Schedule C Form 1040

Schedule C Tax Form 1040

Simple Instructions for Schedule C Filing for Businesses: When a US Taxpayer has a self-owned business, disregarded entity or certain income from consulting in the US or abroad — they may have to file an IRS Form Schedule C along with their 1040 tax return. The Schedule C can seem intimidating, since it requires the Taxpayer to report significant amounts of information regarding earning, expenses, etc. But, in general the Schedule C is a manageable form that most Taxpayers can handle without getting overwhelmed — and even bouts of feeling helpless can oftentimes be resolved. Let’s go through the basics of how to prepare Form Schedule C.

Introduction: Who Needs to File Schedule C

The introduction part of Schedule C, 1040 is used to identify the basics and background information of the filer, including:

• • • Name of proprietor Social security number (SSN)

    • Principal business or profession, including product or service (see instructions)

    • Enter code from instructions

    • Business name. If no separate business name, leave blank.

    • Employer ID number (EIN) (see instr.)

    • Business address (including suite or room no.)

      • City, town or post office, state, and ZIP code

    • Accounting method: (1) Cash (2) Accrual (3) Other (specify)

    • Did you “materially participate” in the operation of this business during 2020?

      • If “No,” see instructions for limit on losses . Yes No

    • If you started or acquired this business during 2020, check here .

    • Did you make any payments in 2020 that would require you to file Form(s) 1099? See instructions

    • If “Yes,” did you or will you file required Form(s) 1099?

What is the Business Code

The Business Codes are used to help the IRS identify what type of business the Taxpayer operate. As provided by the IRS:

• • • These codes for the Principal Business or Professional Activity classify sole proprietorships by the type of activity they are engaged in to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS). Select the category that best describes your primary business activity (for example, Real Estate).

    • Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C, line B. Note. If your principal source of income is from farming activities, you should file Schedule F.

Accounting Method

The two types of available accounting methods for businesses, include Cash and Accrual. Most Taxpayers operate on a Cash Basis — which means they book income when it is received, and claim deductions when they are paid:

As provided by the IRS:

• • • Generally, you can use the cash method, an accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a small business taxpayer (defined later in Part III), you must use an accrual method for sales and purchases of inventory items.

    • Special rules apply to long-term contracts (see section 460 for details). If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends beyond 12 months or the end of the next taxable year, it may not be deductible or may be deductible only in part for the year of the payment.

    • See chapter 1 of Pub. 535. For amounts includible in income and deductible as expense under an accrual method, see Pub. 538. To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.

Materially Participate

• • • Materially Participates refers to actually “participating” in the business activity — as opposed to it being a complete passive activity. As provided by the IRS:

    • Material Participation

      • For purposes of the seven material participation tests listed later, participation generally includes any work you did in connection with an activity if you owned an interest in the activity at the time you did the work.

      • The capacity in which you did the work does not matter. However, work is not treated as participation if it is work that an owner would not customarily do in the same type of activity and one of your main reasons for doing the work was to avoid the disallowance of losses or credits from the activity under the passive activity rules. Work you did as an investor in an activity is not treated as participation unless you were directly involved in the day-to-day management or operations of the activity.

    • Work done as an investor includes:

• • • • Studying and reviewing financial statements or reports on the activity

      • Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and

      • Monitoring the finances or operations of the activity in a nonmanagerial capacity.

Schedule C Part I (Income)

In order to determine the tax liability and report the business, the first step is to provide the income earned, including:

• • • Gross Receipts Or Sales.

    • Returns and Allowances

    • Subtract Line 2 From Line 1

    • Cost Of Goods Sold (From Line 42)

    • Gross Profit.

    • Other Income, Including Federal And State Gasoline Or Fuel Tax Credit Or Refund (See Instructions)

    • Gross Income

Example of Income

Schedule C Part II (Expenses)

• • • Advertising

    • Car and truck expenses

    • Commissions and fees

    • Contract labor (see instructions)

    • Depletion

    • Depreciation and section 179 expense deduction (not included in Part III) (see instructions) . . . . . Employee benefit programs (other than on line 19)

    • Insurance (other than health)

    • Interest (see instructions):

      • Mortgage (paid to banks, etc.)

      • Other

    • Legal and professional services

    • Office expense (see instructions)

    • Pension and profit-sharing plans

    • Rent or lease (see instructions):

      • Vehicles, machinery, and equipment
      • Other business property

    • Repairs and maintenance

    • Supplies (not included in Part III)

    • Taxes and licenses

    • Travel and meals:

      • Travel
      • Deductible meals (see instructions)

    • Utilities

    • Wages (less employment credits)

    • Other expenses (from line 48)

Use of Home

When Taxpayer uses a portion of their home for exclusive work purposes, they may qualify for an expense deduction — and there is a “safe harbor” available to protect Taxpayers. 

As provided by the IRS:

• • • You may be able to deduct certain expenses for business use of your home, subject to limitations. To claim a deduction for business use of your home, you can use Form 8829 or you can elect to determine the amount of the deduction using a simplified method. For additional information about claiming this deduction, see Pub. 587.

      • If you are not using the simplified method to determine the amount of expenses you may deduct for business use of a home, do not complete the additional entry spaces on line 30 for total square footage of your home and of the part of the home used for business. Just include the amount from line 36 of your Form 8829 on line 30. Simplified method. The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. In most cases, you will figure your deduction by multiplying the area (measured in square feet) used regularly and exclusively for business, regularly for daycare, or regularly for storage of inventory or product samples, by $5. The area you use to figure your deduction cannot exceed 300 square feet.

    • You cannot use the simplified method to figure a deduction for rental use of your home. Electing to use the simplified method. You choose whether or not to use the simplified method each tax year. Make the election by using the simplified method to figure the deduction for the qualified business use of a home on a timely filed, original federal income tax return for that year. An election for a year, once made, is irrevocable.

    • A change from using the simplified method in one year to actual expenses in a succeeding year, or vice versa, is not a change in method of accounting and does not require the consent of the Commissioner.

Schedule C Part III (Cost of Goods Sold)

• • • Method(s) used to value closing inventory:

      • Cost
      • Lower of cost or market
      • Other (attach explanation)

    • Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If “Yes,” attach explanation

    • Inventory at beginning of year. If different from last year’s closing inventory, attach explanation

    • Purchases less cost of items withdrawn for personal use

    • Cost of labor.

      • Do not include any amounts paid to yourself

    • Materials and supplies

    • Other costs

    • Add lines 35 through 3

    • Inventory at end of year

    • Cost of goods sold

      • Subtract line 41 from line 40. Enter the result here and on line 4 

Part IV (Vehicle)

• • • Information on Your Vehicle. Complete this part only if you are claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business. See the instructions for line 13 to find out if you must file Form 4562.
    • When did you place your vehicle in service for business purposes? (month/day/year) 
    • Of the total number of miles you drove your vehicle during 2020, enter the number of miles you used your vehicle for:
      • Business
      • Commuting (see instructions)
      • Other
    • Was your vehicle available for personal use during off-duty hours?
    • Do you (or your spouse) have another vehicle available for personal use
    • Do you have evidence to support your deduction?

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance. 

Contact our firm for assistance.