In other parts of this tax guide, I’ve made this point, and it’s worth repeating.
Your business expenses are NOT deductions. At least not in the same way as your mortgage interest or charitable giving that you itemize. You do not claim them as part of your itemized deductions.
And here’s the great part: You can take the standard deduction on your taxes and still claim your business expenses. That is because your expenses are actually listed as part of the income part of your tax filing, not the deductions. As part of the income reporting process, you fill out a Schedule C that lists both income and expenses for your business, and it’s the difference between the two that is reported as income.
Introducing business expenses
This article is an introduction to the topic of expenses. It’s not meant to cover all of the expenses you can claim. That will come in future articles. The idea here is to understand what they are, and why they are so important to keep track of.
What are business expenses?
Remember that the IRS sees your independent contractor work as a business, not a normal job. This is why Schedule C is called “Profit and Loss for Businesses.” The whole point of a business is not how much money comes in. It’s all about what’s left over after expenses.
What we are doing here then is keeping track of what those business expenses are. If we spent money as part of operating our business, we SHOULD keep track of that so that we don’t pay more in taxes than we should. According to the IRS, a business expense is whatever is reasonable and necessary to operate your business. Driving your car for deliveries makes sense. It’s also kind of necessary for a lot of deliveries if you want the food to arrive in a reasonable time. As a general rule, if it is something you have to have to be able to complete your work and if it makes sense that you need that, it’s considered an expense.
Why it’s important to track your expenses.
Uncle Sam wants your money. If you earned it, he wants a part of it. But he’s only entitled to the PROFIT part of your money. If you are not tracking your expenses, you are letting him have more money than he deserves.
In his book “Income Tax Guide for Ride Share and Contract Delivery Drivers“* John White talks about his “Rule of Seven.” For every seven dollars you earn, you pay a dollar of self employment tax. For every seven dollars of business expense, you save a dollar on your self employment tax. If you spent $7,000 on expenses but didn’t record it, you will pay $1,000 too much in self employment tax.
And oh, yeah… throw in another $700 or more in income tax.
I don’t know about you, but I have better things to do with that $250 than to send it in to Uncle Sam.
But here’s the thing: You can’t claim it if you didn’t track it. You cannot claim it if you do not have proof that you spent it. You have to keep good records.
*Full disclosure: the Amazon link above is an affiliate link. Learn more about affiliate links.What expenses can you claim?
We’re going to get into a lot more detail soon.
Your major expense, if you drive, is your car. In fact, we’re going to have five different articles about your car expenses. That might seem like overkill. However, as important as that car expense is and as many questions as people have about claiming their car or mileage, etc., I think it’s worth taking the time.
There’s a lot of rules around claiming your car mileage or expenses. You can do a lot of book keeping tracking every single penny you spend on gas, etc. The IRS does allow you to simplify that by claiming a standard mileage rate.
Your smart phone is reasonable and necessary for operating your business. That means your cell and data plan are as well. We’ll get into more depth soon enough on the different kinds of things that qualify as expenses. If it’s reasonable and necessary for operating your business, you probably can claim it.
Do you have to write down ALL of your expenses on your taxe form?
The expense section on a Schedule C has a number of categories. You track your expenses using accounting software, a good old fashioned spreadsheet, or an even more old fashioned handwritten ledger. Find whatever works. When you fill out your schedule C you just enter the totals for each category.
There are some items that don’t have a category, and schedule C allows you to list them in a part called “other expenses.” (Creative name). Further on, we’ll get into some of the common expenses and what category they would fit under.
Can I claim anything I want?
No. No. Absolutely No.
I will warn you. Don’t go crazy. There’s a recurring theme in this Tax Information Series: The IRS looks for patterns. They have data from thousands of people who do delivery. If you are claiming things for your delivery business that are way out of place, they can detect that pattern.
Remember: Reasonable and necessary.
What I will say is, if you’re not sure, track it. Document it. You can always find out from your tax pro that it doesn’t qualify. But if you didn’t document it, you can’t claim it. So track anything that you have a question about. That’s not the same as claiming it. But in the event you were right about it, now that you have the receipt or documentation, you can claim it.
Be reasonable on the one hand. On the other hand, be thorough. Capture every penny of expense you are allowed to capture. The Income Tax Guide book I mentioned earlier has a pretty in depth look at many of the common expenses, including why you don’t want to take certain types of expenses. In just a few articles I’ll have a breakdown of many of the common expenses listed by category on the Schedule C.
Matt A
this was a really helpful Post. I was temporarily laid off because of coronavirus and had saved my annual taxes to the last minute. Now I’m happy I did that! I know better what I can claim now. Thank you.
ronald.l.walter
I’m glad that’s helpful. And now we get extra time to send it in. Trying to decide whether to just send it in now and get it done with or wait and hang on to my money.