Schedule C, also known as “Form 1040, Profit and Loss,” is a year-end tax form used to report income or loss from a sole proprietorship or single-member limited liability company (LLC). You must file a Schedule C if the primary purpose of your business is to generate revenue or profit and if you’re regularly involved in your business’s activities.
Schedule C is due usually on or before April 15 for income or losses during the previous year. Download this IRS Schedule C Form and follow along as we will walk through the steps on how to fill out Schedule C. A simplified form, Schedule C-EZ, is no longer available for years after 2018.
Who Reports Income on Schedule C
The following businesses must report their business income on Schedule C of the owner’s personal income tax return.
- Sole proprietorships: Self-employed taxpayers, freelancers, and any other single-owner business that hasn’t taken steps to form a corporation, LLC, or other legal entity
- Single-member LLCs: If a single-member LLC doesn’t elect to be treated as a corporation, the LLC is a “disregarded entity,” and the LLC’s activities should be reflected on Schedule C of its owner’s tax return.
1. Gather the Necessary Business Information
Before filling out your Schedule C, you need to prepare your profit and loss (P&L) report for the prior year. No matter how you compile your income and deductions, a few simple bookkeeping tips can make the process much easier.
You’ll also want to have your general business information ready, like your employer ID number (EIN) if you have one. If this is not your first year filing Schedule C, have your prior Schedule C available as it will provide a lot of the required information.
Here are the five things you’ll need to complete the form:
1. The IRS’s instructions for Schedule C: This guide explains how to complete your Schedule C, but the form instructions are handy for identifying the Principal Business or Professional Activity code for your business.
2. Your employer ID number (EIN): If you have a separate EIN for your business, you must include it on your Schedule C. This can be located on the IRS notice that you receive after submitting your Form SS-4, the Application for Employer Identification Number.
Schedule C businesses are not required to have a separate EIN unless you have employees. If you don’t have an EIN, you’re required to display your Social Security number on tax forms that you send to vendors and contractors like Form W-9 and Form 1099. It’s wise to get an EIN to avoid disclosing your Social Security number.
3. Your profit and loss report for the tax year: You can find the financial information that you need to fill out your Schedule C tax form on the profit and loss report. Make sure that you have generated the report using the correct accounting method. Most small businesses file their tax returns using cash-basis accounting.
4. Inventory count and valuation as of the end of the tax year: For businesses that sell items, you’ll need to determine the cost of the goods that you sold during the tax year. This can be done by completing an annual physical inventory and comparing that information with your point-of-sale (POS) or other inventory management software. If you track inventory, make sure the cost of the inventory shown on your balance sheet matches your actual inventory. If you have less than $25 million in gross receipts, you’re not required to track inventory unless you’ve done so on a prior return.
5. Mileage records: If you are using your personal vehicle for any business activity, it is necessary to keep accurate mileage records to deduct those expenses. You can either use a paper mileage log or a smartphone app to track your mileage.
If you use an accounting software program to track your income and expenses, you can run your profit and loss report for the tax year and use that to complete each section of your Schedule C. If you’re not using accounting software, we recommend QuickBooks Online. QuickBooks will ensure your books stay organized, and it can track your vehicle mileage.
Profit and Loss Report
The P&L report, often referred to as an income statement, is a financial statement that summarizes the revenue, costs, and expenses incurred during a specific period of time, usually a fiscal year or a quarter. These reports provide information about a company’s ability to generate profit by increasing revenue, reducing costs, or both.
Below is a sample Profit and Loss report from QuickBooks Online that provides the information necessary to complete Schedule C.
2. Fill Out Schedule C Basic Business Information
You can find a fillable PDF of Schedule C on the IRS website, or you can use tax preparation software to complete the form. Below, you will find a brief explanation of how to complete each of the fields in this section.
Name of proprietor: Enter your name in this field.
Social Security number: Since the profit on Line 31 carries over to your Form 1040, you must enter your Social Security number on Schedule C, even if you also have an EIN.
Line A: Principal business or profession, including product or service―Indicate the type of business you have and whether or not you sell products or services.
Line B: Principal business or professional activity code―Select the code that best describes your business from Page 17 and 18, professional activity code list, provided by the IRS instructions.
Line C: Business name―Put the name of your business in this field. If you don’t have a business name, leave this field blank.
Line D: EIN―Enter your nine-digit EIN. If you don’t have one, then leave the field blank. If you have employees, then you need an EIN. Be sure to read our article How to Apply for an EIN.
Line E: Business address―Enter the physical address of your business. Don’t enter a post office box here. Leave the field blank if the address is the same as your address listed on Page 1 of Form 1040.
Line F: Accounting method―Select the accounting method that you use to track income and expenses (cash or accrual). This must be the same as the prior year. You may choose your method if this is the first year of the business, but most small businesses use the cash method. Read our guide to accrual vs cash accounting for more information.
