Some taxpayers would rather close their eyes rather than deal with taxes. I beg to differ because after filling out Schedule C I see how well I’m doing as a freelance word crafter. Really, isn’t that every entrepreneur’s end game, to be able to report a profit? At tax time, you may say, “Whew, I worked hard” and agree with Franklin D. Roosevelt who said, “Taxes are paid in the sweat of every man who labors.”
So, get ready to dig in your heels and learn what a Schedule C is, who needs to file one and how to do it, and new information about Schedule C-EZ. By the time you finish reading this post, Schedule C won’t seem threatening.
What is Schedule C?
Every year millions of individuals who own businesses gather their tax records to report their income and expenses and record a profit or loss on Schedule C also titled “Profit or Loss from Business.”
As a courtesy, the IRS notes on the form under the words “Schedule C” (Form 1040 or 1040-SR). This helps the taxpayer know which income tax form to use. For example, most taxpayers classified as individuals use Form 1040, 1040-SR is for seniors 65+, 1040-NR nonresident aliens, and Form 1041 for decedent estates.
Who Needs to File Schedule C?
Single-member LLCs and sole proprietorships who are self-employed use Schedule C to report income, expenses, costs of goods sold, vehicle information, and miscellaneous expenses. At the same time, taxpayers who use Schedule C must fill out Schedule SE to calculate their self-employment tax.
Instructions to File Schedule C
With a mouse in one hand and white chocolate in the other, I navigate to my favorite tax software found at FreeTaxUSA.com and go to work. The software guides me through each step to fill out Schedule C so I won’t forget to take common business tax deductions to lower my tax liability. However, there’s nothing wrong with completing the form by hand.
Below are general guidelines to file Schedule C separated by sections as noted on Schedule C. Before you begin, make sure to read the current year’s IRS instructions for Schedule C. The document highlights any new changes, pertinent reminders, and other forms you may be required to complete.
When reviewing the instructions below, keep a copy of Schedule C and its instructions in front of you as a reference for sections I-V.
Before filling out those sections, taxpayers must complete lines A-J. There are spaces for your personal information to include your name, principal business or profession, business code, and address. You’ll also answer specific questions related to your business.
Sections to complete in your Schedule C
Section I: Income
On the first line, you report gross receipts earned by your business. This amount doesn’t include refunds, allowances, cost of goods sold, and other income as those amounts are covered in subsequent lines. If you’re wondering, other income includes items like the value of exchanged goods and services, cash from odd jobs, jury duty, etc.
Section II: Expenses
Your business records should include your expenses by category. You can match the types of expenses listed on Schedule C with your records. Expenses that can’t be allocated to a specific line number in Section II can be itemized under Section V: Other Expenses. Pay specific attention to lines 9, 11, 13, 16, 18, 20, and 24. You should follow the IRS Schedule C instructions to complete those lines.
You may be required to complete other forms such as Form 4562, 1099-MISC, or Form 8990. Once you make deductions for the business use of your home (Form 8829), you can calculate your net profit and loss and enter the result on the line of the appropriate 1040 U.S. tax return you use.
Section III: Cost of Goods Sold
After selecting your cost inventory method and answering other designated questions, fill in your beginning inventory on January 1st (if you operate your business on a calendar year).
For the remaining lines, you can use the amounts shown on your business’s profit and loss statement or your point of sale system. These costs are different than the ones listed in Section II. Complete each line to include costs of items withdrawn for personal use, labor cost, materials and supplies, and other costs.
Once you enter a total of those costs and your ending inventory as of December 31st (calendar-year businesses), then you can figure your costs of goods sold. Enter this figure in Section I: Income.
Section IV: Information on Your Vehicle
If you claimed vehicle expenses in Section II, you must complete this section. The questions are straightforward and easy to answer. Remember you must have written mileage records to support the number of business miles you drove.
Section V: Other Expenses
In my business, I use internet services for research and claim a percentage of the cost used for business purposes. Examples of other expenses listed in this section might include business start-up costs, bank fees, etc. These are business expenses you haven’t reported in section 2.
Tips to Fill Out Schedule C
- Maintain accurate records
Keeping accurate records streamlines the task of completing the form and provides written information to support the amounts reported to the IRS.
- Write down useful information you may need to complete your Schedule C
Also, it’s helpful to have a notepad and pencil or phone app to jot down questions and reminders. For instance, you may need the amounts of real estate and personal property taxes and health insurance premiums paid or social security benefits you received.
If you use tax software, it completes a series of forms as you input the information. Likewise, the software has built-in alerts to ensure you report information correctly and take every available deduction.
- Complete one Schedule C for each self-employed business you have
Sole proprietors may operate several self-employed businesses. They must complete a separate Schedule C for each of those jobs. For example, a business owner who sells products online and is also an Uber driver must complete two Schedule Cs.
Lastly, compare the amount on your company’s profit and loss statement with what’s shown on Schedule C. They probably won’t match but should be close since you may make adjustments on your tax return you haven’t yet posted to your books.
- Don’t use Schedule C-EZ any more
Just so you know, prior to 2019 self-employed business owners could use Schedule C-EZ when their expenses didn’t exceed $5,000 and they met other qualifications. In 2019 the IRS deleted Schedule C-EZ so all sole proprietors will use Form Schedule C.
Tax Attachments Like Schedule C Back-Up What’s Reported on Your 1040
Unless you’re the sun that doesn’t get taxed for making solar energy, you owe taxes on the profit you make to operate your business. When you file taxes as a small business owner, forms like Schedule C simplify reporting your business’s financial activities.
Just keep in mind, it’s always a good idea to contact a professional tax preparer to avoid mistakes and inaccuracies in your tax return. Then too, you may want to hand over tax preparation to someone else and concentrate on growing your business.
On that note, keep reading: