Business Deductions

Explanation of Schedule C Expenses

The following is an explanation of certain Schedule C expense items:

Line 14: Employee benefit programs (other than on line 19)

Examples of benefit programs associated with line 14:

  • Accident and health plans
  • Group-term life insurance
  • Dependent care assistance programs
    • If you made contributions on your behalf as a self-employed person to a dependent care assistance program, complete Form 2441, Parts I and III to figure your deductible contributions to that program.
    • You cannot deduct contributions you made on your behalf as a self-employed person for group-term life insurance.

Line 15: Insurance (other than health)

Examples of insurance to include:

  • Business liability
  • Business interruption
  • Workers' compensation (does not apply if you are self-employed and have no employees)

If you are any of the following, deduct the self-employed health insurance deduction on Line 29 of Form 1040 instead of on line 15:

  • Self-employed (i.e. sole proprietor, a partner, an LLC member if the LLC is a single-member LLC or multiple-member LLC and the LLC did not elect to be taxed as a corporation)
  • A more-than-2 percent shareholder in an S corporation.

Line 16: Interest

  • Loans:
    • Interest on loans used for business purposes is deductible.
    • Interest on loans used for personal purposes is not deductible, except for mortgage interest, which is deductible on Schedule A as an itemized deduction.
  • Credit Cards:
    • If you're a sole proprietor and use your personal credit card to charge business-related expenses, you may deduct the interest related to those expenses on Schedule C.
    • If you mix business and personal expenses on the same credit card, you may deduct only interest related to the business expenditures.
    • To determine the amount of interest that is deductible you must allocate the business-related portion of the interest.
      • Example:
        • You use your personal credit card to charge both business and personal expenses.
        • Total charges on your credit card for the year were $10,000, allocated as follows:
          • Business expenses: $4,000 (40%).
          • Personal expenses: $6,000 (60%).
          • Total interest on the $10,000 was $1,000.
        • Result:
          • You may deduct interest expense of $400 (40% x $1,000) on Schedule C. This is in addition to any other interest you may have paid on other business-related loans.
          • The remaining $600 of your credit card interest is not deductible because it is a personal expense.
Suggestion

To avoid having to go through this allocation process, simply use one credit for business and another for personal use.

Line 19: Pension and profit-sharing plans:

  • Employees:
    • Enter your deduction for contributions you made for the benefit of your employees (not your own) to a pension, profit-sharing, annuity plan, or other plan.
  • Self-employed persons:
    • If the plan included you as a self-employed person, enter contributions made for yourself on Schedule 1 (Form 1040) , Part II , line 16 and NOT on Schedule C.
  • Form 5500-EZ
    • File this form for a one-participant plan. This is a plan that covers only you (or you and your spouse).
  • Form 5500
    • File this form if the plan is not a one-participant plan.

Line 23: Taxes and licenses:

  • You may deduct:
    • Federal Unemployment Taxes.
      • These taxes are not withheld from the wages of employees.
      • Only the employer pays unemployment taxes.
    • Employer's share of FICA taxes
      • These are social security and Medicare taxes.
      • The employee pays one-half and the employer pays one-half.
      • The employer's deducts his half on this line.
    • State unemployment taxes
      • State unemployment taxes are not paid by employees.
      • The employers pays this tax based on a percentage of the employee's gross wages (e.g., it's usually paid the first $7,000).
        • Tip: To keep your experience low, keep your turnover low or successfully defeat a claim by an ex-employee when you feel your justified.

Line 27a: Other expenses (from line 48):

  • Line 27a is a catch-all for expenses not listed on lines 8 through 26.
  • Use Part V of Schedule C to enter a description and amount for expenses you couldn't enter on lines 8 through 26.
  • Add up items other expenses and carry the total to Part II, Line 27.
    • Examples of other expenses include:
      • Amortization (see note below)
      • Bank fees
      • Publications related to your business or profession

Amortization:

  • Complete Form 4562 for amortization that begins in the current tax year.
  • Examples of amortizable items:
    • Business start-up costs and section 197 intangibles are amortized.
    • Section 197 intangibles are intangible assets acquired in connection with the purchase of a business. They are amortized over 15 years.
  • Examples of section 197 intangibles:
    • Goodwill
    • covenant not to compete
    • Franchises
    • Trademarks
    • Trade names
    • Copyrights
    • Patents
    • Formula
    • Process
    • Format
    • Customer lists
    • Subscription lists
    • Lists of advertisers: radio, T.V.,  newspapers, magazines
    • Interest on business debt
    • Leasing costs for equipment
    • Licenses and fees to government agencies
    • Merchant authorization fees for credit card payments
    • Repairs and maintenance of office facility and equipment
    • Shipping and postage
    • Storage fees