Business mileage records and other Schedule C considerations
Tuesday, January 03, 2012
UPDATE: See a newer look at Schedule C under the 2017 tax reform legislation in my Feb. 25, 2020, post on Deducting business meals & other expenses on Schedule C.
I just ran out to my garage to jot down the odometer reading on my car. I use it for business-related travel and I claim those miles on my Schedule C filing.
But I hadn't recorded my annual travel amount until my Twitter buddy CPA Mercedes Infante reminded me. Thanks @MInfanteCPA!
Documentation of all your tax claims is critical, but especially so for Schedule C filers.
The Internal Revenue Service relies on us to be truthful and report all the income we receive since, in many instances, the tax man doesn't get third-party verification. (That's changing, but that's a topic for a future post.)
Similarly, we have to make sure we can document all our business expense claims, including the miles we drive for work-related meetings, professional conferences and even to buy office supplies.
Schedule C overview: In case you're a new sole proprietor who will be attaching a Schedule C to your 1040 for the first time this filing season, here are some things to note.
In the first section, don't freak out about the instruction to enter you employer identification number, or EIN. You might not need one, but the IRS' Do You Need an EIN Web page will help you determine that and, if you do, it has links to where you can apply for one.
You will need, however, to enter your employment code in Box B on Schedule C. You'll find the list of Principal Business or Professional Activity Codes on the last few pages of the Schedule C instructions.
And if you and your spouse each materially participate in your business, take note of Line G. This is where you note that you materially participated in the business. When both husband and wife do so and file a joint return, they can opt to be taxed as a qualified joint venture instead of as a partnership. The Schedule C instructions have more on this election.
Now to the fun stuff. Filling out your Schedule C.
Part I, Reporting income: Good news for 2011 tax returns. You can ignore the first line in this section. It asks for merchant card and third party payments. This is an effort by the IRS to get a better handle on these types of payments, which it fears have been under reported.
But for the 2011 tax year, the IRS has deferred the reporting requirement so, as the form says, enter zero. But be ready for it next year.
The rest of the section is pretty straightforward. You add up all your gross earnings, even those for which you didn't make quite enough to be issued a 1099. You also must report income such as the value of bartered goods or services.
But if you sell products instead of services, you also subtract that amount here to come up with your gross income. And that means we have to skip ahead on the form for a minute.
In figuring the cost of your goods sold to enter in Part I, you have to fill out Part III. I know, it's a bit confusing but we are talking taxes here, so….
And you might not have to deal with Part III anyway. It applies only to a business that sells goods to customers. You can skip it if you make your money by providing services.
Part II, Counting up expenses: Now to the more fun stuff. Tallying all the business expenses that can reduce your gross income and thereby cut your tax bill.
Of course, the previously mentioned record keeping is crucial here. If you have the documentation, you can write off a wide range of business expenses. They include:
- Advertising costs,
- Commissions and fees,
- Legal fees,
- Repairs and maintenance,
- Office expenses,
- Home office costs (although this actually shows up under the expenses section; and don't forget your Form 8829),
- Depreciation and Section 179 expenses,
- Travel, meals and entertainment costs, and
- Car and Truck expenses, the item that started this post.
More on your car costs in a minute, but first I want to note a few specific business expenses lines on Schedule C.
You'll also find in Part II a line for entering your pension and profit-sharing plans. This is for contributions you made for employees of your company. Your report and get to deduct contributions to your self-employed retirement account on Line 28 of your 1040.
And that line for wages, it's also for amounts paid to employees, such as bookkeepers, receptionists, salespeople, etc. Production worker salaries, however, are counted as part of the cost of goods sold in Part III.
Part IV, or back to your car: As for your business related automotive expenses, you can enter your actual automotive costs (gas, oil changes, repairs, insurance, etc.) or you can take the IRS standard mileage rate.
For 2011 taxes, there are two rates. It's 51 cents per business mile for the first half of 2011 and 55.5 cents per mile for business travel on and after July 1, 2011.
And don't forget to add your parking fees and tolls to your vehicle cost total.
The amount that you enter on this line (number 9 on the 2011 Schedule C) also requires you to fill out Part IV of the form. And this is why I ran to the garage after seeing Mercedes' reminder.
I generally don't have depreciation expenses, so I just enter my automotive info in this section.
Here the IRS wants to know when I started using the car for business purposes, how many miles I drove for business vs. other purposes and the overall auto situation for our household.
I take my annual mileage amount -- my 2011 odometer reading minus the 2010 figure I noted the year before -- and subtract the business miles I have logged for 2011 to provide that breakout to the IRS.
And because I have tracked my total and my business travel mileage, I can answer "yes" to the last two questions on in this section:
- Do you have evidence to support your deduction?
- If "Yes," is the evidence written?
Part V, Other Expenses: The last section of Schedule C is a catchall area for any business expenses that didn't seem to fit in the form's previous lines.
This generally includes professional organization membership dues, business publication subscriptions (both for paper and online versions) and business gifts to clients.
Return to page 1: Although you might have to skip ahead to Parts III, IV and V on the second page of Schedule C, you have to go back to page 1 to finish your sole proprietorship tax filing.
That's where you'll figure your net profit or loss.
While it's no fun paying taxes, at least owing them means that your business made money. Congratulations!
But you know the reward for having a successful business, don't you? More taxes.
This time it's self-employment taxes, noted on Line 31 of Schedule C.
If you made more than $400 then you'll owe self-employment tax on those earnings and must fill out Schedule SE.
So as you are making money on your business throughout the year, be sure to account for SE tax in your estimated tax payments.
Yes, there's a lot to think about with your sole proprietorship's taxes. But careful completion of Schedule C will help ensure you pay what you owe in taxes but no more.
You also might find these items of interest:
Appreciate the mention, and that the tip helped!
Here's another tip: Try a mobile app to simplify recordkeeping of business expenses. I recommend either 'Expensify' or 'ConcurBreeze'. These allow you to capture digitized images of your receipts (while on the go) and easily integrate with QuickBooks. They also track distance via GPS - and calculate auto mileage painlessly and accurately. Plus, it's paperless!
Posted by: Mercedes Infante | Wednesday, January 04, 2012 at 03:08 PM
Great tax tips. It is important to write down the mileage so you can credit the correct amount on your taxes.
Posted by: Mark Randall | Wednesday, January 04, 2012 at 02:07 PM