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petemlarson
New Member

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

Because of such a low income, my Earned Income Credit and Child Credits are not given to me. If I exclude my business expenses, my business income is higher but my refund is also higher. Not sure if I can amend prior year returns and delete out the business expense lines to get a larger refund.
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Accepted Solutions
ColeenD3
Expert Alumni

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

There is another reference you need to be aware of. While what you read did use the word, "can", they are not taking into account that you will manipulate your return to take a credit that you do not qualify for based on your real income including all your expenses.

 

A self-employed individual is required to report all income and deduct all expenses. Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.

 

Net earnings from self-employment are included in earned income for EITC purposes. It is defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a). This ruling applies equally to the EITC. CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

 

https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employme...

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6 Replies
ColeenD3
Expert Alumni

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

Yes, the IRS requires that you enter all your income and expenses. For the very reason you expressed, it is not allowed to omit the expenses in order to qualify for these credits.

Anonymous
Not applicable

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

you will probably end up losing. if you report only sales you will end up paying 14.1% in self-employment on the net income (sales0 reported.  so in effect, you'll pay 14.1% in S-E tax on the sales in addition to regular income taxes.    you run another problem. claiming certain credits when it's improper could result in the IRS barring you for taking them for the next 2 years.   

petemlarson
New Member

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

Thanks for the response. I've been digging through IRS pub 535 "Business Expenses" which repeatedly says "expenses you can deduct"... not "expenses you must deduct". In fact, Section 1 even starts with the question "What Can I Deduct?" (not "What Must I Deduct?").

 

Am I mistaken to think that the word can implies the choice to deduct these expenses?

petemlarson
New Member

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

Thanks for the response - I really appreciate it. I've already run the numbers by deleting the expense line and my TurboTax-calculated refund went up.

 

Why would not deducting *optional* (optional based on the IRS's use of the words "expenses you can deduct") business expenses, which would increase the amount of credits I'm already qualified for (just not receiving the full amount), make my claiming more of these credits "improper" ?

 

I understand my scenario is the exact opposite of 99+% of people... wanting to NOT deduct expenses to improve my tax scenario. Anyone have experience actually doing what I'm proposing?

 

 

ColeenD3
Expert Alumni

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

There is another reference you need to be aware of. While what you read did use the word, "can", they are not taking into account that you will manipulate your return to take a credit that you do not qualify for based on your real income including all your expenses.

 

A self-employed individual is required to report all income and deduct all expenses. Revenue Ruling 56-407, 1956-2 C.B. 564, deals with the issue of taxpayers not taking all allowable deductions in computing net earnings from self-employment for self-employment tax purposes. Rev. Rul. 56-407 held that under §1402(a), every taxpayer (with the exception of certain farm operators) must claim all allowable deductions in computing net earnings from self-employment for self-employment tax purposes.

 

Net earnings from self-employment are included in earned income for EITC purposes. It is defined by cross-reference to the definition of net-earnings from self-employment under I.R.C. §1402(a). This ruling applies equally to the EITC. CCA 200022051 also provides insight regarding deduction of Schedule C expenses.

 

https://www.eitc.irs.gov/tax-preparer-toolkit/frequently-asked-questions/earned-income-self-employme...

petemlarson
New Member

Am I required to deduct my business expenses? My income is so low that I would be better off just reporting sales without deducting expenses. Is this ok?

Excellent! You guys have been so helpful. I will leave the expenses in 🙂

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