Schedule C - Profit or Loss for Form 1040
Schedule C for Small Business Taxes
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?
Schedule C - Profit or Loss from Business is part of the individual income tax return IRS Form 1040. It shows the income of a business for the tax year, as well as deductible expenses. The resulting net profit or loss of the business, found on line 31, is then reported (beginning with 2018 taxes) on Schedule 1 (line 12) of Form 1040. It is also entered on line 2 of Schedule E (Supplemental Income or Loss) to determine self-employment taxes.
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 percent of meal expenses if they are separate from entertainment, with some exceptions for meals provided at your business location.
Additional business income deduction. You may be able to deduct 20 percent of your business income in addition to other regular expense deductions. This deduction has limits and qualifications, so check with your tax professional about it.
What Other Recent Changes Do I Need to Know About?
The Internal Revenue Service has allowed an alternate simplified method to calculate home office expenses for your Schedule C since 2013. 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. A word of warning: you may receive a bigger deduction if you use the original more complicated method of calculation. You have a choice each year.
Which Businesses Must File Schedule C?
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. Sole proprietors must file Schedule C. You would also file Schedule C if you are the sole owner of a limited liability company or LLC.
You may also be able to use Schedule C to file your business tax return if you are the sole owner of a limited liability company (called a single-member LLC or SMLLC).
Can I Use Schedule C-EZ?
If yours is a very small business with under $5,000 in business expenses, you may be able to use Schedule C-EZ to save time in tax preparation. Some of the other criteria for using Schedule C-EZ are:
- You must use the cash method of accounting,
- Your business can't have an inventory of products or parts used to make products,
- Your business must have had a profit for the year you are filing the return; no passive activity losses either,
- You have no employees,
- You don't depreciate or amortize purchases of business assets, and
- You don't deduct expenses for home business use.
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.
How Should I File Schedule C for a Husband/Wife Business?
Typically, two people are considered partners and must file a partnership tax return when they own a business together. But if you and your spouse both actively participate in the day-to-day operations of your business, you may both file separate Schedule C forms and divide the business income and expenses between you.
This type of business is called a qualified joint venture. The QJV is only available in some states and under some circumstances. Check with your tax professional before you attempt to file in this way.
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 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, meals and entertainment expenses, and home business expenses.
What is the Process for Completing Schedule C?
To complete Schedule C, follow the sections:
1. Income. If you sell products and have an inventory, you will need to complete the Cost of Goods Sold section (Section 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.
2. Expenses. In Part II 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.
3. Net Income. The final part of Schedule C calculates net income by subtracting deductions from gross income
You can find more details on how to complete Schedule C in this step-by-step process explanation.
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.
Don't forget to also calculate your self-employment tax, which is based on your Schedule C net income.
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.