Small Business Taxes & Management

Frequently Asked Questions


Deductions on Schedule C

 

Small Business Taxes & ManagementTM--Copyright 2004, A/N Group, Inc.

 

The Study. If you do business as a sole proprietorship (or as an LLC with only a single member), you'll file your business taxes on Schedule C and attach it to your Form 1040. The Government Accounting Office has done a statistical study to determine which are the most used expense lines on Schedule C. That is, what percentage of taxpayers claim a particular expense and how much is each expense as a percentage of the total expenses.

We've reproduced the results of the study below. You can see that car and truck expenses were the most frequently claimed expense. It appeared on 71% of the Schedule C's filed. That's not surprising. Bad debts appeared on only 2.8% of the returns. Again not surprising because the majority of Schedule C filers probably use the cash method of accounting and you generally can't claim a bad debt expense if you're on the cash method. About 50% of the Schedule C's showed office expense; 35% showed advertising; 56% had supplies expense. Some 72% claimed "other", which takes in a broad range of expenses that are often specific to the type of business.

Car and truck expenses made up about 11% of the total dollar amount of expenses claimed; wages accounted for about 15% and other, again a catchall category, for almost 22% of the dollar amount.

While only 16% claimed home office expenses, the data was for 2001. The law changed in 1997 allowing more small business owners to claim a home office deduction. It's possible this percentage will rise in the future.



                          Percentage of Taxpayers    Expense as Percentage
                            Claiming the Expense       of Total Expenses

Advertising                        35.1                      2.5
Bad debts                           2.8                      0.3
Car/truck                          71.0                     10.9
Commissions                         7.8                      2.8
Depletion                           0.6                      0.2
Depreciation                       43.1                      7.7
Employee benefit programs           2.2                      0.5
Insurance                          37.1                      3.3
Interest on mortgage                5.6                      1.3
Interest on other business debt    13.2                      1.6
Legal/professional services        47.9                      1.7
Office                             49.5                      2.4
Pension/profit sharing plans        1.1                      0.2
Rent on machinery/equipment        15.1                      2.0
Rent on other business property    19.7                      5.8
Repairs                            30.5                      2.8
Supplies                           56.4                      5.3
Taxes                              40.1                      3.3
Travel                             26.8                      2.0
Meals/entertainment                36.2                      1.1
Utilities                          53.5                      4.7
Wages                              10.1                     14.7
Other                              72.3                     21.8
Home office                        16.4                      1.4

                                                  Total    100.0%

Other Points. The results presented represent those for a range of business sizes. The percentages change when the analysis is broken down by business size. For example, when the study looked just at businesses with higher dollar volume, the percentage of those claiming a deduction for pension and profit sharing expenses increased materially.

The GAO divided the businesses into three sizes. Businesses with under $25,000 in gross receipts represented some 61% of the total businesses; those with gross receipts between $25,000 and $100,000 represented 25% of the total businesses. Businesses with over $100,000 in gross receipts represented only 14% of all Schedule C filers.

Note that cost of goods sold were not part of the analysis. Companies in the retail or wholesale business will have a substantial portion of their total deductions in cost of goods sold.

Finally, while the statistics are interesting, they shouldn't affect your deductions. You should take all the deductions you're entitled to and none that you're not. Just make sure you keep good records and can substantiate your expenditures.


Copyright 2004 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536


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--Last Update 03/18/04