Schedule C Tax Tips - What's Deductible?

What is the most frequently asked tax question? Are you ready? Here it is: "What's deductible?" It comes in several forms, such as: How do I identify all the deductions I'm allowed to take? Is there anything deductible that I'm not deducting? How do I make sure I'm taking all legal deductions? Is there one resource that describes all legitimate deductions, A to Z?

Knowing all allowable small business tax deductions is no easy task. Our beloved politicians have done much to complicate our lives in this regard.

Any long journey begins with a single step, so here's where you can start learning what's deductible: your income tax return. Go to the IRS website right now and print out a copy of Schedule C and take a close look. Here you'll find a list of about twenty deductible business expenses. To get a current copy of the Schedule C, go to the IRS website and click on "Forms and Publications".

Schedule C is divided into 5 sections (Parts I-V). Part I is labeled "Income" and Part II is labeled "Expenses", so you would think the best place to start is Part II, right? Well, if you don't sell a product, you are correct. But if you do sell a product, take a close look at Part I because this is where you deduct what is known as "Cost of Goods Sold".

For retailers, this is probably your largest expense. You get to deduct your wholesale cost of all products sold during the year. Part III of Schedule C contains the details of how this expense is calculated, and the amount from Line 42 is transferred back to Line 4. So that's your first and potentially biggest deduction, if you sell a product.

Now let's move on to Part II. Take a good look at Lines 8-27. This section of Schedule C is a literal goldmine of deductions in alphabetical order. Here they are, with the corresponding Schedule C line number:

8-Advertising 9-Car and truck expenses 10-Commissions and fees 11-Contract labor 12-Depletion (OK, there's a rare one) 13-Depreciation and Section 179 deduction 14-Employee benefit programs 15-Insurance 16-Interest 17-Legal and professional services 18-Office expense 19-Pension and profit-sharing plans (OK, another rare one) 20-Rent or lease 21-Repairs and maintenance 22-Supplies 23-Taxes and licenses 24a-Travel 24b-Meals and entertainment 25-Utilities 26-Wages (if you have employees) 27-Other expenses

Take special note of that last expense, Line 27, "Other expenses". That's my favorite! This is where you can deduct any other legitimate business expense that's not included on the other lines. In fact, Part V is devoted exclusively to this "Other Expense" category, and the IRS allows you to have any number of business expenses listed here, which are added together on Line 48 and then transferred back to Line 27.

By taking this quick tour of Schedule C, you're off to a great start in answering the question, "What's deductible?"

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