Form 1040 Schedule C, entitled Profit or Loss From Business, is the federal income tax form used by sole proprietors to record business income and expenses. The form also provides space for the business owner to report on cost of goods sold and business uses of a vehicle. Part II, the expense section of the form, is where common deductions are claimed, added together, and then subtracted from gross income.
Schedule C deductions are listed on the form in alphabetical order. They range from advertising to wages, encompassing 19 types of expenses. These include ordinary business expenses such as rent, utilities, supplies and interest on business loans. Be aware that you cannot use Schedule C to claim deductions that should be filed on Schedule A or Schedule E. For example, if you earn income from rental property, you file that on Schedule E. Personal property taxes, interest paid on a home mortgage and charitable deductions are three examples of deductions you should claim on Schedule A.
Fees you pay for services required by the business are common deductions. An example is paying an accountant to keep the books. Additionally, contemporary business practices often require business owners to fulfill orders for products and services purchased from an online source. Sometimes the business must then pay a service fee or some type of charge to complete the transaction. For instance, when customers use the PayPal e-commerce funds exchange service to pay for merchandise, the business must pay a fee. Keep a record of these transactions, as the fees are deductible business expenses.
Whether you entertain customers with a free meal or tickets to the theater, the costs are tax deductible. Keep restaurant and parking receipts and don't forget to include any tips you give service providers.
Common deductions claimed as part of employee benefit programs on Line 14 of Schedule C are contributions to the cost of employees' health insurance. A separate line is provided to claim other insurance costs for the business such as property and liability. However, this does not include self-provided health insurance. Small-business owners who pay for health insurance for themselves and dependents claim this deduction directly on Form 1040 when adjusting gross income.
The Internal Revenue Service will expect you to have documents such as receipts, bank statements and supporting documentation for any business deductions you claim. File these away for reference in case you should be asked to present them to the IRS later.
- Internal Revenue Service: Instructions for Schedule C
- Internal Revenue Service: Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
- Internal Revenue Service: Schedule C Profit or Loss From Business
- Internal Revenue Service: Top Six Tax Tips for the Self-employed
Vicki A Benge began writing professionally in 1984 as a newspaper reporter. A small-business owner since 1999, Benge has worked as a licensed insurance agent and has more than 20 years experience in income tax preparation for businesses and individuals. Her business and finance articles can be found on the websites of "The Arizona Republic," "Houston Chronicle," The Motley Fool, "San Francisco Chronicle," and Zacks, among others.