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 side-gigger, 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.
After reading this guide to Schedule C deductions, 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 monitor all future purchases. And at tax time, they’ll handle filing your taxes for you.
You can put the expenses for all forms of advertising under Line 8 in Part II (Expenses) of Schedule C. That essentially includes anything you did to earn new business or increase sales to past customers that you can’t categorize elsewhere.
Some examples of tax-deductible advertising expenses include:
- Purchases of 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 and Machinery
To run a business, you must often use various vehicles and machinery. Keep an eye on how much you spend in these areas throughout the year so you can make deductions later:
- Cars and Trucks. You can use Line 9 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 2021 is $0.56 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 in service. If the vehicle is also for personal use, you can only deduct the miles driven for business purposes. The IRS considers commuting expenses between your home and place of business personal miles. Maintain a written mileage log to document the business miles driven for the year. You can’t use the standard mileage rate 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. However, you can’t deduct fees for parking your car at your workplace. These are considered a commuting expense.
- 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 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, employee retention credit, empowerment zone employment credit, Indian employment credit, credit for employer differential wage payments, or employer credit for paid family and medical leave. Make sure anyone whose wages are included on this line receives a W-2.
- 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. You must send a copy of the 1099-NEC to the IRS.
- Legal, Accounting, or Professional Services. If you used the services of a lawyer, accountant, CPA, or other tax preparer, you can deduct their fees on Line 17. This refers to companies that provide a service (such as Quickbooks for your monthly bookkeeping or Quickbooks Payroll for your business’s payroll) as well as companies that produce a physical product (such as a new employee handbook). If you have an accountant, you can split the fees they charged for tax preparation and deduct those for preparing forms related to your business 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. In some cases, these fees also require you to file a Form 1099-NEC if they exceed $600.
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 goods in a single year instead of spreading it out. See Publication 946 for more information.
Employee Benefit Programs
Since you’re self-employed, you can deduct your own medical, dental, or long-term care insurance premiums on Line 17 of Schedule 1 attached to your Form 1040. That can also include premiums for your spouse and any children under 27 years old at year’s end, even if those children are not dependents.
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. That includes things like health insurance, group term life insurance, accident insurance, or child care assistance programs.
You can deduct contributions you made on your employees’ behalf to pension or retirement plans on Line 19. These can include SEP (simplified employee pension), SARSEP (salary reduction simplified employee pension plan), SIMPLE (savings incentive match plan for employees of small employers), and 401(k) plans. See IRS Publication 560 for further information on these plans.
There’s a business credit available for establishing a retirement plan for employees. See Form 8881’s instructions for additional information. The credit is limited to $5,000 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 it’s advisable to consult a third party to ensure you’re 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 the appropriate percentage of that as part of your home office deduction.
Do you have business property secured by a mortgage? If so, you can deduct the mortgage interest noted on Form 1098 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.
Consult IRS Publication 535, “Business Expenses,” Chapter 4, for help figuring the interest allocation you can deduct here. Remember that if someone else helped pay the loan, you must split the deduction with them.
The costs of 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. Rental of vehicles, machinery, or equipment goes on Line 20a. However, see IRS Publication 463 if you leased a vehicle for more than 30 days. You may have to subtract an “inclusion amount” from your deduction to account for depreciation.
- 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, you’re restoring something unusable to a usable state, or you’re replacing something, you cannot deduct those costs here. These expenses may need to be capitalized and depreciated. Repairs would include expenses like paying a plumber to fix the bathroom in your deli, 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 included in 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. But be careful, the first landline to the home is not deductible, though extra costs for business purposes on that line (such as long-distance charges) are.
You can claim expenses incurred from purchasing office supplies — such as postage, paper, envelopes, and pens — on Line 18. You can claim other miscellaneous supplies the business consumes on Line 22. Examples of these might be toilet paper, cleaning supplies, coffee for employees and customers, small hand tools, or first-aid kits.
You can also deduct items like technical manuals or small equipment you replace every couple of years here. This line is something of a catchall. Therefore, you should make an effort to ensure nothing overly expensive ends up in this category.
Taxes & Licenses
On Line 23, input the sales taxes you paid as the seller of goods or services. However, if you collected these taxes directly from the buyer, you must include those amounts in gross receipts on Line 1.
Other deductions that fall here include:
- Licenses or regulatory fees (you may need to amortize liquor licenses due to cost and duration)
- Federal unemployment tax
- Contributions to a state unemployment insurance or disability benefit fund, if your state’s laws consider those taxes
- Federal highway use tax
- Social Security and Medicare taxes paid for your employees
- Real estate and personal property taxes on your business assets
You cannot deduct federal income taxes here, although you can deduct half your self-employment tax on Line 15 of Schedule 1. You also can’t deduct estate taxes, gift taxes, or assessment taxes for improvements to your property. Generally, assessment taxes add to your basis in the property and are not deductible. Note that sales taxes you pay on products for use in your business should be included in their cost.
Travel, Meals, & Entertainment
There are two deductions you may need to take regarding your business travel expenses.
- Business Travel. If you go on a business trip, your hotel, plane ticket, taxi fares, parking, and tips for bellhops are all deductible using Line 24a. You must keep your receipts, as this is one area the IRS frequently audits. As for travel outside North America for a business convention or other meeting, it’s deductible if the convention is directly related to your business and there’s a good reason it’s outside the continent. You can find more detailed information in IRS Publication 463, “Travel, Gift and Car Expenses.”
- Business Meals. You may deduct only 50% of the cost of meals consumed for business purposes on Line 24b. That includes meals with your clients. “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 to dinner and bill it to your room and deduct the cost. Documentation is important. Keep a record of the date, place, attendees, business purpose, and cost. Alternatively, you can use the standard meal allowance for business meals and ignore the actual 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. For example, you might list your cellphone or internet costs here since there’s not a separate line item for them.
You’re still required to ensure any expenses you list are reasonable and necessary for your business. But if you truly can’t fit some expenses into any other category, you can use this space to create some of your own.
There are several other things you must keep in mind when preparing your return:
- What’s included in “other income” on Line 6? That’s income that might be considered “non-sales” income. That includes bad debts you wrote off in prior 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. It’s also the place to enter recaptured depreciation on listed equipment (like computers), the business usage of which dropped to below 50%.
- If you paid any sales tax on items you bought for the business, the sales tax is considered part of the cost of the item. Thus, you deduct it wherever you’re deducting the cost of the item. Sales tax on purchased items is not treated separately and entered on the line for taxes and licenses.
- 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. Your cost of health care can be deducted on Schedule 1. Similarly, your SEP or SIMPLE plan contributions are deducted on Schedule 1, Line 16. For deductions and limits, see IRS Publication 560, “Retirement Plans for Small Business.”
- 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 and end of the trip as well as the date and what you were doing. IRS agents are easily impressed if you’ve got pages and pages of this stuff. There are several apps that use your phone’s GPS for tracking mileage, such as MileIQ. Some of the apps are free, while others offer premium plans with added features.
If you keep these things in mind and track your necessary expenses carefully, you’ll be in good shape to really take advantage of your deductions.