Schedule C

Schedule C is an IRS tax form to report the profit and loss from a business operated or profession performed as a sole proprietor. It is the main form individuals use to deduct expenses from their sole proprietorship business. 

The form is useful in calculating a sole proprietor's profits and losses, and the form often involves complex business expense deductions. However, the IRS has determined that there is a large amount of net misreporting of Schedule C activity, contributing to the yearly tax gap.

• Schedule C is a tax form issued to U.S. taxpayers by the Internal Revenue Service (IRS) department to report the profit or loss obtained as a sole proprietor.
• An individual conducting business through a single-member LLC can also use the form to record details associated with business activity.
• Schedules F and E are different from it. Schedule F is used to report farm income and expenses. Schedule E reports supplemental income, for instance, the profit or loss from rental real estate, royalties, partnerships, S corporations, estates, and trusts.

Schedule C is a tax form in which a business's income and expenses for the tax year are entered. It indicates how much an individual gained/lost during the end of the year from the sole proprietorship business. Individuals who own and run their businesses are known as sole proprietors. A sole proprietor files the form annually at the end of every year.

Schedule C must be filed by all statutory employees, independent contractors, freelancers, and self-employed people. In the case of an LLC, Unless it has chosen to be recognized for tax purposes as a corporation, a single-member Limited Liability Company (LLC) is handled like a sole proprietorship, and they have to file Schedule C.

The prime prerequisites before filling out an IRS Schedule C form are as follows: 

• Balance sheet
• Profit and loss statement

The sole proprietors can download the schedule C form by visiting the IRS website.

Following are some of the steps to be followed to fill out the IRS schedule C form: 

• Fill in basic details: It includes the name of the proprietor, principal business or profession, including product or service, business name (if any), business address, and SSN.
• Part I: It is where the income details are presented.
• Part II: It asks for the expense details.
• Part III: It is the section for the cost of goods sold.
• Part IV: It is the section for "Information on your vehicle."
• Part V: It is the section for other expenses.

Let us look at the schedule C examples to understand the concept better:

Example #1

Based on the above sample form, assume the following data:

Gross receipts or sales: $20,000 

Returns and allowances: $2,000

Costs of goods sold: $8,000

Other income: $1,000

The form will show gross income as $11,000 based on the following calculations:

Gross profit = Gross receipts or sales- Returns and allowances- Costs of goods sold

= $20,000 - $2,000 - $8,000

=$1,000

Gross income = Gross profit + Other income

=$10,000+$1000

=$11,000

Example #2

The Schedule C for 2009 revealed total earnings of $244.8 billion from roughly 22.7 million individual income tax filings associated with nonfarm sole proprietorships.

Let's look into some of the deductions mentioned in the Form Schedule C:

• Business meal expense: For a limited time, business meals are 100% deductible under certain conditions.
• Depreciation and section 179 expense deduction: Income the sole proprietor report on Schedule C may be qualified business income, and it will qualify him for a deduction on Form 1040 or 1040-SR, line 13.
• Deduction for depletion: It is entered on line 12 for deduction for depletion in form 1040.
• Employee benefit programs: It is entered on line 14 of the form. It enables the owner to deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan linked on line 19.
• Taxes and licenses: The item is entered on line 23 of the form. Examples are state and local sales taxes imposed on you as the seller of goods or services, real estate and personal property taxes on business assets, federal unemployment tax paid, and federal highway use tax.
• Expenses for lodging and transportation: It is entered in Line 24a, and the value should be connected with overnight travel for business while away from the sole proprietor's tax home.
• Deductible business meal expenses: Deductible expenses related to a business meal are entered in Line 24b.
• Deduct utility expenses: It should be only for sole proprietor's trade or business and entered in line 25.
• Business use of home: Sole proprietorship may deduct certain expenses for business use of the house, subject to limitations (line 30).

Schedule C, which is required for sole proprietors, whereas Schedule F, which is required for self-employed farmers, list the income and expenditure related to their farming businesses. Individual businesses file the Schedule E form as part of filing their tax returns. It is used to file taxes from partnership firms, rental property, and other extra income streams.

Generally, rental income or losses are reported on Schedule E. In contrast, business income or expenses are reported on Schedule C. While the income reported on Schedule E is not subject to self-employment taxes, the income reported on Schedule C is subjected to self-employment taxes. 

All the farmers, such as owners/operators of plantations, nurseries, orchards, ranches, and farmers of poultry, fish, livestock, dairy, and fruit, are included in filing income tax under the Schedule F form. In contrast, the schedule C form is filed by the sole proprietors.

This article has been a guide to what is Schedule C. We explain its deductions, examples, how to fill it, and comparison with Schedule E and Schedule F. You can learn more about it from the following articles –

• Schedule K-1
• Debt Schedule
• Loan Amortization Schedule