EcommerceBytes-NewsFlash, Number 2520 - April 13, 2011 2 of 4

Guest Column: Categorizing Ecommerce Expenses on IRS Schedule C

By Ina Steiner

Procrastinators, take note! Kevin Reeth, CEO of Outright.com, has put together a guide for U.S.-based online sellers who are finishing up their taxes in advance of the April 18th deadline. Kevin has spent more than 15 years working on software applications and services for Intuit, Yahoo and eGroups, and in 2008, co-founded Outright.com, a service to track income and expenses specifically designed for very small businesses, including entrepreneurs and self-employed.

By far the most popular tax time questions we get over at Outright.com have to do with "How do I categorize Expense X on my Schedule C?" And it truly can be difficult to fit square peg expenses like "web hosting" into Schedule C categories that haven't yet caught up with the way ecommerce sellers do business.

That's why we've put together this quick guide for ecommerce sellers who do their own taxes and are scratching their heads over how to fit in expenses like cell phone, home office deduction and the ever popularly mis-categorized, web hosting expense. Here's your handy Schedule C guide:

How to Categorize Common eCommerce Expenses on the Schedule C

Expenses Included Notes

Advertising Website Creation
Domain Name Registration & Hosting Flyers and Brochures

Blog Giveaways
Business Gifts to Clients/Contractors
Website costs are almost universal for small businesses today.
While a website serves many purposes, the essential reason to have most websites is to promote the business, so I believe advertising is the most appropriate category.

Capital Expenditures Computer
Camera

Company car
Computers purchases should be capitalized and can be written off as a Section 179 deduction. Small items such as parts and accessories can be written off as office expense.
Camera purchases should be capitalized and can be written off as a Section 179 deduction.

Vehicles that are 100% owned by the business should be capitalized and depreciated.

Commissions and fees PayPal Fees

Don't track Self-Employment Tax You do not track self employment tax as it is calculated as a part of figuring your total tax liability on Form 1040. You do however get to deduct 1/2 of your self employment tax from Adjusted Gross Income.

Insurance Home Insurance
Business Insurance
Only insurance that you purchase just for your business is deductible on Schedule C.
Your standard homeowners or renter's policy can be included with your home office expense on Form 8829

Keep in own category Health Insurance
Medical Expenses

Home Office Deduction for Home Storage of Business Equipment/goods

Gas for Client Visits

Home Office

Office Furniture

Parking Costs for Client Visits

Online Tax Prep Fees
Health insurance is a unique deduction for the self employed. The expense actually is a separate deduction on Form 1040 and Schedule SE. Medical expenses are not deductible on Schedule C, but rather are an itemized deduction on Schedule A.
Use Form 8829 to calculate the cost of using a portion of your home to store business equipment and goods.
When calculating vehicle expenses you must choose between tracking actual costs or taking the mileage deductions. You are free to choose the option which gives you the largest deduction.
Expenses for a home office are included on Schedule C, but must be calculated separately on Form 8829. Office furniture should usually be capitalized and deducted as a Section 179 deduction on Form 4562. When calculating vehicle expenses you must choose between tracking actual costs or taking the mileage deductions.
Parking costs are then in addition to whichever method you choose to calculate operating expenses.
Tax preparation costs are deductible on Schedule A, still it is appropriate to allocate a portion, but not the total cost of tax preparation to Schedule C under the legal and professional services category.

Legal and professional services Accountant
Lawyer

Business Counseling/Coaching

Not deductible Aspirin, etc. Over the counter medicines are generally not deductible.

Not tracked on Schedule C Physical therapy for carpal tunnel syndrome "Physical therapy costs would be deducted as part of
your medical expenses on Schedule A."

Office Expense "Post-It's, Staples, Pens and other Office Supplies
Notebooks
Printer Paper
Printer
Business Cards
Programs to help business (Outright, Freshbooks, Shoeboxed, etc.)
Necessary Software (Photoshop, InDesign, etc.)
Costs Associated with Camera Film
Books to help with business
Magazines to help with business
Subscriptions to Job Boards
Zip Drives
External Harddrive
Data backup
Anti-virus for work computer
Computer upgrades
Computer peripherals" "Many printers today are such low cost, that they can be considered office expense. If you spend significant amounts on a high price printer, you should write it off as a Section 179 deduction like computers above.
Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562'
Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562'

Subscriptions to job boards are only deductible on Schedule C if it is a necessary expense to operate the business. Job board subscriptions that are primarily for finding a new job, should be expensed on Schedule A as job hunting expenses.

Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562. If a computer upgrade is expected to significantly increase the life of the computer, the cost should be capitalized and depreciated using Form 4562"

Other "Cellphone
Skype
Conferences & Networking Events
Professional Group Memberships
Public Transport Costs for Client Visits
Phone Cards
Security Monitoring
Subscription Publications (NY Times) or
Databases (ERIC) required for research
Public Internet Access
Incorporation/DBA, etc.
Postage
Post Office Box
Storage Fees
Groceries for rented office
Groceries for home office" "The cost of Skype is only deductible if it is a ordinary and necessary expenditure needed to operate your business and is not for personal reasons.
Only $5,000 of organization expenses are deductible in the year you start up a business.

Only the cost of groceries that are directly used by clients and employees is deductible. You may not deduct the cost of groceries to provide meals for yourself while working at home."

Rent-Other Business
Property Rented Office

Returns and Allowances Unpaid Invoices "Only deduct unpaid invoices if you have included the invoices in gross receipts.
If you never reported the revenue from an unpaid invoice, you do not get to deduct the value that was never received."

Supplies Protective Clothing/Goggles

Travel, Meals and
Entertainment "Cleaning and Laundering Service When Traveling for Business"

Utilities "Internet from home/office Cable or Satellite TV" "Only the cost of internet that is used exclusively for the business is deductible. If the internet connection is also use for your home, you can deduct a portion of the cost using form 8829.
The cost of cable or satellite TV is only deductible if it is an ordinary and necessary expense needed to operate your business. Even if the TV cost is used for your business you may be required to allocate a portion of the cost if it is every used for personal reasons."

(Thanks to accountant Wray Rives of Rives CPA for double checking our work!)

Also, bookkeeper Holly Neitzel of AccountingSpot reminds us, "There are some expenses that I would put in "Other" for tax purposes, but would actually assign to a category in my bookkeeping during the year (i.e. categories not listed on the Schedule C). Then at tax time, the whole category can go in to "Other." For example, Internet from home/office for taxes I would recommend as categorizing as "Other" on the Schedule C. But for general business purposes I would use an "Internet" category. Bookkeeping is not just for tax purposes. It's also important for internal business decisions throughout the year."

About the Author
Kevin Reeth is CEO of Outright.com, a service that helps small businesses easily keep track of income and expenses. Kevin spent more than 15 years working on software applications and services for Intuit, Yahoo and eGroups before co-founding Outright in 2008.

The guest column above is a guide, consult a tax professional for advice, and see instructions for completing Schedule C on the IRS website.

About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

You may quote up to 50 words of any article on the condition that you attribute the article to EcommerceBytes.com and either link to the original article or to www.EcommerceBytes.com.
All other use is prohibited.

