Schedule C Tax Deductions - "E" is For Employees, Education and Entertainment

Looking for legitimate tax deductions for your income tax returns this year? Here are three common expenses you can deduct on Schedule C, all starting with the letter "E".

Employees.

There are several legal deductions related to your employees. Obviously, the compensation you pay them is reported on Schedule C, Line 26. Even though the description for this item is "Wages", don't stop there. Salaries, commissions and bonuses are also deductible and should be put on Line 26 also.

What about your own compensation as the sole proprietor? Don't make the mistake of reporting that on Line 26. Then where does it go? It doesn't go anywhere on Schedule C. The money you withdraw from the business out of profit, also known as "draw", is not a business expense.

What about employee benefits? Things like health insurance, medical expenses that are paid via a Medical Reimbursement Plan, retirement plan contributions (such as the employer's payments on behalf of the employee into a SIMPLE IRA Plan or a SEP) are all deductible. These expenses can be added together and reported on Line 14, "Employee benefit programs."

Only health insurance premiums for your employees are deductible on Schedule C. Health insurance premiums for yourself are deductible, but don't put that on Schedule C; those get reported on Form 1040, Line 29. If you have a SIMPLE IRA Plan, the contributions you make for your employees go on Schedule C, but the contributions you make into your own account go on Form 1040, Line 28. The same is true for SEP contributions, which are reported on Form 1040, Line 28.

Education.

If you attend a conference, workshop or seminar to improve existing business-related skills, or take a college or graduate school course for that purpose, the expense is deductible. The key here is that the material must be related to your existing business. For example, if you are a computer software consultant, any type of class dealing with computers would qualify. But if you take a class in engineering because you are considering a career change, that class would not be deductible. Also, don't forget that many business classes apply to virtually all types of businesses, such as courses in bookkeeping or marketing. Report education expenses on Line 27, Other Expenses.

Entertainment.

This is an area that the IRS loves to scrutinize, for obvious reasons. When entertaining existing or potential customers, if you attend a sporting event or a concert, for example, 50% of that expense is deductible (just like meals). Just be sure you engage in a substantial business discussion before, during or after the event, and write-off is legitimate.