Line G: Material participation in the business―Material participation means that you were heavily involved in business operations and not just an investor. If you perform at least 500 hours per year of service for the business, or you perform the majority of the services for the business, then you materially participate. However, there are other ways to qualify as well. IRS Schedule C Instructions Pages 4 and 5 list seven tests to determine material participation. This is an important question as you cannot deduct a loss in the current year if you don’t materially participate.
Line H: If you started your business in the current tax year, check this box. Otherwise, leave it blank.
Line I: If you paid a contractor $600 or more during the tax year, then select “Yes” on this line. By selecting Yes, you are required to send a 1099 Form to each contractor who you paid $600 or more to during the tax year. To learn more, check out our 1099 reporting guide.
Line J: If you selected “Yes” on Line I, then you should also select “Yes” on Line J and be sure to send out the required forms.
3. Complete 1040 Schedule C Part I―Gross Income Section
The purpose of this section is to report the income in your business. It’s also where you will calculate your gross profit and your gross income.
Schedule C businesses that have been affected by the pandemic are eligible to receive a Small Business Administration (SBA) Paycheck Protection Program (PPP) loan and forgiveness of 2.5 times your average monthly net income for 2019 or 2020. Also for 2020, PPP loans, even if forgiven, are not taxable. Please see this article on PPP loans for more information.
Below you will find a brief description of what information you need to report in the Gross Income section of Schedule C and where you can find this info on your Profit and Loss statement.
Below is an example of Part I:
Line 1: Gross receipts or sales―This is the total amount of all products and services sold to your customers before taking into account any product returns or other related costs to generate those sales.
Line 2: Returns and allowances―This is the total amount of refunds that you gave to customers for returned or damaged products.
Line 3: Enter the difference between your total income and any refunds given to customers here.
Line 4: Cost of goods sold―This is the cost of producing all of the products or services sold and must match Part III, line 42
Line 5: Subtract line 4 from line 3 to calculate the gross profit.
Line 6: Report any income that doesn’t come from your normal business operations. This is often listed as Other Income on your P&L statement. Interest income should be reported on Form 1040, line 2b, and not on Schedule C, even if the interest is from your business account.
Line 7: This is the sum of lines 5 and 6, your gross income.
4. Complete 1040 Schedule C Part II―Expenses Section
The expenses incurred by your business reduce its profit, and this translates to a lower tax liability. Most of the fields in Part II are self-explanatory, and you can pull this information from your income statement. However, there may be some expenses that don’t tie directly to any of lines 8 through 27a. You’ll use Part V of Schedule C to reflect these expenses.
Below you will find a brief description of what information you need to report in the expenses section of 1040 Schedule C. For a complete description of deductible expenses, see our guide to IRS Business Expense Categories.
You can deduct expenses paid in 2020 with a PPP loan, even if the loan was forgiven.
Below is an example of Part II:
Line 9: Car and truck expenses―You have the option to deduct the actual expenses of using your vehicle for business or taking a standard mileage deduction.
Line 11: Contract Labor―Enter payments made to independent contractors for services provided. Don’t include any wages paid to employees reported on Form W-2.
Line 12: Depletion―Depletion is only reported by companies that own and use natural resources such as mining, timber, and petroleum businesses.
Line 13: Depreciation and section 179―Include the annual deduction allowed to recover the cost of business equipment or investment property used in your business that has a useful life beyond the tax year. To learn more about how to calculate this deduction, check out IRS Publication 946.
Line 18: Office expense―Deduct office supplies and postage expenses here. Expenses related to maintaining a home office belong on Line 30, not on Line 18.
Line 19: Pension and profit-sharing plans―Deduct any contributions that you made for the benefit of your employees to a pension or profit-sharing plan. Retirement contributions for yourself don’t get reported on Schedule C.
Line 21: Repairs and maintenance―Deduct minor repairs and maintenance that doesn’t add to the property value. For example, paying a plumber to repair a toilet or to unclog a sink would go here.
Line 23: Taxes and licenses―You can deduct real estate and personal property taxes on business assets, licenses and fees for your trade or business, and the employer portion of Social Security and Medicare taxes paid on wages of your employees.
Line 24: Travel and meals―In most cases, you can only deduct 50% of the meal expenses for your business. The meals must be incurred while away from home overnight or have a specific business purpose. You must keep documentation of the business nature of the expense as well as the name of the client or potential client with which you dined to support this.
Line 26: Wages―Enter total salary and wages paid to employees for the tax year included on Form W-2. Don’t include amounts paid to yourself.
Line 27a: Other expenses―List any business expenses that you did not report on Lines 8 through 30. You will provide the detail of these expenses in Part V of Schedule C.
Line 28: This is the sum of all your expenses on lines 8 through 27a. This amount should equal the total expenses on your P&L, with adjustments made for nondeductible expenses, such as 50% of your meal expenses.
