Schedule C - Profit or Loss for Form 1040
Answers to Your Questions about Schedule C
Schedule C is an important tax form for small business owners. This article answers questions about this form and gives you the latest changes to the form.
What is Schedule C?
What Businesses Use Schedule C?
Schedule C is part of your income tax return (Form 1040). It is used by several types of businesses:
Sole proprietors (single owner businesses) are the default business type. If you have a business that you own by yourself and it is not registered with your state as a specific type of business entity, you’re a sole proprietor.
Single-member limited liability companies (LLCs) use Schedule C if they have not elected to pay income taxes as a corporation or S corporation.
Qualified Joint Ventures are husband-wife partnerships who both actively participate in their business with no owner owners and who file a joint tax return. They can qualify to file two Schedule C forms instead of the more complicated partnership tax return.
What's New with Schedule C?
The 2017 Tax Cuts and Jobs Act has made several changes to small business taxes that you should know about before you work on this form. If you are having a tax preparer work on your Schedule C, be sure to add these items to your discussion. These changes are all for tax years beginning with 2018.
Accounting method. If you have been using the accrual accounting method, you may be able to switch to cash accounting, if you meet certain requirements.
Entertainment expenses. You may no longer deduct entertainment expenses. You may still deduct 50% of meal expenses if they are separate from entertainment, with some exceptions for meals provided at your business location.
Business losses. Your ability to claim business losses on your tax return has changed and you can no longer carry back losses to a previous year. These regulations are complicated. Read more about claiming business losses and about changes to the net operating loss carryover and talk to your tax professional.
What Other Recent Changes Do I Need to Know About?
Simplified Home Business Deduction. If you have a small space for your home office, you may be able to use a simplified method to calculate home office expenses for your Schedule C. The calculated rate is $5 a square foot up to 300 square feet for a maximum $1,500 deduction.
A worksheet is provided and the calculation is entered on line 30 of Schedule C. You may need to calculate the deduction both ways (simplified vs. regular) to which gives you the larger deduction.
Qualified Business Income (QBI) Deduction. A new business tax deduction is available to small business owners, beginning in the 2018 tax year and beyond. Called the Qualified Business Income (QBI) deduction, it allows small businesses to take a 20% deduction in addition to deducting regular business expenses. There are, of course, qualifications and limitations so check with your tax professional. The deduction is calculated on a separate form and added to your Form 1040.
Can I Use Schedule C-EZ?
Schedule C-EZ is no longer in use. For the 2019 tax year and future tax years, you will need to use Schedule C.
Must I File a Separate Schedule C for Each Business I Own?
You must file a separate Schedule C for each business you own, showing the income and deductions from income for that particular business.
What Information Do I Need to Complete Schedule C?
You will need the following information to complete your Schedule C:
- A profit and loss statement, sometimes called an income statement, for the tax year
- A balance sheet for the tax year
- Statements relating to the purchase of any business assets during the tax year, including vehicles, equipment, and property (land and buildings)
- Information on inventory to prepare a cost of goods sold calculation if your business sells products
- Details on travel and car/truck expenses, meal expenses, and home business expenses.
What is the Process for Completing Schedule C?
To complete Schedule C, follow the sections:
Part I Income. If you sell products and have an inventory, you will need to complete the Cost of Goods Sold (COGS) section (Part III of the form) to calculate the cost of products or parts. Then include all other income, and subtract returns and allowances and cost of goods sold to get Gross Income.
Enter the total from your Cost of Goods Sold calculation in Part III in Line 4 of Part I.
Part II Expenses. Include all of your deductions for business expenses. If you have a vehicle that you drive for business use, use Part IV to calculate this deduction. If you use a part of your home for business, you will need to use IRS Form 8829 for the calculation of this deduction, or you may be able to use a simplified calculation.
Complete Part I and Part II up to Line 29.
Line 30 is the calculation for the business use of your home. Do this calculation and get to a total for this Line.
Part III Cost of Good Sold. In this part, you'll include information on your inventory valuation and run through the COGS calculation.
Part IV Information on Your Vehicle. If you are claiming car or truck expenses for your business, you will need to include information about:
- When you bought the vehicle and placed it in service (began using it),
- Your total business, commuting, and other mileage for the year,
- Information about your personal use, and
- Whether you have evidence to support your deduction.
If you bought a car or truck and you are depreciating it, you'll also need to complete Form 4562 Depreciation and Amortization.
Part IV is information only. There's nothing to enter on your Schedule C calculation.
Many businesses get into tax trouble because they don't have supporting evidence for business driving expenses. Keep track of your business miles and keep good at-the-time records of business driving expenses.
Part V. Other Expenses. List other kinds of business expenses not shown on the first page of Schedule C. These might include internet fees, bank fees, and other miscellaneous expenses.
The Bottom Line. Net Income. After you have completed all the sections and done the math, you'll enter your Net profit or (loss) in Line 31.
How Do I File Schedule C with the IRS?
Beginning in 2018, file Schedule C with your Form 1040 after entering your net business income from line 31 of your Schedule C on Schedule 1, Line 12, "Business Income or Loss." This income is included with all other income sources to determine your total adjusted gross income tax liability.
How Do I Correct a Mistake on Schedule C?
You must file a corrected Schedule C as part of an amended personal tax return, Form 1040X, if you make an error when completing the form.
IRS. "2019 Instructions for Schedule C." Business Owned and Operated by Spouses. Page C-2. Accessed Feb. 7, 2020.
IRS. "The Highlights of Tax Reform for Businesses." Accounting Methods. Accessed Feb. 7, 2020.
IRS. "The Highlights of Tax Reform for Businesses." Meal and entertainment expenses. Accessed Feb. 7, 2020.
IRS. "The Highlights of Tax Reform for Businesses." Excess business losses. Net operating losses. Accessed Feb. 7, 2020.
IRS. "Facts About the Qualified Business Income Deduction," Accessed Feb. 7, 2020
IRS. "About Schedule C-EZ (Form 1040)." Accessed Feb. 7, 2020.
IRS. "Schedule C Profit or Loss From Business." Accessed Feb. 7, 2020.
IRS. "Instructions for Form 1040X." Accessed Feb. 7, 2020.