Maximizing Schedule C Deductions and
Working with an Accountant
The more you know about the tax strategies and deductions available to home-business owners, the less you will have to pay in taxes.
“Waiting until the last minute in April to think about your tax situation is a BIG mistake. To save money, you MUST expand your knowledge about taxes!” – Barbara
A comic once said that nothing has done more to stimulate the writing of fiction than the itemized deduction section of the income tax forms. In truth, home-business owners and self-employed individuals are not as likely to lie on their tax returns as they are to overlook legitimate deductions to which they are legally entitled.
YOU DON’T HAVE TO BE an expert when it comes to understanding taxes in general or filing your own return, but whether you call yourself a home-business owner or a self-employed individual who works at or from home base, you need to know about, and fully understand, the many deductions available to you on the Schedule C form and related Home Office Expense form.
As tax expert Julian Block confirms, “In these increasingly tough times, it is more vital than ever that you assume greater responsibility for your financial future. You ought not to rely exclusively on paid advisers to keep on top of tax law changes or other legislation that might make it necessary to review your plans. At the very least, you should be knowledgeable enough to raise good questions and evaluate answers when you deal with a professional. The informed client gets the best advice.”
Major tax reform was approved by Congress in the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. Thanks to the new tax law, figuring out one’s 2018 taxes quickly got more complicated. The good news for home-business owners today, however, is that the new tax law retained most of the deductions self-employed individuals have enjoyed for decades on Schedule C (1040 form) and Expenses for Business Use of Your Home (form 8829).
From 1995 through 2018, I published How to Maximize Schedule C Deductions & Cut Your Self-Employment Taxes to the Bone, which sold thousands of copies first as a print booklet offered by mail, then as a PDF book on my website, and finally as a Kindle eBook that enjoyed surprising sales from 2012 into 2019. I discontinued this book’s publication in 2019 because keeping the book up to date was taking more time than it was worth to me.
The following information offers valuable tax perspective gained from my many years in the home-business and crafts industries, which you can add to by checking some of the resources I’ve linked you to below. And there are plenty of books by tax experts that will also make learning easy. Your most important takeaway from this article should be to heed my advice about educating yourself on the many deductions to which all home business owners and self-employed individuals are entitled.
DO YOU TEND TO PROCRASTINATE when it comes to the topic of taxes? Always waiting until the last minute in April to think about your tax situation is a BIG mistake because there are things you could be doing throughout the year, and especially at the end of each year, to lower the amount of self-employment and federal taxes you’ll have to pay on April 15.
I know the topic of taxes is considered boring to most small business owners, but saving money isn’t a boring topic, and the more you know about the tax strategies and deductions available to home business owners, the less taxes you will have to pay. Just identifying the many deductions to which you are entitled is the first step to cutting both your self-employment and federal taxes. The second is understanding the special tax-cutting strategies you might be able to put into place to further lower your SE taxes.
In talking with home-business owners nationwide, I’ve learned that most have no idea at all of the many tax advantages of a business based at home. People have often told me, “Oh, I just let my accountant handle it.” Sometimes this attitude comes from just being too busy to do such work, but other times it’s because an individual simply isn’t informed about tax matters and doesn’t want to learn. But it’s a mistake to plead ignorance when it comes to the preparation of your tax return. Some think they are doing everything right when they hire a tax preparer, accountant, or CPA to do their taxes, but if they haven’t kept track of all their expenses in the first place—or even identified all those to which they are legally entitled—they will end up paying higher taxes than necessary.
From a lifetime of self-employment, I’ve learned that accountants rarely (if ever) remind business owners about deductions they might be overlooking, or tax-cutting strategies they might implement to lower self-employment taxes. They just work with the figures they are given. Only one of all the accountants I’ve worked with ever suggested that I might be overlooking a deduction. Always so busy at tax time, they just took the figures I gave them and dropped them in the appropriate slots on the tax forms, often making mistakes in the process.
Working with an Accountant
WHEN MY FAVORITE CPA retired, I once again had to look for a new accountant. Following my own advice to others, I got a referral from a trusted business friend, had a brief interview with the man, and later went in with my usual well-prepared tax organizer. Later, after picking up the draft of my return and seeing there were some problems with it, I called for an appointment to discuss them.
First, my “draft invoice” was for $395 instead of the $300 I had originally been quoted in writing. Fifty dollars of the overcharge was for a form related to a foreign tax credit on a mutual fund that resulted in a “whopping big” three-dollar deduction. I said I should have been consulted about this since I didn’t feel a puny $3 deduction was worth a $50 fee to complete the form. The accountant gave me a poor excuse about it not being his job to tell me to disregard this deduction (what was that again?), but he did remove this amount from my bill. In the end, he also removed the remaining $45 because his reason for the extra charge (that my tax return was more detailed than he anticipated) didn’t hold as much water as my objection to him changing his quoted fee.
Always remember there is room for negotiation, especially when you’re dealing with someone who wants to keep you as a client.
Even when you believe you have a qualified tax preparer or accountant, you may have problems simply because tax regulations are so complicated, so confusing, and often so vague that they can be interpreted in different ways. While an aggressive accountant may interpret a particular tax rule in such a way that it becomes a valuable tax deduction for you, a more conservative accountant might say, “I wouldn’t take this deduction if I were you because . . .” which could cost you the loss of a legal tax deduction if you’re less than savvy about taxes.
