Who Uses Schedule C for Business Taxes?
Several business types use Schedule C to report their business taxes:
Sole proprietors: Sole owners of businesses that have not registered with a state as another business form (an LLC or corporation). These businesses pay tax using Schedule C to report business income. Single-member LLC: This type of business pays tax using Schedule C if the business has not elected to pay tax as a corporation or S corporation. Qualified joint venture: A husband-wife business organized as a partnership may become a qualified joint venture and pay tax using two Schedule C forms instead of using the more complicated partnership form. There are restrictions and qualifications for this election.
Steps To Completing Schedule C
Step 1: Gather Information
You will need three types of financial detail about your business to complete the form: business income, cost of goods sold, and business expenses. Business Income Collect detailed information about the sources of your business income. Include returns and allowances. Cost of Goods Sold If you have an inventory of products for sale, you’ll need to gather information for this calculation, including:
Your inventory valuation method Inventory value at the beginning of the year Inventory value at the end of the year Cost of labor, materials, and supplies
Business Expenses Gather information on all business expenses (they should be in your profit and loss statement), including:
Phone, utilities, computer expenses, and other office expenses Business insurance, such as insurance on your business property, and disability insurance Supplies, including office supplies Wages you paid and payments you made to non-employees Interest on loans, leases, mortgages, and other business debts Meal expenses, which may be deductible up to 100%
Some expenses are difficult to categorize on a tax return. In Part V of the form, you will be able to list other expenses, such as miscellaneous expenses like petty cash on your business tax return, so don’t hesitate to include all of these hard-to-categorize items.
Step 2: Calculate Gross Profit and Income
Now that you have information on your income and the cost of goods sold, you can calculate your business income and gross profit. Include the calculations for the cost of goods sold. You will have to go to Part III-Cost of Goods Sold to do the calculation. Then add the total in the income section on Line 4. Here are the calculations:
Gross receipts from sales - Returns and allowances = Net receiptsNet receipts - Cost of goods sold = Gross profitGross profit + Other income from tax credits or other sources = Gross income
Step 3: Include Your Business Expenses
Business expenses that you can deduct are listed alphabetically on lines 8 through 27. You can deduct depletion, depreciation, and Section 179 expenses, as well as employee benefits and insurance. Interest on mortgages and other business debts is deductible, as are legal and professional fees, office expenses, and pension and profit-sharing plans. You can also deduct costs associated with the rental or lease of vehicles or other business equipment, costs of repair and maintenance, supplies, taxes, licenses, travel expenses, meals and entertainment, utilities, and wages. Line 27 is for “other” expenses. You’ll collect them in Part V of the form and transfer the total amount here. Many of these business expenses have restrictions or conditions that must be met before they can be deducted, so check with a tax professional before you submit your return. miss a deduction. Wages, salaries, and payroll tax expenses are deductible costs. The total wages paid, the employer portion of FICA taxes (Social Security and Medicare), unemployment insurance, and federal and state workers’ compensation insurance are all deductible expenses.
Step 4: Include Other Expenses and Information
Line 30: Business Use of Your Home If you work from home, you have two options for including information regarding the expense for business use of your home:
Option A involves completing Form 8829, by calculating the total area of your home and getting a percentage for your home business. Include the total allowable expenses resulting from those calculations on Line 30 of Schedule C. Option B is a simplified calculation: $5 per square foot of home business space up to 300 square feet for a maximum $1,500 deduction. Enter this information in the appropriate sections of Line 30. You can only use space that is used regularly and exclusively for your business, regularly for daycare, or regularly for storing inventory or product samples, regardless of how you calculate the deduction.
Part IV: Information on Your Vehicle This is an information section, with no calculation to add to your Schedule C. You’ll need to include information here about business driving mileage. Part V: Other Expenses Here you can provide more detail on other expenses you are deducting. This is the place to include your cellphone, internet provider, and website expenses, as well as bank charges and other miscellaneous expenses. Try to fit as many of these as possible within lines 8 through 27. The total of these other expenses goes on Line 27a and Line 48.
Step 5: Calculate Your Net Income
The final calculation is for net income:
Enter total expenses on Line 28 and subtract this amount from Line 7 to get your tentative profit on Line 29.Then subtract the expenses for the business use of your home on Line 30 to get your net profit or loss on Line 31.
If You Have a Business Loss
If your Schedule C shows that you have had a business loss (expenses are greater than income), you must show whether your loss is at risk or not, by checking the box on line 32a or 32b. (Most small business owners have full risk if they participate fully in the business.) You may have to file Form 461 if you have a business loss.
Finally, Add Schedule C to Your Tax Return
Carry the net profit/loss from Line 31 of your Schedule C to Schedule 1, Line 3 of Form 1040. Add or subtract your profit or loss from this business to/from the other income or losses from other businesses, but do not include any wages from an employer.
