I run a small business, and I am doing taxes for the first time, so I
have a few questions about legal deductions. I guess this isn't
technically a deduction, but if someone loans me money, (my mother
loaned me $10,000 to help me get on my feet) is it included as income?
And are there any deductions when I pay her back?

The other thing, is that I purchased equipment in 2004, and I'm still
paying for it in 2005. It is mixed in with some nonbusiness purchases
on the card, so I can't just deduct my monthly card payments. So how
is this worked out?

Lastly, if I buy a bowflex for the home office (located in our garage,
so it has a specific room) and it is half intended for use by
employees, can this be a deduction as well?

I also heard that I can deduct monetary gifts from my income, what are
the limitations of this?

Dear Fujtech,

The information provided by the folks commenting below is essentially correct.

Let me clarify things for you so you can make the proper entries on your 
tax return, OK?

First of all, they are both right about the loan from Mom. 
Don't add it in to your business income. But, since you have
deposited into the bank account, just get some paperwork,
signed by your mother, showing that it IS a loan. Spell out
when you have to pay it back and what rate of interest you're
paying her. That way, if you're ever audited, you can prove the
source of the money.

Next, on to the equipment you purchased. Yes, you may enter the full purchase
price on your Schedule C. If the cost was over $500.00, you'll want to 
depreciate it. Use Form 4562 to enter the total cost. You can use the
top part of the form that has the section on Section 179 depreciation. 
You may deduct the full amount of the cost using that form. Then, 
carry that amount to your Schedule C, to the line that says Depreciation. 

The reason you're allowed to deduct the full cost, even though you're still
paying for it on the card is...you've borrowed the money to buy it from 
the credit card company. As far as the store is concerned, it's paid in 
full. So, it's just like taking out a loan. 

In addition, you may deduct the interest you're paying on the credit card
that relates directly to the cost of this asset. For instance, if the 
equipment costs $5,000 and the interest rate is 12% per year, you would
multiply 1% times the unpaid balance on the equipment each month. 
(1% = 12% divided by 12 months). 

Then, finally, the bowflex. Don't go there. It's for your personal use.
You probably don't have employees anyway. (Employees are people who work
for you that you pay on payroll, with withholding and payroll taxes and
all that stuff.) You probably have some freelance people helping out.
(Although, you may want to learn more about the difference.)

Unless you really do have staff, and you can maintain a log showing
that they are using the equipment, it's not worth discrediting 
yourself under audit. But, the risk is yours. If you insist, keep 
the log and deduct the percentage of cost that your staff uses it for 
business. 

You may want to pick up a book by Jan Zobel called Minding Her Own
Business: The Self-Employed Woman?s Essential Guide to Taxes and
Financial Records
http://www.amazon.com/exec/obidos/tg/detail/-/1572484551
Don't concern yourself with the "Woman" in the title. It's an 
excellent book for anyone. 

As to QuickBooks, sure, you can use that since it's got a full
bookkeeping system. But you can start with the cheap version and
work your way up. 
http://quickbooks.intuit.com/commerce/compare/qbcom/compare_result.jhtml?priorityCode=0273400000

I would have recommended NitroTaxHelper.com since it's easier to use,
and cheaper. But you need to track your assets and liabilities, not just 
your income and expenses. 

Also, please don't be upset with me, but I really urge you to get a
good tax professional involved in doing your tax return. I know it
will cost you a couple of hundred dollars or so. But I can promise
you that they will save you more than that in taxes AND in audits.

A big part of my practice is going to IRS audits on behalf of people
who've done their own tax returns and messed it so much that they
attracted IRS's attention. Sometimes, I can fix the problems before
we ever get to audit. Other times, my job is to convince IRS the mistakes
were innocent and to beg them to cancel the penalties.

So, please, get help. At least for the first year. OK?

Good luck with your business. I hope this helps clarify some things.

Best wishes

Your TaxMama-ga

Complete, concise, and helpful.

First of all, I'm not sure how you are doing your accounting, but if
haven't already, I would highly recommend purchasing some accounting
software, such as quickbooks.  Well worth the $200.

The money from your mother is not considered income for your business.
 On a balance sheet, this would be set up as a liability account. 
However, the payments to your mother to repay the loan would not be
deductible, because it is not an expense; it is a reduction in the
amount of the liaility.  This is a balance sheet issue, not an income
statement issue.

As far as the equipment is concerned, this is why it is highly
recommended that you keep business expenses and personal expenses
separate.  You should get a line of credit or credit card that you use
exclusively for business expenses.  In any case, the purchase of the
equipment gets accounted for in 2004.  I'm not sure what kind of
equipment it is, so I'm not sure if you can expense it or if you need
to set it up as an asset.  In either case, you need to set up a
liability account for the amount of the purchase.  Then, the amounts
you pay to reduce that debt offset the liability, like the loan from
your mom.  If the equipment needs to be set up as an asset, then you
will need to start depreciating it.  If this is the case, I would
suggest you consult an accountant.

Items such as the bowflex are very tricky.  Laws regarding home office
equipment are very confusing, so I would DEFINITELY recommend that you
consult an accountant.  The same advice would hold true regarding the
gifts.  There are laws regarding the amount and frequency of gifts, so
an accountant would definitely be a good course of action.

Good luck with your business!

To clarify on the previous comment, the receipt and repayment of a
loan's principal doesn't affect taxes (since it's not revenue or
expense), but the interest on the loan is a legitimate, deductible
expense.

Also, I would advise separating your business and personal finances
ASAP. It sounds like you're operating as a sole proprietorship (no
incorporation), which means your personal assets are fair game to
satisfy your business liabilities. Especially if you're mixing
personal and business on the same credit card, that's risky business.

I would concur with most everything stated in the Answers and Comments
to your question. I would like to add two comments, though; one of
which involves hawking a product (an essential product) that we
distribute.  The first comment is this; it is not worth the time,
savings, effort, headache, etc., to do your own taxes. The IRS is, and
always will be, of the mindset that if you truly run your business
like a bona fide business (and not a hobby) you'll have an accountant
do your tax work.  In addition, most IRS agents figure that one person
filing one tax return per year (as a sideline to his/her regular job)
will likely make more mistakes than a tax professional that makes a
living out of filing dozens or hundreds of returns each year.  Thus,
the self-filer acutally has a greater likelihood of being targeted for
an audit.  My second comment is this; you should have more than a
passing familiarity with the tax code relevant to small businesses. 
We distribute a tax reduction audio course for small business owners
(put together by a former IRS lead attorney) that will put all the
relevant information at your fingertips; and this information is fully
annotated to the IRS tax code.  The course also teaches you how to
properly document your expenses so that, if you happen make a purchase
with your personal credit card (we still don't use a business credit
card), you will have full documentation of the purchase (who, what,
when, where, why, how).  All such information can be kept in a tax
diary - a permanent, accurate, and complete record of your tax
deductions (as required by the IRS). You can get more information from
us at www.taxarrest.com.  Good luck.