Guide · January 22, 2020
Schedule C: How Sole Proprietors Report Income
Schedule C is the tax form a sole proprietor uses to report income or loss from a business. It attaches to your personal return, Form 1040. If you run a business alone and have not formed a corporation or partnership, this is the form that shows how much you earned and what it cost to earn it.
Who uses Schedule C
You use it if you operated a business or practiced a profession as a sole proprietor. The IRS says an activity counts as a business when your main purpose is income or profit and you work at it with continuity and regularity. A hobby does not qualify. A one-time side job may not qualify either.
Some other people use it too. Statutory employees report their income and expenses on it. So do spouses who run a business together and choose to be treated as a qualified joint venture. A single-member LLC that has not elected to be taxed as a corporation also reports on Schedule C.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).
Part I: Your income
Part I runs from line 1 to line 7. Line 1 is gross receipts, which is the money your business took in. Include amounts that were reported to you on Form 1099-MISC. If the 1099-MISC totals in box 7 are higher than what you put on line 1, the IRS asks you to attach a statement that explains the gap.
Line 4 is the cost of goods sold, for businesses that make or buy products to sell. Line 7 is your gross income, which is what is left after returns and the cost of goods. Most service businesses have nothing on line 4, so their gross income is close to their gross receipts.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).
Part II: Your expenses
Part II runs from line 8 to line 27, and line 28 adds it all up. Each line has a plain label: advertising, insurance, office expense, supplies, rent or lease, repairs, legal and professional services, taxes and licenses, utilities, wages and more. A line for "other expenses" covers costs that do not fit elsewhere. Part V is where you list them.
Keep the line to its purpose. Office supplies and postage go on line 18. Premiums for business insurance go on line 15. Fees for tax advice about your business go on line 17. Do not deduct your own labor, and do not deduct federal income taxes, including your self-employment tax. You may deduct one half of your self-employment tax elsewhere on your return.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).
Cars, meals and the home office
Three expenses draw the most questions. For a car used in the business, the standard mileage rate for 2019 is 58 cents per mile. You may use it in place of tracking your actual vehicle costs, in most cases. For meals, you can generally deduct only 50 percent of business meal costs.
The home office is reported on line 30. You can figure it with Form 8829, which uses your actual costs. Or you can use the simplified method, which allows $5 per square foot for up to 300 square feet. The space must be used for business in a qualified way. The simplified method cannot give you a deduction larger than your business income from that space.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).
Net profit and where it goes
Line 29 shows your tentative profit, which is gross income minus total expenses. Line 30 takes out the home office deduction. Line 31 is your net profit or loss. That is the number that moves to the rest of your return. Individuals carry it to Schedule 1, line 3, and also to Schedule SE, which figures self-employment tax.
If expenses are higher than income, you have a loss, but you cannot always enter it in full. The at-risk rules and the passive activity loss rules may limit it. A large loss may also be an excess business loss that is figured on Form 461.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).
Records that back each line
Every number on Schedule C should trace to a document. For income, keep invoices, bank deposit records and any 1099 forms you receive. For expenses, keep receipts, bills, canceled checks and a log for each business trip or drive.
The IRS is specific about travel. Even when you use the standard meal allowance instead of actual meal receipts, you must still keep records that prove the time, place and business purpose of your travel. A simple monthly habit helps: match the bank statement to the books, then file the receipts. Done each month, it turns tax time into a review instead of a search.
Sources: IRS, 2019 Instructions for Schedule C (Form 1040 or 1040-SR), Profit or Loss From Business, revised January 17, 2020 (irs.gov/pub/irs-prior/i1040sc--2019.pdf).