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Individual Income Tax Guide

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Schedule C, Part I.­ – Income

Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. In certain circumstances, however, gross income does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873, Extraterritorial Income Exclusion, to figure the extraterritorial income exclusion. Report it on Schedule C as explained in the Instructions for Form 8873.

Line 1 – Gross Receipts or Sales: Enter gross receipts from your trade or business, including amounts you received in your trade or business that were properly shown on Forms 1099-MISC, Miscellaneous Income. If the total amounts that were reported to you in box 7 of Forms 1099-MISC are more than the total you are reporting on line 1, attach a statement explaining the difference.

Statutory employees: If you received a Form W-2 and the "Statutory employee" box in box 13 of that form was checked, you report your income and expenses related to that income on Schedule C or C-EZ. Enter your statutory employee income from box 1 of Form W-2, Wage and Tax Statement, on line 1 of Schedule C or C-EZ and check the box on that line. Your employer should have withheld Social Security and Medicare tax from your earnings; as a result, you do not owe self-employment tax on these earnings. Statutory employees include:

full-time life insurance agents;

certain agent or commission drivers and traveling salespersons; and

certain homeworkers.

If you had both self-employment income and statutory employee income, you must file two Schedules C. You cannot use Schedule C-EZ or combine these amounts on a single Schedule C.

NOTE: Qualified joint ventures should report rental real estate income not subject to self-employment tax on Schedule E, Supplemental Income and Loss. See Qualified Joint Venture, and the Instructions for Schedule E.

Installment sales: Generally, you cannot use the installment method to report income from the sale of:

personal property regularly sold under the installment method; or

real property held for resale to customers.

But you can use the installment method to report income from sales of certain residential lots and timeshares if you elect to pay interest on the tax due on that income after the year of sale. See Code Section 453(l)(2)(B) for details. If you make this election, include the interest in the total on Form 1040, line 62. Check box c and enter the amount of interest and “453(l)(3)” on the line next to that box.

If you use the installment method, attach a statement to your return. Show separately for 2016 and the 3 preceding years:

gross sales;

cost of goods sold, gross profit;

percentage of gross profit to gross sales;

amounts collected; and

gross profit on amounts collected.

Line 2 – Returns and Allowances: Report your sales returns and allowances as a positive number on line 2. A sales return is a cash or credit refund you gave to customers who returned defective, damaged, or unwanted products. A sales allowance is a reduction in the selling price of products, instead of a cash or credit refund.

Line 6 – Other Income: Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you received in 2016, any amount of credit for biofuel claimed on line 2 of Form 6478, Biofuel Producer Credit, any amount of credit for biodiesel and renewable diesel fuels claimed on line 8 of Form 8864, Biodiesel and Renewable Diesel Fuels Credit, credit for federal tax paid on fuels claimed on your 2015 Form 1040, prizes and awards related to your trade or business, and other kinds of miscellaneous business income. Include amounts you received in your trade or business as shown on Form 1099-PATR, Taxable Distributions Received From Cooperatives.

If the business use percentage of any listed property (defined in Line 13, later) dropped to 50% or less in 2016, you should report on line 6 any recapture of excess depreciation, including any Section 179 expense deduction. Use Part IV of Form 4797, Sales of Business Property, to figure the recapture. Also, if the business use percentage drops to 50% or less on leased listed property (other than a vehicle), you should include on line 6 any inclusion amount. See chapter 5 of Publication 946, How to Depreciate Property, to calculate the amount.

Table of Contents

Line 1 – Gross Receipts

Statutory Employees

Installment Sales

Line 2 – Returns and Allowances

Line 6 – Other Income

Chapter 19  Schedule C: Income