Appendix C: Consider Income, Expenses, and Vehicle Information
Each year, sole proprietors have the chore of preparing and depositing Annex C with their 1040 to show the IRS if their business had a taxable profit or a deductible loss. Schedule C may seem daunting, but filing will be easier if you plan ahead and keep good records.
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We’ve divided the form into sections, so you can see what the IRS expects of you and what documents you’ll need at tax time.
Part I: Income
In this section, you calculate your gross income.
Begin by reporting gross receipts or sales for the year, including reported amounts 1099 forms issued by clients or others for whom you have provided services.
Other types of income you must report include:
- The value of goods or services you received through barter transactions
- Bad debts you recovered if they were written off on previous year’s tax returns
- Interest on corporate bank accounts.
Add these together and subtract your cost of goods sold (which is calculated in Part III and explained below) to arrive at gross revenue.
Part II: Expenses
This is where good record keeping can really save you money on your taxes. You can cover a wide variety of business expenses you paid during the year, including things like:
- Advertising costs
- Legal fees
- Repairs and maintenance
- office expenses
You can also deduct:
1. Car and truck expenses: You can report these costs in one of two ways: Enter your actual expenses—for gas, oil changes, repairs, insurance, and so on. — if you have supporting documents, or take the standard IRS mileage rate. The fare for 2021 is 56 cents per mile.
2. Depreciation and deduction of expenses under Section 179: The law allows businesses to gradually amortize or deduct the cost of assets such as equipment, fixtures, furniture, etc., that will last more than a year. For these assets, you first complete Form 4562: Depreciation and Amortization, and enter the result on Schedule C.
You also use Form 4562 if you elect the “expenses” deduction of Section 179. Section 179 allows you to deduct the full cost of assets (new and used) in the year they are put into use, subject to certain limits.
3. Bonus amortization: Bonus amortization has been amended for qualifying assets acquired and placed in service after September 27, 2017. For qualifying assets purchased new before September 28, 2017, the old 50% bonus depreciation rules still apply. The new rules allow for a 100% “spend” premium on new or used assets.
The bonus amortization percentage gradually decreases over the year:
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- 2023 at 80%
- 2024 at 60%
- 2025 at 40%
- 2026 at 20%.
After 2026, there is no additional depreciation. This bonus “expenditure” should not be confused with expenditure under section 179 of the Code which has entirely separate rules, see above.
The 100% spend is also available for certain productions, such as qualified films, television and live performances, and certain fruits or nuts planted or grafted after September 27, 2017.
A 50% depreciation premium for the first year can be elected over the 100% expense for the first tax year ending after September 27, 2017.
4. Pension and profit-sharing plans: Report only the contributions you made for your employees on Schedule C. If you also made contributions for yourself, report them on your 1040.
5. Travel, meals and entertainment: For Business trip, deductible expenses include:
- Fax services
- Internet connections
- Some other incidental expenses
You will see that travel is reported separately from business meals and entertainment:
- For tax years before 2018, you can only deduct 50% of your eligible meal and entertainment expenses.
- As of 2018, in general, only meals are 50% deductible, while entertainment is not deductible at all.
- For the 2021 and 2022 tax years, there is an exception for qualifying business meals provided by a restaurant. In these cases, the meals are 100% deductible.
6. Salaries: This category may seem simple, but can be a little tricky if you produce and sell goods. You should report here amounts paid to employees, such as accountants, receptionists, salespeople, etc. However, if you have production workers, you will report their wages as part of the cost of goods sold in Part III.
7. Expenses related to the professional use of your home: You are entitled to this deduction if you use part of your home regularly and exclusively for your business. To qualify, your home office must be:
- Located in a separate area of your home where you don’t mix business with other activities
- Used for business on an ongoing basis, not just once in a while
You first calculate the home office deduction on Form 8829: Expenses for business use of your home then enter the result here.
Once you have entered all of your deductions, subtract them from your gross income to get your Schedule C net profit or loss. The net income amount is then transferred to your Form 1040.
Do you have a loss? So you’re not done yet. You must follow some additional steps in this section before transferring this loss to your 1040 because it may not be fully deductible.
- You must declare whether you are fully “at risk” for the amounts invested in the business.
- If you are, you can go ahead and take all of the write-off.
- Otherwise, you will need to complete Form 6198: Risk Limitations to determine if your deduction is limited.
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Part III: Cost of Goods Sold
This section is for any business that sells goods to customers, so skip Part III if you work in a service business: consulting, yoga teachersoftware programmer, daycare owner, etc.
Start by declaring the value of your inventory at the beginning of the year. This amount is usually the same as the amount you reported for closing inventory on last year’s Schedule C.
Then, declare the following costs and add them to your initial inventory:
- Merchandise, but do not include the value of anything withdrawn from sale or for your personal use.
- Wages paid to production workers, factory supervisors, etc., if you are in manufacturing or construction.
- Costs of supplies and other overheads.
From this total, subtract the value of your closing inventory. The result is your cost of goods sold. Enter this amount in Part I to reduce your gross income.
Part IV: Information about your vehicle
In this section, you give the IRS information about all vehicles for which you claim expenses in Part II. The IRS uses the answers in this section when reviewing your deduction for vehicle to see if it looks legit. It is therefore important, for example, to be able to answer YES to the question whether you have written documentation for your deduction. If you answer NO, don’t be surprised if the IRS asks you to justify the deduction.
Part V: Other Expenses
If you have business expenses that do not fit into the categories listed in Part II, itemize and report the total of those expenses on the “Other expenses” line in Part V.
Here are examples of other possible business expenses:
- Contributions for professional organizations
- Subscriptions to corporate publications
- Fees you paid to credit card companies for processing customer card transactions
- Business gifts to suppliers, customers, subcontractors, etc.
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