For sole proprietors and other self-employed business owners, Schedule C is a crucial tax document. It serves as a means of disclosing profit or loss and incorporating that data into the owner’s annual personal tax returns. More than 27 million small business owners used Schedule C to submit their tax returns in 2018, the most recent year for which data was available.
This article discusses Schedule C and provides information on how to fill it out and submit it.
- Schedule C is used by sole proprietors and single-owner limited liability corporations (LLCs) to determine their business’s yearly net income (profit or loss).
- The business owner adds personal income, deductions, and credits to their Form 1040/1040-SR along with Schedule C’s net income.
- Schedule C allows you to deduct charges for your home business and business travel.
- These expenses can be written off as part of the cost of goods sold by companies that produce and sell goods.
- In some situations, some business losses might be minimized.
Describe Schedule C.
Many small businesses are required by the Internal Revenue Service (IRS) to utilize the Schedule C form each year to record their profit or loss for federal income tax purposes. To determine the owner’s total taxable income and any taxes owed, the data from this form is combined with other income, deductions, and credits on Form 1040 or 1040-SR (for seniors).
Who Must Utilize Schedule C?
The following two company categories utilize Schedule C:
- small enterprises or sole owners who haven’t registered as a different business type with their state.
- Owners of limited liability corporations (LLCs) with only one member (owner) who hasn’t chosen to file their business taxes as a corporation.
Prior to Beginning Schedule C Work
The first step in creating your Schedule C tax schedule is gathering your company’s annual financial data. You will require this information regardless of whether you hire a tax preparer or business tax software.
The Revenue and Loss Report
A profit and loss statement (P&L), also known as an income statement, determines your company’s net income by summing up all of your sources of income and deducting all of your business expenses. The majority of the information you’ll need for Schedule C is based on the information on this form.
Amounts you pay yourself as a business owner are not included. Not what you take out of the company for personal use, but your net business income is what you pay income tax on.
This form is available in all corporate software programs or applications, or you can customize an Excel template to fit your particular industry.
Data about the cost of goods sold
If your company sells things, the costs associated with purchasing, producing, and delivering those commodities are broken out into separate annual totals known as the “cost of goods sold.” You must know the cost of inventory at the start and end of the year in order to perform this calculation. You must also be aware of all the expenses, both direct and indirect, such as the price of labor, supplies, and materials. For further information on how to determine this cost, go to IRS Form 1125-A Cost of Goods Sold.
Vehicle Mileage Information
If you use your own vehicle or one owned by your company for work purposes, you can incur driving expenses. You must be ready to include these costs on Schedule C by being aware of the following:
- When did you buy and first use your car or other vehicle in (month/day/year)?
- Total distance traveled in the vehicle:
- business miles combined (deductible)
- (nondeductible) miles traveled for travel
- All other kilometers traveled are nondeductible.
On Schedule C, you’ll also be asked whether you have documentation to back up your deduction and whether that evidence is in writing. The IRS scrutinizes this deduction carefully. Make sure you have enough documentation to support your claim for driving miles.
Information Regarding Home Use for Business
Subject to certain conditions and restrictions, the area of your home that you use for business activities is deductible on Schedule C. It must be routinely utilized solely (no personal use allowed) and exclusively for your business, either as your main location or as a secondary building for stock or product samples.
You must first determine the percentage of your total home square footage that is devoted to your business in order to compute this deduction. Then, to determine the amount of the deduction, you can either use actual expenses or a simplified technique.
How to Finish Schedule C
There are five components to Schedule C, some of which must be filled out by all businesses and some of which are unique to particular business circumstances.
Identification and other details
Using the schedule that starts on page C-17 of the Instructions for Schedule C, enter the code for your primary place of business or profession in line B.
Enter your employer’s ID number in line D. (EIN).
Specify your company’s accounting procedure in Line F. (The majority of small enterprises employ cash accounting.)
In case your company suffers a loss, respond to the “material involvement” question on line G.
Line I: For payments you received, you might have been required to file one of many 1099 forms. The two that are issued most frequently are a 1099-NEC to non-employees and a 1099-MISC for other payments.
Section I: Earnings
To compute gross income on line 7, the process of recording income guides you through a number of different types of income:
- Gross sales or receipts.
- Absent refunds and allowances,
- less the cost of the products sold (from line 42).
- Moreover, additional sources of income, such as interest, refunds, and tax credits,
- To get a rough idea of your profit or loss, enter this information on line 29 and remove your total expenses (line 28) from it.
