April 15 is less than a month away. Don’t panic! If you are self-employed and do not have C-Corp, then you will be filing a 1040 with Schedule C. A Schedule C shows the Profit or Loss from Business. The income is the easy part, but the tricky part is knowing how to classify expenses. First look at your Chart of Accounts. The Chart of Accounts is to a business’ financial picture as a table of contents is to a book. Use your Charts of Accounts as “vitamin C” and it will prevent errors in recording your income and expenses. I recommend printing a blank copy of a 1040 form with the Schedule C and then printing out a copy of your current Chart of Accounts. Then you can “map” accounts, which means to assign what deductible expenses that will properly correspond to your business’ Chart of Accounts. If you are not using Quickbooks or have no idea what a Chart of Accounts is, then I suggest you sign up for a free Outright account. You can use Outright to figure out your taxable income taking the income and expenses for 2008 that you already have calculated on an Excel spreadsheet. 🙂
Outright enlisted the help of two bookkeepers Jeanné Neubelt of BookWorks Total Bookkeeping Services and Cheryl Hinkson of For Your Business Bookkeeping Services to compile a list of nine “hardest to classify” business deductions.
1. Business cards
When you first hang out your shingle, you might head down to the local printer to get some business cards made up. But what kind of expense is that?
Which do I choose: Supplies, Legal & Professional Services or Advertising?
As a self-employed individual, odds are your business cards will be given out to prospective customers in an effort to generate revenue. For this reason, the most appropriate category would be Advertising.
2. Website Hosting
You pay a monthly hosting fee to firms like Host My Site. Does that go under equipment rental? Office expense?
Which do I choose: Advertising, Utilities, Equipment Rental or Office expense?
Recommendation: Advertising or Utilities
According to Jeanné, this expense is similar to business cards in that it is likely used to help attract customers and drive revenue. However, Cheryl sees it a bit differently: “Web Hosting is a service and with a detailed P&L you would list it as Service Provider but on a simple P&L you will list it as a Utility.”
3. Stock photos/icons (and other digital media)
Which do I choose: Cost of Goods Sold, Office Expense, Supplies, Legal & Professional Services?
Recommendation: Cost of Goods Sold, Advertising, or Supplies
In this case, it depends on how the items are used. As Cheryl explains, “A web designer or graphic company that has signed up for unlimited access to stock photos available online would expense the monthly or quarterly fee to supplies for Cost of Goods Sold.” However, in the case where the images are being used for your business web site, “you could easily classify the expense as Advertising or Supplies”, says Jeanné.
4.Getting a DBA/Fictitious Name
You’re now in business for yourself, so you get a super cool name to use. How do you treat the costs of doing that?
Which do I choose: Taxes & Licenses or Legal & Professional Services?
Recommendation: Both, unless you file everything yourself
According to Cheryl: “Formation Fees should be broken into two categories: The portion of the fee that is paid to the state and the annual renewal fee should be recorded as taxes & licenses and the portion of the fee that is for professional services provided should be classified as legal & professional fees if you contracted a licensed professional to complete your formation documents.”
5. Payments to web designers (and other independent contractors)
How do you treat the graphic designer who created the look and feel for your web site?
Which do I choose: Legal & Professional Services or Contract Labor?
Recommendation: Contract Labor
“Professional services is generally used only for legal, accounting/tax/payroll and business consultancy,” says Jeanné. Better to use Contract Labor – and “be sure to get a completed W-9 so you can send 1099s where appropriate.”
6. Desktop Software
You fork over the money to purchase the latest version of Adobe’s CS4.
Which do I choose: Supplies? Office Expense? Depreciation/Section 179?
Recommendation: Depreciation/Section 179
As Cheryl states, “Software Purchases are a depreciable item unless the program has a useful life of less than one year. In most cases you would not replace your software each year so it should be listed as a depreciable item.”
7.Web-based software subscriptions
Being the fan of web-based software that you are, you have monthly subscriptions to FreshBooks for your invoicing. But where do those expenses go?
Which do I choose: Utilities, Office Expense, or Taxes & Licenses?
Recommendation: Utilities or Office Expense
Here we get different opinions. For Cheryl, “In a simple set of books I would classify payments to a Web Services Provider to utilities as you are utilizing their program.” However, Jeanné recommends placing them under Office Expense.
There are still times when you have to send this by snail mail. And that does in fact cost money.
Which do I choose: Supplies, Office Expense, Other Expense?
Recommendation: Office Expense if small, Other Expenses if significant
According to Jeanné, you would place the costs under “Office Expense if it is a few rolls of stamps or the postage meter for letters.” However, for large shipping costs, place them under Other Expenses.
9.Coffee machine, coffee and filters
You need your caffeine, we know. But what kind of deduction is that?
Which do I choose: Supplies or Office Expense?
Recommendation: Office Expense
“Office Supplies are physical widgets and stuff you use up (paper clips, pens, sticky notes, toner, legal pads, thumb drives, computer supplies, planners and calendars, etc),” says Jeanné. “Office expense might be more substantial or service related (janitorial supplies, cleaning service, coffee supplier, water cooler, etc.)”
Bonus expenses: Using the “other expenses” category
The following are very common self-employed expenses that should be placed under the “other expenses” category:
* Bank/ATM fees
* Survey and research costs
* Professional “How To” Books (web design, programming, etc.)