While using TurboTax Home and Business, Why does adding business expense deductions reduce my federal refund?

[kmathis-]

By inputting business expense deductions, I would think that my refund should increase not decrease.  On the same token, whenever I add business income from a 1099-MISC my refund increases, when I would think my refund would decrease.

Is the software wrong, or am I thinking of this backwards?

[DawnC0 · Accepted solution]

It depends.  Usually, yes, expenses would increase your refund and income would lower it.  However, this is not the case if you qualify for the Earned Income Credit.  That credit varies based on your income, so if you are at the maximum Earned Income Credit amount, but your income goes down, due to business expenses, your EIC goes down by more, which will reduce your refund amount.  

There are other credits that work like that as well, but the EIC is the one that triggers this most often.  If you are using the CD/download desktop version of TurboTax, you can use Forms Mode to look deeper into your return.  

[rwom1217]

I am having the same issue.  Would it make sense to simply not claim the deductions?  For example, when I enter my business phone line expense, my refund goes down.  Can I simply not claim that deduction?  Are there long-term benefits to claiming certain expenses year after year, even if it decreases the return amount on occasion?

[MonikaK1]

Preview your tax documents rather than rely on the refund tracker to see how your entries affected your results. If you are using a Desktop version of TurboTax, you can go to Forms mode to view your Form 1040, Schedule C, and other affected forms. You can also preview your return before filing in TurboTax Online to find out how your taxes were calculated. See here for details. 

The refund meter at the top of the screen may be showing a different number than your return because it is lagging behind your entries on your return.

Adding an item of income doesn't necessarily increase your taxable income dollar for dollar. For example, if you have a Qualified Business Income Deduction, the deduction will increase if your net business income increases. 

Report all of your income and all of the business deductions to which you are entitled, to accurately reflect net profit or loss.

See this TurboTax tips article for more information about reporting business income and deductions.

@rwom1217 

[VolvoGirl]

One reason, By increasing your deductions and expenses it will decease your income and you may not be getting as many credits as before like the EIC credit. You can't go by the refund monitor until you have entered everything in. Also after you reduce your income to zero there is no more refund to get back. But even though your taxable income goes down and you owe less income tax on it, you may owe for other things like self employment tax (if you have a Net Profit) or the 10% early withdrawal penalty from 401k or IRA accounts.

Be aware, if you have self employment income you can get in trouble for not reporting all your expenses to qualify for the EIC.