I was dissatisfied with this accountant, not only for the above reasons but because he had a totally different idea of how major home improvements (such as a furnace, air conditioner, or a roof) are to be deducted as part of the Home Office Deduction. I was stunned when he told me that my previous accountant—an Enrolled Agent—had been doing it wrong. That wasn’t true, of course; it was just another example of the point I made in all my home-business books about it being hard to find two accountants who agree on anything because the complicated tax laws allow for many interpretations. The bottom line here is, if you don’t like the way one accountant interprets the tax laws, maybe it’s time to look for a different one, which is exactly what I did.
Checking Your Return before Filing
I CAN’T STRESS ENOUGH the importance of going over your return with the proverbial fine tooth comb to make sure all the figures are not only correct, but in the right place. Even if you’re sure you have a terrific tax prepare or accountant, you should double-check every figure you’ve provided to make sure it shows up in the right place on your prepared return.
Case in point: The above-mentioned accountant—who gave me a very impressive finished product—had overlooked $1,000 in deductions that were clearly listed in my organizer. “Sorry, I just didn’t see that,” he said about one of the two missed deductions. He also listed the home equity line of credit interest I had that year as a separate deduction on the home office worksheet where it gave me a deduction worth only 10 percent of the total amount, instead of including it in my mortgage interest expense so I could get the other 90 percent of that amount on Schedule A. Funny how much a couple of missed or misplaced deductions can increase your total SE and federal taxes, and how much you can save just by being savvy about all the figures on your tax return.
The lesson here is that it is simply imprudent to put all your faith and trust in a tax preparer, accountant, or CPA, no matter how impressive their credentials or fancy tax package. Unless you’re willing to pay the penalty in higher taxes, you need to become more knowledgeable about taxes in general, and home business deductions in particular. Above all, never assume that accountants don’t make mistakes, because they do, and it’s your job to find the errors.
A reader of my tax eBook wrote to me saying, “It seems to me that you’re way ahead of most accountants when it comes to knowing about the rules and deductions for a homebased business.” And a business owner once told me, “It appears to me that you should not need a tax accountant because you could do it yourself. You can easily file your own tax return at the IRS.gov website and drop the appropriate figures into the online Schedule C form.”
Ah, yes, I suppose I could have done this . . . if I wanted to stress myself to death. My sister Mary, a financial whiz, has always done her own returns using TurboTax® software, so she naturally encouraged me to do my own returns several years ago to save the accountant’s fee. But I wanted no part of that. Although my focus was always to lower my self-employment taxes, more important to me than saving money was the need to eliminate as much stress in my life as possible.
Being a creative person, I’ve always hated even the chore of gathering all the figures for the accountant, let alone the thought of actually doing the return myself. Take depreciation schedules, for example. They’re so complicated now that even CPAs are stressed when trying to figure them out. And I certainly wanted nothing to do with the complicated rules for figuring out how to calculate the depreciation on the house as it related to the Home Office Deduction.
Things got even more complicated the year I hired my husband, Harry, as an employee in order to write off all our unreimbursed medical expenses through the medical reimbursement program offered by AgriPlan/BizPlan. And when I put a few thousand dollars into landscaping and other improvements to the house after Harry died, I found my tax return getting even more complicated because this affected the depreciation of the house for business.
Then there was the large loss I sustained in my investments in 2008, a loss that could be spread out over a few years to cut my taxes. No question about all this being more than I even wanted to think about, let alone deal with. The bottom line is that knowing whether the figures are correct on a finished return is a whole lot different than having to figure out which line on a tax form to put them on in the first place.
In my opinion, today’s tax code is so complicated that no one without great financial expertise or knowledge about the thousands of constantly changing tax rules and regulations should try to do their own tax return. Consider, too, that the IRS is always trying to identify tax cheats and wring every last dime out of taxpayers in general, so the last thing you want to do as a small business owner is try to hide any of your income or give the IRS any reason to flag your return for closer inspection and a possible audit.
I’ve always figured that having an accountant’s name on the Brabec tax return might make the difference in whether an audit would be considered or not; and if the return was selected for an audit, then having an accountant who knew how everything was figured in the first place would be worth gold.
Do You Really Need a Landline Phone? And the expense that goes with it? (This article links to tax-related articles on the web.)
Selected Tax Resources
These websites normally update their tax information each year:
The Balance: Business Law & Taxes; Deductions & Credits. This site’s A-Z List of Business Deductions is impressive with sections for specific types of deductions for businesses of all kinds.
Education Tax Credits, Tax Deductions and Homeschooling (a deduction available to those in a few states).
NOTE: The 1040.com website is unusual and one you might want to explore for an easy way to file your taxes online for a $25 service fee. It also maintains a “Coronavirus Pandemic News and Resources” page worth checking out.
Expanded Child Tax Credit available only through the end of 2022
A Freelancer’s Guide to Taxes
IRS Small Business and Self-Employed Tax Center
IRS How law change affects moving, mileage and travel expenses
IRS Business Travel Expenses
Home Business T/C