If you operate a sole proprietorship or single-member limited liability company (LLC), tax time can be worrisome, especially if you’re doing your own taxes.
Before the cold sweat and anxiety of tax season gives you a clammy embrace, make sure you know what you need to complete your Schedule C Tax Return.
A little preparation and you’ll likely find there’s nothing much to worry about.
What is the Schedule C Form?
At its core, the Schedule C is nothing more than a profits and losses worksheet for sole proprietors and single-member LLCs (as long as the LLC hasn’t elected to be taxed as a corporation).
Before jumping into the details of Schedule C, it’s important to note that if you have $5,000 or less in business expenses, you may be able to file a Schedule C-EZ instead. Schedule C-EZ is a similar but much simpler form. It’s worth taking a moment to look at the list of requirements at the top of the form to see if your business qualifies.
The rest of this article, however, focuses on the more complex Schedule C.
Your Schedule C should be filed as an attachment to your personal income return. The form is longer than the EZ, but at only two pages, it’s far from the longest one the IRS has to offer. If you’ve never filed a Schedule C, you’re bound to feel confused by some of the language you encounter. But have no fear.
All you’ll find here is an explanation of what the Schedule C requires in the simplest language possible, so you can be prepared when it’s time to file. Ready? Let’s go.
General Business Information
Lines A Through E
These lines are pretty straightforward. For Lines A and B, you’ll describe what your business does and pick a 6-digit code from the instructions that best describes your main business activity.
The rest is simple contact information: your business’s name, address and EIN. An EIN is a federal tax ID number (if you don’t have an EIN, just leave the space blank.)
Lines F Through J
If you’re not well-versed in IRS linguistics, Lines F through J might be a little tricky. Here’s a quick interpretation:
You’ll have to select your accounting method. In the cash method, the income isn’t counted until cash or check is received for your services or products. The accrual method is used when you count income when services are rendered, orders are place, or some other transaction occurs, but you have not yet received any money.
For further explanation, see Schedule C Instructions.
Did you materially participate in the operation of this business? Most businesses will mark “yes.” As a sole proprietor or single-member LLC, it would be unusual not to play a substantial role in business operations.
The exceptions tend to be if you’re solely an investor, your business is a rental activity (like leasing equipment), or employees or contractors did the majority of the work. If you mark “no,” you should see the instructions for further clarification.
Is your business new (or new to you) this year? If so, tick this box.
Do you need to send any 1099s? In general, if you paid any contractors more than $600 throughout the year, you must send them a 1099. The deadline to send out these 1099s is January 31.
Your answer on Line I will determine your answer to Line J: if you owe 1099s, make sure you send them.
Next, the real work begins.
Part I: Income
Here, you’ll begin with your gross sales receipts. This line once had multiple subheadings but has been reduced to one simple line. That means you need to calculate your business’s sales receipts total for the year and write it in Line 1.
Returns and Allowances:
If you sold merchandise and you had a return policy in place where customers could return these goods for refunds, this line is the total amount refunded (if you included the original sales in Line 1).
Cost of Goods Sold:
If your business doesn’t manufacture or buy and resell merchandise, then you’ll leave Line 4 blank, and you won’t need to complete Part III of the Schedule C Form. If your business does manufacture or buy and resell merchandise, then you’ll need to complete Part III first and enter the amount on Line 42.
If your business doesn’t sell or manufacture merchandise, your gross profit will be the same number as indicated on Line 1.
Do not include any income from the sales of your business’s products or services—those all belong on Line 1. Things that may be included here are items like: interest from checking and savings accounts, bad debts written off last year but collected on this year, any prizes or awards, or federal or state gasoline tax credits or refunds.
Unless your business had “other income,” your gross profits will be the same as your gross income. Enter your gross income on Line 7.
Part II: Expenses
With business expenses, you should abide by these two rules: If an expense doesn’t come with a receipt, write it down. If you have a receipt, keep it. Why? Not only do you want to be able to accurately capture your profit margin, but also because of Part II. This section is where all the time you spent tracking receipts, mileages, paid invoices, tips, parking, and other business expenses throughout the year really pays off.
