It is not uncommon for self-employed taxpayers to b know if the IRS requires them to report certain expenses on Schedule C. Learn all about this tax issue in this guide.

Many a taxpayer disregards depreciation and other allowable deductions in computing net earnings from self-employment for self-employment tax purposes? Some taxpayers might like to do this to boost their Social Security contributions and eventually their SS benefits. In some circumstances it could also increase their earned income credit. But is this allowed? The short answer is NO. Here’s the explanation why:

IRC Sec 1402(a) defines net earnings from self-employment as “the gross income derived from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business.” Gross income from a trade or business does not itself constitute net earnings from self-employment; allowable deductions must be taken for expenses in order to arrive at net SE earnings. Rev. Rul. 56-407 held that under Sec 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. Since net SE earnings are included in earned income for EITC purposes as defined by cross-reference to the definition of net-earnings from self-employment under IRC Sec 1402(a), the rule that claiming allowable deductions is mandatory applies equally to the EITC. Deliberately not claiming expenses to increase the amount of EITC would be fraud. (Chief Counsel Advice 200022051)