Schedule C filling requirement : Section Wise Explanation

Are you new to schedule C? Lets understand schedule C filling requirement, information you should have and who can help you with it.

What is schedule C in form 1044?

It feels scary if you are new to tax filling form. Schedule C is not that scary or complicated. Schedule C is the part of form 1044 tax return form. It is applicable to self employed person. It is 3 page short form. In nutshell, Schedule c is the profit and loss account for your business.

Schedule C filling requirement:

So who is required to file schedule C? It is not for every business owner in USA. Schedule C is for unregistered business owners or LLC owner. If you are running sole proprietorship or you own single member LLC, you are required to file schedule c form along with form 1044.

Let me give you some idea about proprietorship or LLC, in case you are unaware of it.

Sole proprietorship: Sole proprietorship is unregistered business operated by single person. The method you use for generating income is irrelevant. You might be freelancer or earning from side gig or working as independent contractor. You need to attach schedule c with form 1044 while filling your taxes.

LLC:  LLC is Limited Liability Corporation. Single member LLC has option to report all income and expense of LLC to member’s individual return. So all net profit/loss of business will be reported in member’s tax return.

How to fill C Form:

There are three ways you can fill your C form.

Get help of CPA:

If you want to avoid headache later, get help of CPA. Just submit the details you have and he will guide you or fill your form C along with form 1044. Your CPA will give you additional tips in claiming correct deduction or things not to do in next year. It always pays off getting help of expert.

Use reliable software:

There are good tax filling software available in market. You can fill your form with the help of it. You just need to enter the amount and other calculation software does automatically. You need to spend only few bucks to get the subscription of software.

Do yourself:

If you are not interested in any option above, you can still do it yourself using IRS website. Bit tricky but anyways.

Information required to fill schedule C:

Financial Statement :

I am keep repeating this on my blog that take your books seriously. People are coming to us with 4-6 years pending returns and bookkeeping. Don’t be that lazy. Gets your books done on monthly or quarterly basis. You can get help of our team if you don’t find any quality bookkeeper. Just contact us. 

You need to generate financial statements from your software and keep with you or supply to your CPA to enter details in schedule C. If you don’t get sense with financial statement, please get help of CPA.

Motor vehicle expense:

You can claim motor vehicle expense straight using standard mileage deduction or you should have proof for your business trips and related motor expense. Discuss your tax consultant about this.

Inventory details:

If you are manufacturer, you will be required to fill cost of goods sold section. You should have opening and closing inventory amount with you.

Payment to contractor:

If you have paid independent contractor during the year, you should have form 1099 with you. These payments will be allowed as deduction.

Read our 1099 guide.

Home office expense:

You should have home mortgage interest, repair, electricity, rent details with you. IRS allows to claim proportionate amount of home office expense while filling tax return.

Business assets :

Have you purchased or sold any business assets during the year? You should have the record ready with you to submit or use while filling Schedule C.

Schedule C Instruction :

Schedule C is divided in 5 parts. Lets understand all sections one by one.

Basic Information : 

Before filling calculation part, you need to give basic details of yourself and business as per below:
1. Name of the proprietor
2. Social security number
3. Product or service
4. Business name ( Optional)
5. Employer ID number ( EIN)
6. Business address

Accounting method :

You need to tick your accounting method of calculating profit and loss. If you are new to accounting method, we recommend go though our post – Accrual vs cash accounting method.

Material participation:

IRS get your confirmation about  your involvement in running business. Your hours spent determine your material participation. You need to go through IRS guideline for it or just ask your CPA about it.

Form 1099:

When you pay any independent contractor, you need to file form 1099 to IRS. If you have paid any contractor, have you completed this requirement? Or will complete the requirement? You will be required to give correct info about it.

Schedule C Form Download:

You can download schedule C Form from IRS site. Keep this with you for better understanding of section.

Section wise explanation of Schedule C :

Section 1

Line 1: Here, you need to mention total annual sales amount or receipt from sale of services. This amount includes money you received as independent contractor.
Line 2: Have you issued refund or Is there any sales return? You need to show that amount here.
Line 3: Line 3 is your net sales.
Line 4: Cost of goods sold figure you get at  part 3.
Line 5: Net sales less cost of goods sold is your gross profit
Line 6: Whether you have received any fuel credit, mention in box 6.
Line 7: Line 7 is your gross income.

Section 2 :

This is the important section which helps you save your taxes. Here, you are required to enter all the figures related to your business expense.

Common expense you can claim are as follow:
1. Advertising
2. Vehicle expense
3. Commission
4. Contract labor
5. Depreciation on fixed assets
6. Insurance
7. Employee benefit program
8. Pension sharing plans
9. Travel expense
10. Legal fees
11. Professional fees
12. Interest on mortgage
13. Other interest paid
14. Office expense
15. Repair and maintenance
16. Rent paid for vehicle or for property ( Office rent)
17. Travel & Meals
18. Utility
19. Wages

Line 28: Here, you are required to write total of all expense.
Line 29: Tenative profit / loss : Subs tract line 28 from line 7 and you will get loss or profit for the year.

Home office expense:

If you are using your home as business space, you can claim home office expense . For it, you need to attach form 8829. You need to enter figure arrive in form 8829 in line 30.

Line 31: You can find net profit of business by subtracting  line 30 from line 29.

Line 32: If you incur loss during the year, you need to confirm risk factor by ticking the boxes of investment risk.

Part 3: Cost of goods sold :

This part is not applicable to service business. However, if you are selling goods ( Includes wholesaler and ecommerce), you need to show figures in this part.

Inventory method: You are required to tick inventory method you used. It may be cost or Lower of cost or market value or other methods such as FIFO, LIFO, average. Check your inventory software to know the method it uses.

Cost of goods sold: Cost of goods sold can be arrived by adding purchase, opening inventory, cost of labor , material and supplies, other costs and then subtracting closing stock.

Part 4: Information on your vehicle:

This section is required to file if you are claiming vehicle expense. You are required to give following info here:

1. Miles you drove including business and commuting
2. Personal use of vehicle
3. Other vehicles you have
4. Last vehicle service date
5. Do you have evidence to support the claim?

Part 5: Other expense:

Here, you can mention expense not included in part 2.

Wrap up:

Schedule C is the part of your tax return and we advice to fill all the information carefully. The information you enter should have relevant proof of document. In case you get IRS audit, this will be helpful. Share this post with your friends and make them tax aware.