Schedule C: Consider income, expenses, and vehicle information
Each year, sole proprietors have the chore of preparing and filing Schedule C with their 1040 to show the IRS whether their business had a taxable profit or a deductible loss. Schedule C can seem daunting, but filing will be easier if you plan ahead and keep good records.
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We've broken down the form into sections, so you can see what the IRS expects from you and what records you'll need at tax time.
Part I: Income
In this section, you calculate your gross income.
Start by reporting gross receipts or sales for the year, including amounts reported on 1099 forms that were issued by clients or others for whom you provided services.
Other types of income you must report include:
- The value of goods or services you received through barter transactions
- Bad debts you recovered if they were written off on prior-year tax returns
- Interest on business bank accounts.
Total up these items and subtract your cost of goods sold (which is calculated in Part III and explained below) to arrive at gross income.
Part II: Expenses
This is where good record keeping can really save you money on your taxes. You can write off a wide variety of business expenses you paid during the year, including things like:
- Advertising costs
- Commissions
- Supplies
- Legal fees
- Repairs and maintenance
- office expenses
You can also deduct:
1. Car and truck expenses: You can report these costs in one of two ways: Enter your actual expenses—for gas, oil changes, repairs, insurance, etc.—if you have supporting documentation, or take the IRS standard mileage rate. The rate for 2021 is 56 cents per mile.
2. Depreciation and Section 179 expense deduction: The law allows businesses to depreciate—or gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more than one year. For these assets, you first fill out Form 4562: Depreciation and Amortization, and enter the result on Schedule C.
You also use Form 4562 if you elect the Section 179 "expensing" deduction. Section 179 lets you deduct the full cost of assets (both new and used) in the year they are placed in service, subject to certain limits.
3. Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. For qualified assets that were purchased new before September 28, 2017, the old rules of 50% bonus depreciation still apply. The new rules allow for 100% bonus "expensing" of assets that are new or used.
The percentage of bonus depreciation phases down in the year:
- 2023 to 80%
- 2024 to 60%
- 2025 to 40%
- 2026 to 20%.
After 2026 there is no further bonus depreciation. This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions, such as qualified film, television, and live staged performances, and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first-year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
4. Pension and profit-sharing plans: Only enter contributions you made for your employees on Schedule C. If you also made contributions for yourself, report those on your 1040.
5. Travel, meals, and entertainment: For business travel, deductible expenses include:
- Lodging
- Transportation
- Tips
- Fax services
- Internet connections
- Some other incidental expenses
You'll see that travel is reported separately from business meals and entertainment:
- For tax years prior to 2018, you can deduct only 50 percent of your allowable meals and entertainment expenses.
- Beginning in 2018, generally, only meals are 50 percent deductible while entertainment is not deductible at all.
- For tax years 2021 and 2022, there is an exception for qualified business meals provided by a restaurant. In these cases, the meals are 100 percent deductible.
6. Wages: This category may seem straightforward, but can be a little tricky if you produce and sell goods. You should report amounts paid to employees, such as bookkeepers, receptionists, salespeople, etc., here. However, If you have production workers, you'll report their wages as part of the cost of goods sold in Part III.
7. Expenses for business use of your home: You qualify for this deduction if you use part of your home regularly and exclusively for your business. To qualify, your home office must be:
- Located in a separate area in your home where you don't mix business with other activities
- Used for business on an ongoing basis, not just once in a while
You calculate the home office deduction first on Form 8829: Expenses for Business Use of Your Home and then enter the result here.
Once you've entered all your deductions, subtract them from your gross income to get your net Schedule C profit or loss. The net income amount is then transferred to your Form 1040.
Do you have a loss? Then you're not done, yet. You have to go through some additional steps in this section before transferring that loss to your 1040, because it may not be fully deductible.
- You must declare whether you're fully "at-risk" for amounts invested in the business.
- If you are, then you can go ahead and take the full write-off.
- If not, you'll have to fill out Form 6198: At-Risk Limitations to determine if your deduction is limited.
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Part III: Cost of goods sold
This section is for any business that sells goods to customers, so skip Part III if you're in a service business—consultant, yoga teacher, software programmer, daycare center owner, etc.
Start by reporting the value of your inventory at the beginning of the year. This amount is usually the same as what you reported for closing inventory on last year's Schedule C.
Next, report the following costs and add them to your beginning inventory:
- Merchandise, but don't include the value of anything withdrawn from sale or for your personal use.
- Wages paid to production workers, factory supervisors, and the like, if you're in manufacturing or construction.
- Expenses for supplies and other overhead.
From that total, subtract the value of your closing inventory. The result is your cost of goods sold. Enter that amount in Part I to reduce your gross income.
Part IV: Information on your vehicle
In this section, you give the IRS information about any vehicles for which you're deducting expenses in Part II. The IRS uses the answers in this section when reviewing your vehicle deduction to see if it seems legitimate. So it's important, for example, to be able to answer YES to the question about whether you have written documentation for your deduction. If you answer NO, don’t be surprised if the IRS asks you to justify the deduction.
Part V: Other expenses
If you have business costs that don't fit into the categories listed in Part II, detail and report the total of those expenses on the line for "Other Expenses" in Part V.
Examples of other possible business expenses include:
- Membership dues for professional organizations
- Subscriptions to business publications
- Fees you paid to credit card companies for processing customer card transactions
- Business-related gifts to suppliers, clients, contractors, etc.
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