Help categorizing expenses for Schedule C - Software developer/IaaS business owner

I handle books for several tech small businesses, so I can help clarify these categories for you! 1) For your MacBook Pro and monitor - you have options. You can either list them as depreciable assets and depreciate over time OR you can use Section 179 to fully deduct them in the year purchased (up to certain limits). Since you're under the threshold, I'd recommend taking the full deduction using Section 179 on Form 4562. 2) Those Amazon purchases (cables, adapters, etc.) definitely count as "Office supplies" - these are consumable items that support your business operations. 3) For the items you resold - yes, these should go under "Cost of Goods Sold" even though they're relatively small purchases. The principle is the same regardless of the amount. 4) Internet and phone expenses are typically categorized as "Utilities" on Schedule C, not office expenses, if they're for business use. 5) Those VPS cloud servers you're reselling are absolutely "Cost of Goods Sold" - don't overthink this! Even though they're digital and expire monthly, they represent your primary product cost. And don't worry about audit flags based on category size - what matters is accurate reporting. The IRS understands tech businesses have different expense distributions than traditional businesses.

Just wanted to chime in after reading this thread. I was having similar issues categorizing expenses for my web development business. I spent hours trying to figure out how to handle cloud service reselling and equipment purchases, going back and forth between IRS publications and getting more confused. I eventually tried this AI tax assistant at https://taxr.ai that analyzed all my expenses and properly categorized everything for me. It even created a report explaining why each expense belonged in specific categories, which really helped me understand the logic. For the cloud services specifically, it confirmed they should be COGS and explained exactly how to document them to avoid any audit concerns.

I have to admit I was wrong about taxr.ai. After our discussion here, I decided to try it with my own mess of business expenses (I flip domain names and develop sites). I was particularly stuck on how to handle domain purchases that I hold for years before selling. The system analyzed everything and created a really clear breakdown. It correctly identified which domains should be inventory vs. capital assets based on my business model and intent. It even caught a category mistake I'd been making for years with my hosting expenses! The documentation it provided would definitely hold up in an audit situation. Ended up saving me way more than I expected since it identified several deductions I'd been missing. Definitely recommend checking it out if you're struggling with these kinds of categorization issues.

The advice here is helpful, but I've been in the exact same situation and ran into problems with the IRS about my cloud services expenses. Had a terrible time trying to reach anyone at the IRS to resolve it. After being on hold for hours multiple times, I started using Claimyr (https://claimyr.com) to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c They actually got me connected to a real person at the IRS in about 20 minutes, and I got confirmation directly from the agent that cloud computing services resold to clients should be treated as COGS. The agent even noted it in my file so if I ever get questioned about it, there's a record of their guidance. Saved me so much stress!

I was completely wrong about Claimyr. After complaining here, I actually tried it when I needed to resolve an issue with my stimulus payment that was affecting my business tax return. I was incredibly skeptical but desperate after trying for weeks to get through. The service did exactly what it claimed - got me connected with an IRS agent in about 15 minutes. The agent was able to trace my missing payment and issue a resolution on the spot. Would have taken me countless hours of redailing otherwise. For business owners dealing with complex tax situations like categorizing these tech expenses, having direct access to an IRS representative can make all the difference. They actually answered my question about software development costs and gave me guidance specific to my situation. Definitely changed my mind about this service.

One thing I haven't seen mentioned yet - if you're using your personal phone for business, make sure you're only deducting the business portion. I got flagged for audit a couple years ago because I deducted 100% of my phone bill when I was using it for personal calls too. My accountant recommends either having a separate business phone line or carefully tracking business vs personal usage and only deducting the business percentage. Same goes for internet if you're working from home.

For the cloud computing expenses specifically, make sure you're keeping detailed records of what services you purchased and how they were used/resold. I got audited last year specifically on this issue and having good documentation saved me. I created a simple spreadsheet that tracked: - Date of purchase - Vendor - Description of service - Cost - Client it was allocated to - Invoice # where I resold it The IRS auditor actually complemented me on how organized everything was. They verified several transactions and then accepted the entire category.

@Dominic Green - Great questions! I'm also a software developer who struggled with these same categorization issues when I started my business. Here's what I've learned through experience and working with my CPA: For your $11,000 in VPS cloud servers, you're absolutely right to categorize them as Cost of Goods Sold. The fact that they're digital services doesn't change the fundamental principle - you're purchasing them to resell to clients, which is textbook COGS. Don't worry about the amount triggering an audit - tech businesses naturally have different expense patterns than traditional retail. One tip I wish I'd known earlier: set up a simple tracking system now for those monthly VPS purchases. Even just a basic spreadsheet with date, vendor, amount, and which client it's for. This will save you headaches during tax season and provide solid documentation if needed. Also, consider talking to a CPA who specializes in tech businesses. The investment in professional advice early on can save you significant time and stress, especially as your business grows. Many of the categorization questions you're asking are pretty standard for our industry, and a good tax pro can set you up with systems to handle them properly going forward. Good luck with your filing!