U.S. Advanced Individual Tax Deductions on Schedule C
The IRS Schedule C (Form 1040) is commonly utilized by individuals to submit their individual income tax returns, disclosing their annual income, and determining the taxable portion after accounting for tax deductions and credits. The following will talk about entities that are required to report on Schedule C, as well as the specific deductions applicable to Schedule C.
- What Type of Entity Reports on Schedule C?
Individuals who work for themselves are obligated to disclose their financial gains and losses through the completion of Schedule C. This requirement applies to sole proprietors managing small business, independent business contractors, and single member limited liability companies. Schedule C is submitted alongside the Individual Income Tax Return, Form 1040, and is therefore expected to be filed by April 15 annually.
- Specific Deductions on Schedule C
(1)
|
Ordinary and necessary expenses
Entrepreneurs have the opportunity to claim deductions for ordinary and necessary expenses that are pertinent to their business operations. Ordinary expenses are those that are common and widely recognized within the taxpayer’s specific industry, while necessary expenses are those that are deemed beneficial and suitable for the trade or business. These expenses are categorized and reported on Schedule C.
|
(2)
|
Cost of goods sold
Businesses that engage in the sale of goods and maintain inventories are required to calculate and disclose the cost of goods sold on Part III of Schedule C. Small business taxpayers with average gross receipts of less than $25 million (adjusted for inflation) over a three-year period have the option to deduct the cost of goods sold without maintaining an inventory, provided that they account for inventory in a manner that accurately reflects their income. Taxpayers whose inventory consists of minor materials or supplies may choose to expense these items rather than maintaining an inventory.
|
(3)
|
Advertising
The cost of goods sold is recorded in the income section of Schedule C as a direct deduction from revenue. All other expenditures are reported in Part II, the expense section of Schedule C. A significant number of Schedule C filers report advertising expenses on Line 8.
|
(4)
|
Vehicle and mileage expenses
The utilization of a vehicle for business purposes is eligible for deduction on Schedule C as an ordinary and necessary business expense. Business use encompasses travel between different workplaces, client or customer visits, transportation to off-site business meetings, and commuting from home to a temporary workplace.
An instance of non-business vehicle use pertains to the commute between one’s residence and regular workplace. Costs incurred during travel away from one’s home are categorized as travel expenses. An individual is considered to be traveling away from home if they require sleep or rest to fulfill work obligations while away. Vehicle expenses incurred during such travel are regarded as business expenses and are eligible for deduction as travel expenses.
The standard mileage rate is set at 65.5 cents per mile and encompasses various expenses such as depreciation, lease payments, maintenance, repairs, tires, gasoline, oil, insurance, and license and registration fees (among others). Taxpayers may supplement this rate with parking fees and tolls that are accrued for business-related purposes.
To utilize the standard mileage rate for a car owned, the taxpayer is required to opt for this method during the initial year in which the car is employed for business-related activities. Subsequently, the taxpayer retains the option to select either the standard mileage rate or actual expenses in later years.
|
(5)
|
Legal and professional fees
Payments made to accountants and lawyers are typically eligible for deduction on Line 17 under legal and professional fees. It is important to note that tax preparation expenses for business tax preparation can be deducted on Schedule C, whereas individual tax preparation fees are no longer eligible for deduction on Schedule A due to the elimination of miscellaneous deductions by the TCJA.
|
(6)
|
Office expenses and supplies
Office expenses and postage can be claimed as deductions on Line 18 of Schedule C, whereas materials and supplies are eligible for deduction on Line 22. It is important to emphasize that only incidental materials and supplies, excluding inventory items, are deductible in the year of purchase. Additionally, books, professional instruments, and equipment may also be deducted if they are utilized within the same tax year.
|
(7)
|
Travel and meal expenses
When a taxpayer’s work obligations necessitate an overnight absence from their usual place of residence, and the duration of this absence exceeds a typical workday, requiring sleep or rest to fulfill work demands, they are considered to be "away from home." In such instances, travel expenses incurred during this period are eligible for deduction as ordinary and essential business expenses.
When travel serves both personal and business purposes, the deductibility of transportation costs is determined by the primary purpose of the trip. Travel expenses encompass meals while in travel status (with a 50 percent deductible), as well as lodging and incidental expenses. For guidance on the deductibility of business meals and entertainment, please consult our other article.
https://www.kaizencpa.com/Knowledge/info/id/1590.html.
|
(8)
|
Business use of home
Self-employed taxpayer can claim deductions for home business expenses on Schedule C, Line 30, by attaching Form 8829. In order to qualify for these deductions, a portion of the taxpayer’s residence must be used exclusively and regularly as their primary place of business for trade or business, as a location for meeting clients, customers, or patients in the regular course of trade or business, or as a separate structure (not attached to the home) used in connection with trade or business.
Taxpayers may calculate the deduction using one of two methods.
(a) Simplified Method
Deduction is calculated by the multiplication of the permissible area, which is capped at 300 square feet, by $5, and it cannot result in a negative net income (subject to the gross income limitation). Additionally, any unallowable expenses cannot be carried over.
(b) Actual Expenses
Taxpayers are required to submit Form 8829 for their deductions, which cannot result in a loss due to the gross income limitation. Any expenses that are disallowed will be carried over to the following year.
|
(9)
|
Excess business losses
The maximum allowable excess business loss for non-C corporation taxpayers is capped at $250,000, or $500,000 for married couples filing jointly, with these amounts adjusted for inflation. An excess business loss occurs when a taxpayer’s total business deductions for the tax year exceed their total gross income or gain from the business. Excess business losses that exceed the limit are considered as a net operating loss (NOL) carryforward and can be used to offset income in subsequent tax years.
|
Reference:
https://www.irs.gov/forms-pubs/about-schedule-c-form-1040
https://www.irs.gov/forms-pubs/about-form-1040
https://www.irs.gov/pub/irs-pdf/f1040sc.pdf
https://www.irs.gov/pub/irs-pdf/p587.pdf
|
