If you’re a sole proprietor, here’s the lowdown on three small business tax deductions you can report on Schedule C. They all start with the letter “A”.
1. Accountants. The fees you pay your accountant are generally tax-deductible on Schedule C, provided the fees are for services rendered on behalf of your business. So, if you pay an accountant to prepare your income tax return, that tax prep fee is deductible to the extent it applies to the forms required for your sole proprietorship, such as Schedule C, Schedule SE, Form 4562 and Form 8829.
But what if your accountant also prepares Form 1040, Schedule A, and any other non-business forms on your personal income tax return? You cannot take a deduction on Schedule C for the fees paid to prepare personal income tax forms, so ask your accountant to itemize his tax prep fees on the invoice, separating personal form fees (like Form 1040) from business form fees (like Schedule C). Only the business form fees are deductible on Schedule C. The personal form fees are deductible on Schedule A.
Does your accountant provide other business-related services? Fees for these other services are also deductible, such as bookkeeping, payroll, payroll tax returns (including all the year-end reporting such as Form W-2′s and Form 1099-MISC), business consulting, software training, financial statement preparation and analysis, and so on. Should you ever be audited and pay your accountant to represent you before the IRS, such fees would also be deductible.
Where do your report accountant fees on Schedule C? Line 17 is the most logical place, “Legal and professional services”.
2. Attorneys. Legal fees you incur in the course of business are also deductible. And again, it’s critical that you only deduct attorney fees related to your business. Personal legal fees are not deductible on Schedule C. Examples of business-related legal fees include the drafting of contracts and any other documents for use in your business. If you pay a monthly fee to a company like Prepaid Legal (for business legal services), that is a deductible business expense. Put your attorney fees deduction on Line 17, right along with any accountant expense.
3. Advertising. Any expense you had to promote your business, either offline or online, is deductible as advertising. Think about all the possible ways to hang out your shingle: in the offline world, this includes print media ads, (be sure to include not only newspaper and magazine ads, but also ads in your local neighborhood association newsletter and your child’s school PTA phone directory), television and/or radio commercials, coupon decks, yellow pages, billboards, etc. If you use direct mail, you can deduct the cost of printing as well as the postage.
Do you advertise via the internet? Online ads are just as deductible as offline ads: banner ads, ezine ads and email ads are all deductible. Advertising expense has its own line on Schedule C, line 8.