If you’re self-employed, understanding what’s deductible and recording all of your business expenses should be priorities.
When you work for yourself, accurate accounting is critical. The IRS pays special attention to tax returns prepared by sole proprietors. Not only does the agency try to determine whether all taxable income has been recorded, but they also scrutinize business expenses that are claimed, since some taxpayers blur the lines between personal and business purchases.
We’re not suggesting you hold anything back when you’re tracking your tax-deductible business expenses. We want you to claim every penny that the IRS says is permissible. This is especially important if your company makes a lot of money. You’ll need to document everything you can to offset your income and minimize your tax obligation.
How do you ensure that all of the money you’re spending to make money ends up somewhere on your IRS Schedule C? Let’s look at steps you can take.
Review the Schedule C
The actual IRS Schedule C form contains broad expense categories. You may need to dig into deeper explanations of them.
If you’ve never completed a Schedule C before, it’s especially important that you familiarize yourself with it. You can view a copy of the 2020 version here. Pay special attention to Part II Expenses. The form breaks down business expenses into specific categories. But what’s the difference between Office expenses and Supplies? What does Other business property mean? Not only do you have to know which expenses are deductible, but you must be sure to include them in the right category.
The IRS has a special publication devoted to discussion of deductible business expenses. You’ll find links to it here. It’s a lengthy document, but there’s an interactive table of contents that lets you jump right to the section you want. You don’t have to read the whole thing, but you might bookmark it so you can consult it when you have a question. There are many questions on the Schedule C that may require additional explanation.
You might want to visit the IRS instructions online. This page displays a detailed outline of the form, section by section and line by line, so you can find what you’re looking for easily and click a link to get there.
Keep Detailed Records
This will be challenging if you’re doing your bookkeeping manually. You’ll need to set up a system of folders or envelopes or whatever works for you and separate receipts by either month or Schedule C category. If you know your way around Excel, you could set up a spreadsheet divided by category and enter receipt information as it comes in. This will make calculations easier, too.
Do make notes on your receipts so you’ll know why you thought the purchases would be deductible. You might also indicate whether the receipt was already entered in your master list, so you don’t have duplicate entries. Don’t forget about credit card charges and checks you’ve written for tax-deductible purchases that didn’t generate a receipt. Enter them in your master list as you go. If you’re ever audited, you’ll need copies of them for documentation. If you get electronic receipts in email, save them in a folder on your computer and record them.
You can categorize your tax-related business expenses using personal finance or accounting applications.
There are numerous personal finance and small business accounting applications that allow you to import your online banking transactions and categorize them. These include QuickBooks (online and desktop), Mint, Quicken, and Simplifi by Quicken. Their category lists can often be modified, so you can make sure your tax-related expenses are organized accurately.
Don’t Dismiss the Unusual
There are some legitimate tax deductions that the IRS doesn’t necessarily include in the Schedule C instructions, but which it will accept. For example, H&R Block reported on a case where the cost of cat food was considered a business deduction (a scrapyard was trying to attract wild cats to keep snakes away). A professional bodybuilder was able to claim his purchase of ProTan Muscle Juice Professional Posing Oil as an acceptable business expense.
We’re not recommending that you spend a great deal of time looking for obscure tax deductions. But think about your purchases as you make them to see if they’re tax-worthy.
All of these suggestions may sound time-consuming. They can be, until you get into the habit of tracking all of your tax-related business expenses, but it does require constant diligence. We can help ensure that you’re only claiming legitimate deductions and advise you on those you might question. We can also prepare and file your return for you and/or help with year-round tax planning. Contact us for a consultation.
SOCIAL MEDIA POSTS
If 2021 is your first year as a sole proprietor, you’re likely to find income tax preparation challenging. Contact us for help with this.
Filing an IRS Schedule C requires careful, year-round bookkeeping. We can help you set up a system for tracking business expenses.
Before you can file an IRS Schedule C, you need to understand this complex form. Let us help you learn what’s needed.
There are numerous financial applications that let you import bank transactions and categorize them for tax purposes. Ask us.
Are you an individual or business owner who’s interested in lowering your tax burden? Call us at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.
When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.
Whether you sell products or services, you may need to create estimates in QuickBooks Online. Here’s how it’s done.
Incorporating your small business the right way can bring tax benefits and protect your personal assets. Read on to learn more about what incorporation is, why you might want to incorporate, and how an accountant can help you navigate the questions that come with selecting the right business structure.
…and tips on how to do it.
Paying employees seems easy enough. Their hours are logged, and you sign the checks; however, there’s more to payroll than that, and overlooking these critical aspects of paying your employees can have costly consequences. Here are five common payroll errors small business owners make and how to prevent them.