As a sole proprietor or single-member limited liability company (LLC), the mere thought of tax season may cause anxiety. Before you get worked up, however, remember the Iowa Western SBDC provides resources to help. In this post, we discuss what you need to complete your Schedule C and how to do so. With proper planning and organization, the filing process should prove relatively smooth and simple.
What Is the Schedule C? The Schedule C is basically a profit-and-loss statement for sole proprietors and single-member LLCs. It is filed with your personal income tax return, and consists of two pages with five parts total.
Lines A Through J This section consists of basic contact information — name, address, EIN, and so forth. Although this section is straightforward, some IRS verbiage may confuse you. Here are some tips: • EIN– If you don’t have an EIN, leave this line blank. • Line F– If you use the cash method, income isn’t counted until payment is received for your products or services. Under the accrual method, you count income when the transaction occurs — that is, when services are rendered or orders are placed — rather than when payment is actually received. • Line G– As a sole proprietor or single-member LLC, you most likely materially participated in your business operations. One exception is if contractors conducted the majority of your company’s work. For additional information, refer to the Schedule C instructions. • Line I– You must issue 1099s to any contractors you paid $600+ throughout the year. Your answer on Line I corresponds with your answer on Line J. For more information, visit our blog post discussing 1099s.
Part I: Income Calculate your total sales receipts for the year and write it on Line 1. • Returns and Allowances– If you sell products and allow customers to return these items for refunds, write the total amount refunded on this line. Only do this if you included the original sale on Line 1, though! • Cost of Goods Sold– If your small business does not manufacture or buy and re-sell merchandise, leave Line 4 blank and do not complete Part III below. Your gross profit will be the same number as Line 1. If, however, your firm does manufacture or sell products, you must complete Part III and enter the amount from Line 42 here. • Other Income– Items included on this line include: interest from checking and savings accounts; bad debts written off last year but collected this year; prizes or awards; and tax credits or refunds. Do not include income from sales of your products or services — this belongs on Line 1! Unless your business had “other income,” your gross profit will equal your gross income. Record gross income on Line 7.
Part II: Expenses In this section, Lines 8 through 27 deal with various deductible expenses, including: legal fees, mileage, interest, utilities, wages, depreciation, and so forth. Refer to the Schedule C instructions for specific restrictions, and remember: if you have no proof of an expense (receipts, bank statements, mileage forms, etc.), don’t deduct it! If audited, you will need solid proof for each expense.
Add up all your expenses and write the total on Line 28. Then, subtract your expenses (Line 28) from your gross income (Line 7). The resulting figure is your net profit (or loss). Enter this amount on Line 29.
Next, account for your home office expense on Line 30 (if applicable). You can use the IRS’ simplified calculation method (multiplying $5 for each square foot of your home office) or you can use Form 8829. Regardless of which method you use, however, remember: your workspace must be used exclusively for business use. In other words, if your home office is also your dining room table, you cannot deduct this as a business expense.
Enter your home office expense total on Line 30, then subtract it from Line 29. The result is your total net profit (or loss): • If you earned a profit, enter it on Line 12 of your 1040 tax return. You also need to complete Schedule SE to calculate self-employment tax owed. (Enter your net profit on Line 2 of your Schedule SE.) • If you show a loss, enter the amount on Line 31 and check either Box 32a or 32b. If you are not liable for the loss, check 32b and complete Form 6198 to determine the amount you can deduct. If, on the other hand, you are liable for the loss, check box 32a. Then, write the amount from Line 31 on Line 12 of your 1040.
Parts III, IV, and V These sections are not mandatory for every small business: • Part III deals with Cost of Goods Sold. If your firm manufactures or sells merchandise, you must complete this section. • Part IV relates to vehicle expenses. Keep track of mileage throughout the year, as you will need written records as proof for this section. • Part V covers expenses not addressed elsewhere, including: tools, postage, service charges, overdraft fees, and so forth. Again, keep written records of these expenses.
Lastly, check Form 3800 for general business tax credits as well as Schedule C’s instructions for required forms pertaining to your particular business.
Once you complete your tax return, attach all forms, and submit to the IRS, you’re finished! If you have additional questions, contact us at (712) 325-3376.
The Iowa Western Small Business Development Center is a free resource for small businesses and start-ups in Southwest Iowa. We serve seven counties – including Cass, Fremont, Harrison, Mills, Page, Pottawattamie, and Shelby – and provide consulting services to help businesses start, grow, and prosper.
(Photo credit: Steven Depolo / Flickr)
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