IRS Schedule C enables small business owners to calculate the profit or loss from their business. That amount from Schedule C is then entered on the owner's Form 1040 individual tax return.
Learn who should use Schedule C and how to complete it.
What Is Schedule C?
Schedule C, Profit or Loss from Business, requires you to provide information on you and your small business and has a series of lines on which you enter figures that help you calculate the business's gross profit, gross income, total expenses, and, ultimately, net profit or loss.
If you have a net profit for the year, you would enter the amount of profit on both line 3 of Schedule 1 of Form 1040 and on line 2 of Schedule SE, which is used to calculate the amount of tax you owe on earnings from self-employment.
If you have a net loss and your entire investment in the business is at risk, you would enter the amount of the loss on both line 3 of Schedule 1 of Form 1040 and on line 2 of Schedule SE. If only some of your investment is at risk, you must fill out Form 6198, At-Risk Limitations.
Who Uses Schedule C?
Schedule C is completed by those who have received income from a business they ran or a profession they practiced as a sole proprietor. The IRS defines a business as an activity whose primary purpose is to produce income or profit. The business activity must also be done regularly. If you do the activity only occasionally and it's not done for profit, it's not a business.
A sole proprietorship is the default business type. If you have a business that you own by yourself and it is not registered with your state as a corporation or a limited liability company (LLC), you’re its sole proprietor.
If you have registered your company as a single-member LLC, you would use Schedule C if you have not elected to pay income taxes as a corporation instead.
If your and your spouse run a business together as a partnership with no other owners and you file a joint tax return, you can declare the business to be a qualified joint venture for tax purposes. You would both fill out a Schedule C and you can then file a single Form 1040 instead of the more complicated partnership tax return.
If you own more than one business, you must complete a Schedule C for each of them.
Certain independent contractors who are considered by law to be employees for tax purposes must also complete Schedule C. These so-called statutory employees include drivers who distribute beverages other than milk or meat, vegetable, fruit, or bakery products and full-time life insurance salespeople who work primarily for one company. For a complete explanation of workers who are considered to be statutory employees, see the Statutory Employees page of the IRS's website.
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
- Information on inventory to prepare a cost of goods sold (COGS) calculation if your business sells products
- Details on travel, car/truck, meal, and home business expenses
How to Fill Out and Read Schedule C
To complete Schedule C, first fill in the information about your business at the top of the form. The codes for business or professional activities, one of which you will enter in box B, are found on the last two pages of the instructions for Schedule C.
For more information on Forms 1099, which are mentioned in questions I and J, see the IRS's General Instructions for Certain Information Returns. There are several different types of Form 1099, which is categorized by the IRS as an information return.
Part I: Income
If you sell products and have an inventory, you will need to complete Part III: Cost of Goods Sold (COGS) before you can fill in Part I. You will then subtract both returns and allowances and your COGS from your gross receipts or sales to get your gross profit.
Next, add any other income, including finance reserve income and state or federal gasoline or fuel tax credits or refunds, to arrive at your gross income on line 7. For a more complete description of what constitutes "other income," see page 6 of the Instructions for Schedule C, Profit or Loss From Business.
Part II: Expenses
Fill in all of your deductions for business expenses in Part II. If you have expenses that weren't categorized in Part II, enter them in Part V: Other Expenses and add them up. Put the total on line 48 in Part V and on line 27a in Part II.
Add all the expenses you've now recorded in Part II and enter the figure on line 28. Subtract line 28 from line 7 for the tentative profit or loss on line 29.
If you are claiming expenses from using your home for your business, enter them on line 30. You may use the simplified method that consists of multiplying the square footage of your home that was used for the business by $5 or you may use a more complicated method that requires filling in Form 8829 using the instructions provided by the IRS.
Finally, subtract line 30 from line 29 to end up with your net profit or loss.
Part III: Cost of Goods Sold
This part of the form is necessary to determine your gross profit. It includes line items such as inventory, purchases, and materials.
Part IV: Information on Your Vehicle
If you claimed car or truck expenses on line 9 of Part II and are not filling out Form 4562, Depreciation and Amortization, the IRS requires you to provide the information in this part, including:
- The date you began using the vehicle for your business
- The number of miles you drove the vehicle for business, commuting, and other reasons
- Information about your personal use of the vehicle
- Whether you have written evidence to support your deduction
You are required to fill out Form 4562 only if you are including the depreciation in the value of your vehicle in your business's car or truck expenses.
Businesses frequently get into tax trouble because they don't have supporting evidence for business vehicle expenses. Carefully track your business miles and the other miles you put on the vehicle.
How to File Schedule C
You must file Schedule C along with your Form 1040. If you are filing by mail, you should attach Schedule C to the form. You also have the option of e-filing them.
For the 2019 tax year and beyond, you have the option of using the new Form 1040-SR for seniors to prepare your personal income taxes if you were born before Jan. 2, 1955. Form 1040-SR has a larger type font and allows for easy reporting of income from sources common to seniors, including Social Security and distributions from retirement plans.
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 1040-X, if you realize you have made an error.
- Schedule C is used by small business owners and professionals who operate as sole proprietors to calculate their profit or loss for the tax year.
- That profit or loss is then entered on the owner's Form 1040 individual tax return and on Schedule SE, which is used to calculate the amount of tax owed on earnings from self-employment.
- When filing, Schedule C should be attached to Form 1040.