IRS Schedule C Tax Deductions & Expenses for Small Business Owners
Running a small business puts serious demands on your time, energy, creativity, and talent. Knowing where you are financially is a critical component. Whether you are a freelancer, independent contractor, or have a side business, you probably have a good sense of what your business income stream looks like.
However, where the money goes is often a little foggier. And how those business expenses fit into your tax picture may be even more mysterious. Properly tracking your business expenses is very important come tax time, especially if you’re to get the most out of your tax returns.
Take a look at the following guide to Schedule C deductions, and you may find that you’re missing out on some key tax deductions for self-employed freelancers and small business owners.
The expenses for all forms of advertising can be placed under line 8 in Part II (Expenses) of Schedule C. This essentially includes anything you did to earn new business or increase sales to past customers that can’t be categorized elsewhere.
Some examples of deductible advertising expenses include:
The use of various vehicles and machinery is often required to run a business. Be sure to keep an eye on how much you spend in these areas throughout the year so that you can make deductions later:
If you run a small business, you may have to hire people for various tasks. Some of these may be regular, full-time employees; others might be contract workers or consultants. The good thing is, you can claim the money you spend paying these people:
Line 13 is the place to enter depreciation. “Depreciation” refers to deducting the cost of a large purchase in portions over its useful life, instead of in one lump sum in a single year. You must begin depreciating the cost of the item in either the year you bought it or the year you started using it.
IRS Notice 2015-82 increased the safe-harbor amount for expensing, rather than depreciating, tangible property from $500 to $2,500. You can continue to depreciate items over their useful life, if you choose, but you can expense items up to $2,500 as of January 1, 2016 without it affecting Section 179 annual limit for spending cap.
The Section 179 Expense Deduction allows you to deduct the full value of most tangible items in a single year instead of spreading it out. If you are depreciating any items, see Publication 946 for more information.
Since you are self-employed, you can deduct your own medical, dental, or long-term care insurance premiums on line 29 of your 1040. This can also include premiums for your spouse and children (under 27 years old at year’s end – even if not a dependent). The net profit of your business must be equal to or greater than the premiums. This deduction on your personal tax return is called “Self-Employed Health Insurance.”
You can also deduct premiums you paid for employees on line 14 of your Schedule C. This includes things like health insurance, group term-life insurance, accident insurance, or childcare assistance programs.
Contributions you made on your employees’ behalf to pension or retirement plans can be deducted on line 19. These can include SEP, SARSEP, SIMPLE, or 401k plans. See IRS Publication 560 for further information on these plans. There is a business credit available for establishing a retirement plan for employees. See Form 8881, with its instructions, for additional information. The credit is limited to $500 per year for up to three years.
Compliance with Department of Labor regulations may become part of your business life if you establish benefits plans. So, you might at least consider using a third party to make sure you are coloring within the regulatory lines. Ordinarily, you would file Form 5550 with the Department of Labor.
You can deduct the cost of any insurance you carry strictly to protect the business (such as general liability business insurance, or errors and omissions insurance) on line 15. If you have a home office and pay renters’ insurance or homeowners’ insurance, don’t deduct it here – instead, deduct that as part of your home office deduction.
Do you have property for business use that is secured by a mortgage? If so, the interest noted on Form 1098 that you received is deductible on line 16a. If you used money from a loan secured by a home mortgage for business use, you can deduct a portion of that interest here also. You should consult IRS Publication 535, “Business Expenses,” Chapter 4, for help with figuring the interest allocation that can be deducted here. Remember also that if someone else helped pay the loan, you must split the deduction with them.
Interest paid on other business loans, as well as for small business credit cards, can be deducted via line 16b.
The costs of maintaining the property where your business is located can add up throughout the year. Luckily, you can deduct these costs:
Expenses incurred from purchasing office supplies – such as postage, paper, envelopes, and pens – can be claimed on line 18. Other miscellaneous supplies the business consumes can be claimed on line 22. Examples of these might be toilet paper, cleaning supplies, coffee for employees and customers, small hand tools, or first aid kits.
Items like technical manuals or small equipment that will need to be replaced every couple of years can also be deducted here. This line is something of a catchall, and therefore you should make an effort to ensure nothing overly expensive ends up in this category.
On line 23, input the sales taxes you have paid as the seller of goods or services. However, if you collected these taxes directly from the buyer, those amounts must be included in gross receipts on line 1.
Other deductions that fall here include:
Line 27 is the real catchall. On the second page of Schedule C, you can list “other expenses.” You still need to put them into categories, but you can put items here if you’re not sure they fit into one of the lines provided. For example, you might list postage here, since there is not a separate line item for that (although you could include it under “office expense”). Your cell phone or Internet expense might also be listed here.
You’re still required to make sure any expenses you list are reasonable and necessary for your business. If you truly can’t fit some expenses into any other category, the IRS gives you a place to create some of your own.
There are several other things you must keep in mind when preparing your return:
If you keep these things in mind and track your expenses carefully, you’ll be in good shape to really take advantage of your deductions.
How do you track your expenses throughout the year?
Gary’s extensive professional background varies from small business owner to school administrator. Most recently, he has been involved in taxes, first as a certified preparer, and later as a tax software developer. He is currently licensed to practice before the IRS, volunteers as an instructor for AARP’s Tax-Aide program, and has his own tax practice.
IRS Schedule C Tax Deductions & Expenses for Small Business Owners
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