If you run a business or practice a profession as a sole proprietor, use the IRS Schedule C to report income or loss on a federal tax return. Read on to learn about the form and how to fill it out.
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What Is the IRS Schedule C?
On this form, a sole proprietor’s business income or loss is reported for the given year. If the goal of your business is to turn a profit and you are regularly involved in the business, you must fill out this form.
If your business is a single-member LLC (limited Liability Company), you also use Schedule C. This is not for partnerships or businesses that are incorporated as S or C corporations.
Don’t use Schedule C if your sole proprietorship or other business operates only every now and then. You don’t use Schedule C to report on a hobby not intended to produce profit either.
For these activities, use Schedule 1 on line 21 of your IRS Form 1040 or Form 1040NR income tax return.
Schedule C-EZ
You may qualify to use Schedule C-EZ instead. This is a shorter version of the Schedule C. Use Schedule C-EZ if:
- Your business expenses were not more than $5,000
- Your business earned a profit
- You don’t have any employees
- The business doesn’t have any inventory
- You aren’t using depreciation for anything such as a vehicle
- You are not deducting costs of a home office
If you don’t fit the C-EZ requirements, you’ll fill out Schedule C.
How Much Time to Budget
The IRS estimates it will take one hour and 39 minutes to complete a Schedule C. Any given business owner may take longer, however.
A lot of the time required to fill out tax forms depends on how complete and well organized your business records are. The IRS also estimates it will take over three and a half hours to keep the necessary records to fill out Schedule C.
Another hour and 19 minutes will be spent learning about the law and how to fill out the form, according to the IRS.
If you use tax software such as TurboTax you may be able to fill out the form much faster. Tax software will also help you decide whether to fill out Schedule C, Schedule C-EZ or another form.
Sometimes tax law changes after the Schedule C forms and instructions are printed. You can check the IRS Schedule C update site here to see the latest.
Completing the Schedule C
The first part of the form is basic information about your business. Here are line-by-line instructions for filling out this part.
- Put a description of your business activity. This could be “real estate agent” or “home appraiser.”
- Look up the activity code for your business at the NAICS website and enter it here.
- Leave the business name and employer line blank unless your business is incorporated as an LLC.
- Unless you have an Employer Identification Number (EIN), leave this line blank. Don’t put your Social Security number.
- Put your office address in the address line. Don’t use a P.O. box. If you work from home, leave this line blank.
- Put down whether you use the cash method or the accrual method for accounting. Many independent contractors use the cash accounting method. If you’re not sure, ask your bookkeeper or accountant.
- Most business owners meet the material participation requirement if they worked at least 100 hours on the business in the previous year. They should check “yes”. Rental businesses may be an exception, however. Check instructions for Schedule E for details on this.
- If you started or bought the business during the tax year, check the box here. You may also need to check if you are re-starting a business after temporarily closing it. Check the Schedule C instructions if you need clarification.
- Check “yes” here if you paid $600 or more to contractors during the year. If you check “yes” send a 1099 form to each contractor you paid $600 or more.
Part 1. Income
This section covers the gross income from your business. Note that you may get a Qualified Business Income (QBI) deduction that reduces your taxable income. Check instructions for Form 1040 or IRS Publication 535 for more on this.
- Line 1. Put down the total amount of your gross receipts. If you get copies of Form 1099-Misc, be sure to include any amounts shown on these.
- Line 2. Enter cash or credit refunds given to customers for defective, damaged or unwanted products. You can enter any reductions in the selling price of products here as a sales allowance.
- Line 3. Subtract returns and allowances from line 2 from the gross sales on line 1.
- Line 4. The figure on this line comes from line 42 in Part III, the section on cost of goods sold.
- Line 5. Subtract cost of goods sold on line 4 from the amount on line 3 to find gross profit.
- Line 6. This is for interest income, bad debts you recovered, and other types of income.
- Line 7. Add lines 5 and 6 to get your gross income.
The gross income from line 7 is not the income on which you’ll pay taxes. First you have to deduct expenses. You’ll do that in the next part of Schedule C.
Part II. Expenses
This is for the costs you incurred to run your business. Only put expenses for business use of your home on line 30.
- Line 8. Advertising includes expenses for business cards, flyers, signs, Facebook ads, and so on.
- Line 9. Car and truck expenses go here. Either take the standard mileage deduction or use your actual expenses.
- Line 10. Sales commissions and referral fees go here. Include commissions paid to a real estate broker or property management firm to find a tenant for a rental unit.
- Line 11. This is for payments to independent contractors. Don’t put wages to employees here.
- Line 12. Unless your business is a mining, petroleum or timber company, you’ll usually leave this blank.
- Line 13. Enter any depreciation here. You can’t depreciate land or inventory but you can depreciate real estate, automobiles, computers, and other assets. A section 179 deduction may let you treat all or part of the cost of some kinds of property as an expense for the current year.
- Line 14. Here you can enter premiums for accident and health insurance, group-term life insurance, and dependent care assistance. Special rules for self-employed people are explained in the Form 1040 instructions.
