Breaking Down Your Schedule C

When you venture into entrepreneurship, there’s not an official guide available that will hold your hand throughout the entire process. The achievements and shortcomings you’ll have as an entrepreneur will be vastly different from the next person’s. Despite this fact, I guarantee that both of you will have similar stories with one important requirement that some small business owners must complete -- correctly filling out and filing your Schedule C tax form.

Wondering who should file a Schedule C form? Small business owners and entrepreneurs with sole proprietorships, including freelancers and single-member LLCs, must file their business taxes with Schedule C. Doing this helps them report their net profit and loss while determining how much they need to pay in self-employment and federal income taxes.

There are nine steps you need to follow in order to complete and file your Schedule C. We know you’re busy as ever now, running your growing small business as you deal with responsibilities at home. Making this easier for you, we’ve listed the steps you’ll need. Refer back to this informational guide as you complete your Schedule C. If you experience problems with the tax form or have any questions, contact your tax consultant as they will help you figure everything out. Surging coronavirus cases nationwide has halted most in-person activities, so schedule a phone call or phone meeting with them.

1. Organizing your financial statements:

Start this process by having your accounting software open. You should have the following financial statements and documents all ready to go:

• Business profit and loss statement

• Balance sheet for the tax year

• Business tax credits you plan to use

• Your meal expenses

• The miles on your vehicle for business purposes

• Fixed asset depreciation schedules

1. Filing 1099 forms for contract employees:

When you look at the Schedule C tax form, the first section asks whether you have made any payments if you filled out Form 1099. You must file a 1099 form for every contract employee you’ve paid $600 or more throughout the year.

1. Reporting the cost of goods you’ve sold:

Once you fill out the next section with your general business information, move to the second page where you start breaking down your cost-of-goods-sold calculation. Use your accounting software as it has all the information you’ll need for this. Look at your balance sheets from the last two years to find beginning and ending inventory. Purchases, labor costs, and materials are located on last year’s income statement.

1. Reporting your gross income:

Go back to the first page where Part 1 asks for your business’s gross income. This information should be in your accounting software as well. Still unsure about what counts as your gross income? It’s your gross sales minus returns, allowances, and cost of goods sold. On the tax form, line one is your gross receipts and sales, including the sale of merchandise that was returned or discounted. The next line wants you to enter that information separately so you can calculate net sales on line three. You also need to make sure the amount you enter for the cost of goods matches your calculation on the second page.

1. Reporting your business expenses:

For Part 2, you’ll need to use your accounting software as you enter your small business tax deductions. You’ll copy and paste most information off the accounting software into your Schedule C, but there are a few differences you need to watch out for. There will be differences between your book and tax expenses when “see instructions” appear on your tax form. Before you fill this section out, you should research how much you can deduct from each business expense or if you’re able to deduct them on your Schedule C. Some differences you will notice include:

• Car and truck expenses

• Traveling and meals

• Entertainment

• Fines and penalties

• Depreciation and section 179 expense deduction

• Your small business being located at your home

1. Reporting your vehicle expenses:

Did you know the miles you travel for work count as a car or truck expense deduction? The best news? You don’t even need to have a company car or truck for this. Just make sure you keep close track of your business mileage throughout the year.

1. Adding other expenses:

Some expenses might not exactly fit into the IRS business expense categories. You would need to list them separately on the second page of the tax form.

1. Calculating net profit or loss to report:

It’s time to calculate your net profit or loss. This is pretty simple and straightforward, just subtract your gross income from your total expenses. If you’ve experienced a loss, your business might qualify for a net operating loss deduction.

1. Attach and file Form 1040:

Once everything is filled out, it’s time to file! You can e-file your return or send it through the mail. The mailing address depends on your state or territory, so check on the IRS website before you put your Schedule C in the mailbox.

References:

Lasker, Ryan. “How to Fill Out (and File) Schedule C for Form 1040.” The Blueprint, 15 Sept. 2020

“2019 Instructions for Schedule C (2019).” IRS, 22 Jan. 2020.