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How to Categorize your Business Income & Expenses

Many small business owners have questions about filing their annual taxes with the IRS. It can be difficult to do so, especially if you are not familiar with schedule C, which is the form that you will likely be filling out in order to file those taxes. In this article, we are going to cover an overview of the basics of filing your schedule C. If you have additional questions, you can contact the professionals at Tax Force Incorporated for the answers that you need.

There are a number of terms in the first section of schedule C which requires your attention. These include gross receipts, returns and allowances, cost of goods sold, gross profit, gross income and bartering. In essence, this is the information about your business which would allow the IRS to see how much income you generated, how much cost can be deducted and the gross profit or income that your business generated.

Gross Receipts - This is the income from any product or services that were provided by your business.

Returns and Allowances - Any cash or credit refunds to your customers, rebates which were offered or any other allowances should be considered in this area.

Cost of Goods Sold - Anything that your company spent to make or purchase the product which was being sold to your customers would be included in this area. Be aware of the fact that you may have carryover inventory for the previous year or inventory that is carried over to the next year that will need to be calculated to provide the proper number to the IRS.

Gross Profit - You will need to subtract your allowances and returns from the total gross receipts for your business. You will then need to subtract the cost of the goods that you sold, which will allow you to arrive at the gross profit.

Gross Income - In this section, you will provide the gross profit from your business along with any other income that may be associated with it.

Bartering - If you engage in bartering, it is necessary for you to include the fair market value of the services or goods on this line.  Both parties should include the appropriate amount as sales.

Schedule C Part II - Expenses

Although there is much that can be written about the expenses of your business, it is important to understand that only ordinary and necessary expenses associated with your business can be deducted on your tax return. Here are some specifics about business expenses but you can always contact Tax Force Inc for additional help.

Car and Truck Expense - If a vehicle is used exclusively for your business, all of the cost of operating the vehicle can be deducted from your taxes. If you use the vehicle for both personal and business use, you must allocate the amounts between the two, or use the standard mileage deduction provided by the IRS.

Contract Labor – If work is performed for a business by non-employees, such as independent contractors, those costs are deductible.

Depreciation - The annual deduction which is permitted for the recovery of the reduction in price of any real property in your business is known as depreciation. This would include property that has a useful life that extends beyond the tax year. The depreciation amount begins when the property is first used and ends when it is no longer in service.

Insurance (other than health) – Include insurance premiums paid for a trade or business, such as general liability insurance, workers compensation insurance, etc.

Self-employed Health Insurance – Health insurance paid on behalf of a sole proprietor as a self-employed taxpayer is deductible as an adjustment to income on Form 1040. Deductible amounts include insurance premiums paid for the self-employed taxpayer, spouse, dependents, and children under age 27, if certain criteria apply. Please contact Tax Force Inc for determination of eligibility.

Interest – You can deduct interest paid on debt used in connection with the business, including business portion of vehicle loans (in addition to standard mileage rate deduction).

Legal and Professional Services – Fees charged by accountants and attorneys, that are ordinary and necessary expenses directly related to operating the business, and fees for tax advice and for preparation of tax forms related to the business, are deductible.

Office Expense – You can include your expenses for office supplies and postage.

Ordinary and necessary office supplies are deductible when purchased. The cost of office equipment with a useful life of more than one year must be depreciated or expensed.

Items such as calculators and office phones which are of too little value to depreciate are generally expensed.

Rent or Lease – Vehicle, machinery, or equipment rental or lease are deducted on 20a. Property rentals, such as office space in a building are deducted on 20b.

Repairs and Maintenance – You can deduct the cost of incidental repairs and maintenance that do not add to the property’s value or appreciably prolong its life.

Supplies (not included in Cost of Goods Sold) – Supplies are deductible as they are actually consumed and used in the business during the year.

Taxes and Licenses – Such as state and local sales taxes, real estate and business property taxes, licenses and regulatory fees, employer portion of payroll taxes, etc.  

Travel and Travel Meals - Transportation and lodging associated with overnight business travel can be deducted from your income. This is any time that you spend away from what is known as your tax home, which is the primary place of your business. When traveling for business, you can also deduct your travel meals at 100%.

Meals and Entertainment – Meals and entertainment are deductible if incurred while entertaining a client, customer, or employee.  A deduction for meals and entertainment are generally limited to 50% of the expenses.   

Utilities – Deduct only utility expenses directly related to the business.

Wages – Include total gross salaries and wages paid to employees of the business (which includes withheld taxes), minus any employment tax credits being claimed.

Net Profit or Loss - This number is associated with the profit and loss of your business before any deductions that may be taken on form 1040. It is also possible to deduct startup costs in many cases.

For additional help or if you have any questions about filing your business taxes, you can contact Tax Force Inc. We will be happy to assist you to ensure that your taxes are filed properly and promptly.

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