Line 30: Expenses for business use of home―You may be eligible to deduct expenses for the business use of your home if you use a portion of your home exclusively for business. See our guide to the home office deduction for more information.
Line 31: Net profit (or loss)―This is the taxable income from your business. Positive amounts on line 31 must be reported on Form 1040, line 12, and Schedule SE, line 2. Negative amounts on line 31 are usually deducted on Form 1040, line 12 unless your income comes from estates or trusts, or not all your investment is at risk. If this applies to you, it is best to speak with an accountant or tax professional.
Line 32―If line 31 is negative, you need to check one of the following boxes:
- 32a: All investment is at risk―Select this option if you have a business loss and all of the amounts you have invested are at risk, meaning there is no protection against the loss. Most schedule C business owners have all their investment at risk.
- 32b: Some investment is not at risk―Select this option if you have a business loss, but not all of your investment in the company is at risk. The most common example is nonrecourse loans used by the business to purchase equipment. Refer to the at-risk rules on Page 14 of the Schedule C instructions.
5. 1040 Schedule C Part III―Cost of Goods Sold Section
Part III reports the direct cost of producing the sales reported on Line 1. Complete this section if you sell goods or merchandise or use subcontractors to generate income.
Most of these lines are self-explanatory. You can pull the amounts requested directly from your P&L or POS system or make a simple calculation to determine the necessary subtotals. Be sure not to duplicate any expenses that were included in Part II.
Below is an example of Part III:
Line 33: Inventory method―You don’t need to keep track of inventory if you have less than $25 million in gross receipts. However, tracking inventory might help you to manage your business. If you do track inventory, select the inventory valuation method that you use. You can value inventory using any method approved by the IRS. However, if you are using the cash method of accounting, then you are required to use the cost method to value inventory. The other option listed is “lower of cost or market.” This means that you’re valuing your inventory at either the historical cost or the current market value, whichever is lower. If you decide to change how you account for inventory, you’ll need to file Form 3115. Refer to IRS Pub 538 for more information on inventory valuation methods.
Line 35: Beginning inventory―Indicate the inventory on-hand at the beginning of the tax year. This should match with your ending inventory from last year. You need to provide an explanation if it doesn’t.
Line 36: Purchases―Enter the total amount of inventory purchased less any product used for personal reasons.
Line 41: Ending inventory―Enter the cost of inventory on-hand at the end of the year.
Line 42: Cost of Goods Sold―Total cost of goods sold on this line must match the cost of goods sold on Part I, Line 4.
6. 1040 Schedule C Part IV―Information on Your Vehicle
Most taxpayers report vehicle information on Page 2 of Form 4562, which is also used to report depreciation. However, if you are claiming vehicle expenses on Line 9, but you are not claiming depreciation for any assets, then complete section IV instead of Form 4562.
Below is a copy of Part IV:
For 2020, you can deduct 57.5 cents per business mile instead of your actual vehicle expenses. It is very important that you keep a record of the miles that you drive for business purposes, but there are several smartphone apps to make this easy. Your records must include the following information:
- Date and purpose of the trip
- Name of the client or supplier, if applicable
- Total miles driven round trip
7. 1040 Schedule C Part V―Other Expenses Section
Part V provides a breakdown of other expenses. A good rule of thumb is to keep any expenses labeled as “Miscellaneous Expense” to a minimum. Make sure the total on line 48 matches line 27a from Part II.
Below is an example of Part V:
Schedule C Due Dates
Schedule C, Profit and Loss From a Business, is filed along with your personal income tax return, Form 1040. It is usually due on April 15 of the following year. If April 15 falls on a weekend or holiday, it is due on the following business day. Because of the ongoing worldwide pandemic taking place in 2020 and 2021, On March 17, 2021, the IRS and Treasury Department announced that the filing date for the 2020 tax year had been extended from April 15, 2021, to May 17, 2021.
May 17, 2021
April 15, 2022
You can receive an automatic six-month extension until Oct. 15 (Nov. 17, 2021, for the 2020 tax year) by filing Form 4868. An extension of time to file doesn’t extend the time to pay. You must estimate the tax you will owe and make a payment when you file Form 4868.
Additional Filing Requirements for Schedule C Businesses
Your Schedule C is now complete, but don’t forget to do the following:
- Report your net income on Form 1040, Schedule 1, Line 3.
- Calculate the Qualified Business Income Deduction (Section 199A deduction) on Form 8995 or Form 8995-A and report it on Form 1040, Line 10. Most Schedule C businesses with positive net income qualify, but see the instructions to Form 8995 to learn more.
- Complete Schedule SE if your net income is over $400 and report your self-employment tax on Line 4.
The most difficult part of filing your Schedule C is accurately summarizing your income and deductions, which is why we recommend using accounting software. Once you have a complete and accurate Statement of Profit or Loss, you should be able to complete your Schedule C without much difficulty.