The first year I had to file taxes as a business owner, I was scared, overwhelmed, and a bit under-prepared. The good news is that if you have kept up on your bookkeeping all year, and if you are a sole proprietor or are a single-owner LLC, doing your business taxes is EASY. Schedule C is included with your 1040 form, and is straightforward and easy to fill out.
I’m going to show you exactly what is included in the Schedule C, and where to find the info. This applies whether you are manually filling out the forms OR if you are using tax-filing software like TurboTax. Of course, if you have specific concerns or don’t feel comfortable preparing your taxes, hire an accountant. Similarly, if you don’t have clean books for the year, hire a bookkeeper to help you with clean-up STAT!
Who Should Fill out the Schedule C
Schedule C is intended for single-owner LLCs and sole-proprietors. It’s intended for businesses with at least $5,000 in expenses. If you have micro-business with very low costs, then you may be able to file a Schedule C-EZ instead.
Before You Start
Before you even get started, make sure to have all your end-of-year reports and financial information available. You will need:
- 1040 and Schedule C tax forms. Even if you are going to use software like TurboTax I’d recommend using these forms for reference.
- Schedule C instructions from the IRS. The tutorial I provide here will work for most businesses. However, there are special circumstances that I will not cover here. I highly encourage you to also review the IRS instructions to make sure you aren’t missing anything.
- Your year-end income statement
- Your year-end balance sheet
- Statement showing all assets purchased during the year
- Statement showing all inventory
Name of Proprietor
This is your name.
Social Security Number
This is your personal social security number, not your EIN.
Give a brief description of your business. If you are a freelancer, describe the services you provide.
This is a pre-defined IRS code to identify the type of business you have. You can find this code in the Schedule C instructions.
Provide your business name if you have one. This may be the legal name of your LLC, or if you are a freelancer without a “business name,” you can leave this line blank.
In this field, you must use your EIN (employer identification number) in this field rather than your SSN. If you don’t have an EIN, leave it blank.
Business address. This should be the address that you have registered with your state for your business. It must be a street address and not a P.O. Box. If you are a freelancer or small business owner that works out of your house, this may be your home address.
This is the accounting method you used for your bookkeeping during the year. Most small businesses use the cash method. If you’re not sure, check with your bookkeeper. If you are changing your accounting method from the previous year, you must also file Form 3115.
For the vast majority of small businesses, the answer to this question is yes. If you were involved in the day to day management and operations of the business, you had “material participation.”
If you started a new business during the year, check this box. Also, if you are re-starting a business, and did not file a Schedule C for the prior year, also check this box. Otherwise, leave blank.
It’s very possible that you are responsible for filing 1099 Forms. If you had any employees or hired freelancers or contractors during the year, you probably need to file 1099 forms as well.
Part I: Income
Line 1: Gross receipts and sales
This should be the total of your revenue accounts for the year. It may consist of product sales, service revenues, or freelancer earnings. Add all revenue accounts from your year-end income statement to determine this total.
While this won’t apply to most of you, but some folks (life insurance agents, travelling salespeople, etc) may have received a W-2 with a “Statutory employee” check in box 13. If so, include this income in Line 1 AND check the box on Line 1.
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Line 2: Returns and Allowances
This line should include any returns you received on physical goods you sold (or refunds on services you provided), and any discounts your provided on the sales price of your good or service. Find these figures from the revenue section of your income statement.
The total in Line 1 minus Line 2. This should also equal the total revenue section of your Income statement.
Line 4: Cost of Goods Sold
This number should come from the COGS account on your income statement. You will also calculate COGS later on in the form. The number of Line 4 should match Line 42.
Line 5: Gross Profit
Line 3 minus line 4. This should match the Gross Profit line on your income statement.
Line 6: Other Income
This section includes any interest income, bad debts you’ve recovered, and other misc income. There’s a good chance that this line may be blank.
Line 7: Gross Income
Line 5 plus line 6.
Part II: Expenses
Using your income statement, enter the totals for each of your expense accounts. If you have a type of expense account that is not listed in lines 8-26, manually list these accounts and totals in part 5. Sum these custom expense accounts and enter the total on line 27a.
Note: If you have trouble mapping your expense accounts to the Schedule C, you may want to consider this when doing your bookkeeping for the next year. It’s easiest when you create your chart of accounts to match your tax forms.
Line 28: Total Expenses
Sum of lines 8 thru 27a. This should match your total expenses on your Income Statement
Line 29: Tentative profit or (Loss)
Line 7 minus line 28. This should match the bottom-line on your income statement.
Line 30: Expenses for business use of your home
Use Form 8829 to calculate this amount if you work out of your home.
Line 31: Net profit or loss
Line 29 minus line 30. You will go on to enter this same amount on your Form 1040, line 12 and on Schedule SE, line 2.
Line 32: Risk
Only check a box on line 32 if you have a loss. Otherwise, skip this line. If all money invested in your business is your own, the check 32a “All investment is at risk.” If you have investors or loans that are protected against loss, then check 32b. If you checked 32b, you must also fill out and include Form 6198.
Part III: Costs of Goods Sold
You should already know your COGS from your year-end Income Statement. In Part III of the schedule C, however, they make you re-calculate it.
This refers to how you’ve recorded the inventory you hold. Most folks value their inventory based on how much you paid for it. In this case, you would check box (a) cost.
Your beginning inventory balance for the current year should match the closing inventory reported on your prior year Schedule C. If there is a difference, you will have to attach an explanation explaining why they are different.
This should match your closing inventory from the prior year. If not, attach your explanation.
If you used any of your inventory for personal use, enter that amount here.
Lines 37, 38, 39
Include any other labor (not your own), materials, supplies, or other costs that were directly consumed in the conversion of inventory into goods that were sold.
Sum lines 35 thru 39
Line 41: Inventory at end of year
Enter that total inventory that you held at the end of the year. This should match your year-end inventory statement and the inventory line of your December 31 balance sheet.
Line 42: Cost of Goods Sold
Line 40 minus line 41. This should match your COGS account from your income statement, and line 4.
Part IV: Information on your vehicle
If you have a vehicle you use for your business and you claimed these expenses on line 9, fill out this section. Otherwise, skip it. Also, if you are claiming depreciation expense on the vehicle, you will need to fill out Form 4562. In that case, skip this section as well.
This is the date you began using your care for business purposes.
Split out the miles you drove the vehicle for business, commuting (to and from your business location), and other (personal use). Do not include any miles PRIOR to the date listed on line 43.
Line 45 and 46
These are pretty straightforward.
Line 47a and 47b
You are required to keep detailed records of any car or truck expenses. To learn more on this, read IRS Pub. 538.
As you can see, filing your small business taxes is easy as long as you’ve kept your books in order all year and you have the appropriate year-end financial reports. If you need help cleaning up your books, producing reports, or setting up your bookkeeping system to make future years easier—contact us. We can provide full-service bookkeeping support, or consulting in setting you your cloud-based bookkeeping system. If your books are in order, taxes are easy!