How To Complete Schedule C, Step by Step

Preparing Schedule C
Preparing Schedule C. Getty Images

Schedule C is the most common business income tax return. It is used to report business income (net profit) for a sole proprietorship or single-member limited liability company (LLC). A sole proprietorship reports its business income by completing Schedule C and including the net income on the owner's personal tax return (on Form 1040/1040A/1040EZ). For purposes of reporting taxes, a single-member LLC is considered a sole proprietorship.

After you complete Schedule C you will include the income on your personal tax return, adding it to other income you receive from other sources. 

Time Required: Several hours, depending on complexity of your business

Where and how to file Schedule C

The information from Schedule C showing the net profit of the business is included on Line 12 of the individual's Form 1040, and on Schedule SE (to determine self-employment tax). Schedule C is included with the tax filing for the individual income tax return.

Information Needed to Complete Schedule C

General information needed to complete this form includes:

  • Principal business or profession
  • Name and address of business (if different from owner's name)
  • Employer ID Number of the business, or Social Security Number of owner
  • You will need to know if the business operates on a cash accounting or accrual accounting basis. If you are not sure which one to choose, read the article on Cash vs. Accrual accounting and talk with your tax adviser.

    Information on income: Collection information on your business income, including income from products or services, returns and allowances, and other income (tax credits or refunds, for example).

    Calculate Cost of Goods Sold

    To calculate Cost of Goods Sold, you will need to know:

    The calculation of COGS is in Part III, lines 34-42.

    You will also need to know the ending inventory valuation method (line 33). You will probably need help from your CPA or tax adviser for this section.

    • Beginning inventory
    • Additional goods produced or purchased
    • Inventory sold or disposed of
    • Ending inventory.

    Calculate Your Gross Profit

    Now that you have information on your income and cost of goods sold, you can calculate Gross Profit. The calculation is:

    • Gross Receipts from sales
    • Less returns and allowances
    • Equals Net Receipts
    • Less Cost of Goods Sold
    • Equals Gross Profits
    • Plus other income (from tax credits or other sources
    • Equals Gross Income

    List Business Expenses

    Business expenses which you may deduct are listed alphabetically on lines 8-27. They include:

    Tips to Help You Complete Schedule C

    Wages and other payroll expenses: Wages, salaries, and payroll tax expenses are deductible costs. The total wages paid, the employer portion of FICA taxes (Social Security and Medicare), unemployment insurance, and workers compensation insurance (federal and state), are all deductible expenses.

    Vehicle expenses: If you claimed a deduction for auto expenses on line 9, you will need to provide additional information to substantiate your deduction for business use of your car/truck.

    Information on company-owned vehicles and other assets owned by the business is captured in Part IV (lines 43-47). Note that on line 47 you are asked if you can provide evidence to support your deduction. Be sure you can answer "yes." Information on other business assets

    Other expenses: Part V allows you to provide more detail on other expenses you are deducting. This is the place to include your cell phone, internet provider, and website expenses, as well as bank charges and other miscellaneous expenses. Try to fit as many of these as possible within lines 8-27. The total of these other expenses goes on line 27.

    Business use of home: Beginning with 2013 taxes, you have two options for including information on business use of your home. Option A: complete Form 8829 and include the total allowable expenses on line 30 of Schedule C. Option B: Use a simplified calculation, which is currently using $5 per square foot of home business space times the square footage, up to 300 sq. ft., for a maximum $1500 deduction, on line 30. Read more about the simplified deduction method.  For either deduction method, you may only use space that is used regularly AND exclusively for your business.

    Calculating net profit: The final calculation is for Net Profit. Subtract the Total Expenses on Line 28 from Gross Income on Line 7. Then subtract Expenses from Business Use of your home (line 30), to get the Net Profit/Loss. This number is what you must report on your income tax return.

    Filing the Schedule C: When you have completed Schedule C, take the Net Profit/(Loss) from Line 31 to your Form 1040, Line 12. Add/subtract your income from this business to other income from other businesses (not your wages from an employer).

    Calculating self-employment tax: The total Net Profit from the Schedule C is also used to calculate self-employment taxes to be paid by the owner of the business. If the business has a loss, no self-employment tax is owed. Self-employment tax is calculated on Schedule SE.

    Qualified joint venture: A Qualified Joint Venture is an LLC owned by you and your spouse, which may be treated as a sole proprietorship for tax purposes. In this case, both spouses must complete a separate Schedule C. The requirements for this "Qualified Joint Venture" are outlined in the instructions for Schedule C.

    Sales of services: If your income is from selling services, like consulting, you will not have to calculate cost of goods sold. In this case, your gross income and your gross profit are the same (unless you have tax credits or other income sources).

    Limits on deductions: Note that most business expenses have restrictions on their deductibility or conditions that must be met before they can be deducted. 

    Do I Need a CPA to Complete Schedule C? 

    If your business is fairly simple, and you aren't selling any products (and have to deal with cost of goods sold), you might be able to complete Schedule C yourself. For a more complicated return, it's best to have a qualified tax preparer do it. 

    Important Disclaimer:

    I am not a CPA or tax attorney and the information on Schedule C is provided for general information purposes and is not intended to be tax or legal advice. Even if you have a simple business tax return, it's always good to have a tax preparer look over your Schedule C to make sure you didn't miss anything.