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 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 tax reporting purposes.
After you complete a Schedule C, you must include the resulting income number on your personal tax return, adding it to any income you received from other sources.
How to Use and File Schedule C
The information from Schedule C showing the net profit — or loss — of your business is entered on line 12 of Form 1040, as well as on Schedule SE which is used to determine self-employment tax. You must include Schedule C with the rest of your tax return when you file it with the IRS.
Information You'll Need 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.
Calculating 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. This information appears on line 34.
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 derives from selling services, such as if you do consulting work, 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
List 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 Forms 1099-MISC.
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
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 auto expenses on line 9, you must provide additional information to substantiate 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. Be sure you can answer "yes."
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.
Calculating Your Net Profit
The final calculation is for net profit. Subtract the total expenses entered on line 28 from your gross income on line 7, 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.
Schedule C on 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.
Calculating Self-Employment Tax
The total net profit on line 31 of your 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 Ventures
A qualified joint venture is an LLC that's owned by you and your spouse. It can be treated as a sole proprietorship for tax purposes. In this case, both spouses must complete separate Schedule C forms. The requirements for qualified joint ventures are outlined in the instructions for Schedule C.
Using a CPA to Complete Schedule C
If your business is fairly simple and you aren't selling any products so you don't have to deal with the cost of goods sold, you might be able to complete Schedule C yourself, but be very sure you've met all the rules for deducting various business expenses. It's best to consult a qualified tax preparer for a more complicated return.
The above instruction on Schedule C is provided for general information purposes only and is not intended to be tax or legal advice. Even if you have a simple business tax return, it might make sense to have a tax preparer look at your Schedule C to make sure you didn't miss anything.