All Financial Matters

Items Reported on Schedule C

If you own a small business or operate as an independent contractor, the government wants your money. Specifically, they want to tax the profit that you have seen from your business. But don’t worry yet. The full amount of taxable income is determined by more than just the total profit made.

A self-employed designation is determined by the IRS. For tax purposes, anyone who is the sole owner of their trade or business, an independent contractor (this includes freelancers), or a member of a partnership in a small business are classified as self-employed. As such, there are additional tax forms that need to be filed each year that the business is in operation.

A self-employed person who makes $400 or more in profit during the year, has to declare that income to access taxes. This also applies to church employees who earn more than $108 and didn’t receive a W-2 reporting form. The IRS forms will determine what taxes if any need to be paid.

All self-employed persons must file a Schedule SE form in addition to the 1040 form. The Schedule SE form has a long and a short version. The form has instructions concerning who needs to fill it out. This form records the total earnings of the business or trade enterprise, the amount of tax according to IRS calculations, and the tax amount after a fifty percent deduction is applied.

This amount may not be the final tax owed on the profit of the business. There is another form where people list the profit or loss from their business enterprise. This form is called a Schedule C. Any portion of the profit that was funneled back into the business to fund expenses is recorded here on specific lines.

The total profit received into the business is reported here, just like it was recorded on the Schedule SE. Freelancers and independent contractors may have a business account where they record each payment transaction to determine this amount. Anyone who has an ongoing contract with you for services will be subject to sending you a 1099 form. This form details the amount of money paid to you for work done in the tax year.

Home based businesses can use this form to record any expenses for the business use of the home. This amount is transferred from another form, Form 8829, where the amount of the home deduction is determined. Information about the use of your vehicle for business use is recorded on the Schedule C form. Businesses that deal in inventory for their products have room in Part III to list that information and the dollar amounts.

The Schedule C form is useful in determining the amount of taxes that you will pay. A tax professional will be able to tell you all of the deductions that you are qualified to take against your profits to lower the amount of taxable income. Exemptions are even better because they lower the amount of taxes to be paid.

Home Office Deductions

You have started a new business in your home. If your business continues to operate from there, you may be eligible for a home office tax deduction. Read on to find out if the way you operate your home business qualifies you for this deduction.

When this subject was first approached, deductions were claimed for things like using the family room to address envelopes for business invoices. The home office deduction has been narrowed down to weed out uses that don’t qualify.

The use of the home for business has to meet certain requirements. The use needs to be exclusive, regular, and for business. The room in your home where you conduct business is the primary place of business even if you have someplace else where you also conduct business activities.

This does not mean that the family room can be used for a home office deduction if you address envelopes once a week. The “exclusive” requirement means that the room is used for business and nothing else. A room can’t double as the office and qualify for the home office deduction.

This also goes for equipment in the home office. The use of the equipment has to be for business and not personal use. If you have one computer in the home, chances are the other family members are using it when you are not.

A room that is set up as an office and is only used as such would qualify for the home office deduction. Any equipment for the business that can fit needs to be in that room to ensure that no one else is using it for personal stuff. For a qualified room, a portion of the interest paid on mortgage payments, taxes on the home, and utility bills can be deducted. Take the square footage of the room and find out what percentage it comprises of the total footage of the home. This is the percentage of the bills that can be deducted for the home office.

Those who don’t qualify for the home office deduction are not left out in the cold. There are other ways to garner a tax deduction for your business. You can deduct the amount of money spent on equipment that is used for the business. This includes paper clips, printers, computers, copiers, pens, computer paper, and the like.

Exceptions do exist to the exclusivity rule that applies to the home office deduction. If the office is used as a daycare facility or to store inventory, the square footage of the room can be deducted. The deduction for the home office is limited by the amount of profit that you make from the business.

Add up your business expenses and the amount of profit you made during the current tax year. When profit is more than or equal to the business expenses, you can claim all deductions that apply for the home office. On the other hand, if your business expenses are more than the profit you made, the home office deduction is limited.