Business Tax Tips

Schedule C Tax Deductions - "C" is For Contributions, Contractors & Commissions

Here are three legitimate tax deductions for the self-employed that begin with the letter "C". Do you have these expenses in your sole proprietorship? If so, be sure to report them on your tax return.

1. Contributions. By contributions, I'm referring to charitable contributions - donations you make to tax-exempt organizations (known in tax lingo as 501c3 organizations) such as churches, synagogues and other humanitarian or educational institutions that have IRS non-profit status.

This is one of those tricky deductions. If you are a sole proprietor and make a donation from your business checking account, you don't actually take the deduction for this contribution on Schedule C. Instead, the deduction is reported on Schedule A, Itemized Deductions. So if you don't file Schedule A, which is fairly common because IRS statistics show that about two-thirds of personal tax returns take the standard deduction, you don't get to write off the donation.

So, a word of caution to all you kind-hearted sole proprietors: do not assume that just because you made the donation from your business account, you automatically get to deduct it.

Corporations ("C" corporations but not "S" corporation) do get to deduct charitable contributions as a business expense on the corporate income tax return (Form 1120), provided certain conditions are met. Is that reason enough to incorporate? Probably not. But hopefully you aren't making donations merely for the tax benefits.

2. Contractors. If you hire independent contractors to perform services for your business, those fees are deductible on Schedule C. Line 11 is the logical place to report it, "Contract labor."

Keep in mind that this is one of the most controversial deductions in business and a potential red flag if the IRS suspects abuse. Why is that? Because many businesses pay their workers as independent contractors rather than employees merely to avoid the payroll taxes. This is a big no-no and if you get caught, you'll regret it. If the IRS can prove that your contractors are actually employees, they can reclassify past compensation as wages and required you to pay the overdue payroll taxes, plus late payment penalties and interest.

Now, if you have a legitimate contractor relationship with a service provider, you need not worry about this. Just be sure you do things right: if you hire an independent contractor, do you have a contract? Does the contractor send you invoices? And at the end of the year, do you send him a Form 1099-MISC? The answer to those questions better be "yes."

For me information on this topic, be sure to talk with your tax professional, or go to the IRS website, search on "independent contractor" and you'll access an excellent article entitled "Independent Contractor or Employee"?

3. Commissions. Another common form of compensation is commissions, reported on Schedule C, Line 10. Again, if you are paying other people a commission for services rendered, be sure that these folks are truly independent contractors and not employees. If they are contractors, you can report the expense on Line 10 and legally avoid payroll taxes. But if they are employees, the compensation should be included on Line 26, Wages, and be subject to payroll taxes, income tax withholdings, and the small mountain of payroll paperwork that accompanies employee compensation.

----------------------------------------------------
Looking for more small business tax tips? For a free copy of the 25-page Special Report "How To Instantly Double Your Deductions", visit http://www.yousaveontaxes.com . Wayne M. Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

Schedule C Tax Deductions: "B" Is for Bad Debts, Bank Charges & Books

Are you wondering whether you are deducting all the expenses the law allows for your sole proprietorship? Here are three commonly overlooked deductions that begin with the letter "B".

1. Bad Debts. If you use the Accrual Method of bookkeeping, you record income from a sale when you invoice the customer, regardless of when or even whether they pay you. So what happens if they don't pay you? Let's say hat several months have passed and you keep sending them statements that continue to be ignored. By the end of the year, if you've done all you can do to collect the payment without success, you can take a deduction for the uncollectible amount. This is known as a "bad debt" and you should write it off.

What happens if you deduct the bad debt on your 2008 return and the customer surprises you by making payment in 2009? You simply record the payment as income on your 2009 return.

If you use the Cash Method of bookkeeping, you record the income only when the customer pays you, so there really is no bad debt to deduct.

2. Bank Charges. All those annoying nickel and dime bank fees that appear on your monthly bank statement are deductible business expenses. The key here is to take the time to carefully examine every monthly bank statement and then record those bank charges in your bookkeeping software program or manual record keeping system. It's easy to overlook these charges because you didn't write a check or use your credit card to incur them.

The same thing applies to merchant credit card fees. If you accept credit card payments from customers, fees are probably assessed to your bank account every month and these fees are automatically deducted from your bank balance. Be sure to record those charges, too, or you'll miss out on bona fide tax deduction.

3. Books, Magazines, Trade Journals. Any book you purchase for business use is a legitimate tax deduction. Be careful here not to limit this deduction to only those books that deal with your particular industry, product or service. Self-help books contain much advice that is applicable to your life as a business owner, as well as books on topics such as time management, people skills, salesmanship and marketing.

And while we're on the topic of reading material, you probably subscribe to newspapers, magazines and trade journals that you read primarily for business purposes, so these are deductible as well.

Since none of these three expenses have a specific Schedule C line in Part II, the best place to put them is in Part V, Other Expenses. The total of all these Other Expenses (line 48) is then transferred to Schedule C, Line 27.

----------------------------------------------------
Looking for more small business tax tips? For a free copy of the 25-page Special Report "How To Instantly Double Your Deductions", visit http://www.yousaveontaxes.com . Wayne M. Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.

Small Business Tax Tips: How to Deduct Anything

Looking for an easy way to know exactly what you can and cannot deduct on your income tax return? Knowing what is deductible and what isn't deductible has mystified small business owners for decades. This article should help you see the big picture.

What's deductible? Believe it or not, anything is deductible. Anything? Yes, anything. Let me explain.

Anything is deductible, provided that it is specifically mentioned in the tax code as deductible. It's as if Uncle Sam is saying, with a big smile on his face, "This particular item is deductible, no doubt about it."

Anything is deductible, provided that it is not specifically mentioned in the tax code as non-deductible. There are deductions that are specifically disallowed. Again, imagine Uncle Sam (this time with a frown) telling you, "Sorry, but this particular item is not deductible, no doubt about it."

But what most taxpayers do not realize (and the IRS is in no hurry to tell you this) is that most deductions are not specifically mentioned anywhere in the tax code. By that I mean this: most allowable deductions are not said to be deductible or non-deductible. Getting confused? Bear with me here.

For example, where does it say in the tax code that paper clips used in your office are deductible? Guess what - it doesn't. How about staples? Same thing -- there isn't really a specific reference to that either. But neither does it say that paper clips (or staples) are non-deductible.

Then how do we know what is deductible and what isn't? Because the tax code does provide some general rules about what is deductible, and these general rules can be boiled down to this famous statement: Anything is deductible, provided that it is an ordinary and necessary business expense. Any expense that meets that two-part requirement is deductible. Let's unpack that concept.

Here's how the IRS defines these two requirements: By "ordinary", the tax code simply means an expense that is "common and accepted" in your type of business. Is it common for an office to use paper clips in the normal course of business? Obviously. How about staples (not to mention the stapler)? Of course.

Not only are basic office supplies commonly used in virtually every business, but it is an accepted practice for these items to be a normal part of a typical business, right? I think you get the idea. And you should also now see why the tax code doesn't specifically mention paper clips or staples in it's list of legitimate business deductions.

By "necessary", the tax code means an expense that is appropriate and helpful for your business. Now apply that concept to office supplies. Are paper clips and steps appropriate and helpful? Absolutely.

----------------------------------------------------
Looking for more small business tax tips? For a free copy of the 25-page Special Report "How To Instantly Double Your Deductions", visit http://www.yousaveontaxes.com . Wayne M. Davies is author of 3 ebooks on tax reduction strategies for small business owners and the self-employed.