Small business owners who are filing business taxes as a sole proprietorship or single-member LLC must file using a Schedule C (Form 1040) to report profit or losses. An activity qualifies as a business if the primary purpose is to generate income or profit, or if you're involved in the activity on an ongoing basis.
There are various tax documents you need to take to your tax preparer to file Schedule C. If you want to do your own business income taxes, you will need this information before you start using tax preparation software or going with the DIY approach.
First, you will need to gather your company's income statement, which shows your revenue and expenses for the year. For this statement, you will need information on all sources of income for your business, including any 1099-MISC income from work as an independent contractor. You can deduct returns and credits that reduce your business income, and you may also be able to write off bad debts if your business uses the accrual accounting method.
Cost of Goods Sold
If your business sells products and keeps inventories of those products, you may want to calculate the cost of goods sold. For this calculation, you will need the following information:
- Beginning inventory: This is the amount you have in inventory at the beginning of the year.
- Ending inventory: This is the inventory you have at the end of the year and will help you arrive at a number of units sold.
- Cost of labor: This will be important if you have employees working solely on goods sold, and the cost of labor is a direct cost. Add up all the wages and salaries you pay these employees.
- Materials and supplies: This will typically be a large expense if you have inventory as it includes the wholesale cost as well as all supplies used in preparing and distributing the products.
Your profit and loss statement will mostly focus on the difference between your revenue and all of your expenses for the year. Expenses are an important factor for your taxable income, so take your time and include everything. The more actual and allowable business expenses you have, the lower your business income and business income tax bill will be. Include records for common monthly expenses, including:
- Phone, utilities, computer expenses, and other office expenses
- Business insurance
- Manufacturing and office supplies
- Labor fees
- Interest on loans, leases, mortgages, and other business debts
- Meal expenses
- Tolls, parking, and miscellaneous travel expenses
Some expenses are difficult to categorize on a tax return, but there is a place for miscellaneous expenses, so don't hesitate to include all of these hard-to-categorize items.
Make sure you have records for all of your business expenses. You don't need to submit the records of your expenses with your tax return, but you will need to show them to your tax preparer and be prepared to show them to the IRS in case your business tax return is audited.
Travel and Driving Expenses
If you drive for business purposes, you will need records to show the business purpose for trips, and you may need actual driving expenses if this is the method used to calculate driving expenses. You and your tax preparer may want to compare the standard deduction and actual expenses to see which gives you more tax deduction. If you traveled for business on out-of-town trips, you will need information about the business purpose of these trips, and details on expenses, including air, hotels, and meals.
Business Use of Your Home
You will need information for Form 8829 to substantiate the business use of your home. To start, you'll need a calculation of the percentage of your home square footage set aside for "regular and exclusive" use by your business. You will also need to know the amount you spend on your home mortgage interest, real estate taxes, homeowner's insurance, and on home expenses like utilities, repairs, and maintenance.
You will need to provide information on your business asset records—including business vehicles and house value if you work from home—for depreciation purposes. Take all of this information to your CPA, Enrolled Agent, or another type of tax preparer, or use business tax software to prepare your return.
Plan ahead and start early. If you are preparing tax returns yourself, most systems will allow you to enter and save information as you have it available, which can be helpful for considering different advantages.
IRS. "About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)." Accessed May 21, 2020.
IRS. "2019 Schedule C Form." Accessed May 21, 2020.
IRS. "About Form 1099-MISC, Miscellaneous Income." May 21, 2020.
IRS. "Form 1125-A." Accessed May 21, 2020.
IRS. "Topic No. 511 Business Travel Expenses." Accessed May 21, 2020.
IRS. "Form 8829." Accessed May 21, 2020.