Schedule C (Profit or Loss from Business) is a IRS document one should use to report net income and expenses incurred entering into business by a self-employed person or a sole proprietor. The document is completed along with Form 1040 to arrive at the net profit or loss that is then used to determine tax liability.
Here is an in-depth description of Schedule C:
Purpose of Schedule C
Generally, Schedule C is meant for sole proprietors, independent contractors, or freelancers who are self-employed. Report income and expenses related to self-employment using this form for net profit or loss computations.
Key Components of Schedule C
- Income Section: This is the section where you enter total income derived from your business, whether in sales, services, or the general bijou of your business. If you’re self-employed, all income received has to be added here.
- Expenses: Here, you can subtract out many ordinary and necessary business expenses such as your rent and utilities, supplies, wages, car expenses, etc. There are lines on the form for each type of expense, so you can claim either based on your actual costs or, for vehicle expenses, the standard mileage rate.
- Net Profit or Loss: Schedule C summarizes income and expenses and produces net profit or loss for your business. This figure is transferred to Form 1040 to be included in your total taxable income.
Who Must Use Schedule C
Schedule C is filed by persons whose business operates as a sole proprietorship. The following are considered:
Freelancers or independent contractors
- Sole owners of a business
- Individuals running a hobby turned into a business
Filing and Reporting
- Attach to Form 1040: Schedule C is filed with your individual income tax return (Form 1040).
- Required Records: Maintain detailed records of all income and expenses to substantiate the claims made on Schedule C. This includes receipts, invoices, bank statements, and other documents that support the business deductions.
Common Deductions
- Business Expenses: These are types of expenses for example office supplies, marketing, travel, and any other costs related to the running of business.
- Home Office Deduction: If you work from home, you may benefit from this type of deduction.
- Depreciation: Deduction is possible for depreciation on the assets being used in a business such as computers or equipment.