How to File Schedule C: Profit or Loss From Business

Schedule C, Profit or Loss from Business, is an IRS form used to report income and expenses from a business operated as a sole proprietorship. It is filed with your personal tax return, Form 1040, and the final profit or loss figure calculated on it becomes part of your total income. This form allows self-employed individuals, including independent contractors and freelancers, to detail their business’s financial activity for the tax year.

Who Must File Schedule C

You must file Schedule C if you operate a business as a sole proprietor, which includes independent contractors, freelancers, and gig workers. If you are the sole member of a Limited Liability Company (LLC) that has not elected to be treated as a corporation, you also use this form. An activity qualifies as a business if your primary motive is to earn a profit and you engage in it with continuity and regularity. The IRS distinguishes this from a hobby by considering factors like whether you keep business-like records and depend on the income for your livelihood.

Statutory employees also report their income and expenses on Schedule C. These are independent contractors who fall under specific statutes that treat them as employees for certain tax purposes, such as Social Security and Medicare taxes. Your employer will indicate if you are a statutory employee by checking a box on your Form W-2.

Required Information and Records

Basic Business Information

You will need your business name, address, and Employer Identification Number (EIN), if you have one. You must also identify your principal business or professional activity using a six-digit code that corresponds to your industry. These codes are listed in the instructions for Schedule C on the IRS website.

Income Records

Gather all Forms 1099-NEC and 1099-K you received, as these report payments from clients and third-party networks. Since these forms may not represent all of your income, you must also have records of other gross receipts. These can include sales logs, reports from payment processors, and bank deposit records reflecting business earnings.

Expense Records

Collect all receipts, bank statements, and credit card statements that show business-related purchases. You will also need invoices for services like advertising or contract labor. Records for utilities, rent for business property, and insurance premiums are also needed to substantiate these costs.

Cost of Goods Sold (COGS) Information

For businesses that sell products, you must calculate the Cost of Goods Sold. This requires knowing the value of your inventory at the beginning and end of the tax year. You also need records of the total cost of all purchases made during the year that became part of your inventory.

Vehicle Use Information

If you used a vehicle for business, you must have records to claim a deduction. For the standard mileage rate, you need a detailed log showing the date, miles driven, and purpose of each business trip. If you opt for the actual expense method, you must have receipts for all vehicle-related costs, such as gasoline, repairs, insurance, and registration fees.

A Guide to Completing the Form

Part I – Income

This part is used to calculate your gross income. You will report your total gross receipts or sales, including amounts from any Forms 1099 you received. From this total, you subtract any customer returns and allowances. After also subtracting your Cost of Goods Sold, which is calculated in Part III, you arrive at your gross income.

Part II – Expenses

This section is for deducting your business operating costs. You will enter expenses into specific categories, such as advertising, commissions, insurance, professional fees, office expenses, and rent. Car and truck expenses, which are detailed in Part IV, are also entered here. The form guides you to sum all your expenses at the end of this section.

Part III – Cost of Goods Sold

If your business maintains inventory, you will complete this part to determine your Cost of Goods Sold. The calculation starts with your beginning inventory value, adds the cost of purchases, and subtracts your ending inventory value. This final figure is then used in Part I to calculate your gross income.

Part IV – Information on Your Vehicle

This section requires details about your business vehicle usage to substantiate the deduction claimed in Part II. You will provide the date the vehicle was placed in service and the total miles driven for business, commuting, and other purposes. You must also answer questions to confirm you have written evidence to support your deduction.

Part V – Other Expenses

Any business expenses that do not fit into the specific categories in Part II are detailed here. You will list each type of expense separately, such as business-related education or software subscriptions. The total from this section is then included with your other expenses in Part II.

Calculating and Using Your Net Profit or Loss

The final calculation on Schedule C determines your business’s net profit or loss. You subtract your total expenses from your gross income to find your tentative profit. After accounting for any expenses for the business use of your home, you arrive at the final net profit or loss for the tax year.

This net profit or loss figure is transferred to other parts of your tax return. It is carried over to Schedule 1 (Form 1040), where it becomes part of your total income calculation. The same figure is also reported on Schedule SE, Self-Employment Tax, to calculate your liability for Social Security and Medicare taxes. A profit will result in self-employment tax, while a loss may reduce your overall tax liability.