Categorizing transactions to align with the IRS Schedule C

Ever have questions about how to categorize a particular transaction in your GoDaddy Bookkeeping account?  You're not alone, it happens.  That's why we created this summary of a multi-part blog series from our resident CPA, Chris Peden, focused on removing the mystery of this tax form and getting you back to what you love - running your business!

 

Income

Line 1 – Gross Receipts or Sales

There are two kinds of income you would report on this line:

    1. the sales of goods or services (online sales, art fair sales, consignment sales, etc.)
    2. bartered goods and services (the net effect of trading one product/service for another, usually without an exchange of cash)

Line 2 – Returns and Allowances

Three types of transactions would fall under Returns and Allowances. All three are related to you not receiving as much for a good/service as you usually do.

    1. sales returns and allowances - items you sold, but customers returned for a refund
    2. cash discounts - offered to a customer in return for paying an invoice quickly
    3. trade discounts - reduction in prices from what you normally charge

Line 4 – Cost of Goods Sold

Cost of Goods Sold is a calculated amount equal to:

The Cost of Goods Available for Sale (line 40) - which is the sum of:

      • Beginning inventory - usually last years ending inventory (line 35)
      • Purchases less cost of item withdrawn for personal use (line 36)
      • Cost of Labor - wages you pay employees involved in your business (line 37)
      • Materials and Supplies - not the main stuff but the extras, like glue or buttons (line 38)
      • Other Costs - such as packaging, inbound shipping, overhead (line 39)

minus

Ending Inventory - the cost of the items you have left to sell at the end of the year (line 41)

GoDaddy Bookeeping doesn't track lines 35 - 42 of the Schedule C, but does track Cost of Goods Sold on line 4. More info on how to use this category can be found here

Line 6 – Other Income

Income not reported on Line 1.  Such as repayment of bad debt, interest income, contest winnings or prizes, lawsuit winnings, etc.

(Don’t worry, we didn’t skip any income lines. Some lines are for calculations only.)

 

Expenses

Line 8 – Advertising

Getting the word out about your business - ads, flyers, postcards, promotional items, banners, etc.

Line 9 – Car and Truck Expenses

You can either take the Standard Mileage Deduction or deduct actual expenses - but you can't do both. The standard deduction based on business miles driven, tolls and parking.  Actual expenses are just that - actual expenses related to the business use of your vehicle. This includes items such as gas, oil, maintenance, lease/rental fees, car washes, parking, tolls, registration, insurance and depreciation.  Once you select a method, you must continue to use that method year after year.

Line 10 – Commissions and Fees

Commissions include amounts paid to independent contractors to sell your products, they do not include bribes or kickbacks paid when doing business overseas.

Line 11 – Contract Labor

Payments made to people who aren't your employees but have performed services for your business. Not included on this line would be wages to employees (line 26), accountant/attorney fees (line 17) or folks who do small repairs/maintenance fro your office (line 21).

Line 12 – Depletion – this line only applies to forestry and mining concerns

Line 13 – Depreciation

You can only depreciate equipment if, 1. you own it, 2. you use it in your business and 3. it has a determinable useful life of over a year. There a few ways to determine useful life and to calculate depreciation. Once you determine the right method for your situation you can calculate the amount of depreciation to include on the Schedule C.  Note: You may need to create the category in your GoDaddy Bookkeeping account if it doesn't already exist. 

Line 14 – Employee Benefits Program

This includes employer sponsored healthcare plans or dependent care assistance for your employees.  This is not where you would record your health care premiums if you are a sole-proprietor or otherwise not an employee of the company.

Line 15 – Insurance

Various types of business insurance are included, such as: property, credit, liability, malpractice, workers' compensation, state unemployment, business vehicles and business interruption insurance.

Line 16 – Interest

Includes interest paid on business related debts

Line 17 – Legal and Professional Fees

Fees associated with your accountant or attorney.

Line 18 – Office Expenses

Things such as hand soap & toilet paper (if you have a restroom for your employees/clients), coffee service (again, if you provide for your employees/clients), window washing, plant service and cleaning or lawn services.  It does not include furniture, fixtures, home office expenses, utilities, office equipment leases or significant renovations.  Office supplies (such as pens and paper) should be included on Line 22 - Supplies.

Line 19 – Pension and Profit Sharing Plans

Contributions you make on behalf of your employees to a qualified pension or profit sharing plan (such as  SEP, SIMPLE, or 401(k) ).

Line 20 - Rent or Lease

Vehicles, machinery, equipment or real estate (such as office space, warehouse, storage).

Line 21 - Repairs and Maintenance

Incidental repairs during the expected life of the machine or tool, or routine maintenance to keep the machine or tool functioning as expected.

Line 22 - Supplies

Supplies not used in the production of your product (these would be Cost of Goods Sold).  This includes things that are incidental to the creation of your work product, but a necessary part of doing business.  Examples include: pens, paper, folders, printer ink, printer paper, calendars, etc.

Line 23 - Taxes and Licenses

Business Licenses and permits, employee related taxes,   Not included: liquor license, taxicab license, tv/broadcast license, self-employment tax

Line 24 - Meals, Travel and Entertainment

According to the IRS (Publication 463) you can deduct the costs of travel, meals and entertainment when they "are both ordinary and necessary" and are either directly-related or associated with your business. 

Line 24a - Travel

Air, bus or train costs. Hotel, motel or other types of lodging. Tips associated with travel. Laundry and dry cleaning while traveling. Local transportation (shuttles, taxis, rental cars). Fax or internet charges while traveling.

Line 24b - Meals and Entertainment

You can only deduct 50% of what you spend on business meals and entertainment - while traveling away from home, entertaining clients or while attending a convention / reception, etc.   The cost of travel to and from the business related meal/entertainment are not subject to the 50% limit.

Line 25 - Utilities

Keeping the lights on and the rooms in your business warm! If you have a home office, you can deduct a pro-rated amount based on the square footage of the office. Common items categorized as Utilities include:

    • Electricity
    • Gas / Propane / etc.
    • Water / Sewer service (not bottled water - the water than comes out of the faucets)

Line 26 - Wages

The salaries and wages you pay employees who help out with your business.  This includes things such as:

    • wages
    • bonuses
    • commissions (for internal sales folks. External sales commissions are reported on Line 10 - Commissions and Fees).  

There are also a few situations that should not be reported on this line. They include:

    • your salary as owner of of a sole-prop or LLC - this shows up on your personal 1040
    • amounts paid to assembly workers or workers who indirectly have a hand in making your goods (foreman or repair folks) - these should be included on Line 37 - Cost of Labor.
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