For many, starting a small business is a dream that they have had since they were young. We grow up hearing about the American dream and that their is a fortune waiting for you on the other side of the rainbow, So a selected few starting a business could bring a great fortune. For most, starting and running a business is a very stressful way to go through life. Without said many people have entrepreneurship in their blood. It’s possible your mother or your father was an entrepreneur and so to the core of you phyche you always so yourself as the same. You probably have watched them and thought to yourself, “I bet I can do a better job”. Its also not necessary to have entrepreneurship running through your family. Maybe you saw your family memebers doing the “9-5” things for 20 years and you don’t see yourself going down that road.
When you finally take that leap of faith your going to face some different challenges that you otherwise would not face if you were an employee of a company. First and foremost you realize their is no paycheck at the end of the week. I’m sure your parents, siblings and friends have done their share of reminding you about this. Their is no shortage of fears sourounding venturing off on your own. You know now that their is no guarantee in business.
When you finally start you will need to get yourself acquainted with a Schedule C. Schedule C is a tax form that is attached to you individual taxes (1040). The Schedule C is for the sole proprietor otherwise known as an unicorporated business. Before you go off an get yourself incorporated I want help you pull the reigns back a bit I have witnessed to many people jump at the idea of incorporating because this means that they are now officially a business. I disagree with this 100%. If you are doing anyting even if it is aside business you are in business and are trying to become a success at it. Incoprating to early can be a costly journey. First off you have the fees involved in the incorporation process. If you do it yourself you might get it done for under 600 dollars or should you need an accountant or an attorney you are looking at $1,200-$1,500. We charge here $1,195 for your reference. Their are also additional documents that you have to file with the IRS and the State beyond the cost of a basic incorporation package .
This really is just the beginning of the process. What if its your first time starting a business and you quickly realize that you or your family is not going to stomach the ebbs and flows of what starting a business entails. You decide with renewed energy that its best you get back into the work force. The money you lost to incorporate will surely bother you. Unless you have a very high liability type of business that Incoprating and getting a lawyer to work is needed I recommend holding off on incorporation until you can prove to get through the first 2 years of business. When you incorporate you have additional things to think about and as a new business its a lot to take in. Should I be an S-Corp, C-Corp, Partnership or LLC? In each of these situations you have some consulting that needs to be done. I just don’t think you need to concern yourself with these decisions when your first starting out.
In my Business Book I talk about everything you need to know about the incorporation topic. So when your ready the resource is available but for now we are going to stick to the sole proprietor and the Schedule C.
The easiest way to look at a Schedule C is that its a profit and loss statement for your business. You probably didn’t think we would be getting into accounting reports however its the most basic way to look at a Schedule C. The Schedule C is a separate document belonging to the 1040 (your personal Return). The amount that we call net Profit will “flow” to Line 12 and be added to all of your other income on your return. This is Sch C 101. The Schedule C on your software is going to request that you enter all of your 1099’s that you received as a subcontractor. Do not just add all of your 1099’s and put it on to the line for your income. 1099’s go on line 2. The IRS has received the exact same documents that you have received and are linking them up to what you are submitted. Its important that each 1099 is entered assuming that you are using a software which is recommended. Not everyone who is in business receives a 1099. Many business operate partly on a cash basis. Enter your cash receipts on Line 1. This is were keeping a good set of books is important. If your books are in order and all you income is reported correctly you will want to add your 1099’s up and them subtract them from your Gross Profit on your books. The importance of this is so that you have your line for Cash and your line for 1099’s separate. Their is one more Line of income you are going to want to enter into your system and that is the amount of Income you received from your merchant account or Credit card charges. Credit card payments are reported on Schedule K and you will want to enter the information into your software just as it looks on the document. Once again the IRS does have a copy of this document so do not lump sum it with 1099’s and Cash. Mark everything out seperatly or you can believe you will be getting a letter from the IRS which states that they have no record of you Credit Card payments received. Save yourself the pain of needing an accountant fix this up. You will lose all of the financial savings you recognized if an amended return is need to be filed. Keep your income documents in order.