Part II: Prices
For tax-deductible business expenses, see this section. Each expense must be for your trade or business and meet the following criteria to be deducted on Schedule C:
- regular (consistent, accepted), and
- Necessary (helpful and appropriate)
Observations on a handful of the items on this list that are more typical
The car and truck expenses listed on line 9 correspond to the company driving miles you estimated.
Depreciation is an annual deduction for long-term assets that your company owns, such as automobiles, structures, machinery, and furnishings.
State income taxes and some employment taxes are included in the taxes and licenses on line 23, but federal income taxes are not.
With rare exceptions, line 24b meals are typically deducted at 50% of the cost.
Enter your calculation for your home office space using the simplified method on line 30. Enter your calculations for the actual expense method on Form 8829, and then affix it to your Schedule C.
Your net gain or loss is shown on line 31. (line 29, net profit or loss minus line 30). This is the amount you’ll use on your Form 1040 as your company’s net income.
There are prerequisites, restrictions, and limitations for each of these expense deductions. For more information, go to the Schedule C Instructions.
Schedule C excludes a significant business tax deduction for proprietors of independent contractors. On qualified business income, it is a 20% additional Eligible Business Income (QBI) deduction.To claim this deduction, submit IRS Form 8995, or ask your tax preparer for assistance.
Part III: Sales Prices
The total should be put on line 4 of page 1, and the information from your cost of goods sold calculation should be included here.
Part IV: Vehicle Specifications
For the purpose of calculating your business driving deduction, enter the data you gathered.
To determine the depreciation on business-owned automobiles, utilize Form 4562.
Other Expenses, Part V
The following are some typical extra costs:
- Bank charges
- Internet expenses
- Poor credit
- a fraction of your year-to-date business expenses.
Your Tax Return’s Schedule C Attachment
Depending on whether you have a profit or loss, adding your Schedule C information to your Form 1040 involves a number of processes.
Enter the amount on line 31 if you made a profit for the year, which occurs when your total income exceeds your total expenses (by deducting line 30 from line 29).After that, you must enter this data on
Line 3 of Schedule 1 on Form 1040, and
To determine how much self-employment tax you owe, use Schedule SE.
Add the sums from these two schedules, as well as your other income, to your Form 1040.
Before entering the loss on line 32 of Schedule C, there are a few procedures you must do if you experienced a loss for the year—that is, if your total expenses exceeded your total income. There are restrictions on how much loss you can sustain depending on a number of factors, such as whether you’re an active partner in your company or a passive investor.
To determine how much of your loss is allowable, you’ll need to complete IRS Form 6198 and perhaps other documents. Due to its complexity, this procedure should be carried out with a licensed tax professional’s assistance.
Questions and Answers (FAQs)
If I had no income this year, do I still need to fill out Schedule C?
You are not required to submit a Schedule C for the year if your small business had no revenue or outlays. However, you must submit Schedule C to report those payments if your firm is dormant and you have received any payments (from insurance, for instance) connected to it.
Can I finish Schedule C by myself?
You might be able to finish this form on your own if you have a straightforward Schedule C and are capable of following the directions. However, it’s better to seek assistance if you have a loss or intricate deductions, such as cost of goods sold. To ensure you don’t overlook anything and that you are claiming the maximum number of deductions to minimize your tax burden, seek out a licensed tax professional or use company tax software.
What is meant by “contract labor”?
Contract workers are people who do work for your company but aren’t really employees. Independent contractors, independent workers, and other employees that get a 1099-NEC from you can fall under this type of employee. Exclude any payments you made to:
- Employees, including those who receive tips and those who work part-time on line 26,
- For legal counsel, CPAs, or other experts you paid on line 17.
- Contractors you paid on line 21 for upkeep or repairs
- Additional employees you paid for other costs on line 27a.
- Cost of labor is accounted for on line 37 in the cost of goods sold.
Self-employment tax: What is it?
Small business owners must pay self-employment tax in order to cover their share of Social Security and Medicare costs. The tax for small enterprises is computed on Schedule SE based on the owner’s Schedule C net earnings.
The overall tax is 15.3 percent, which includes 12.4 percent for Social Security and 2.9 percent for Medicare. Both employers and employees are responsible for paying these taxes. The employer portion of this tax can be deducted, so the remaining half, or 7.65 percent, is taxable income.