© FTI Publishing, LLC 2013 - 2017. All Rights Reserved.    Terms of Use / Disclaimer

Home    About   Contact Us  Privacy Policy

Home About Table of Contents Forms & Instructions News

Individual Income Tax Guide

F

T

I

Publishing

Terms of Use / Disclaimer

2016 Quick Reference Tables

Quick Reference Tables

Tax Calendar

Search Tips

Introduction to Schedule C


Use Schedule C (Form 1040) to report income or (loss) from a business you operated or a profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity.

NOTE: A sporadic activity or a hobby does not qualify as a business and the income and expenses from such an activity is not reported on Schedule C. You should generally report income from a nonbusiness activity on Form 1040, line 21, or Form 1040NR, line 21.

You should also use Schedule C to report:

(a) wages and expenses you had as a statutory employee;

(b) income and deductions of certain qualified joint ventures; and

(c) ertain income shown on Form 1099-MISC, Miscellaneous Income. The Instructions for Recipient (which are on the back of Copy B of Form 1099-MISC, Miscellaneous Income) discusses the types of income to report on Schedule C.

Schedule C-EZ: Small businesses and statutory employees with business expenses of $5,000 or less may be able to file Schedule C-EZ, Net Profit From Business, instead of Schedule C.

Limited liability companies (LLCs): Generally, a single-member domestic LLC is disregarded as a separate entity for federal income tax purposes, and is referred to as a disregarded entity. However, a single-member LLC will not be disregarded and will be treated as a separate corporation if the member has made an election (i.e., checked the box) for the LLC to be treated as a corporation. See the instructions to Form 8832, Entity Classification Election, for more information about this election.

Lines A through J

Line A: Describe the business or professional activity that provided your principal source of income reported on line 1. If you owned more than one business, you must complete a separate Schedule C for each business. Give the general field or activity and the type of product or service. If your general field or activity is wholesale or retail trade, or services connected with production services (mining, construction, or manufacturing), also give the type of customer or client. For example, “wholesale sale of hardware to retailers” or “appraisal of real estate for lending institutions.”

Line B: Enter on line B the six-digit code from the Principal Business or Professional Activity Codes chart.

Line D: Enter on line D the employer identification number (EIN) that was issued to you on Form SS-4, Application for Employer Identification Number (EIN). Do not enter your SSN on this line. Do not enter another taxpayer's EIN (for example, from any Forms 1099-MISC, Miscellaneous Income, that you received). If you do not have an EIN, leave line D blank.

You need an EIN only if you have a qualified retirement plan or are required to file employment, excise, alcohol, tobacco, or firearms returns, or are a payer of gambling winnings. If you need an EIN, see the Instructions for Form SS-4.

Single-member LLCs:   If you are the sole owner of an LLC that is treated as a disregarded entity, you may have an EIN that was issued to the LLC (in the LLC's legal name) if you are required to file employment tax returns and certain excise tax returns. However, you should enter on line D only the EIN issued to you and in your name as a sole proprietor. If you do not have such an EIN, leave line D blank. Do not enter on line D the EIN the IRS issued to the LLC.

Line E: Enter your business address. Show a street address instead of a box number. Include the suite or room number, if any. If you conducted the business from your home located at the address shown on Form 1040, page 1, you do not have to complete this line.

Line F: Generally, you can use the cash method, accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a qualifying taxpayer or a qualifying small business taxpayer (see the Part III instructions), you must use the accrual method for sales and purchases of inventory items. Special rules apply to long-term contracts (see Section 460 for details).

If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends substantially beyond the close of the year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 1 of Publication 535, Business Expenses.

If you use the accrual method, report income when you earn it and deduct expenses when you incur them even if you do not pay them during the tax year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer. Other rules determine the timing of deductions based on economic performance. See Publication 538, Accounting Periods and Methods.

To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a Section 481(a) adjustment.

Example: You change to the cash method of accounting and choose to account for inventoriable items in the same manner as materials and supplies that are not incidental. You accrued sales in 2014 for which you received payment in 2015. You must report those sales in both years as a result of changing your accounting method and must make a Section 481(a) adjustment to prevent duplication of income.

A net negative Section 481(a) adjustment is taken into account entirely in the year of the change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive Section 481(a) adjustments on line 6. If the net Section 481(a) adjustment is negative, report it in Part V, Other Expenses.

For details on calculating Section 481(a) adjustments, see the Instructions for Form 3115, and Rev. Proc. 2006-12, 2006-3 I.R.B. 310. Also see Rev. Proc. 2006-37, 2006-38 I.R.B. 499.

Line G: If your business activity was not a rental activity and you met any of the material participation tests, as explained on the Material Participation page, or the exception for oil and gas applies, check the “Yes” box. Otherwise, check the “No” box. If you check the “No” box, this activity is passive. If you have a loss from a passive activity, see the Passive Activity Rules page. If you have a profit from the rental of property to a nonpassive activity (i.e., to an activity in which you materially participated), the net rental income from the property is treated as nonpassive income.

Rental of personal property: Generally, a rental activity (such as long-term equipment leasing) is a passive activity even if you materially participated in the activity. However, if you met any of the five exceptions described in the Rental Activities page, the rental of the property is not treated as a rental activity and the material participation rules apply.

Exception for oil and gas: If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability, check the “Yes” box. The activity of owning a working interest is not a passive activity, regardless of your participation.

Limit on losses: Your business activity loss may be limited if you checked the “No” box on line G. In addition, your rental activity loss may be limited even if you materially participated. In general, a business activity in which you do not materially participate or a rental activity is a passive activity and you have to use Form 8582, Passive Activity Loss Limitations, to figure your allowable loss, if any, to enter on Schedule C, line 31. See the Passive Activity Rules page and the instructions to Form 8582.

Line H: If you started or acquired this business in 2015, check the box on line H. Also check the box if you are reopening or restarting this business after temporarily closing it, and you did not file a 2014 Schedule C or C-EZ for this business.

Line I: If you made any payment in 2015 that would require you to file any Forms 1099, check the “Yes” box. Otherwise, check the “No” box.

You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You may also have to file an information return if you sold $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other similar basis for resale.

NOTE: See the Guide to Information Returns for which Forms 1099 must be filed, the amounts to report, and the due dates for the required Forms 1099.

Table of Contents

Schedule C-EZ

Limited Liability Companies

Line A

Line B

Line D

Line E

Line F

Line G

Line H

Line I

Schedule C Profit and Loss From Business