An Overview of Schedule C
The IRS Schedule C form is the most used business income tax form for small business owners. The form is attached to your tax return.
Form 1040 may be used to file your income taxes in 2019 and subsequent years. The 1040-SR is available in big print and with a standard deduction chart for seniors.
The IRS Schedule C is used to calculate your business' taxable profit for the tax year. The profit is then reported on your own 1040 Form. And the taxes owed are calculated from there.
Even if you use a tax preparer, you must learn how to complete Schedule C to ensure the accuracy of your tax filing information.
“Because most small firms file their tax returns on a cash basis, make sure you're using the right basis.”
Things You'll Need to Complete Your Form
The first step in your Schedule C instructions is to gather some data. This includes the following:
The tax year's profit and loss statement
Schedule C is a profit and loss statement for your company. You may find most of the information you need to complete the Schedule C form is on your accounting software's profit and loss statement or income statement. Because most small firms file their tax returns on a cash basis, make sure you're using the right basis.
The IRS' Schedule C Instructions
The IRS Schedule C form is simple so you won’t need instructions. But you'll still need the Principal Business or Professional Activity code for your company. But don’t worry because it is easily accessible within the guidelines provided by the IRS.
Inventory count and valuation as of the fiscal year's conclusion
If you sell things in your firm, you must calculate the cost of the commodities sold during the tax year. Before completing Schedule C do a yearly physical inventory at your business. To confirm the information in your point of sale or other inventory management software.
Your company's identification number (EIN)
If your company has a distinct EIN, you must submit it on Schedule C. If you don't remember your EIN, you may find it on the IRS notification. You can receive the notification after completing Form SS-4 to the IRS.
When using your car for business purposes, keep mileage records to reduce the costs of the business usage of your car. Avoid the urge to "guess" your mileage. You may track your miles using a variety of nice smartphone applications. Or you can keep a paper mileage journal.
IRS Schedule C Instructions (6-Part)
The Header of Schedule C Tax Form
The top portion of IRS Schedule C lacks a section header and a name. Yet it is nonetheless relevant.
Following these Schedule C guidelines fill out the top section of the form with the following information:
- You will fill in the "Name of proprietor" area with your name
- Even if you have an EIN you must include your SSN on Schedule C
- Line A simply requires a brief business description and the code for Line B is supplied in the IRS's Schedule C guidelines
- In Lines C, D and E you will write your name, EIN and address of your company
- In Line F identify your tax accounting method which must be used indefinitely unless you file Form 3115 to modify it
- Line G: As a general rule if you work in your business or you are a material participant in it then you must select the Yes box on this line
- Line H: You will only check this box on the first IRS Schedule C you fill out for your business
- Lines I and J: If you paid subcontractors or people for work done in your business you might need to submit Form 1099 for the payments you made to them. Especially if you paid them at least $600 during the tax year
Part I of Schedule C: Income
The Schedule C requirements for Part I require you to submit your business's income. It's also where you figure out your gross profit and gross income.
- Lines one, two and three: Line 1 should show your total income before deductions for taxes and refunds. Refunds granted to consumers are recorded on Line 2. And the difference between your total income and any refunds given to customers is reported on Line 3
- Lines 4 & 5: If you sell items or have non-employee labor expenses skip these lines for the time being. And return to them after calculating your cost of goods sold in Part III. If you do not sell items or have subcontracted labor expenses put a "0" on Line 4. And the total from Line 3 on Line 5
- Line 6: Include any money that is not generated by your typical company operations. This is frequently recorded as "Other Income" on your profit and loss statement
- Line 7 is the result of adding Lines 5 and 6. This is your total earnings
Part II of Schedule C Form: Expenses
Your company costs diminish your earnings and less profit is preferable in terms of taxes since it equals a lesser tax burden.
This does not imply that you should undertake extra costs to avoid paying taxes. While you follow these Schedule C guidelines make sure to include all qualifying business costs on your IRS Schedule C tax form.
The majority of the fields in Part II are self-explanatory. And the data you need may be found on your Profit and Loss statement.
Most business owners will have expenditure categories on their profit and loss statement. They do not directly relate to Lines 8–27a. Part V of Schedule C.
Part III of Schedule C: Cost of Goods Sold
The majority of the lines in Part III are simple. You can get the quantities you need straight from your P&L or point-of-sale system. Otherwise, you can do simple computation to get the subtotals you need.
Make sure you don't include any costs from Part II while following these Schedule C recommendations.
Part IV of Schedule C Form: Vehicle Information
If you want to claim automobile expenditures on Line 9 you must fill out Part IV of Schedule C. This is when the mileage logs described before in this post will come in handy.
Part V of Schedule C: Other Expenses
Part V of Schedule C is where you record the costs you didn't disclose on Lines 8 through 26 or Line 30.
Remember that you have the legal right to deduct any reasonable business costs from your income to lower your taxable profit.
Don't disregard a cost just because it lacks a precise line number in Part II. Part V should be used to record the expenditure. And Line 27a should be used to record the sum of all lines in Part V.
The Bottom Line
If you followed these Schedule C guidelines and reviews correctly your Schedule C form should now be completed.
Take a few minutes to reread your IRS Schedule C and double-check your figures before entering the profit or loss on Line 31 in your Form 1040.
If your accountant completed your tax return then compare your IRS Schedule C to your P&L for the tax year.
Your accountant will gladly answer any questions you have so that you may file the most accurate tax return possible.