How come the more deductions I enter in Schedule C, my federal refund amount is reduced?

Question

I have a small business and have entered expenses in Schedule C.  I would think that the more write-offs I enter my overall taxable income should be reduced, thereby increasing my Federal Refund.  But the opposite happens.

For example, if I enter Office Expenses, my Federal Refund amount is reduced.  If I take the Home Office Deduction, my Federal Refund amount is greatly reduced.

Why is this?

kiarab · Answer

I would recommend filing an accurate return, so accurately reporting your business expenses on your tax return. If your business is audited, the IRS may investigate everything and wonder why you didn't take certain expenses or in future years, they may wonder why your expenses all of a sudden increased when it was lower years before.

And yes, the more business expenses you have, the less taxes you would owe on that income. If you had made more, it definitely would benefit you more to take claim all of your business expenses because you wouldn't qualify for as much of the EIC, but it sounds like you are in the narrow spot where it doesn't benefit you as much as the EIC.

taxpay#er255 · Answer

Because your assumptions are accurate - your answer is very insightful and provides a good hint at what might be happening.  I will play with the numbers and see if that is what is happening.  If this is the case, does it make more sense to take the EIC credit and not the rightful business deductions, or should one take the business deductions and NOT take the EIC credit?

Thought:  If would seem that if more business deductions were taken, taxable income would be reduced and self-employment tax would also be reduced.  The downside would be showing little to no income.

kiarab · Answer

Hello,

Is your income overall low? (like 10-15k? It can be a bit higher if you have dependents).

If so, what may be happening is that you are getting the Earned Income Credit. The earned income credit increases the more earned income you have until it hits a peak and starts to decrease. If you are at the point where more earned income causes you to get more of the credit, then when you enter in your business expenses, it will decrease. This is because if you have more business expenses, it decreases the amount of profit you had with your business, decreasing the overall amount of earned income you have.