While it’s important to claim every penny that the IRS says is permissible, some taxpayers have previously tried to blur the lines between personal and business expenses leading to increased scrutiny from the IRS. Document everything to accurately offset your income and minimize your tax obligation—primarily if your business generates a lot of revenue.
Sometimes, you need to spend money to make money. Here are some top tips to help ensure that your IRS Schedule C is filled out correctly.
Review the Schedule C Section
Surprise birthday parties are great, but surprise fields on your tax forms? Not so much. Make sure you’re familiar with the categories and sections on Schedule C, paying particular attention to Part II: Expenses.
Although Schedule C breaks down business expenses into various categories, it’s up to the business owner to understand what those categories mean. What is the difference between “Office Expenses” and “Supplies”? What does “Other Business Property” mean? Business owners are responsible for knowing which expenses are deductible (and which aren’t!) and filing them in the correct category.
Fortunately, the IRS does provide additional context and information, including a unique publication which discusses deductible business expenses. This document can help clear up many sections on Schedule C that require further information or context. Make sure you bookmark it and use the interactive table of contents to weed through the data and find what you need.
The IRS also lists all of their instructions for Schedule C online for taxpayers to review. You can view a detailed outline of the form, broken down section by section and line by line.
Make Sure Your Records Are Detailed, and Up To Date
Using bookkeeping software like QuickBooks—or even better, having a dedicated bookkeeper—will be a significant advantage if you’re working manually, set up a system of folders or envelopes (or whatever works for your particular needs) and separate your receipts. We suggest sorting by month, but you can also sort by Schedule C category. Alternatively, if you’re a tech-savvy business owner, you can set up a spreadsheet in Excel or Google Sheets and enter the receipt information there. This may also make it easier to process calculations.
Make notes as you go so you remember which receipts are deductible. Beware of making duplicate entries—make a note when you add a receipt to your master list, so you don’t accidentally upload it twice.
Credit card charges or checks you’ve written for tax-deductible purchases should also be included, even if they did not generate a receipt. Enter them in your master list as you go, but remember that you’ll need copies of them for documentation if you are audited. Create a folder in your email inbox for e-Receipts to keep track of them on your computer, too.
There are many personal finance and small business accounting programs that help you organize, input, and categorize your online banking transactions. At Soukkala Consulting, we’re big fans of QuickBooks! Get in touch with us if you need help getting started.
Examine the Unusual
H&R Block reported on a case in which a bodybuilder could claim the purchase of ProTan Muscle Juice Professional Posing Oil as an acceptable business expense.
Avoid spending too much time looking for obscure tax deductions. Consider your purchases as you make them see if they’re tax-deductible.
It may seem tedious to follow all of these suggestions. If you don’t get in the habit of tracking all your tax-related business expenses, they can be difficult, but it does require constant diligence. By working with us, you can make sure you are only claiming legitimate deductions and learn how to verify. You can also have your return prepared and filed by us, and we can help you plan your taxes all year long. Please get in touch with us to schedule an appointment.