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’re 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 want 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.
Pro tip: To easily locate and keep track of your business expenses, you can use Keeper Tax. They’ll scan all your past business purchases for available write-offs and then they’ll monitor all future purchases. At tax time, they’ll handle filing your taxes for you.
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 tax-deductible advertising expenses include:
- Purchased email lists for sales through direct-mail marketing
- Manufacturing expenses of promotional items, such as pens, calculators, calendars, and notepads
- Printing costs for banners and business cards
- Online advertising or website costs
Vehicles & Machinery
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:
- Cars and Trucks. Line 9 can be used to deduct either the actual expenses of operating your car or truck (such as gas and oil, repairs, license, registration, insurance, and tires) or the standard mileage rate, which for tax year 2020 is 57.5 cents per mile. For a given vehicle, you can claim either actual expenses or the standard mileage rate if you took the standard mileage rate the first year the car was placed in service. Keep in mind, if the vehicle is for personal use as well as business use, you can only deduct the miles that were driven for business purposes. The IRS considers commuting expenses between your home and place of business to be personal miles. You need to maintain a written mileage log to document the business miles driven for the year. You can’t use the standard mileage rate if you use your car for hire (such as for a ridesharing service) – you can only take actual expenses. The same applies if you are using five or more cars at once. Whether you take actual expenses or the mileage deduction, you can still deduct parking fees and tolls.
- Rental or Lease of Vehicles, Machinery, and Equipment. If you leased any equipment or vehicles, you can deduct the cost on line 20. If you leased a car for 30 days or more for business purposes, see the section on leasing a car in Publication 463 for guidance. This is also an area where you may want to get an accountant involved.
Wages, Commissions, & Fees
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:
- Wages. You can deduct all the money you paid to employees as wages by using line 26. However, you can’t deduct money you paid to yourself or any money deducted elsewhere in your return. You should also subtract any amounts you received as a credit from the Work Opportunity Credit, Empowerment Zone and Renewal Community Employment Credit, Indian Employment Credit, or Credit for Small Employer Pension Plan Startup Costs. Make sure that anyone whose wages are included on this line receives a W-2 from you as well.
- Independent Contractors. Payments to contractors, freelancers, or other small-business people can go on line 11. You must send Form 1099-NEC to those whom you pay $600 or more. Before 2020, you would have reported those payments on Form 1099-MISC. Copies of the 1099-NEC and Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) must be sent to the IRS.
- Legal, Accounting, or Professional Services. If you used the services of a lawyer, accountant, CPA, tax preparer, doctor, or other professional, their fees can be deducted on line 17. This refers to companies who provided a service (such as Quickbooks who might handle your monthly bookkeeping or Quickbooks Payroll who does your businesses payroll), as well as companies that produce a physical product (such as a new employee handbook). If you have an accountant, the fees they charged for tax preparation can be split, and those for preparing your Schedule C can be deducted here. The cost for preparing the rest of your personal return isn’t deductible.
- Commissions and Fees. Line 10 is a sort of catchall category for any money you paid to other businesses or individuals for services. An example might be commissions you paid to salespeople.
Depreciation & Section 179 Expense Deduction
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 without it affecting the Section 179 annual limit for the 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.
Employee Benefit Programs
Since you are self-employed, you can deduct your own medical, dental, or long-term care insurance premiums on line 16 of Schedule 1 attached to your Form 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 child care 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.
Insurance (Other Than Health)
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 deductio
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