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How to Categorize Common eCommerce Expenses on the Schedule C
	Expenses Included	Notes
Advertising	Website Creation Domain Name Registration & Hosting Flyers and Brochures Blog Giveaways Business Gifts to Clients/Contractors	Website costs are almost universal for small businesses today. While a website serves many purposes, the essential reason to have most websites is to promote the business, so I believe advertising is the most appropriate category.
Capital Expenditures	Computer Camera Company car	Computers purchases should be capitalized and can be written off as a Section 179 deduction. Small items such as parts and accessories can be written off as office expense. Camera purchases should be capitalized and can be written off as a Section 179 deduction. Vehicles that are 100% owned by the business should be capitalized and depreciated.
Commissions and fees	PayPal Fees
Don't track	Self-Employment Tax	You do not track self employment tax as it is calculated as a part of figuring your total tax liability on Form 1040. You do however get to deduct 1/2 of your self employment tax from Adjusted Gross Income.
Insurance	Home Insurance Business Insurance	Only insurance that you purchase just for your business is deductible on Schedule C. Your standard homeowners or renter's policy can be included with your home office expense on Form 8829
Keep in own category	Health Insurance Medical Expenses Home Office Deduction for Home Storage of Business Equipment/goods Gas for Client Visits Home Office Office Furniture Parking Costs for Client Visits Online Tax Prep Fees	Health insurance is a unique deduction for the self employed. The expense actually is a separate deduction on Form 1040 and Schedule SE. Medical expenses are not deductible on Schedule C, but rather are an itemized deduction on Schedule A. Use Form 8829 to calculate the cost of using a portion of your home to store business equipment and goods. When calculating vehicle expenses you must choose between tracking actual costs or taking the mileage deductions. You are free to choose the option which gives you the largest deduction. Expenses for a home office are included on Schedule C, but must be calculated separately on Form 8829. Office furniture should usually be capitalized and deducted as a Section 179 deduction on Form 4562. When calculating vehicle expenses you must choose between tracking actual costs or taking the mileage deductions. Parking costs are then in addition to whichever method you choose to calculate operating expenses. Tax preparation costs are deductible on Schedule A, still it is appropriate to allocate a portion, but not the total cost of tax preparation to Schedule C under the legal and professional services category.
Legal and professional services	Accountant Lawyer Business Counseling/Coaching
Not deductible	Aspirin, etc.	Over the counter medicines are generally not deductible.
Not tracked on Schedule C	Physical therapy for carpal tunnel syndrome	"Physical therapy costs would be deducted as part of your medical expenses on Schedule A."
Office Expense	"Post-It's, Staples, Pens and other Office Supplies Notebooks Printer Paper Printer Business Cards Programs to help business (Outright, Freshbooks, Shoeboxed, etc.) Necessary Software (Photoshop, InDesign, etc.) Costs Associated with Camera Film Books to help with business Magazines to help with business Subscriptions to Job Boards Zip Drives External Harddrive Data backup Anti-virus for work computer Computer upgrades Computer peripherals"	"Many printers today are such low cost, that they can be considered office expense. If you spend significant amounts on a high price printer, you should write it off as a Section 179 deduction like computers above. Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562' Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562' Subscriptions to job boards are only deductible on Schedule C if it is a necessary expense to operate the business. Job board subscriptions that are primarily for finding a new job, should be expensed on Schedule A as job hunting expenses. Some software can be expensed in the year it is purchased however significant expenditure for software that is expected to last for several years should be capitalized. Off the shelf software cost that is capitalized can be written off as Section 179 deduction on Form 4562. If a computer upgrade is expected to significantly increase the life of the computer, the cost should be capitalized and depreciated using Form 4562"
Other	"Cellphone Skype Conferences & Networking Events Professional Group Memberships Public Transport Costs for Client Visits Phone Cards Security Monitoring Subscription Publications (NY Times) or Databases (ERIC) required for research Public Internet Access Incorporation/DBA, etc. Postage Post Office Box Storage Fees Groceries for rented office Groceries for home office"	"The cost of Skype is only deductible if it is a ordinary and necessary expenditure needed to operate your business and is not for personal reasons. Only $5,000 of organization expenses are deductible in the year you start up a business. Only the cost of groceries that are directly used by clients and employees is deductible. You may not deduct the cost of groceries to provide meals for yourself while working at home."
Rent-Other Business Property	Rented Office
Returns and Allowances	Unpaid Invoices	"Only deduct unpaid invoices if you have included the invoices in gross receipts. If you never reported the revenue from an unpaid invoice, you do not get to deduct the value that was never received."
Supplies	Protective Clothing/Goggles
Travel, Meals and Entertainment	"Cleaning and Laundering Service When Traveling for Business"
Utilities	"Internet from home/office Cable or Satellite TV"	"Only the cost of internet that is used exclusively for the business is deductible. If the internet connection is also use for your home, you can deduct a portion of the cost using form 8829. The cost of cable or satellite TV is only deductible if it is an ordinary and necessary expense needed to operate your business. Even if the TV cost is used for your business you may be required to allocate a portion of the cost if it is every used for personal reasons."