Anyone who operates a business as a sole proprietor must fill out Schedule C when filing his or her annual tax return. IRS form Schedule C accompanies the main tax return form, 1040, for taxpayers who must report a profit or loss from their business. This schedule asks about the taxpayer’s business name, product or service, business address, accounting method, gross receipts or sales, and cost of goods sold. This form is also where business owners report their tax-deductible business expenses, such as advertising, car and truck expenses, commissions and fees, supplies, utilities, home office expenses and many more. A business expense must be ordinary and necessary to be listed as a tax deduction on Schedule C. Small business owners also use Schedule C to take a deduction for the use of a personal vehicle for business purposes and to report when it was placed in service for business purposes and the number of miles it was driven for business use.
Using the entries on Schedule C, the taxpayer calculates the business’s net profit or loss for income tax purposes. This figure then is transferred to form 1040 and is used in calculating the taxpayer’s overall tax liability for the year. Taxpayers who operate more than one sole proprietorship must file a separate Schedule C for each business.
There are a few other less common scenarios that require the use of Schedule C. These include earning wages and incurring expenses from being statutory employee, receiving income and taking deductions from certain qualified joint ventures, and receiving certain income reported on Form 1099-MISC, Miscellaneous Income. Also, sole proprietors engaged in certain lines of business may have to file other forms in addition to Schedule C. For example, landlords may need to file Schedule E to report rental income that is not subject to self-employment tax, and sole proprietors with a home office will need to file form 8829 to claim a deduction for expenses related to the business use of their home.