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Chapter 20  Schedule C: Expenses, Page 2

Line 17 – Legal and professional services: Include on this line fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business.

Include fees for tax advice related to your business and for preparation of the tax forms related to your business. Also include expenses incurred in resolving asserted tax deficiencies related to your business.

For more information, see Publications 334, Tax Guide for Small Business or 535, Business Expenses.

Line 18 – Office expenses: Include on this line your expenses for office supplies and postage.

Line 19 – Pension and profit-sharing plans: Enter your deduction for the contributions you made for the benefit of your employees to a pension, profit-sharing, or annuity plan (including SEP, SIMPLE, and SARSEP plans described in Publication 560, Retirement Plans for Small Business). If the plan included you as a self-employed person, enter the contributions made as an employer on your behalf on Form 1040, line 28, or Form 1040NR, line 28, not on Schedule C.

This deduction may be subject to limitations. For more information on potential limitations, see Publication 560.

In most cases, you must file the applicable form listed below if you maintain a pension, profit-sharing, or other funded-deferred compensation plan. The filing requirement is not affected by whether or not the plan qualified under the Internal Revenue Code, or whether or not you claim a deduction for the current tax year. There is a penalty for failure to timely file these forms.

Form 5500-EZ: File this form if you have a one-participant retirement plan that meets certain requirements. A one-participant plan is a plan that covers only you (or you and your spouse).

Form 5500-SF: File this form electronically with the Department of Labor (at www.efast.dol.gov) if you have a small plan (fewer than 100 participants in most cases) that meets certain requirements.

Form 5500: File this form electronically with the Department of Labor (at www.efast.dol.gov) for a plan that does not meet the requirements for filing Form 5500-EZ or Form 5500-SF.

For details, see Publication 560.

Lines 20a and 20b – Rent or Lease expenses: If you rented or leased vehicles, machinery, or equipment, enter on line 20a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an amount called the inclusion amount. See Leasing a Car in chapter 4 of Publication 463 to figure this amount.

Enter on line 20b amounts paid to rent or lease other property, such as office space in a building.

Line 21 – Repairs and maintenance: Deduct the cost of incidental repairs and maintenance that do not add to the property's value or appreciably prolong its life. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized.

Line 22 – Supplies: In most cases, you can deduct the cost of materials and supplies only to the extent you actually consumed and used them in your business during the tax year (unless you deducted them in a prior tax year). However, if you had incidental materials and supplies on hand for which you kept no inventories or records of use, you can deduct the cost of those you actually purchased during the tax year, provided that method clearly reflects income.

You can also deduct the cost of books, professional instruments, equipment, etc., if you normally use them within a year. However, if their usefulness extends substantially beyond a year, you must generally recover their costs through depreciation.

Line 23 – Taxes and Licenses: You can deduct the following taxes and licenses on line 35:

Do not deduct the following taxes:

Line 24a – Travel: Enter your expenses for lodging and transportation connected with overnight travel for business while away from your tax home on line 24a.

In most cases, your tax home is your main place of business, regardless of where you maintain your family home. You cannot deduct expenses paid or incurred in connection with employment away from home if that period of employment exceeds 1 year. Also, you cannot deduct travel expenses for your spouse, your dependent, or any other individual unless:

Do not include expenses for meals and entertainment on this line. Instead, see the instructions for Line 24b, below.

Instead of keeping records of your actual incidental expenses, you can use an optional method for deducting incidental expenses only if you did not pay or incur meal expenses on a day you were traveling away from your tax home. The amount of the deduction is $5 a day. Incidental expenses include fees and tips given to:

They do not include expenses for:

You cannot use this method on any day that you use the standard meal allowance (as explained in the instructions for Line 24(b) below).

You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting:

These rules apply to both employers and employees. Other rules apply to luxury water travel. For more information on the deductibility of travel expenses, see Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Line 24b – Deductible Meals and Entertainment: Enter your total deductible business meal and entertainment expenses on line 24b. This includes expenses for meals:

Deductible expenses: Business meal expenses are deductible only if they are:

You cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement, or recreation.

Also, you cannot deduct membership dues for any club organized for business, pleasure, recreation, or other social purpose. This includes:

But it does not include the following groups or organizations unless a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests:

There are exceptions to these rules as well as other rules that apply to skybox rentals and tickets to entertainment events. See Publication 463, Travel, Entertainment, Gift, and Car Expenses.

Standard meal allowance: Instead of deducting the actual cost of your meals while traveling away from home, you can use the standard meal allowance for your daily meals and incidental expenses. Under this method, you deduct a specified amount, depending on where you travel, instead of keeping records of your actual meal expenses. However, you must still keep records to prove the time, place, and business purpose of your travel.

The standard meal allowance is the federal M&IE rate. You can find these rates on the Internet at www.gsa.gov for locations inside and outside the continental United States.

See Chapter 1 of Publication 463 for more information on how to calculate your deduction using the standard meal allowance, including special rules for partial days of travel.

Amount of deduction: In most cases, you can deduct only 50% of your business meal and entertainment expenses, including meals incurred while away from home on business. However, if you are subject to the Department of Transportation (DOT) hours of service limits, that percentage is increased to 80% for business meals consumed during, or incident to, any period of duty for which those limits are in effect. The following individuals are subject to the DOT hours of service limits:

However, you can fully deduct meals, incidentals, and entertainment:

See Publication 535, Business Expenses, for more information and other exceptions.

Daycare providers: If you qualify as a family daycare provider, you can use the standard meal and snack rates, instead of actual costs, to figure the deductible cost of meals and snacks provided to eligible children. See Publication 587, Business Use of Your Home (Including Use by Daycare Providers), for more information, including recordkeeping requirements.

Line 25 – Utilities: Deduct utility expenses only for your trade or business.

Local telephone service: If you used your home phone for business, do not deduct the base rate (including taxes) of the first phone line into your residence. But you can deduct any additional costs you incurred for business that are more than the base rate of the first phone line. For example, if you had a second line, you can deduct the business percentage of the charges for that line, including the base rate charges.

Line 26 – Wages (less employment credits): Enter the total salaries and wages you paid for the tax year. Do not include salaries and wages deducted elsewhere on your return or amounts paid to yourself. Reduce your deduction by the amounts you claimed on:

Form 5884, Work Opportunity Credit, line 2;

Form 8844, Empowerment Zone Employment Credit, line 2;

Form 8845, Indian Employment Credit, line 4; and

Form 8932, Credit for Employer Differential Wage Payments, line 2.

You should not reduce your deduction for any portion of a credit that was passed through to you from a pass-through entity.

NOTE: If you provided taxable fringe benefits to your employees, such as personal use of a car, do not deduct as wages the amount applicable to depreciation and other expenses that you claim elsewhere.

In most cases, you are required to file Form W-2, Wage and Tax Statement, for each employee.

Line 27a – Other Expenses: Enter the total of your other expenses from line 48 here.