Schedule C is an important tax form for sole proprietors and other self-employed business owners. It’s used to report profit or loss and to include this information in the owner’s personal tax returns for the year. In 2018, the last year reported, more than 27 million small business owners filed their tax returns using Schedule C.
This article explains Schedule C and gives details on how to complete and file this form.
- Sole proprietors and single-owner limited liability companies (LLCs) use Schedule C to calculate their business net income (profit or loss) for the year.
- The business owner adds the net income from Schedule C to their Form 1040/1040-SR, along with personal income, deductions, and credits.
- You can deduct expenses like business driving and home business costs on Schedule C.
- Businesses that make and sell products can deduct these costs as the cost of goods sold.
- Some business losses may be limited in some circumstances.
What Is Schedule C?
The Internal Revenue Service (IRS) requires many small businesses to use Schedule C Profit or Loss From Business to report their profit or loss for federal income tax purposes each year. The information from this form is included with the owner’s other income, deductions, and credits on Form 1040 or 1040-SR (for seniors) to calculate the person’s total taxable income and any tax due.
Who Should Use Schedule C?
The two business types that use Schedule C are:
- Sole proprietors or small businesses that haven’t registered with their state as another business type.
- Owners of single-member (owner) limited liability companies (LLCs) that haven’t elected to file their business taxes as a corporation.
Before You Start Working on Schedule C
Gathering your business financial information for the year is the first step in preparing Schedule C. Even if you use a tax preparer or business tax software, you will need this information.
Profit and Loss Statement
A profit and loss statement (P&L), sometimes called an income statement, calculates the net income of your business by adding up all your sources of income and subtracting all your business expenses. The information on this form is the basis for most of the information you’ll need for Schedule C.
Don’t include amounts you pay yourself as a business owner. You pay income tax on your business net income, not what you take out of the business for personal use.
All business software programs or applications have this form, or you could use an Excel template and tailor it to your specific business.
Information for Cost of Goods Sold
If your business sells products, the cost of buying, making, and shipping those products is calculated separately to get a total for the year, called cost of goods sold. For this calculation, you’ll need to know the cost of inventory at the beginning and end of the year. You will also need to know all of the direct and indirect costs, including the cost of labor, materials, and supplies. See IRS Form 1125-A Cost of Goods Sold for more details on how to calculate this cost.
Information About Vehicle Mileage
You may have business driving costs for driving your own car or one owned by your business. To prepare for including these costs on Schedule C, you’ll need to know:
- When (month/day/year) you bought and started using your car or other vehicle
- Total number of miles you drive the car
- Total business miles (deductible)
- Total commuting miles (nondeductible)
- Total other miles driven (nondeductible)
You’ll also have to answer questions on Schedule C about whether you have evidence to support your deduction and whether this evidence is in writing. The IRS looks closely at this deduction, so make sure you have adequate evidence for claiming driving miles.
Information About Business Use of Your Home
The space in your home that you use for business purposes is deductible on Schedule C, with several qualifications and limitations. It must be used exclusively (no personal use) and regularly for your business, either as your principal place of business or as a separate structure for storing inventory or product samples.
To calculate this deduction, you will first need to find the percentage of your total home square footage that’s used by your business. Then you can use either actual expenses or a simplified method for calculating the deduction amount.
Steps To Complete Schedule C
Schedule C has five parts, some of which must be completed by all businesses and some parts that are specific for certain business situations.
Identification and Other Information
Line B: Your principal business or professional activity code, using the schedule beginning on page C-17 of the Instructions for Schedule C.
Line D: Enter your employer ID number (EIN).
Line F: Enter your business accounting method. (Most small businesses use cash accounting.)
Line G: Answer the question about “material participation” in case your business has a loss.
Line I: You may have had to file one of several 1099 forms for payments you made. The most common are a 1099-NEC to nonemployees and 1099-MISC for miscellaneous payments.
Part I: Income
The process of recording income walks you through several types of income to calculate gross income on line 7:
- Gross receipts or sales
- Minus returns and allowances
- Minus cost of goods sold (from line 42)
- Plus other types of income, including interest, refunds, and tax credits
You’ll enter this information on line 29, subtracting total expenses (line 28) from this number to get a tentative profit or loss.
