Question

Your client has started a photography business on Jan 1 of 2016 (sole proprietorship). She has never started a business before. The business had sales of $15,000 and incurred the following expenses in 2016. Explain to your client how these will be handled in 2016 and in 2017 and beyond.

Licenses   5,000

Advertising 2,000

Studio rent 3,500

Market studies 2,300

Studio equipment, cameras & lenses      $25,000

Answer 1

As per the taxation rules, businesses are allowed to deduct the expenses they have incurred in earning the revenue as allowed by the rules. Expenses are classified as revenue and capital. Where revnue expenses can be deducted directly, capital expenses (more of an asset) are allocated over their useful life. In your case, advertising, studio rent and market studies can be considered as allowable revenue expenses and thus their deduction will be available in every year incurred.

As for Licences, if they have a life period of more than 1 year than it shall be considered as intangible assets and their deduction would be available as per the IRS depreciation and amortization rules for them over their useful life.

Similarly Studio equipment, cameras & lenses are also non current assets and thier deduction for depreciation would be available over their useful life as per IRS rules.

Hope this helps, thanks