If you’re self-employed, understanding what’s deductible and recording all of your business expenses should be a major priority.
Accurate accounting is crucial, especially if you work for yourself. The IRS pays special attention to tax returns prepared by sole proprietors declaring their own business transactions. Do you know all the ins and outs of the Schedule C? 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 deductible dollar that the IRS says is permissible. It’s often a special struggle for the self-employed to net the livable income they deserve for how hard they work. To help you get there, you’ll need to document everything you can to offset your gross income and minimize your tax obligation.
How do you ensure that all of the money you’re spending to make money ends up in the right place 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 a good idea to get more familiar with it. 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.
Or, if IRS instructions for filling out forms leaves you dazed and confused (or even just numb and dumbfounded!), then maybe you want to enlist the help of the reliable, friendly experts at Baum CPA. Just click here to schedule a consultation with us today.
Keep Detailed Records
Keeping good records poses an extra challenge if you’re doing your bookkeeping manually. You may want to set up a system of folders or envelopes — or whatever works best for you — and separate and organize 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 makes calculations easier, too.
Do make notes on your receipts so you’ll know why you thought each purchase would be deductible. You might also indicate mark receipts as you enter them in your master list, so you don’t make duplicate entries. Don’t forget about credit or debit card charges and checks you’ve written for tax-deductible purchases that didn’t generate a receipt. Ordering stuff online? Print a copy of the order confirmation email, and use that as the receipt. If you get electronic receipts in email from over-the-counter purchases, save them in a folder on your computer and record them to your tracking system.
Enter these expenses in your master list as you go. If you’re ever audited, you’ll need copies of them for documentation.
There are numerous personal finance and small business accounting applications that allow you to import your online banking transactions and categorize them. In our extensive experience with accounting software apps and add-ons, we find that QuickBooks Online is the very best and most foolproof product for putting bookkeeping and accounting competence into the hands of non-accounting oriented small business professionals. The superior cloud-based accessibility and versatility of QBO make it the only small business accounting application that we recommend. Category lists can be readily tailored for any industry or trade, so you can be sure your tax-related expenses are organized accurately.
Is all of this good advice still too much hassle? Maybe you would prefer to just pick up the phone, and call Baum CPA at 719-493-9499, to find out more about full-service bookkeeping for small business owners.
Don’t Dismiss the Unusual
There are some oddball business expenses that don’t fit the usual mold for 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 for a scrapyard that was trying to attract wild cats to keep snakes away. In another example, 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, and find out if they’re tax-worthy. Still unsure? Ask an expert tax advisor — like Baum CPA!
All of these suggestions may sound time-consuming, and they they can be. But like all management disciplines, and the trade or craft you learned — and mastered — upon which you have built your own small business — you just need to practice the habit of tracking all of your tax-related business expenses until it becomes a natural routine. Baum CPA can help ensure that you’re only claiming legitimate deductions and advise you on those you might question. We can also relieve the drudgery of year-round bookkeeping (and payroll, if you have employees), and prepare and file your tax returns. Contact us now for a consultation!
This blog and its authors provide this content strictly for informational purposes. No content herein should be misconstrued as financial advice. Everyone’s specific circumstances vary — Always consult with a qualified, licensed financial advisor, legal counsel, and tax professional before venturing into any investment or business activities.