Lines 8 through 27 are all different kinds of expenses.
- Legal fees
- Mileage (complete Part IV to calculate)
- Employment benefit programs
- Interest paid on mortgages
- Office expenses
Include as many other expenses you can deduct. Each deduction type has its own restrictions, of which there are too many to concisely list here (see the link to the Schedule C instructions above). While calculating your expenses, here is the most important rule:
If you don’t have proof of an expense (bank statements, receipts, handwritten notes, mileage forms, or any other kind of written proof), do not deduct the expense. Should you be audited, you’ll need hard proof of your expenses. Otherwise, you may face costly penalties.
Once you’ve included all your expenses, you add them together and enter the total on Line 28.
To find your tentative yearly total, subtract the amount on Line 28 (expenses) from the amount on Line 7 (gross income). The remainder will be your net profit (fingers crossed) or your loss. This number goes on Line 29.
You have one final expense to account for on Line 30: the home office expense. As of 2014, you can use the IRS’s simplified calculation method. In this method, you multiply $5 by each square foot of your home office to find your total expense. If you choose not to use the simplified method, the IRS offers a separate form to calculate this expense (Form 8829).
No matter which option you choose, the space you qualify as being work space needs to be used “exclusively” for business purposes. This means if your home office is set up at your kitchen table, it will likely not meet the IRS’s standards of exclusivity.
After calculating your home office expense and entering the total on Line 30, you’ll subtract Line 30 from Line 29. This number is your total net profit or loss.
You Made a Profit:
Enter that number onto Line 12 of your Form 1040 tax return and attach your Schedule C. Your net profit will also be referred to on several other IRS forms as “earned income through self-employment.” You will need to complete Schedule SE to calculate your self-employment tax (enter your net profit onto Line 2 of Schedule SE).
You Show a Loss:
Before you enter the amount on Line 31, you need to check either Box 32a or 32b. If you are not liable for the business’s losses (through nonrecourse loans or “stop loss” procedures), you’ll need to check 32b and complete Form 6198 to determine the amount you can deduct.
If you are liable for the losses (which is more likely), check Box 32a. Carry over the amount of your loss from Line 31 to Line 12 of your Form 1040 tax return.
Parts III, IV, and V:
These sections of Schedule C are not mandatory for all filers. You’ll only need to complete these sections if they apply to your business. Parts III, IV and V are essentially worksheets that help you calculate totals for specific questions in Parts I and II.
Part III pertains to the “Cost of Goods Sold” in Part I (Line 4). If your business doesn’t manufacture goods or buy and resell merchandise, you can leave Part III blank. If this part does pertain to your business, you will need to count inventory and invoices for goods. This section is straightforward as long as you’ve tracked your inventory closely.
Part IV concerns the vehicle expenses in Part II (Line 9). Throughout the year, it’s great to get in the habit of tracking miles on paper. Part IV asks if you have written proof of your vehicle expenses. It may be difficult to prove these expenses if you do not keep written records.
Part V is a list of additional expenses not covered in Parts II, III, or IV. Such expenses might include: Internet-related expenses like domain names, subscriptions to professional or trade journals, membership fees for chambers of commerce or trade associations, service charges, and overdrafts or other fees associated with business bank accounts and business credit cards.
Again, keep receipts of all such expenses. Total these other expenses on Line 48 and enter that number on Line 27a in Part II.
The Finish Line
Once you’ve added your profits or losses to Line 12 of your personal tax return (Form 1040), you’re done with Schedule C for the year. Congratulations! But wait, that doesn’t mean you’re totally finished. Below you’ll find a list of forms you may need to attach and complete before you’re totally done with your tax return.
- Schedule SE: If you show a profit, you’ll need to calculate your self-employment tax
- Form 6198: If you show a loss but are not personally liable for your business losses, you’ll need to complete this form
- Form 3800: This form may allow you to claim general business tax credits
There are also several other forms that may pertain to your particular business (you can find those in the IRS’s Schedule C instructions).
Once you’ve completed your tax return, attach all forms, send it, and then take time to relax. You deserve it!