1. Expenses used to figure the cost of goods sold. If you deduct these from your gross receipts to figure your gross profit for the year, you may not use them again as a business expense. These include the cost of product or raw materials, including freight, storage, and direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products and factory overhead.
2. Capital expenses. These are expenses that are considered as part of the investment in your company such as business start-up costs, business assets and improvements. These expensed must be “capitalized” rather than deducted as a business expense.
3. Personal expenses. These cannot be deducted as a business expense, unless a portion of the expense is directly for business purposes. For example, your home cannot be considered a business expense, but the portion of your home used for your business office can be deducted.