- Line 15. This is for business insurance payments. You’ll put employee accident and health on Line 14.
- Lines 16 a and b. You can deduct interest expense here. Some kinds of interest, such as interest on a home mortgage and investment interest expense, get treated differently. Publication 535 gives details.
- Line 17. Here you can deduct money your business paid to an accountant, business tax preparation professional or attorney.
- Line 18. Office supplies and postage costs go here.
- Line 19. If your business paid into an employee pension, profit-sharing plan, or annuity plan, enter it here. This includes SEP, SIMPLE, and SARSEP plans. It also includes payments made for self-employed people.
- Lines 20a and 20b. Here is where you can enter costs for leasing vehicles, equipment, and office space. Special rules apply if the lease was 30 days or more. Check Publication 463 for details.
- Line 21. You can deduct costs of property repairs and maintenance here, as long as they don’t increase the property value. Unfortunately, you can’t include the cost of your own labor.
- Line 22. Costs for materials, supplies, books, and similar incidentals that you’d normally consume in a year can be deducted here. Don’t include the costs for material and supplies you’ll enter in Part III. Cost of Goods Sold.
- Line 23. You can deduct state and local real estate taxes and personal taxes on business assets here. Likewise, business licenses and other fees. If you collected and paid state and local sales taxes, deduct them here only if you included the collections in gross receipts in Line 1. If you paid Social Security and Medicare taxes on employee, they go here as well.
- Line 24a. Business travel expenses for lodging, transportation, and meals go here.
- Line 24b. You can deduct up to half (50 percent) of the cost of some business-related meals and entertainment. The IRS has details here.
- Line 25. Electric and water bills, heating bills, and other utility expenses for the business go here. If you have a second home phone line for business, deduct the cost here. You can’t deduct the base cost of a first home phone. But if you have special phone services for business use, such as voice mail, those are deductible.
- Line 26. If you paid wages and salaries to employees other than yourself, enter them here.
- Line 27a. Miscellaneous business expenses could include business bank charges, publication subscriptions, professional dues, training classes, trade conferences, computer supplies, and so forth. Here enter the total from line 48 of Part V.
- Line 28. Add up all your expenses from line 8 through line 27a and enter the total here. Again, you’ll deal with home office expenses later.
- Line 29. Subtract your expenses on line 28 from your gross income on line 7. This is your profit. Enter that number here.
- Line 30. This is where you’ll enter expenses for business use of your home. Fill out Form 8829 to get the number for this line. Attach the filled-out form to your return.
- Line 31. This is your net profit after subtracting costs for business use of your home. Enter your profit on Line 12 of your 1040. Also enter it on line 2 of Schedule SE to figure self-employment tax.
- Line 32. Only complete this line if your business lost money last year. You may be able to deduct this loss from other income. Whether and how much you can use this loss depends on how much of your investment was at risk.
Part III. Cost of Goods Sold
This part is only for businesses that make, buy or sell merchandise, such as manufacturers, distributors, and retailers. Professional service firms, for instance, can skip this section dealing with merchandise inventory.
The IRS also says small businesses of any type don’t have to keep inventory. It defines small businesses as those that average $25 million or less in annual sales the past three years.
If you are a manufacturer, distributor, retailer or other firm that makes, buys or sells merchandise, here is how to fill out this section.
- Line 33. Most small businesses use the cash method of accounting and should enter that here. The IRS recognizes other methods. IRS Publication 538 has details.
- Line 34. If you changed the way you valued inventory during the last year, enter “yes.” Also attach an explanation.
- Line 35. Show the value of the inventory you had on hand when the year started.
- Line 36. The amount you spent to purchase more inventory during the year goes here.
- Line 37. Labor costs directly related to producing the product go here.
- Line 38. Here is where you can enter costs for materials and supplies used to produce merchandise
- Line 39. Any other costs for producing the merchandise go here.
- Line 40. Add up amounts from lines 35 to 39 and enter the total here.
- Line 41. This should be the value of your inventory at the end of the year.
- Line 42. If you subtract the amount in line 41 from line 40, that is your cost of goods sold. Enter it here and on line 4.
Part IV. Information on Your Vehicle
- Line 43. Enter the month, day, and year you started using your vehicle for business.
- Line 44b. This is where you can enter the number of miles you drove for business, commuting, and other uses.
- Lines 45 and 46. These give the IRS information about whether you used the vehicle when off duty or had another vehicle to use.
- Lines 47a and b. Keep written mileage logs to show how much you drove on business so you can answer “yes” to these questions.
Part V. Other Expenses
This is the section where you enter other business expenses and transfer them to line 27a. Attach another sheet of paper if you need more space. Avoid lumping lots of expenses indiscriminately into a large sum.
https://rethority.com/wp-content/uploads/2019/07/2018-Schedule-C-Form-1040.pdf
When to File Schedule C
File your Schedule C along with your personal 1040 return. These are usually due on April 15. If April 15 is not a regular business day, it’s due the next business day.
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