© FTI Publishing, LLC 2013 -
Individual Income Tax Guide
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-
Limited liability companies (LLCs): Generally, a single-
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 D: Enter on line D the employer identification number (EIN) that was issued to you on Form SS-
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-
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-
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-
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.
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-
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-
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-
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 – Profit and Loss From Business