Are all expenses deductible in the year they are paid?

Hi June,

I am a cartoonist from Parsippany, NJ --5 years.

I have 3 little questions that all seem to fall under the category of "Are all expenses deductible in the year they are paid?"

1) I usually pay my PO Box fees in the year I use the PO Box, but because of a rise in fees, the Post Office encouraged me to pay ahead, so I have paid for 18 months in 2007, but only used it for 12 months.

2) Advertising: I bought business cards, stickers, and other small items for advertising my business, including Holiday Cards (featuring my artwork). Is the total cost deductible as advertising, even if I have inventory left over? It will take me years to hand out a thousand business cards!

3) Software: I thought that you had mentioned somewhere that software had to be amortized over several years, but cannot find that reference now. Can I deduct the cost of software and software upgrades as supplies in the year purchased?

I truly appreciate your advice, and your time.

Thank you very much in advance,
John

Hi John,

Hello to Parsippany. I lived in NJ much of my life. And my husband covered Parsippany-Troy Hills for a local newspaper way back when.

As a cash-basis taxpayer, yes you may deduct all the expenses you question as current, in the year paid. At one time software had to be amortized -- cost spread over a number of years -- but no more. Take the cost as a supplies expense.

A reminder about cash-basis: It's income when you get it, not when you bill it. It's an expense when you pay it, not when you receive the bill.

Another reminder about December expenses: Paid by check or bank credit card, then it's considered paid regardless of when your check clears or when you pay your credit card.

Best,
June

Inventory

Hi June,

I am a cartoonist who has also become a self-publisher. With the help of your book, Self-employed Tax Solutions, I've been able to make sense of most of my business taxes, but some things remain tricky.

My question: Buying a proof of my books is a necessary expense. The proofs are not always perfect, so I consider any proof not saleable. Yet, they are something that I can keep in my studio to show people, rather than toss them. Where can I deduct the price of the proofs? Do they go under COGS, supplies, or other?

Thanks in advance, John


Hi John,

You have a choice.

You can consider the cost of proofs as production costs when figuring your per book cost. For example:
All production costs for 100 books = $1000. That means cost = $10 per book.
If the proofs cost you another $100, then your total production costs for the saleable books = $1100. So your per book cost = $11.

Or you can include the proof books as part of your inventory. And when you use them for show, treat them the same as you would books that you give away for promotion. For example:
Let's say your cost was as in the above example, $1100. But you got 100 saleable books and and 10 proofs. Then, your cost per book = $10. And every time you use a proof or send out a book with your promo packet your inventory cost = $10 per book .

Inventory is difficult to explain in a short piece. I assumed that, because you used COGS, "cost of goods sold," that you understand a bit about inventory. Hope I was right!

Best,
June