Hot off the press! According to 2016’s IRS Tax Stats:
https://www.irs.gov/pub/irs-soi/16sp02is.xls
The average non-farming Schedule C form’s looks like this (percentages as a proportion to income/sales)
| Income | 100% |
| Cost of Goods Sold / Cost of Sales | 29.15% |
| Advertising expenses | 1.14% |
| Car and truck expenses | 6.23% |
| Commissions | 1.15% |
| Contract labor | 4.00% |
| Depletion | 0.03% |
| Depreciation | 2.70% |
| Employee benefit programs | 0.20% |
| Insurance | 1.40% |
| Legal and professional services | 0.92% |
| Meals and entertainment, only 50% deducted | 0.73% |
| Mortgage interest | 0.22% |
| Other interest paid on business indebtedness | 0.40% |
| Office expenses | 0.94% |
| Pension and profit-sharing plans | 0.08% |
| Rent paid on machinery and equipment | 0.72% |
| Rent paid on other business property | 2.64% |
| Repairs | 1.30% |
| Supplies | 2.75% |
| Salaries and wages | 6.39% |
| Taxes paid | 1.38% |
| Travel | 1.17% |
| Utilities | 2.22% |
| Other business expenses | 8.34% |
| Home office business deductions, total | 0.69% |
| Total Expenses | 76.92% |
| Net income | 23.08% |
What does that mean? Nothing… Never prepare a tax return based on national averages, they provide no value; other than context to compare your numbers vs. the national avg. NOTE: this summary does not take into account industry and/or company size (look at the spreadsheet for that). The real abiding principles you should use for tax deductions for a business are the following:
- The expense is Ordinary, which means it is commonly accepted in the industry and seen often with other businesses in the same trade
- The expense is Necessary which means the expense was required in order to generate the business income or it was incurred as a consequence of the income producing activities. But it does not need to be indispensable in order to be deductible
- The expense is Reasonable, which essentially means is not “lavish or extravagant”, either way this is very subjective and would vary greatly based on the facts and circumstances of the business/industry you are engaged in
- The expense has been well Documented, which means that the taxpayer has the burden of proof to prove the expense existed, the amount reported is accurate, and it has a true business purpose (see necessary)
- The expense has been made in a Legal capacity, which mans the expenditure cannot break any laws, be considered a bribe, or made in connection to an illegal activity / or activity in which the business does not gave the legal capacity to perform; in addition the income itself needs to be legally earned, is not the expenses related to it wouldn’t be deductible either.
This article contains some examples:
https://qbkaccounting.com/type-expenses-deductible-business/
If you need to hire an accountant to help you do tax planning, consider hiring us: 954-414-1524 and/or e-mail me your questions: hector@garciacpa.com
