2023 Schedule C: How to File for Business Profit or Loss

The 2023 Schedule C, Profit or Loss from Business, is a tax form used by self-employed individuals to report a business’s financial performance to the IRS. It is filed with Form 1040. The form calculates the business’s net profit or loss by subtracting expenses from income. This final figure is then included in the taxpayer’s total income, influencing their overall tax liability.

Who Must File Schedule C

If you operate a business or practice a profession as a sole proprietor, you are required to file Schedule C. This category includes independent contractors, freelancers, and individuals in the gig economy who receive income for their services. The primary consideration is whether your purpose for the activity is to generate profit and if you engage in it with regularity and continuity.

Receipt of specific tax documents often signals the need to file a Schedule C. If you received a Form 1099-NEC, Nonemployee Compensation, it indicates that a client paid you for services as an independent contractor. Similarly, income reported on Form 1099-K for goods sold or services rendered through online platforms necessitates filing. Even if you do not receive these forms, all business income must be accounted for.

A distinction exists for statutory employees. If you are classified as a statutory employee, your income is reported on a Form W-2, but the “Statutory employee” box will be checked. This status allows you to report your income and deduct your associated business expenses on Schedule C.

An activity conducted without a profit motive is considered a hobby by the IRS. Factors in this determination include whether you carry on the activity in a businesslike manner and the time and effort you put in. Income from a hobby is reported elsewhere on the tax return, not on Schedule C.

Information and Documents to Gather

Basic Business Information

You must collect fundamental details about your business. This includes your business name and your Employer Identification Number (EIN) if you have one. An EIN is required if you have employees, operate as a corporation or partnership, or file certain tax returns; otherwise, you will use your Social Security Number (SSN). The business address must be a physical location, not a P.O. Box.

You must also identify your accounting method, most commonly either cash or accrual. Under the cash method, you report income in the year you receive it and deduct expenses in the year you pay them. The accrual method involves reporting income in the year you earn it and deducting expenses in the year you incur them, regardless of when payment changes hands.

Income Records

A complete compilation of all business income is necessary. The primary documents for this are the Forms 1099-NEC and 1099-K you received from clients and payment settlement entities. Beyond these forms, you must gather all records of gross receipts not reported on a 1099, such as logs of cash payments and copies of deposited checks. You should also have records of any sales returns or allowances granted to customers, as these amounts are subtracted from your gross receipts.

Expense Records

Organizing your expense documentation requires careful record-keeping. You will need to gather all receipts, canceled checks, and bank or credit card statements that show your business expenditures. These records should be sorted into categories that align with the expense lines on Schedule C. Common expense categories include advertising, office supplies, and professional services. For vehicle expenses, you will need a detailed mileage log tracking business miles, along with receipts for gas, repairs, and insurance.

Completing the Schedule C Line by Line

With your documents organized, you can begin filling out Schedule C. The top of the form asks for the basic business information you previously gathered. You will enter your name, SSN, business name (line C), EIN (line D), and address. You will also specify your accounting method (line F) and answer questions about your material participation and whether you made payments that require you to file Forms 1099.

Part I – Income

Part I is where you report your business’s total income. On line 1, “Gross receipts or sales,” you will enter the total amount from all sales and services for the year. This figure should include amounts from your Forms 1099 as well as all other unreported payments. If you are a statutory employee, you will check the box on line 1 and report the wages from your Form W-2 here. Line 2 is for returns and allowances, which you subtract from your gross receipts to arrive at your net receipts on line 3.

Part III – Cost of Goods Sold (COGS)

Before calculating gross profit, you must complete Part III if your business involves producing or purchasing goods for resale. This section is for businesses that maintain inventory, such as retailers or manufacturers. You will need your beginning and ending inventory values for the year, the cost of purchases, and any other costs associated with preparing your goods for sale. The result from line 42, “Cost of goods sold,” is then transferred to line 4 in Part I. Subtracting the COGS from your net receipts gives you the gross profit on line 5.

Part II – Expenses

Part II is where you will deduct your business expenses. The form lists numerous categories, and you will enter the totals you compiled for each. For example, line 8 is for advertising expenses, and line 9 is for car and truck expenses, calculated using either the standard mileage rate or your actual expenses. The standard mileage rate for 2023 was 65.5 cents per mile. Other common lines include 17 for legal and professional services, 18 for office expenses, and 24b for business meals, which are generally limited to 50% of the cost.

If you are claiming a deduction for the business use of your home, you will need to complete Form 8829, Expenses for Business Use of Your Home. The deductible amount calculated on Form 8829 is then entered on line 30 of Schedule C. Filers using the simplified method for the home office deduction will perform a separate calculation and enter the result directly on line 30.

Part IV – Information on Your Vehicle

If you claim car and truck expenses on line 9, you must provide additional details in Part IV. This section requires you to document your vehicle usage for the year. You will need to enter the total number of miles you drove for business, commuting, and other personal purposes. The form also asks several questions to verify that you have the required evidence to support your deduction.

Part V – Other Expenses

Part V is a section for any ordinary and necessary business expenses that do not fit into the specific categories listed in Part II. You will list each type of expense separately and then enter the total on line 27a, which is then carried to the summary of expenses in Part II. This could include expenses like bank service charges or software subscriptions. After totaling all your expenses and subtracting them from your gross income, the final result on line 31 is your net profit or loss.

Post-Filing Calculations and Related Forms

Schedule SE, Self-Employment Tax

After determining your net profit on Schedule C, that number becomes the starting point for other calculations. The first is for self-employment tax, which covers your Social Security and Medicare obligations. If you have a net profit of $400 or more, you are required to file Schedule SE and pay this tax. On Schedule SE, you will multiply your net profit by 92.35% to find your net earnings from self-employment. For 2023, the Social Security tax rate of 12.4% applies to the first $160,200 of net earnings, while the 2.9% Medicare tax applies to all net earnings.

Deductible Part of Self-Employment Tax

An important benefit is that you can deduct one-half of what you pay in self-employment tax. After you calculate your total self-employment tax on Schedule SE, you take half of that amount and deduct it as an adjustment to your income. This deduction is not claimed on Schedule C but is entered on Schedule 1 (Form 1040). This adjustment lowers your adjusted gross income (AGI), which can reduce your overall income tax liability.

Qualified Business Income (QBI) Deduction

The net profit from your Schedule C is also used to determine your eligibility for the Qualified Business Income (QBI) deduction. This deduction, also known as the Section 199A deduction, allows eligible self-employed individuals to deduct up to 20% of their qualified business income. The calculation is performed on Form 8995 or Form 8995-A for more complex situations. The deduction can be limited by your taxable income and, for some higher-income taxpayers, by the type of business you operate. The final QBI deduction is claimed on your Form 1040 and directly reduces your taxable income.