A sole proprietorship is a non-incorporated business entity wholly owned by a single individual. The sole proprietor has the right to make any and all decisions regarding business operations, including the purchase of equipment, goods and materials necessary for running the business. A sole proprietor may purchase property for both personal and business use through his own name or through the name of his business. However, only personal property used in direct relation to business operations is viewed as a tax-deductible business expense.
Decide how the purchased property will be used in your business. For example, if you buy furniture for a home office, you may deduct or depreciate the cost of the furniture as a business expense. However, if you buy a video game console, even if you use the business name to make the purchase, it will not be considered a legitimate deductible business expense unless you are in the video game business. Only personal property purchased for the direct conduct of business is tax deductible.
Read More: Can a Sole Proprietorship Have Employees?
Determine whether a portion of your personal property purchased for a sole proprietorship is tax deductible. For example, if you buy a new computer and use it for business 75 percent of the time and for personal use 25 percent of the time, you can deduct 75 percent of the costs associated with buying, owning and operating the computer.
Consider the tax advantages of existing large personal property purchases that are used, in some way, for the conduct of business. You can legally deduct the costs associated with your dedicated home office, including a portion of your mortgage payment and utilities. You can also deduct expenses related to purchasing or leasing a vehicle for business use. The same rules apply: only the portion of use directly attributable to legitimate business operations is deductible.
Because a sole proprietor and his business are linked in the eyes of the law and the Internal Revenue Service, a sole proprietor may use business income in any way he sees fit. On the other hand, a sole proprietor is also personally liable for the finances of his business and can be held personally liable for all aspects of his business operations.
Keep receipts and records for every purchase of personal property that can be attributed in some way to conducting your business. A legal or financial professional can help you make the most of your deductions.
Lisa McQuerrey has been a business writer since 1987. In 1994, she launched a full-service marketing and communications firm. McQuerrey's work has garnered awards from the U.S. Small Business Administration, the International Association of Business Communicators and the Associated Press. She is also the author of several nonfiction trade publications, and, in 2012, had her first young-adult novel published by Glass Page Books.