What can I deduct for my expenses. In general if their was one answer it would be, every expense that is related to your business. The schedule C provides many lines for all the different expenses however not every category is represented by the Schedule C document. Its possible that you could have many items in other expenses.
One main expense you want to track is mileage. You get a choice as to whether you want to deduct actual expenses which include gas and repairs or if you would like to include mileage. Unless you are running a big rig arounsd town, mileage will net you more of a deduction than actual expenses would bring you. Schedule C is a better place to put mileage in genral its easier to track. The deductions for milage is always around the 50 cent mark. Let’s say you you drive 15,000 miles as a realtor that would net you a $7,500 expense. Its safe to say that you did not pay $7,500 in gas and probably not in repairs as well. You can see this huge advantage to tracking the amount of miles you drive for your business. This will net you a large savings on taxes. Other expense you might think about:
Advertising and Marketing
Legal and accounting fees.
Utilities including Phone and internet.
Certain items you will not deduct as expenses rather as depreciable items. Depreciation is something that deserves a little more of a look at. Although the scope of deprecation is vast we don’t have the capacity here to dive into everything that needs to be known about it or how it is figured. This is just a tax tips book To learn more about depreciation search Publication 946 on the irs.gov website You want to keep in mind a few things.
Depreciation is a great way to stretch out your expense over a long periosd of time. Depreciation allows for an expense to systematically be taken year after year.
Health Insurance is another expense that is deductible however the deduction might look like it starts on the Schedule C but it ultimately does not end up on the Schedule C. This unfortunate tax law does not allow the expense when figuring the payroll tax you will be paying on your income. Health insurance is a deduction that will not flow ontho Line 12 the way the rest of your income does instead it currently flows on to what is called the “above the line deductions” found on line 29 of the 1040. Do not try to squeeze this into the Schedule C. Make sure your deduction is carried to line 29.
Home Office deduction:
Everyone who starts their own business will say that they work from home and would like to deduct the expenses for running the business out of the home. The deduction for home business use must be scrutinized more than most. Its understood among professionals that if you want to be audited this deduction sure can be the one to raise the red flag. Their are a few things you must first ask your self if you are going to take this deduction. Do I have a designated room to work out of? If you are working in a living room were you have a desk or if you put your desk in the living room to work from I would advise as well as the IRS advise, do not take a Home Office deduction. If you have a room that you have strictly designated as a Home office than you may be allowed to take the deduction. If you can take the deduction than you will need to figure out how much of this office is a part of your home. If your home is 1000 square feet and the office is 200 square feet than you are entitled to deduct 20% of your household expenses which would include: Rents, Insurance, repairs utilities and taxes. Their are a few more you will notice on the form you are filing out which is the Form 8829. This form will attach to your schedule C. Keep in mind you have direct expenses which relate directly to your business and indirect expenses If the expense relates indirectly that means that your only going to take the percentage of the expense that relates to the office space. The indirect amount in our example would be the 20%. If it ends up you are filing this form it might pay to hire someone to do your taxes. You don’t want to mess up this document because it is a “Red Flag” This deduction is a great deduction to take just be mindful that you fall into the parameters of the rules.
We have given you a large amount of information to swallow in a short period of time. My final thoughts on the Schedule C are this. Try not to co mingle you funds so that you have a clear idea of how much you are making Keep a strong set of books. Their are many popular bookkeeping programs to choose from, you can also get a free version on an open source platform. If you use a free open source accounting system keep in mind it is free because its simple and it might not have all the functions and features a paid software might have however its a start to keeping track of income and expenses without going into your pocket. .If your books are in order, you can save time preparing your return or you can save money on preparation. Accountants love an organized client and will charge less than they would if you came in with a shoe box of receipts.
That’s the Schedule C in a nutshell. If you think its time to incorporate you have some added benefits that I write about in MY BUSINESS BOOK but for now lets move on to the exciting world of Residential Rental Real Estate!