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Owners of sole proprietorships and single-member limited liability companies (LLCs) are required to submit an IRS Schedule C tax form to report profits and losses from a business. A sole proprietor is anyone who owns and operates an unincorporated business.
Neither sole proprietorships nor single-member LLCs file separate federal tax returns for their businesses. Instead, the net profit or loss calculated on Schedule C carries over to your Form 1040, Schedule 1 and is included in your overall personal taxable income for the year. If you operate more than one sole proprietorship or single-member LLC, you must file a separate Schedule C for each business.
IRS Schedule C is due on the same date as your individual tax return: April 15. If you can’t file by that date, you can request an automatic six-month extension to Oct. 15. Here’s each step in the process of filing a Schedule C form.
How to file Schedule C faster
To complete Schedule C, you’ll need some basic information about your business and its income and expenses. Here is a list of documents you might need to get started:
- Instructions for Schedule C. The official instructions for Schedule C issued annually by the IRS includes a list of activity codes.
- EIN. If you have a separate tax ID number for your business, you’ll need it now. Otherwise, you’ll use your Social Security number (SSN).
- Profit and loss statement. Using professional tax or accounting software to track your business income and expenses makes preparing Schedule C much easier.
- Inventory count. If you carry inventory in your business, you’ll need to know your beginning and ending inventory numbers for the year.
- Home office expenses. If you are claiming a deduction for your home office, you’ll need information for claiming the home office deduction.
- Business mileage records. If you are claiming car or truck expenses on your Schedule C, you’ll need relevant information for claiming business auto expenses.
If you feel comfortable preparing Schedule C and the rest of your tax forms yourself, you can prepare your return using free fillable forms provided by the IRS. Otherwise, you can use commercial tax preparation software or hire a tax professional to complete the forms for you.
Changes for 2019: Business owners filing 2019 taxes can expect a change in the annual mileage rate, which increased to 58 cents per mile, up 3.5 cents from 2018. You can report Schedule C car and truck expenses in one of two ways: Take the standard mileage rate. Enter your expenses with documentation, including the cost of gas, oil changes, repairs and insurance.
Gross receipts test: The gross receipts test is also different for 2019, as part of changes still rolling out from the Tax Cuts and Jobs Act of 2017. The IRS increased the maximum average annual gross receipts from $25 million to $26 million, meaning more small businesses may be able to deduct business interest. Businesses with average annual gross receipts of $26 million or less in the past three years would not be subject to business interest limitations. If annual gross receipts are higher, the amount of deductible business interest may not exceed the sum of the taxpayer’s business interest income for the year, 30% of their adjusted taxable income and other financing interest expense for the year.
Schedule C instructions: Step-by-step
To complete your LLC Schedule C or sole proprietorship Schedule C, review the instructions below. We’ve broken down each section of the tax form and included images to show what a Schedule C looks like.
On the first line of Schedule C, enter your own name and SSN, even if you have a separate tax ID number for the business. This helps to ensure the IRS knows this Schedule C belongs with your Form 1040.
Now, we’ll go through each of the remaining lines in order.
- Line A and B. Enter a description of your business and an activity code. A list of codes can be found on pages C-17 and C-18 of the 2019 Schedule C Instructions. Choose the one that best matches your business activity.
- Line C and D. If your business has a name and tax ID number separate from your own name and SSN, you’ll enter it on this line.
- Line E. If your business has an address that is different than your home address shown on Form 1040, you’ll enter it here.
- Line F. Indicate whether your business operates on a cash or accrual accounting method.
- Line G. Indicate whether you materially participate in the business. You can find the material participation tests on Page 5 of IRS Publication 925.
- Line H. Indicate whether you started or acquired the business in the current tax year.
- Line I and J. If you paid an independent contractor at least $600 during the tax year, you are required to issue Form 1099-MISC.
Part I: Income
In Part I, you’ll calculate your gross income by entering your gross receipts for the year in line 1. If you have any returns or allowances that reduce your income, you’ll enter those in line 2 and calculate your net receipts on line 3. Line 4 is where you’ll report your costs of goods sold, which are calculated in Part III. After subtracting costs of goods sold from revenues, your resulting gross profit will go on line 5.
If you earned any other income, such as federal tax credits, you’ll enter them on line 6. Add your gross profit and other income together to get gross income on line 7.
Part II: Expenses
Part II is where you capture business expenses. Enter the different categories from your profit and loss statement on lines 8 to 26. Any expenses that don’t fall into the categories are entered in Part V, with the total from Part V flowing to line 27a.
On line 28 of Part II, you’ll enter your total expenses. You’ll then subtract total expenses from the gross income calculated in Part I, and enter the result on line 29. If you have a home office, you’ll enter your home office deduction on line 30.
If you have a net loss for the year, you will need to complete line 32 indicating whether the loss is greater than your investment in the business. You can find more information on at-risk rules in IRS Publication 925.
Part III: Cost of goods sold
Part III is where you calculate costs of goods sold. This section is only relevant if you sell products or use subcontractors to generate income in your business.
On lines 33 to 34, you’ll enter your business’s method for valuing inventory and whether you changed that method during the tax year. On line 35, you’ll enter inventory at the beginning of the year, and on lines 36 to 39 you’ll enter the other costs, such as materials or inventory purchased and direct labor costs. You’ll add up these costs on line 40.
On line 41, you’ll enter ending inventory for the year and calculate your total cost of goods sold on line 42. The result is carried to line 4 in Part I.
Part IV: Information on your vehicle
If you deducted car and truck expenses on line 9 of Part II, you’ll need to complete Part IV or file Form 4562. The Schedule C instructions can help you determine whether you need to file Form 4562.
If you’re not using Form 4562, you’ll enter your total business miles and personal miles for the year. Make sure you have records to support the numbers you enter here. Don’t guess, because if the IRS selects your return for audit, it will require proof of your mileage.
Answer the questions for lines 44 through 47b indicating whether you use your vehicle for personal use or have another car available, as well as whether you have written evidence to support your deductions.
Part V: Other expenses
Part V is where you’ll enter any expenses that didn’t fit into the categories listed in Part II. Enter subtotals from your profit and loss statement, add them up on line 48 and enter the result on line 27a in Part II.
Remember, these are only business expenses. Don’t enter any personal expenses, even if they are deductible elsewhere on your return. If you’re not sure whether an expense is deductible, check with a tax professional before submitting your return.
If your business is relatively simple, you may be able to complete Schedule C on your own, but be sure you understand the rules for deducting various business expenses, including depreciation, home office expenses and business mileage. Otherwise, it might make sense to work with a tax professional to make sure you’re filing a complete and accurate tax return.
What is the purpose of a Schedule C? Business owners must file IRS form Schedule C to report any profits or losses incurred from a sole proprietorship or single-member LLC. Schedule C is part of Form 1040, the individual income tax return that nearly everyone must file. Sole proprietorships and single-member LLCs are pass-through entities, meaning income passes through to the owner’s personal income and is taxed as individual income tax.
Can I file a Schedule C-EZ? The IRS no longer offers a simplified version of Schedule C. All sole proprietorships and single-member LLCs must report profits and losses using the standard Schedule C form when filing 2019 taxes.
When do I need to file Schedule C? Your Schedule C is due on the same date as your individual tax return: April 15. You may request a six-month extension if you cannot file by the deadline, and your new due date would then be Oct. 15.