Small Businesses are large drivers of U.S. economic activity. According to the Small Business Association (SBA), U.S. small businesses employed 56.8 million people, or 48.0% of the private workforce, in 2013. Statistics such as this denotes the importance of small businesses in the broader economy. Therefore, it should be the required that small business, the self-employed, or a LLC that has elected not to file as a corporation, be aware of the business expense deductions that are available on schedule C. Business expenses are the costs of doing business, as such, with the year-end approaching it is important that small business review their tax situation to take advantage of these schedule C deductions that are available and are beneficial to their net income.
Let’s look at the following expenses for schedule C deductions that will be beneficial for your business:
Car & Truck Expenses:
Expenses are deducted under one of the following methods:
1) Actual cost. Deduct the business-use percentage times the actual cost of operating the vehicle (gas, oil, repairs, insurance, tires, license, etc.). Show depreciation on line 13 and rent/lease payments on line 20a.
2) Standard mileage. For 2016, the business standard mileage rate is 54¢ per mile. The standard rate includes all vehicle operating and ownership costs—except the business percentage of auto loan interest, auto personal property taxes, and business parking and tolls (these amounts can be deducted in addition to the standard mileage rate).
Rent of Business Property:
Use line 20a for vehicle, machinery and equipment rental expenses. Use line 20b for other rental expenses (that is, office/building rent). Deduct business use of home rent on Form 8829, Expenses for Business Use of Your Home (line 30, Schedule C)
Mortgage interest on business real property (other than a principal residence) is deducted on line 16a. Interest expenses for the business use of a principal residence are deducted on Form 8829 (see Business Use of Home). All other business interest paid is deducted on line 16b.
To qualify for deductions, such as mortgage interest, insurance, utilities, repairs and depreciation, the area in the home used for business must be used regularly and exclusively: [IRC Sec. 280A(c)(1)]
1) As the principal place of business (including administrative use),
2) As a place to meet with clients in the normal course of business or
3) In connection with the business if it is a separate structure not attached to the taxpayer’s personal residence.
Salary & Wages:
Enter gross wages minus (1) employment credits claimed and (2) any wages deducted elsewhere on Schedule C (such as wages included in cost of goods sold). Do not count payments made to the sole proprietor as wages. These payments are not deducted nor are they recognized as income.
Deduct business insurance premiums for fire, theft, flood or other casualty insurance, credit insurance to cover losses from unpaid debts, overhead insurance that pays for business overhead expenses when the sole proprietor is unable to work due to sickness or disability, but not premiums paid for a policy that pays for lost earnings due to sickness or disability. Liability and malpractice insurance. Business interruption insurance for loss of profits due to a fire or other cause which shuts down the business operations and workers’ compensation insurance.
Legal & Professional Fees:
Fees such as those charged by accountants, that are ordinary and necessary expenses of operating a business are deductible.
The expenses must bear a reasonable relationship to the business activity. Advertising to influence legislation is not deductible.
Deduct the cost of supplies that are not included in inventory costs. Generally, deduct the cost of nonincidental supplies only to the extent the supplies are consumed or used during the tax year. Incidental supplies (kept on hand with no inventory or record of use) are deductible in the year purchased, provided that the method clearly reflects income.
Deduct trade or business utility expenses on line 25. Deduct business use of home utility expenses on Form 8829
Accurate record keeping and documentation of files and receipts as a rule, is required in case of an IRS audit which, eventually will occur at some point. One should use all available software and apps to document all schedule C deductions. Accounting software such as QuickBooks, is excellent for keeping track of all small business activities coupled with ease of data integration into tax software. As best practice, you should work with an accountant and or tax professional, not only to account for the current tax year, but also to perform forward looking tax planning.