How to Complete Schedule C, Step by Step
This Schedule Calculates Net Profit or Loss From Certain Businesses
The IRS Schedule C form is the most common business income tax form for small business owners. It's used to report income for a sole proprietorship or single-member limited liability company (LLC). A sole proprietorship reports its business income by completing a Schedule C and including the resulting net income figure on the owner's personal tax return. A single-member LLC is considered a sole proprietorship for business tax reporting purposes.
After you complete a Schedule C, you must include the resulting net income amount on your personal tax return, adding it to any income you received from other sources, including self-employment tax payable (Social Security and Medicare for small business owners).
Changes to Schedule C from the New Tax Law
The 2017 tax law (effective for 2018 taxes and beyond) made several changes that affect your business income tax and the way you file Schedule C.
- You may be able to use the cash method of accounting and to be exempt from counting inventory and deduct certain expenses instead of depreciating them.
- You may be eligible for the Qualified Business Income (QBI) deduction, and extra 20% deduction in addition to deducting the usual business expenses.
- You can no longer deduct entertainment expenses and the deductions for business meals have changed.
These and other changes to the tax law and Schedule C are complicated. Check with your tax professional before you make any decisions about completing this form or taking these deductions.
Step #1 - Gather Information to Complete Schedule C
You must identify the principal profession you or your business engages in, as well as the name and address of your business if it's different from your own. You'll need the Employer ID number of your business or your Social Security number, and you must state whether the business operates on a cash accounting or accrual accounting basis.
You'll also need your business income and expenses for the year. This includes income from products or services, returns and allowances, and other income such as tax credits or refunds. It also includes expenses from all sources, as long as they relate to the business.
Step #2 - Calculate Business Income
To calculate your business income, you first need to include gross receipts or sales on Line 1. Then include returns and allowances, which are subtracted from Line 1.
Then subtract cost of goods sold (explained below), and you'll have your gross profit.
Add other income, like interest income, to get your total Gross Income on Line 7.
Calculate Cost of Goods Sold
You'll find the calculation of COGS is in Part III, lines 33 through 42. You'll also need to know the ending inventory valuation method that was used in your business.
You'll need your beginning inventory, what additional goods were produced or purchased, inventory that was sold or disposed of, and your ending inventory.
If your income comes from selling services, such as if you are a consultant or professional, you won't have to calculate the cost of goods sold or deal with this section. Your gross income and your gross profit would be the same unless you have tax credits or other income sources.
You can ask for help from your CPA or tax adviser to calculate COGS if needed.
Calculate Your Gross Profit and Income
Now that you have information on your income and the cost of goods sold, you can calculate your gross profit as follows:
Gross receipts from sales - Returns and allowances = Net receipts
Net receipts - Cost of goods sold = Gross Profit
Gross Profit + Other income from tax credits or other sources = Gross income
Step #3 - Include Your Business Expenses
Business expenses which you can deduct are listed alphabetically on lines 8 through 27.
They include advertising, vehicle expenses, commissions and fees paid to salespeople and agents, and contract labor, which includes contractors for whom you filed a Form 1099-MISC to show what you've paid them.
You can also deduct costs associated with the rental or lease of vehicles or other business equipment, costs of repair and maintenance, supplies, taxes and licenses, travel expenses, meals and entertainment, utilities, and wages.
Line 27 is for "other" expenses. They include bank fees, uniforms, and clothing, dues for clubs and organizations, internet and website charges, books, magazines, and software, phone and cell phone costs.
Use this complete list of Business Tax Deductions from A to Z to make sure you didn't miss a deduction.
Many of these business expenses have restrictions or conditions that must be met before they can be deducted, so check with a tax professional before you submit your return.
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 federal and state workers compensation insurance are all deductible expenses.
If you claimed a deduction for driving expenses on line 9, you must provide additional information to prove your deduction for business use of your vehicle. Information on company-owned vehicles and other assets owned by the business is captured in Part IV, lines 43 through 47. Line 47 asks if you can provide evidence to support your deduction.
Part V allows you to provide more detail on other expenses you're 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 through 26. The total of these other expenses goes on line 27.
Business Use of Your Home
You have two options for including information regarding the business use of your home:
- Option A involves completing Form 8829. Include the total allowable expenses resulting from those calculations on line 30 of Schedule C.
- Option B is a simplified calculation: $5 per square foot of home business space up to 300 square feet for a maximum $1500 deduction. Enter this information in the appropriate sections of line 30. You can only use space that is used regularly and exclusively for your business regardless of how you calculate the deduction.
Step #4 Calculate Your Net Income
The final calculation is for net income:
Enter total expenses on Line 28 and subtract this amount from Line 7 (tentative profit).
Then subtract the expenses for the business use of your home on line 30 to get your net profit or loss. This number is what you must report on your income tax return, Form 1040.
If You Have a Business Loss
If your Schedule C shows that you have had a business loss,(expenses are greater than income) you must show whether your loss is at risk or not. (Most small business owners have full risk if they participate fully in the business). Read more about business losses and how they affect your business taxes.
Finally, Add Schedule C to Your Personal Tax Return
Beginning in 2018, carry the net profit/loss online from line 31 of your Schedule C to Schedule 1, line 12 of your Form 1040. Add or subtract your income or loss from this business to other income or losses from other businesses, but do not include any wages from an employer.
Don't Forget Self-employment Tax
A Special Case for Two-Spouse Businesses
A qualified joint venture is a partnership that's owned by you and your spouse. It can be treated as two sole proprietorships for tax purposes. In this case, both spouses must complete separate Schedule C forms. Read more about how to meet the requirements to be a qualified joint venture.
This information on Schedule C is an overview of the form for general information purposes only, It should t intended to be detailed information on how to complete the form, and it's not tax or legal advice. Even if you have a simple business, you might be missing something that could save you money. Use business tax preparation software or get a tax professional to help you complete this form and other business tax forms.