The IRS Schedule C form is the most common business income tax form for small business owners. The form is used as part of your personal tax return. For 2019 and beyond, you may file your income taxes on Form 1040. The 1040-SR is available for seniors (over 65) with large print and a standard deduction chart. (Form 1040-EZ and Form 1040-A are no longer available.)
Using Schedule C for Business Taxes
Several business types use Schedule C to report their business taxes:
Sole proprietors are sole owners of businesses that have not registered with a state as another business form – LLC or corporation. These businesses pay tax using Schedule C report business income.
A single-member LLC business pays tax using Schedule C if the business has not elected to pay tax as a corporation or S corporation.
A husband-wife business organized as a partnership may become a Qualified Joint Venture and pay tax using two Schedule C forms instead of using the more complicated partnership form. There are restrictions and qualifications for this election.
The Schedule C Process: An Overview
- The process for completing Schedule C begins with gathering information.
- Complete the form, adding information and doing the calculations.
- This process will give you a net income or loss amount for your business. Add this amount to your personal tax return, along with other income you received during the year.
- You will also need to calculate self-employment tax payable (Social Security and Medicare for small business owners) if you had income (not a loss) for the year. Add the self-employment tax liability to your tax return.
Changes to Schedule C with 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.
- The regulations for taking business losses have changed, and the tax loss carryback has been eliminated.
Before you try to tackle Schedule C on your own, consider using one of the business tax software programs available, either online or in download form. They will walk you through a set of questions to make sure you don't miss anything important. These programs will also include your Schedule C on your personal tax return.
Steps to Completing Schedule C
Step 1: Gather Information
Business income: You'll need detailed information about the sources of your business income. Include returns and allowances.
Prepare a detailed Profit and Loss statement (Net Income statement) to give your tax preparer or to use in preparing your Schedule C. Your business accounting program should have this form. It's easy to transfer information from this form to your Schedule C.
Cost of goods sold: If you have an inventory of products for sale, you'll need to gather information for this calculation. You will need:
- Your inventory valuation method
- Inventory value at the beginning of the year
- inventory value at the end of the year
- Cost of labor, materials, and supplies.
Business expenses: Gather information on all business expenses (they should be in your Profit and Loss statement). Include:
- Phone, utilities, computer expenses, and other office expenses
- Business insurance, like insurance on your business property, and disability insurance,
- Supplies, including office supplies
- Wages you paid. and payments you made to non-employees
- Interest on loans, leases, mortgages, and other business debts
- Meal expenses may only be deductible at 50%. Entertainment expenses are no longer deductible.
- Some expenses are difficult to categorize on a tax return. This is a place for miscellaneous expenses like petty cash on your business tax return, so don't hesitate to include all of these hard-to-categorize items.
The more legitimate business expenses you include, the lower your tax bill. Don't forget these commonly missed business tax deductions.
Step 2: Calculate Gross Profit and Income
Now that you have information on your income and the cost of goods sold, you can calculate your business income and gross profit.
Include the calculations for the cost of goods sold. You will have to go to Part III-Cost of Goods Sold to do the calculation. Then add the total in the Income section on Line 4.
- 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 that you can deduct are listed alphabetically on lines 8 through 27.
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, 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.
Step 4: Include Other Expenses and Information
Line 30—business use of your home: If you work from home, you have two options for including information regarding the expense for business use of your home:
- Option A involves completing Form 8829, by calculating the total area of your home and getting a percentage for your home business. 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 $1,500 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.
Part IV—information on your vehicle: This is an information section, with no calculation to add to your Schedule C. You'll need to include information here about business driving mileage, commuting mileage, and other driving mileage.
Line 47a asks if you have evidence to support your deduction. Be sure you are keeping excellent records of business miles traveled and business purpose, in case of an audit. This article on an easy way to keep track of business miles might be helpful.
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.
Step 5: Calculate Your Net Income
The final calculation is for net income:
- Enter total expenses on Line 28 and subtract this amount from Line 7 to get your tentative profit on Line 29.
- Then subtract the expenses for the business use of your home on line 30 to get your net profit or loss on Line 31.
And 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, on Lines 32a and 32b (Most small business owners have full risk if they participate fully in the business). You may have to file Form 461 Limitation on Business Losses if you have a business loss.
Finally, Add Schedule C to Your Tax Return
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.