Taxes

Step-by-step instructions for completing Schedule C

The IRS Schedule C form is the most common business income tax form for small business owners. The form is used as part of your personal tax return. For 2019 and beyond, you can file your income taxes on Form 1040. The 1040-SR is available for seniors (age 65+) with large print and a standard deduction table. (Form 1040-EZ and Form 1040-A are no longer available.)

Using Schedule C for Business Taxes

Several types of businesses use Schedule C to file their business taxes:

Single ownerBusinesses are sole proprietors of businesses that have not been registered in a state as another business form: LLC or corporation. These businesses pay taxes using the Business Income Report on Schedule C.

TO Single Member LLC The business pays taxes using Schedule C if the business has not elected to pay taxes as a corporation or S corporation.

A husband-and-wife business organized as a partnership can become a qualified joint venture and pay taxes using two Schedule C forms instead of using the more complicated partnership form. There are restrictions and qualifications for this election.

The Annex C Process: An Overview

  • The process for completing Schedule C begins with gathering information.
  • Complete the form, adding information and doing the calculations.
  • This process will give you a net income or loss amount for your business. Add this amount to your personal tax return, along with other income you received during the year.
  • You’ll also need to figure the self-employment tax due (Social Security and Medicare for small business owners) if you had income (not a loss) during the year. Add the self-employment tax liability to your tax return.

Changes to Schedule C with the New Tax Law

The 2017 tax law (effective for 2018 and later taxes) made several changes that affect your business income tax and how you file Schedule C.

  • You may be able to use the cash method of accounting and be exempt from counting inventory and deducting certain expenses instead of depreciating them.
  • You may be eligible for the qualified business income (QBI) deduction and an additional 20% deduction on top of deducting usual business expenses.
  • You can no longer deduct entertainment expenses and deductions for business meals have changed.
  • The regulations for taking business losses have changed and tax loss carry forward has been eliminated.

Before attempting to tackle Schedule C on your own, consider using one of the commercial tax software programs available, either online or as a download. They’ll walk you through a series of questions to make sure you don’t miss out on anything important. These programs will also include your Schedule C on your personal tax return.

Steps to complete Schedule C

Step 1: Gather Information

business income: You will need detailed information about the sources of income for your business. Include returns and bonuses.

Prepare an itemized profit and loss statement (net income statement) to give to your tax preparer or to use in preparing your Schedule C. Your business accounting software should have this form. It’s easy to transfer information from this form to your Schedule C.

cost of goods sold: If you have an inventory of products for sale, you will need to collect information for this calculation. Will need:

  • 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. To

Business expenses: Gather information on all business expenses (they should be on your profit and loss statement). Include:

  • Telephone, utilities, computer expenses and other office expenses
  • Business insurance, such as business property insurance and disability insurance,
  • Supplies, including office supplies
  • Wages you paid. and payments she made to non-employees
  • Interest on loans, leases, mortgages, and other business debt
  • Meal expenses can only be 50% deductible. Entertainment expenses are no longer deductible.
  • Some expenses are difficult to categorize on a tax return. This is a place for miscellaneous expenses like petty expenses on your business tax return, so feel free to include all of these hard-to-categorize items.

Step 2: Calculate gross profit and revenue

Now that you have information about your revenue and cost of goods sold, you can calculate the revenue and gross profit for your business.

Include cost of goods sold calculations. You’ll need to go to Part III-Cost of Goods Sold to do the calculation. Then add the total in the Income section on Line 4.

  • Gross sales income – Returns and discounts = Net income
  • Net receipts – Cost of goods sold = Gross profit
  • Gross profit + Other income from tax credits or other sources = Gross income

Step 3: Include your business expenses

The business expenses 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, including property and malpractice insurance, but not health insurance.

Interest on mortgages and other business debts are 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, repair and maintenance costs, supplies, taxes and licenses, travel expenses, meals and entertainment, utilities, and wages.

Line 27 is for “other” expenses. They include bank fees, uniforms and clothing, dues for clubs and organizations, Internet and website charges, books, magazines, and software, phone, and cell phone costs.

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 filing.

Wages, salaries and payroll tax expenses are deductible costs. Total wages paid, the employer’s share of FICA (Social Security and Medicare) taxes, 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 to include information about the expense for the business use of your home:

  • Option A involves completing Form 8829, calculating the total area of ​​your home and obtaining a percentage for your home-based 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 commercial space in the home up to 300 square feet for a maximum deduction of $1,500. Enter this information in the appropriate sections on line 30. You may only use the space that is used regularly Y exclusively for your business regardless of how you figure the deduction.

Part IV: Information About Your Vehicle: This is an informational, non-calculated section to add to your Schedule C. You will need to include information here about business driving mileage, commuting mileage, and other driving mileage.

Line 47a asks if you have evidence to support your deduction. Be sure to keep excellent records of business miles driven and business purpose, in case of an audit. This article on an easy way to track business miles may be helpful.

Part V allows you to provide more detail about other expenses you are deducting. This is the place to include your cell phone, Internet provider, and website expenses, as well as bank charges and other miscellaneous expenses. Try to include as many of these as possible on lines 8 through 26. The total of these other expenses goes on line 27.

Step 5: Calculate your net income

The final calculation is for net income:

  • Enter the total expenses on Line 28 and subtract this amount from Line 7 to obtain your estimated profit on Line 29.
  • Then subtract the expenses for the business use of your home on line 30 to get your net gain or loss on line 31.

And 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 or not your loss is at risk, on Lines 32a and 32b (Most small business owners are at risk). total if they fully participate in the business). You may need to file Form 461 Business Loss Limitation if you have a business loss.

Finally, add Schedule C to your tax return

Carry the online net profit/loss from line 31 of your Schedule C to line 12 of Schedule 1 of your Form 1040. Add or subtract your income or loss from this business to other income or loss from other businesses, but do not include no salary from an employer.

Don’t forget the self-employment tax

The total net profit from line 31 of your Schedule C is also used to calculate the self-employment taxes that must be paid by the owner of the business. If the business makes a loss, no self-employment tax is due. Self-employment tax is calculated on Schedule SE.

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