Explain Sch 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
– 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.
– 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.
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.
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.
– To avoid having to go through the allocation process previously explained, use one credit strictly for business and another for personal use.
Line 19: Pension and profit-sharing plans:
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.
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.
File this form for a one-participant plan. This is a plan that covers only you (or you and your spouse).
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
– Trade publications and professional journals
Complete Form 4562 for amortization that begins in the current tax year.
Examples of amortizeable 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:
– covenant not to compete
– Trade names
– 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