If you run a small business, perform freelance work, or have other side income, you probably know exactly what you earn – but you may not be keeping a close eye on what you’re spending. And properly tracking the money you spend to run your business is incredibly 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. 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:
- Purchased email lists for sales
- Manufacturing expenses of promotional items such as pens, calculators, and notepads
- Printing costs for banners
- 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, insurance, and tires) or the standard mileage rate, which for tax year 2015 is 57.5 cents per mile. There are complicated rules about switching between taking actual expenses and taking mileage for each car. Therefore, if you have more than one vehicle, it’s best to pick one and stick with it. Keep in mind, if the vehicle is also for personal use, you must only deduct the portion of miles that were driven for business purposes over the course of the year. You also can’t use mileage if you use your car for hire (such as taxi 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 always 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 Employer Differential Wage Payments. Make sure that anyone whose wages are included on this line receives a W-2 from you as well.
- Independent Contractors. Payments to employees eligible to receive a 1099 can be claimed on line 11. You can also claim the payments made to those contractors you paid less than the $600 requirement for a 1099.
- Legal, Accounting or Professional Services. If you used the services of a tax lawyer, accountant, doctor, graphic designer, or other professional, their fees can be deducted on line 17. This refers to companies who gave you a service (such as a new logo) versus companies who gave you a physical good (such as business cards with the new logo). If you have an accountant, the fees they charged specifically for tax preparation can either be deducted as part of your Schedule A itemized deductions, or they can be included here.
- 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. If it doesn’t fit plausibly under any of the other categories, you may include it here.
Depreciation and Section 179 Expense Deduction
Look no further than line 13 if you are interested in depreciating items. “Depreciation” refers to deducting the cost of a large purchase in chunks over several years 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.
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 accident, health, or life insurance premiums on line 29 of your 1040. You can also deduct premiums you paid for employees on line 14 of your Schedule C. This includes things such as health insurance, life insurance, or childcare assistance programs.
Contributions you made on your employees’ behalf to pension or retirement plans can be deducted on line 19. You also need to file an additional form that must be filed electronically from now on. Click here for a listing of forms.
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) 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 hold a mortgage on any property for business use? Do you have a loan on your personal home that funded your business? You can deduct the interest you paid (the total is listed on the 1098 form you receive from your lender) for these in line 16a. Just remember, 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.
Maintaining the property where your business is located can add up throughout the year. Luckily, you can deduct these costs.
- Rent or Lease of Other Business Property. This one is pretty straightforward. On line 20b, you can deduct any amount you paid in renting or leasing office space, warehouse space, or other real estate.
- Repairs and Maintenance. Line 21 covers any costs incurred in repairing or maintaining your machinery, property, or buildings that don’t actually add to its value. If it adds to value, or you are restoring something unusable to a usable state, or you are replacing something, you cannot deduct those costs here. This would include expenses such as paying a plumber to fix the bathroom in your deli, but not paying a plumber to install an additional sink in the bathroom.
- Utilities. Line 25 covers any utility payments your business makes (separate from those you may pay with your rent or lease) such as electricity or gas. Phone service is also considered a utility. If you take the home office deduction, you may include phone service either here or there, but not in both.
Expenses incurred through the purchase of 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 such as 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 very expensive ends up in this category.
Taxes & Licenses
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:
You cannot deduct federal income taxes here, although you can deduct half your self-employment tax on your 1040, line 27. You also can’t deduct estate or gift taxes or assessment taxes for improvements to your property. Note that you can deduct sales taxes that you pay on items for use in your business, but you should add those taxes to the item’s cost, and not separate it out here.
Travel, Meals & Entertainment
- Business Travel. If you go on a business trip, your hotel, plane ticket, taxi fares, parking, and tips for the bellboy, are all deductible using line 24a. You must keep your receipts for all these items, as this is one area that the IRS frequently audits. You can’t deduct travel outside North America for a business convention or other meeting unless the convention is directly related to your business and there’s a very good reason for it to be held outside the continent.
- Business Meals and Entertainment. Since, presumably, you would need to eat one way or the other, you may deduct only 50% of the cost of meals consumed for business purposes on line 24b. This includes meals that you take clients to. “Lavish or extravagant” meals are not deductible, though the IRS does not specify exactly how big the steak may be. You or an employee must be present at the meal – you can’t just send a client out on your ticket. Also, even though you may swear you do all your best deals while attending Major League Baseball games, you are still only permitted to deduct 50% of the cost.
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.
You’re still required to make sure any expenses you list here 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:
- What’s included in “other income” on line 6? The line for “other income” is a catchall for money that you received but didn’t exactly earn. This includes bad debts you wrote off in previous years but recovered this year, prize money your business won, any interest paid to you (such as on past due accounts), or any tax refunds or tax credits related to using renewable fuels.
- If you paid any sales tax on items that you bought for the business, it is actually considered part of the cost of the item. Thus, you deduct them wherever you’re deducting the cost of the item. They aren’t separated, despite the fact that there is a specific line where you deduct taxes.
- You as the business owner are treated differently from other employees (even if you are self-employed). While there are dedicated lines on Schedule C for your employees’ wages, health insurance, and retirement plans, your own costs in these categories are not included.
- The best way to ensure you get your mileage deduction is to keep a log. You should write down your odometer reading at the beginning of the trip and the end, the date, and what you were doing. IRS agents are easily impressed if you’ve got pages and pages of this stuff.
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?