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Time flies when you’re having fun — but not when it’s time to file your taxes.
The Internal Revenue Service (IRS) has more than 800 different forms and schedules. While most people only have to concern themselves with a few forms, if you operate a business, you need to add Schedule C on Form 1040 to the list of forms you should understand (at least minimally).
Who Needs to Include a Schedule C?
- Businesses that operate as:
- Sole proprietorship
- Single member limited liability company (LLC)
- Anyone who works outside of their regular job and receives a 1099-NEC form (formerly a 1099-MISC form)
What Qualifies as Business Income?
Any money you earn because you own and operate a business of any kind is considered income by the IRS. According to the IRS:
“If there is a connection between any income you receive and your business, the income is business income. A connection exists if it is clear that the payment of income would not have been made if you did not have the business.” (Publication 334)
Business income can include:
- Income received for services rendered as an independent contractor, freelancer, or other non-employee position
- Income received from government contracts
What Can I Deduct to Lower My Tax Bill?
You can subtract business expenses (such as products and materials you purchased or other services you needed to complete your business) from your income. The IRS defines these as expenses that are “ordinary and necessary” for conducting your business.
“Ordinary” applies to expenses that anyone in your line of work would have. For example, anyone who operates a lawn service business would need a lawnmower or hedge trimmers.
“Necessary” means that those expenses are aligned with your business and necessary for you to make money, like gas for the equipment if you run a lawn service business.
Examples of business expenses might include tools that are necessary for your work. For example, if you do construction, you may need hammers, drills, saws, and more. The cost of those tools would qualify as a business expense that you can deduct from what you owe the IRS. Your mileage to drive to and from the places where your business is conducted is also a business expense. Office supplies and equipment—like copy paper, computer, and postage—all qualify for business expenses.
Miscellaneous Business Expenses
Schedule C on Form 1040 also includes a place to deduct several other miscellaneous expenses. Expenses that are considered ordinary and necessary business expenses but aren’t explicitly addressed on Schedule C fall into this category. Some of them may be small, but they can add up.
Some common miscellaneous expenses you can deduct include:
- Costs for your business website and other internet-related expenses
- Bank fees and charges
- Club dues and memberships, but only for business and professional clubs
- Credit card fees, including late fees.
- Education and training for yourself and employees (there are many limits and qualifications on this one).
- Incidental expenses paid through petty cash
- Subscriptions to trade, professional, and technical journals
- Travel expenses (standard mileage rate only)
- Client and employee entertainment
- Advertising and marketing
Remember, there are limits to what you can deduct, and an IRS-certified tax professional can help answer all these questions.
In Summary
Taxes can be confusing and complicated, and adding business taxes can further complicate things. But CWF is here to help!
You work hard for your money, and you don’t want to leave it on the table. If you have a business, are freelancing, work as an independent contractor, earn less than $57,000 per year, and live in Southeastern Pennsylvania and Southern New Jersey, you can get free, professional help from CWF. Our team will make sure you’re capturing all the deductions and complying with all the regulations to avoid any penalties.
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