To help fill out line 12 on the 1040 it was important to know how to fill out the Schedule C for a business.
General Info
The top section of the Schedule C is the general information about the business. This section includes; principal or professional business and the business code going with the principal business, for tax preparation services it is Code 541213. To find the business code look at the chart on page 17 of the schedule C instructions. This code helps tell the IRS a bit more about the business; such as what expenses are “normal” to deduct.
Other information needed is the Businesses Name, EIN, and Business Address. The EIN is the Employer ID Number given to a company from the IRS. In addition, it is important to know whether the business is on a Cash or Accrual accounting basis. Then at the bottom of the section are four questions with yes or no check boxes to answer about the business.
Part 1: Income
Line 1 for the Income Section is for gross receipts and sales; any money the business made through providing the service or product. Line 2 goes through returns and allowances for the business; items returned and a refund given for the product.
Line 4: Cost of Goods Sold is broken down in Part 3 of the schedule C. Other income is reported on Line 6 and includes things like federal and state gasoline tax credit or refund.
Lines 3, 5 and 7 are just adding or subtracting different line numbers together to get totals. Gross Sales subtract Returns and Allowances subtract Cost of Goods Sold and add Other Income is the breakdown of the Income Section.
Part 2: Expenses
Seperate this section into two mini sections. The first section is composed of lines 8 through 27b. It breaks down all of the expenses deductible for businesses. Some of the main categories include; Advertising, Office Supplies, Taxes, Travel and Wages. Line 9, Car and Truck Expense, is broken down farther in Part 4 of the Schedule. Line 27, Other Expenses, is also broken down in Section 5 of the Schedule C even more.
The second mini-section starts with total expenses on line 28; this is where all of the amounts in the above lines are added together. The other major line in this part is Line 30: Expenses for business use of home.
To calculate the business home deduction using the simplified method, take the area of the home office and multiply it by the home office deduction rate. In 2017, the rate was 5 dollars a square foot. A room 11’ by 12’ is used for a home office; this is a 121 square foot room. The deduction would be $605 using the simplified method.
Another way to calculate the home office deduction is through the expenses spent on the home office. For this method, Form 8829 is required. On this form, it will break down the total size of the home, the size of the home office and then all of the expenses paid towards it. Then taking the percentage of the home used for work and multiply that by the total expenses paid. To get a longer example look at the example if Part 4: Information on Your Vehicle.
Part 3: Cost of Goods Sold
Part 3 is a helpful section to help calculate the cost of goods sold for Line 4 of the Schedule C. Calculating cost of goods sold is a systematic process going through: inventory at the beginning of the year, inventory purchases, labor costs, and the inventory at the end of the year.
Part 4: Information on Your Vehicle
When a vehicle is used for business, not just commuting to work and home, then the vehicle becomes deductible. Use Part 4 of the Schedule C if the taxpayer is claiming car or truck expenses on line 9 of expense section.
Example: Susan drives her car for everything, getting to and from work, going to business meetings and appointments, driving her kids to sports practice and going to the store. During the last year, she drove 2,000 miles in commuting to work, 3,000 miles to appointments, and 4,000 miles of other miles. During the year, she also paid 100 for licensing, 300 in oil, 1,000 to repairs and 50 in tolls. How much does she report in Car or Truck Expenses?
Mileage
If Susan uses mileage to calculate her deduction, she will use Part 4 of the Schedule C. To calculate the expense she would take her the miles she used for work, being 3,000. Commuting miles are not included in the total business miles.
After, if Susan takes the 3,000 miles and multiples it by the mileage rate she will have her deductable amount. The business mileage rate for 2017 was .535. Taking the miles and the mileage rate, Susan’s Car and Truck Expense would come out to be 3,000*.535 = $1,605
Expenses
If Susan uses the expenses paid to calculate her car deduction then Form 4562 will be filled out instead of Part 4 of the Schedule C. First Step would be to find the business use of the car. With 3,000 miles for business and 6,000 total other miles (2,000 commuting + 4,000 other), the business use would be 33%. This means 33% of the expenses would be deductible. Total expenses on the car were $1,450 (1000 repairs, 300 oil, 100 licensing, and 50 tolls). This makes Susan’s Car and Truck Expense $478.50.
For Susan it would be smarter to take the deduction based off mileage. Leaving Part 4 of the Schedule C waiting to be filled out.
Part 5: Other Expenses
If there are expenses that don’t fall into one of the categories shown on lines 8-26 the expenses can go on line 27 Other Expenses. Each extra/miscellaneous expense should be reported here. To report the expenses start with the name of the expense, then the expense amount next to it. Total the line items and add the amount to line 27a.