Part II: Expenses
This section is for tax-deductible business expenses. To be deductible on Schedule C, each expense must be for your trade or business and be:
- Ordinary (common and accepted), and
- Necessary (helpful and appropriate)
Some notes on a few of the more common items on this list:
- Line 9 car and truck expenses are those you calculated as business driving miles.
- Depreciation is a yearly deduction on long-term assets owned by your business, like vehicles, buildings, equipment, and furniture.
- Line 23 taxes and licenses include state income taxes and certain employment taxes, but not federal income taxes.
- Line 24b meals are usually deductible at 50%, with some exceptions.
Use line 30 to enter your calculation for the simplified method for your home office space. Use Form 8829 to enter your calculation for the actual expenses method and attach it to your Schedule C.
Line 31 is your net profit or loss (line 29 net profit or loss minus line 30). This is your business’s net income, the number you’ll use on your Form 1040.
All of these expense deductions come with qualifications, limitations, and restrictions. See the Instructions for Schedule C for more details.
An important business tax deduction for self-employed business owners isn’t included on Schedule C. It’s a Qualified Business Income (QBI) deduction of an additional 20% on qualified business income. Use IRS Form 8995 to apply for this deduction, or get help from your tax preparer.
Part III: Cost of Goods Sold
Here’s where you include the details from your calculation of cost of goods sold, with the total to be entered on line 4 on page 1.
Part IV: Information on Your Vehicle
Enter the information you collected to calculate your business driving deduction.
Form 4562 is used to calculate depreciation on vehicles owned by your business.
Part V: Other Expenses
Some common additional expenses are:
- Bank fees
- Internet costs
- Bad debts
- A portion of startup costs for a business you started during the year
Adding Schedule C to Your Tax Return
There are several steps to adding your Schedule C information to your Form 1040, depending on whether you have a profit or a loss.
If you have a profit for the year—that is, if your total income is greater than your total expenses (by subtracting line 30 from line 29)—enter the amount on line 31.
Then you must enter this information on:
- Schedule 1 (line 3) of Form 1040, and
- Schedule SE to calculate the amount of self-employment tax you owe
Add totals from these two schedules to your Form 1040, along with your other income.
If you had a loss for the year—that is, your total expenses were greater than your total income—you must follow some steps before entering the loss on line 32 of Schedule C. There are limits to the amount of loss you can take in certain circumstances, including whether you are a passive investor or an active part of your business.
You’ll need to complete IRS Form 6198 and possibly other forms to see how much of your loss is allowed. This process is complicated and should be done with the help of a licensed tax professional.
Frequently Asked Questions (FAQs)
Do I have to complete Schedule C if I didn’t make any money this year?
If your small business had no income or expenses during the year, you don’t need to file a Schedule C for that year. But if your business is inactive and you received any payments (from insurance, for example) that relate to your business, you must file Schedule C to report those payments.
Can I complete Schedule C on my own?
If you have a simple Schedule C and can follow the instructions for this form, you may be able to complete it on your own. But if you have a loss or complicated deductions, like cost of goods sold, it’s best to get help. Look for a licensed tax professional or use business tax software so you don’t miss anything and you get the maximum number of deductions to keep your tax bill low.
What does “contract labor” mean?
Contract laborers are individuals who work for your business and are not employees. This category of workers can include independent contractors, freelancers, or other workers who receive a 1099-NEC from you. Do not include amounts you paid to:
- Employees, including tipped employees and part-time employees on line 26
- Attorneys, CPAs, or other professionals you paid on line 17
- Contractors you paid for repairs or maintenance on line 21
- Other workers you paid for other expenses on line 27a
- Cost of labor included in cost of goods sold on line 37
What is self-employment tax?
Self-employment tax is the tax paid by small business owners for Social Security and Medicare taxes. For small businesses, the tax is calculated on Schedule SE and is based on the owner’s net earnings on Schedule C.
The total amount of this tax is 15.3%—12.4% for Social Security and 2.9% for Medicare—the same amount paid for these taxes by employees and employers. You can take a deduction for half of this tax (the employer portion), so the taxable amount is half, or 7.65%.