordinarily efficient operating condition, are distinguished from capital expenditures for replacements, alterations, improvements or additions that extend the useful life of the property, increase its value, or makes it adaptable to a different use. Treat these costs as additions to the basis of the property that is being depreciated.
16. Supplies, other than office supplies, can be considered as deductions under this category, if the useful life of the supplies is one year or less. If supplies have a useful life exceeding one year, the cost must be depreciated. This category includes gasoline for the inflator fan, helium for the toy weather balloons, the weather balloons, and propane for the hot air balloon.
17. If connected with the business, or expenditures for the business, Taxes are deductible, even when they are not deductible for personal expenses. Still, certain taxes remain nondeductible: federal income taxes, estate and gift taxes, war and excess profit taxes, and state estate, inheritance, legacy, succession and gift taxes. Generally deductible taxes for federal tax purposes include state and local income taxes, personal property and real property ad valorem taxes. General sales and use taxes are deductible as a business expense as part of the item for which they are paid, although sales and use taxes are no longer a personal itemized deduction. Other taxes that are deductible as a business expense include federal import duties, excise taxes on tires, gasoline, telephone service, and state unemployment fund contributions, state disability insurance benefit fund contributions, and one-half of self-employment taxes. In addition, any state or local tax, license or fee collected for regulatory purposes may be deducted. Transfer taxes, automobile inspection fees, state and local gasoline taxes, registration fees, corporate franchise taxes, occupational licenses and state aviation licenses are also deductible.
18. Business Travel and Entertainment expenses are deductible if they are reasonable, were necessarily incurred while away from home, and are directly connected with and necessary or appropriate to the pursuit of the trade, business, or profession. Commuting expenses are not deductible, but any ordinary and necessary transportation expense incurred by the taxpayer in carrying on the trade or business after he or she reaches the principal place of business are deductible after the initial departure from a residence and the last trip to the residence. This commuting rule does not seem to apply when the principal (or sole) place of business is at the residence.
19. All business Utilities and Telephone expenses are deductible. This includes water, sewer, gas, electricity, cable, local telephone service, long distance toll charges, and any applicable excise, sales, franchise or other similar taxes.
20. If you incur Educational Expenses, that is, expenses connected with educational activities in a trade, business, or profession, these are deductible once you meet the minimum educational requirements necessary to qualify for the business, trade or profession. Thus, ground and flight instruction for a lighter-than-air commercial rating are not deductible, yet, education, training or study to improve or maintain skills as a pilot, or to operate a business would be deductible, even if it leads one to a degree, unless the training or study will qualify one for a new trade, business, or profession. This deduction includes refresher courses, academic course work, vocational classes, and courses dealing with current developments in the field. All directly related costs, such as research, typing, transportation and travel costs are deductible. Therefore, attending pilot safety seminars is a deductible activity, and thus, travel, tuition and related costs to attend the pilot safety seminar are deductible. Still, the educational program must clearly be the predominant purpose of the expenditure.
21. Obviously, there are various Miscellaneous expenses that do not fit the categories discussed above. If such items are recurring expenses for the business, these should be set up as additional categories, and listed under this line of the tax return. Thus, you might decide to have separate categories for postage, express mail fees, courier services, and facsimile services, printing and photocopying.
Likewise, clothing might be a special category. Supplying a uniform of clothing items by an employer, not fit for normal wear, to an employee is deductible. If the item can be used by the employee for normal wear it is not a deductible expense. Still, the use of T-shirt, caps, gloves, and so forth that are retained by the pilot are deductible. Also, these items may be deductible as advertising, if designed to reflect business advertising, such as a business logo.
Providing champagne and other refreshments gratuitously as part of a charter passenger flight is deductible as an ordinary and necessary business expense, and could be stated as either an entertainment expense (that is closely scrutinized by the IRS) or a separate miscellaneous expense category. However, because of liquor control laws in many states, champagne should not be sold as part of a charter flight unless one has obtained the appropriate liquor licenses! These restrictions might be avoided if a pilot offers a glass of champagne as a gratuity.
Other common expenses in ballooning are deductible expenses. For instance, an emergency first aid kit, or helmets, caps or gloves to be worn in flight as protective gear, are deductible as an ordinary and necessary expense. Likewise, road maps, aeronautical charts, pilot logs, and aircraft logs are all deductible.
In the next installment of this series, we will focus on the necessary elements required to claim a deduction for a home office.