Understanding Schedule C Tax Deductions
The Schedule C form is the form that is filled out by a self-employed taxpayer (also known as a sole proprietorship) when the taxpayer is reporting income and expenses. The form will require from the taxpayer their business information, including the business name, in addition to the profession in which it falls under, or the service it provides.
Since a self-employed taxpayer tracks their own revenue, expenses and net income, the method of accounting must be specified as well, so that the IRS can understand how the accounting information contained within the Schedule C form has been calculated. The Schedule C form is divided into five different sections, labeled “Income” (I), “Expenses” (II), “Cost of Goods Sold” (III), “Information on Your Vehicle” (IV), and “Other Expenses” (V).
When a sole proprietorship is preparing the Schedule C Form for a tax return, section I, “Income” should be focused on first. This section asks for the amount of gross sales, as referred to on the taxpayer’s Form W-2, as well as returns and allowances, which are subtracted from the gross income.
The taxpayer must also specify the cost of goods sold, which is the term used to describe the amount of money spent manufacturing, assembling, and preparing goods which are sold by the business.
In most cases, especially for retailers, the cost of goods sold is the largest expense that the company must pay for. This is also usually the largest tax deductible expense contained within the Schedule C form.
In this case, only the goods that were actually sold are included within the tax deduction. Any goods which are still in a warehouse or have gone unsold are not going to be tax deductible. Part III, “Cost of Goods Sold” provides a step by step guide on the Schedule C Tax Form about how the amount is calculated and transferred back to Part I.
Part II of the Schedule C Tax Form, “Expenses”, contains an abundance of other expenses in alphabetical order, which are tax deductible for a sole proprietorship. The contents of this section are:
Car and truck expenses
Commissions and fees
Depreciation and section 179 expense deduction
Employee benefit programs (other than pension and profit-sharing plans)
Insurance (other than health)
Interest (mortgage and other)
Legal and professional services
Pension and profit-sharing plans
Rent or lease (vehicles, machinery, equipment and other business properties)
Repairs and maintenance
Supplies (not included in Part III)
Taxes and licenses
Travel, meals, and entertainment (travel and tax deductible meals and entertainment)
Other expenses (listed on Part V)
A sole proprietorship will find this section to benefit them, offering many opportunities for to take advantage of a tax deduction. While tax deductible wages and pensions are rare in the case of a sole proprietorship, many of the other tax deductions, such as car and truck expenses, advertising, and office expenses will be quite useful.
Part V of the Schedule C Tax Form is solely dedicated to “other expenses” which may be special to a particular business and qualify as tax deductible. Once all other expenses are listed and added together, the total amount is then placed back into part II of the form.
Other expenses, which are ordinary and necessary for the business may be added in Part V which do not fit well into the categories listed in Part II. For instance, if a job requires that a person perform a great deal of research through the purchase of books, and subscribing to magazines and other various forms of publications, these costs and subscriptions can be considered “other expenses”.
Having an extra phone bill for a business line, website maintenance, and Internet domain expenses may also qualify under this section. Charitable donations are not included within the other expense section and fines or penalties paid to the government for law violations are not included.
Amortizations can also be included within the other expense section, such as the costs associated with pollution-control facilities, costs incurred for research and experimentation, qualified revitalization expenditures, amounts paid to acquire, protect and register trademarks and service marks, good will and costs for obtaining a musical copyright.
As a person who is self-employed and pays for one’s own health insurance, the full cost of the health insurance premiums may be tax deductible. Tax deduction of health insurance expenses, however, requires that the business has received a net profit. If a net loss is incurred by the business, health insurance premiums may be tax deductible, but must be listed on Schedule A as a medical expense.