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Small Business Deductions: Schedule C Expenses

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Explanation of Certain Schedule C Expenses

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)

Do not include health insurance premiums on line 15 if you are:
- Self-employed (sole proprietor, partner, LLC member, where LLC is taxed as a partnership) or
- A more-than-2 percent shareholder in an S-corporation.
If you are any of the above, deduct the Self-employed health insurance deduction on Line 29 of Form 1040.

Examples of what to include on line 15:

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

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.
      - Of course 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; it is a personal expense.
      - If you must use a personal credit card to charge some business expenses, ideally, you should use one card strictly (100%) for this purpose and other cards for personal purposes, this way, you avoid having to go through the allocation process explained earlier.
Caveat:
- Make sure you document each business-related expense. Keep receipts, statements, etc in a separate file.
- Late fees and other penalties:
- Keep in mind, finance charges, late penalty charges, over-limit charges, are also interest; they're just given a different name.

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 Form 1040, line 28 or Form 1040NR, line 27, 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 can 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/her 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 27: Other expenses

Line 27 is used as a catch-all for expenses not preprinted on Schedule C.
Use Part V of Schedule C to enter the description and amount of each expense you had that didn't fit in to any of the preprinted expense items listed on Schedule C.
Add up these items up then carry the total to Part II, Line 27.
- Examples of other expenses include:
  - Amortization (see note below)
  - Bank fees
  - Books related to your business or profession
  - Dues to professional societies
  - Gifts ($25 limit)
  - Information services
  - Subscriptions
  - Trade publications and professional journals

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

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Small Business Deductions: Schedule C Expenses

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Explanation of Certain Schedule C Expenses

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