Home office and home-based business are growing in popularity for additional income. The IRS allows for deductions of certain expenses related to generating business revenue. Schedule C for Form 1040 is the starting point to calculate expenses, as well as cost of goods sold to offset income from a home based business. This article looks at the various deductions that maybe used to reduce business income.
Schedule C – Profit and Loss From Business
This is the basic form that’s used to calculate the taxable income from a home business. The schedule is made up of four parts.
- Part I – Income
- Part II – Expenses
- Part III – Cost of Goods Sold
- Part IV – Information on Your Vehicle
- Part V – Other Expenses
The income section (Part I) is where gross revenue generated from the business is listed. If the business sells a product, the total from Part III, cost of goods sold is subtracted from gross revenue to determine gross profit. Other related income, as well as returns, must be included in this section.
Deductible Expenses From Income
Part II is where the majority of the expenses are totaled. This section of Schedule C has a list of various preprinted expense categories. If the expense category is listed on the schedule, the cost of the expense can be inputted next to the preprinted category. If there is not a preprinted category for a business related expense, they must be itemized in Part V, Other Expenses and the total sum entered on line 27.
Home Business Expense Deduction
The expense section of Schedule C allows for a deduction for business use of the home. Form 8829 is used to calculate the portion of the home that can be used as a deduction. Some of the home costs that maybe used include:
- mortgage interest
- real estate taxes
- home insurance
- rent
- repairs and maintenance
- utilities
- home depreciation
Once Form 8829 is tabulated, the final figure from allowable expenses is transferred to Schedule C, line 30.
IRS Mileage and Car Deduction for Home Business
If a vehicle was used as part of the home business, the amount of vehicle expense is entered on line 9 of the expense section (Part II) of Schedule C. Part IV, Information on Your Vehicle, will establish if the vehicle was used solely for business purposes. If a car was not used 100% for business purposes, only the portion used for business purposes can be deducted.
The amount entered on line 9 can be the standard mileage rate for business purposes ($.55 for 2009 tax year) or the actual expenses incurred for business purposes. These expenses may include
- fuel
- repairs
- insurance
- maintenance
- tires
- registration fees
Vehicle depreciation is entered on line 13 and lease or rent payments are entered on line 20a. If vehicle expense is listed on line 9, Part IV Information on Your Vehicle must be filled out.
Once Schedule C is completed, the profit and loss is recorded on line 31. If a profit is realized, that amount is then entered on line 12 of Form 1040 and line 2 of Schedule SE. If a loss is realized and entered on Form 1040, other forms maybe needed for filing.
Source:
irs.gov
James Clausen - Clausen received a Bachelors Degree in Business Administration in Automotive Management and Marketing at Northwood University, graduating ...
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