- How to Pay Taxes on a Net Loss for Sole Proprietors
- Can I Deduct Business Expenses & Still Have a Standard Deduction?
- What Can You Itemize on Your Taxes When You Own a Small Business?
- Can I Include Business Deductions as Well as Standard Deductions on a 1040?
- Can I Deduct Investment Property Expenses on Taxes?
- Is Mortgage Interest an Above the Line Deduction?
If you operate your business as a sole proprietorship, you must report your business income and expenses on Internal Revenue Service Schedule C. To make your task easier, keep track of your business income and hold on to every receipt as evidence of your expenses. Prepare monthly financial statements so that you’re not stuck fumbling through shoeboxes overflowing with receipts at tax time. The completed Schedule C is filed along with your personal 1040 income tax return.
Declare your business or trade income in Part I of Schedule C. This includes income you received from selling scrapped assets, bad debts you recovered, interest you received from business notes and accounts receivable payments and state credits such as gasoline or fuel tax credits. You must also include income you earned outside the proprietorship as a statutory employee, such as working full-time as an insurance agent. If you have proprietorship and statutory employee income, you must file a separate Schedule C for each one.
The IRS lets you deduct every expense incurred on behalf of the business in Part II. For example, you can deduct your business advertising, depreciation, interest you paid, mortgage payments, professional fees such as legal and accounting fees, office expenses, supplies and utilities. You can deduct all your insurance expenses except for health insurance. You can deduct repairs and maintenance costs, taxes, licenses and wages. You can take the IRS standard mileage or the actual mileage -- whichever one gives you the higher deduction.
Cost of Goods Sold
If your business makes money by producing goods or if you purchase goods for resale, complete Section III, Cost of Goods Sold. If your beginning inventory doesn’t match last year’s ending inventory, you’ll have to tell the IRS why. From your beginning inventory, subtract the amount of your purchases less anything you used personally, the costs of labor minus what you paid yourself, materials, supplies and other costs. After adding up your beginning inventory and costs, subtract that amount from your ending inventory. That amount represents your cost of goods sold.
If you are claiming vehicle expenses and don’t use Form 4562 to depreciate or amortize your vehicle, you must complete Part IV, Information on Your Vehicle. You’ll need the date you first started using the vehicle in your business and the number of business and commuter miles you drove, along with information about using the vehicle for personal use. After completing Part IV, list any expenses not previously deducted in Part II in Part V, Other Expenses. The amount of Line 31, net profit or loss, is transferred to your personal income tax return.
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