If you operate a sole proprietorship or single-member limited liability company (LLC), tax time can be worrisome, especially if you’re doing your own taxes.
But before the cold sweat and anxiety of the tax season gives you a clammy embrace, make sure you know what you need to complete your Schedule C tax return.
Because if you have everything you need, you’ll likely find there’s nothing much to worry about.
What is the Schedule C Form?
At its core, the Schedule C is nothing more than a profits and losses worksheet for sole proprietors and single-member LLCs (as long as the LLC hasn’t elected to be taxed as a corporation). This form should be filed as an attachment to your personal income return. The form is far from the longest one the IRS has to offer (this one is a two-page, five-part form), but if you’ve never filed a Schedule C you’re bound to feel confused by some of the language you encounter. But have no fear. All you'll find here is an explanation of what the Schedule C requires in the simplest language possible, so you can prepared when it’s time to file. Ready? Let’s go:
Lines A through J: Most of this section is simple contact information. Name, address, EIN number. (If you don’t have an EIN, leave the space for it blank.) If you’re unversed in IRS linguistics Lines F through J might be a little tricky. Here’s a quick interpretation:
Line F: In the cash method, the income isn’t counted until cash or check is received for your services or products. The accrual method is used when you count income when services are rendered, orders are place, or some other transaction occurs, but you have not yet received any money. For further explanation, see Schedule C Instructions.
Line G: Did you materially participate in the operation of this business? As a sole proprietor or single-member LLC, it’s nearly impossible for you not to have, unless you’re only an investor or employees or contractors did the majority of the work. If the latter is the case, you should see the instructions for further clarification.
Line I: The 1099 question. In general, you must send a 1099 to any contractors to whom you paid more than $600 to throughout the year. The deadline to send out these 1099s is January 31. Your answer on Line I will also be indicative of your answer to Line J: if you owe 1099s, make sure you send them.
Next, the real work begins.
Parts III, IV, and V:
These sections of the Schedule C are not mandatory. Part III pertains to the “Cost of Goods Sold.” If your business doesn't manufacture goods or buy and resell merchandise, you won't need to complete this section. If this part does pertain to your business, you will need to count inventory and invoices of goods. If your business doesn’t buy and resell or manufacture merchandise, you can leave Part III of the Schedule C blank. This section is straightforward as long as you've tracked your inventory closely.
Part IV concerns vehicle expenses. Throughout the year, it's great to get in the habit of tracking miles on paper. Part IV asks if you have written proof of your vehicle expenses. It may be difficult to prove these expenses if you do not keep written records.
Part V is a list of additional expenses not covered in Parts II, III, or IV. Such expenses might include: small tools, state unemployment insurance, postage, service charges, overdrafts, and other fees associated with business bank accounts and business credit card fees. Again, keep receipts and written record of all such expenses.
Part I: Income
Here you’ll begin with your gross sales receipts. This line once had multiple subheadings, but has been reduced to one simple line. That means you need to calculate your businesses total sales receipts for the year and write it in on Line 1.
Returns and Allowances: If you sold merchandise and you had a return policy in place where customers could returns these goods for refunds, this line is the total amount refunded (if you included the original sale in Line 1).
Cost of Goods Sold: If your business doesn’t buy and resell merchandise or manufacture it, then you will leave Line 4 blank and not be required to complete Part III of the Schedule C Form. If your business does manufacture or buy and resell merchandise, then you’ll need to complete Part III first and enter the amount on Line 42 here.
If your business doesn’t sell or manufacture merchandise, your gross profit will be the same number as indicated on Line 1.
Other Income: Do not include any income from the sales of your business' product or services—those all belong on Line 1. Things that may be included here are items like: interest from checking and savings accounts; bad debts written off last year but collected on this year; any prizes or awards; or federal or state gasoline tax credits or refunds.
Unless your business had “other income,” your gross profits will be the same as your gross income. Enter your gross income onto Line 7.
Part II: Expenses
With business expenses you should abide by this: if an expense doesn’t come with a receipt, write it down, and if you have a receipt, keep it. Why? Not only do you want to be able to accurately capture your profit margin, but also because of Part II. This section is where all the time you spent tracking receipts, mileages, paid invoices, tips, parking, and other business expenses throughout the year really pays off.
Lines 8 through 27 are all different kinds of expenses. Legal fees, mileage (complete Part IV to calculate), employment benefit programs, interest paid on mortgages, office expenses, utilities, wages, depreciation, promotion, as well as many other expenses you can deduct. Each deduction type has its own restrictions, of which there are too many to concisely list here (see the link to the Schedule C instructions above), but while calculating your expenses, here is the most important rule:
If you don't have proof of an expense (bank statements, receipts, handwritten notes, mileage forms, or any other kind of written proof), do not deduct the expense. Should you be audited, you'll need hard proof of your expenses, otherwise you may face costly penalties.
Once you've included all your expenses, you add them together and enter the total onto Line 28.
To find your tentative yearly total, subtract the amount on Line 28 (expenses) from the amount on Line 7 (gross income). The remainder will be your net profit (fingers crossed) or your loss. This number goes on line 29.
You have one final expense to account for on line 30: home office expense. As of this year (2014), you can use the IRS' simplified calculation method, for which you multiply $5 by each square foot of your home office to find your total expense. If you choose not to use the simplified method, the IRS offers a separate form to calculate this expense (Form 8829). No matter which option you choose, the space you qualify as being work space needs to be used “exclusively” for business purposes. This means, if you home office is set up at your kitchen table, it will likely not meet the IRS' standards of exclusivity.
After calculating your home office expense and entering the total on Line 30, you will subtract Line 30 from Line 29. This number is your total net profit or loss.
If you've achieved a profit, enter that number onto Line 12 of the your Form 1040 tax return and attach this form. Your net profit will also be referred to on several other IRS forms as “earned income through self-employment.” You will need to complete Schedule SE to calculate your self-employment tax (enter your net profit onto Line 2 of Schedule SE).
If you show a loss, before you enter the amount on Line 31, you need to check either box 32a or 32b. If you are not liable for the business' losses (through nonrecourse loans or “stop loss” procedures), you'll need to check 32b and complete Form 6198 to determine the amount you can deduct. If you are liable for the losses (which is more likely), check box 32a. Carry over the amount of your loss from Line 31 to Line 12 of your Form 1040 tax return.
The Finish Line
Once you've added your profits or losses to Line 12 of your personal tax return (Form 1040), you're done with Schedule C for the year. Congratulations! But wait, that doesn't mean you're totally finished. Below you'll find a list of forms you may need to attach and complete before you're totally done with your tax return.
- Schedule SE. If you show a profit, you'll need to calculate your self-employment tax.
- Form 6198. If you are not personally liable for your business losses.
- Form 3800. This form may allow you to claim general business tax credits.
There are also several other forms that may pertain to your particular business (you can find those in the IRS' Schedule C instructions.
Once you've completed your tax return, attach all forms, send it, and then take time to relax. You deserve it!