IRS Schedule C (Form 1040) (2013): Business Profit or Loss

What Is IRS Schedule C (Form 1040) (2013) For

IRS Schedule C (Form 1040) (2013) is used by sole proprietors and small business owners to report business income, business expenses, and net profit from their own business activity on a personal tax return. It helps taxpayers document their gross receipts, cost of goods sold, and allowable tax deductions, enabling them to determine whether their business earned income or incurred a loss for the tax year. It also applies to independent contractors, statutory employees, and single-member LLC filers who are required to report income for tax purposes.

If you’re catching up on past filings, a completed Schedule C can help resolve an unfiled federal income tax return and bring your records up to date.

When You’d Use IRS Schedule C (Form 1040) (2013)

You would use IRS Schedule C (Form 1040) (2013) when your business activity requires you to report profits, business expenses, or self-employment income for federal tax filing.

1. Filing as a sole proprietor or single-member LLC: This applies when you operate your own business and must report income and business expenses on your personal tax return because you do not file as a separate legal business entity.
   
   
2. Reporting self-employment income as an independent contractor: This applies when clients do not withhold taxes, which requires you to report income and pay your own taxes on gross receipts earned during the tax year.
   
   
3. Reporting income as a statutory employee: This applies when you receive a W-2 with the statutory employee box checked and must still complete the Schedule C tax form to document business use and report income.
   
   
4. Filing late or amended tax returns: This applies when you need to correct reporting income, business expenses, or cost of goods sold from a prior tax season through a revised filing schedule.
   
   
5. Using a separate Schedule C for joint ventures: This applies when spouses elect to file two Schedule Cs for one shared business, so each spouse reports profits, business expenses, and self-employment taxes accurately.

Key Rules or Details for the 2013 Tax Year

IRS Schedule C (Form 1040) (2013) contains several rules that determine how you report income, calculate gross profit, and apply tax deductions for business purposes.

1. Business versus hobby rule: This determines whether your activity qualifies as a genuine business or a hobby, which affects your ability to deduct business expenses and calculate profit or loss on Form 1040.
   
   
2. Material participation requirement: This determines whether your activity is considered active participation, which affects whether losses can be deducted from other income on your tax return.
   
   
3. Accounting method selection: This determines whether you use the cash or accrual accounting method when reporting income, tracking office expenses, and deducting business expenses for tax purposes.
   
   
4. Inventory and cost method rules: These determine how you track goods sold using accurate inventory records and how you calculate the cost of goods sold through the required cost method.
   
   
5. Information return requirements: These determine when you must issue Forms 1099 to independent contractors and professional services providers who received payments of six hundred dollars or more during the tax year.

Step-by-Step (High Level)

1. Enter gross receipts and other income: This step requires reporting income received from your business activity, including all gross receipts and any additional income that must be included for tax purposes.
   
   
2. Calculate the cost of goods sold: This step involves listing the beginning inventory, purchases, labor, and related expenses to accurately compute the cost of goods sold and determine the gross profit.
   
   
3. List deductible business expenses: This step requires entering business expenses such as legal and professional services, office supplies, office expenses, car and truck expenses, meal expenses, and other expenses used to operate your own business.
   
   
4. Complete the vehicle expenses section: This step requires providing mileage records and identifying business purposes for vehicle expenses, including truck expenses and qualifying business use miles.
   
   
5. Compute depreciation and Section 179 amounts: This step involves reporting depreciation for equipment, furniture, and qualifying assets, as well as listing the amounts elected under Section 179 for tax deductions.
   
   
6. Calculate tentative profit and net profit: This step involves subtracting total business expenses from gross income to determine the tentative profit, and then reviewing remaining adjustments to finalize the net profit or loss.

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Common Mistakes and How to Avoid Them

Taxpayers often make errors when completing IRS Schedule C (Form 1040) (2013), which can increase the likelihood of receiving notices or being audited in the future.

1. Mixing personal and business expenses: Avoid this mistake by maintaining separate schedule records and using business bank accounts that keep personal and business expense activity separate.
   
   
2. Poor documentation for vehicle expenses: Avoid this mistake by keeping complete mileage records that show dates, destinations, business purposes, and total miles for deductible vehicle expenses.
   
   
3. Incorrect worker classification: Avoid this mistake by confirming whether individuals are employees or independent contractors before you withhold taxes, issue Forms W-2, or provide 1099 statements.
   
   
4. Missing required information returns: Avoid this mistake by preparing and submitting all required 1099 forms for professional services and payments made to independent contractors during the tax year.

What Happens After You File

After you submit IRS Schedule C (Form 1040) (2013) with your personal tax return, the IRS reviews the information to verify income reporting, business expenses, and calculations of profit or loss. Most electronic filings are processed within a few weeks, while paper filings typically require additional time. 

The IRS may issue your refund or send a notice if further documentation is needed to confirm reporting income, inventory amounts, or extra income. If your Schedule C results in a tax bill you can’t pay in full, you may request an IRS Form 9465 installment agreement to spread payments over time.

FAQs

Can I use Schedule C EZ for the 2013 tax year?

You may use Schedule C EZ if your total business expenses were five thousand dollars or less, you had no inventory, you used the cash accounting method, and you did not claim depreciation or vehicle expenses that require detailed reporting.

Do sole proprietors need an Employer Identification Number (EIN)?

A sole proprietor may file IRS Schedule C (Form 1040) (2013) using a Social Security number unless the business hires employees, withholds taxes, or maintains pension plans that require an employer identification number.

How does IRS Schedule C affect self-employment taxes?

Your net profit from Schedule C is used to calculate self-employment taxes, which cover Social Security and Medicare, and the IRS includes these amounts in the Schedule SE calculation during the tax return process.

Can small business owners file a separate schedule for joint ventures?

Spouses who jointly operate a business may elect to file two Schedule Cs when they qualify for a joint venture election and wish to report income and business expenses separately.

What expenses qualify as business use deductions?

Expenses such as legal and professional services, office supplies, car and truck expenses, meal expenses, and other ordinary and necessary costs may qualify when they support the principal business and serve legitimate business purposes.