Small business owners need to be extra vigilant when filing for taxes. This is because, with small business owners, the workload is often such that it requires them to manage several different things at a similar time. However, filing for taxes tends to be one of the most predominant aspects, because of the relative complexities involved.
Business expenses and the deductions that can be claimed on these expenses tend to be one of the most confusing aspects for all business owners. Given the fact that not all business expenses can be claimed, it is imperative for business owners to have a clear understanding of the tax deductions that are allowable against these business expenses.
Business Expenses on Schedule C
All business owners that are sole proprietors are supposed to fill out Schedule C when filing for the annual tax returns. It is important to note the fact that business expenses must always be necessary and ordinary in order for business expenses to be claimed under Schedule C. All taxpayers are supposed to calculate the net profit of the business, for purposes of income tax.
It is important for business owners to ensure that they have a detailed breakdown regarding the expenses that can be claimed so that they can fill out their returns with proper vigilance and due diligence.
Business Expenses on Schedule C – Expense Breakdown
Schedule C is supposed to be filled and sent out along with tax returns to facilitate taxpayers to file for deductions and claims. As mentioned earlier, Schedule C entails some very useful deductions for all small business owners. Therefore, it is imperative for business owners to have a clear understanding of business expenses allowed on Schedule C, and how can they be efficiently utilized. These are the business expenses that are allowed to be deductible from the perspective of business owners.
The expenses for almost all types of advertising are placed under Part 2 (Expenses Component) of Schedule C. This essentially includes all the expenses that were incurred to get new customers or to expand the business. Some examples of tax-deductible advertising expenses are as follows:
- Purchasing email lists for sales through direct-mail marketing
- Manufacturing expenses incurred for promotional items, including pens, calculators, as well as notepads.
- Printing costs associated with banners and business cards
- Online advertising or website costs
- Vehicle and Machinery
The use of different machinery is often necessary to run a business. Examples of vehicle and machinery expenses that can be deducted are as follows:
- Cars and Trucks: The actual expenses associated with operating cars and trucks can be used as allowable deductions. However, there is a prescribed rate, at which these deductions can be claimed. For example, for the year 2020 the standard applicable rate was 57.5 cents per mile.
- Rental or Lease of vehicles: In case where an individual has leased any vehicle for business use, the costs can be deducted on line 20. However, there are different stipulations in place that are applicable depending on the lease duration of the assets.
- Wages, Commissions and Fees
All cost that is incurred on human capital within an organization can be claimed by taxpayers.
As far as wages are concerned, all the money that is paid to the employees is deducted underline 26. However, any amounts that have been received under Work Opportunity Credit, Empowerment Zone, or any other employment-related credits.
For independent contractors, all the expenses incurred are supposed to be declared underline 11.
For legal, accounting, or professional services, all the fees paid are deducted on line 17.
For commissions, deductions are included underline 10.
- Depreciation related deductions
Depreciation is referred to as deducting the cost of large purchases in portions across the useful life of the asset. As per the IRS Notice 2015-82, the safe harbor amount of expensing can be used, under which property can be depreciated from $500 to $2500. These items can further continue to be depreciated, over the course of time.
In the same manner, Section 179 Expense Deduction allows users to deduct the full amount of most tangible items in a single year as opposed to spreading it out.
- Employee Benefit Programs
In the case of self-employed individuals, they are allowed to deduct their own medical, dental, as well as long-term care insurance programs mentioned on line 16 of Schedule 1 which is attached to Form 1040. In the same manner, premiums paid for employees can also be deducted on line 14 of Schedule C.
Insurance costs that are covered to protect businesses can also be used online 15.
- Paid interest
The mortgage interest that is noted on Form 1098 is also received as deductible expenses on line 16a. In the case where the money is from a loan secured by a home mortgage for business uses, a portion of interest can also be deducted. Hence, interest paid on business loans, as well as for other small-business credit cards can be deducted via line 16b.
- Property Expenses
All costs that are incurred in maintaining the property where the business is located can be added up throughout the year. The costs associated with leasing, or rentals, as well as repairs and maintenance costs can be claimed as deductions. Similarly, all utility expenses can also be claimed as deductions in the financial statements.
- Office Expenses
Expenses that are incurred from purchasing office supplies, for example, postage paper, envelopes, and pens can be claimed online 18. In the same manner, other miscellaneous expenses can also be claimed online 22. For example, toilet paper, cleaning supplies, and any other accessories that are used for the business can be claimed as deductions.
- Taxes and License
The following deductions can also be claimed as business expenses:
- Licensing and regulatory fee
- Federal unemployment tax
- Social Security and Medical assistance provided for employees
- Property taxes paid on business taxes
- Travelling and Entertainment
Business travel and business meals can also be claimed for tax deductions using line 24(a) and line 24(b) respectively. Business travel expenses can be claimed in full, whereas business meals can only be deducted by 50% of the total amount. However, when claiming for these expenses, it is important to note that there is a need by taxpayers to ensure that they have proper receipts and evidence for all the transactions. In a lot of instances, IRS is triggered to conduct an audit where these expenses seem to be bloated, or exaggerated. Hence, proper documentation is very important.
- Other Expenses
Underline 27 of Schedule C, all other expenses can be listed under other expenses. This particular category is for expenses that do not fit into any other criteria. Hence, they need to be adjusted within this domain only.