A freelance writer is setting up her home office. She purchases a desk, a chair, a new laptop, a printer, and office supplies. The writer makes copies of the receipts for her records, and when it’s time to file her taxes, she includes her purchases as deductible expenses.
Savvy entrepreneurs do not just focus on sending out invoices—they also keep a record of their costs. The expenses you accrue to start, run, and grow your business are often considered tax-deductible, which could lower your tax obligations to the Internal Revenue Service (IRS).
While some business expenses are clearly outlined on Schedule C, others fall under the miscellaneous category. Expenses such as these cannot be categorized but still should be included in your taxes to decrease your tax payments.
Deductible Business Expenses
Deductible business expenses are “ordinary and necessary” expenses needed to run your particular business. Typically, you’ll enter these expenses on the IRS’s Schedule C. Doing so tends to lower your taxable income. In general, the more expenses you have for your business, the less you will pay in taxes.
The IRS defines “ordinary and necessary” expenses as costs that are commonly used in your business industry and that enable you to run your business. These deductible business expenses differ for various businesses.
For instance, it is necessary for a hairstylist to purchase hair-styling equipment or hair products; these items are needed for a job to be complete. However, if the hairstylist buys a yoga mat and stretch strings, these items would not be considered ordinary or necessary expenses.
Examples of Deductible Business Expenses
Deductible expenses include:
- Home office: If you are using a portion of your home exclusively or regularly to operate your business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation.
- Transportation: If you use your vehicle for your business, you can deduct certain vehicle-related expenses, including miles you drove for work or depreciation, lease payments, repairs, and other expenditures. However, if you are using your car for personal and business purposes, you will record your mileage.
- Insurance: You can deduct costs of insurance related to your trade, business, or profession.
- Taxes: Federal, state, local, and foreign taxes related to your trade or business are considered business expenses.
- Business interest: Certain types of interest you pay for money you borrowed for your business activities.
- Rental fees: You can deduct rent as an expense if it is used for your business.
- Retirement plans: Savings plans you set up for yourself and your employees such as a SEP IRA, SIMPLE IRA, or SIMPLE 401(k) provide you with very specific tax benefits while allowing you to save your money for retirement.
- Employee payroll: If you have employees, you can deduct certain pay-related disbursements such as sick and vacation pay, bonuses, education expenses, and fringe benefits.
Keep detailed records of your receipts, as the IRS audits the self-employed more often than traditional W-2 workers.
When To Use Schedule A vs. Schedule C for Your Deductions
Before the federal tax laws changed in 2018, Schedule A included business expenses related to employment that a company did not reimburse. Now, Schedule A is only for individuals and is not often used by tax filers because most people take a standard deduction for unreimbursed employee expenses.
What Are Miscellaneous Expenses?
Miscellaneous expenses are defined as “other” expenses. These expenses are not specific but are still considered ordinary and necessary. Therefore, they are deductions that can be included on your Schedule C.
You can list your miscellaneous expenses in broad categories such as bank fees, advertising, education, damages recovered, and credit card convenience fees.
Miscellaneous Business Expense Examples
There are many miscellaneous business expenses entrepreneurs can list on their Schedule C. The following are some of the expenses the IRS allows you to deduct:
- Credit card convenience fees: What you pay to accept credit card transactions from credit card companies.
- Professional fees: These include fees you pay for accountants and attorneys for services related to running your business, not including fees paid to acquire business assets.
- Regulatory and licensing fees: You can deduct certain regulatory and licensing fees you pay to state or local government.
- Supplies and materials: The IRS allows you to deduct supplies and materials you used for your business during the tax year as long as you haven’t deducted them in previous years.
Miscellaneous business expenses do not include equipment costs, furniture, improvements to your property, or any personal living expenses. They do not include charitable contributions or the fines you paid to a government entity for violating a law.
How To Deduct Misc Expenses
Deducting your business and miscellaneous expenses is not difficult. Here are the steps to seamlessly deduct your expenses:
- Separate all of your receipts into categories for traditional as well as miscellaneous business expenses.
- Enter your traditional business expenses for each category on lines 8 through 26 and line 30.
- List your miscellaneous expenses on “Part V: Other Expenses” on Schedule C.
- Add up your miscellaneous expenses and write it on line 48.
- Write your total miscellaneous expenses on line 27a.
- Add the totals for your business expenses (lines 8 through 26 and line 30) and miscellaneous expenses (line 27a).
- Enter the total on line 28.
Frequently Asked Questions (FAQs)
How do I prove business expense deductions?
You can prove business expense deductions by saving receipts for your expenses and showing that it was for a reasonable business expense. Bank and credit card statements and copies of receipts are the best forms of proof.
Is food a miscellaneous expense?
Meals are considered deductible business expenses. However, food is not considered a miscellaneous expense because miscellaneous expenses refer to deductions that are not easy to categorize. Food, which is considered a business expense, is entered on line 24 of your Schedule C.
How many miscellaneous expenses can I claim?
You can claim as many miscellaneous expenses as needed, provided they meet the IRS requirements outlined in IRS Publication 535.