Schedule C (Form 1040): Profit or Loss From Business—A Complete Guide for 2018

What Schedule C (Form 1040) Is For

Running your own business or working as an independent contractor means wearing many hats—including that of a tax filer. Schedule C (Form 1040) is the IRS form that allows sole proprietors to report their business income and expenses to determine their profit or loss for the year. This guide will walk you through everything you need to know about Schedule C for the 2018 tax year, using plain language to explain what can seem like a complicated process.

Schedule C is your business's tax report card. If you operated a business as a sole proprietor, worked as a freelancer, or earned income as an independent contractor during 2018, this is how you tell the IRS about your business finances. The form captures two essential pieces of information: how much money your business brought in (income) and how much you spent running it (expenses). The difference between these two figures is your net profit or loss, which ultimately affects your overall tax bill.

The IRS considers your activity a business if your primary purpose is making a profit and you're involved with continuity and regularity—not just occasionally or as a hobby. For example, if you consistently sell handmade crafts online with the intention of making money, that's a business. If you occasionally sell items from your garage at random times with no profit motive, that's likely not a business for tax purposes.

Schedule C handles various business situations. You'll use it if you're a consultant working for yourself, a rideshare driver, a freelance writer, a small retail shop owner, or anyone else operating as a sole proprietor. The form also covers statutory employees (certain types of workers who receive a W-2 form but can deduct business expenses), and it can be used by married couples who choose to treat their jointly-owned business as a "qualified joint venture" rather than a partnership.

One important detail: Schedule C attaches to your regular Form 1040 tax return. It doesn't stand alone. The net profit or loss you calculate on Schedule C flows to Schedule 1 of your Form 1040, where it becomes part of your total income. If you made a profit, you'll also need to file Schedule SE to calculate self-employment tax (which covers your Social Security and Medicare contributions, since you don't have an employer paying half of these taxes for you).

When You’d Use Schedule C (Form 1040)

For the 2018 tax year, Schedule C was originally due on April 15, 2019—the same deadline as your individual income tax return. If you filed for an extension, you had until October 15, 2019, to submit everything. But what if you missed these deadlines entirely, or discovered errors after filing?

If you never filed your 2018 Schedule C and you should have, you need to file it as soon as possible. The IRS can assess penalties for late filing, but filing late is always better than not filing at all. The penalty for failing to file is typically much steeper than the penalty for paying late, so getting that return submitted should be your priority.

Perhaps more commonly, you might need to amend your Schedule C after you've already filed. Life happens—you discover a box of forgotten receipts, realize you claimed an expense incorrectly, or receive a corrected Form 1099-MISC that changes your reported income. In these situations, you'll file Form 1040-X (Amended U.S. Individual Income Tax Return) along with a corrected Schedule C.

You generally have three years from the date you filed your original return (or two years from the date you paid the tax, whichever is later) to file an amended return claiming a refund. For 2018 returns filed by the April 15, 2019 deadline, this means you had until April 15, 2022, to amend and claim a refund. However, if you owe additional tax because of the amendment, you should file as soon as possible to minimize interest and penalties.

When filing Form 1040-X, you'll explain what you're changing and why. Attach your corrected Schedule C and any other affected forms. The IRS takes longer to process amended returns than original ones—typically eight to twelve weeks, though it can take longer during busy periods. You can check the status of your amended return using the "Where's My Amended Return?" tool on IRS.gov after three weeks.

Key Rules or Details for the 2018 Tax Year

Several important rules govern Schedule C that affect how you report your business activity. Understanding these fundamentals will help you avoid problems down the road.

Accounting Methods

You must choose an accounting method—either cash or accrual. Most small business owners use the cash method because it's simpler: you report income when you actually receive it and deduct expenses when you actually pay them. The accrual method, which reports income when earned (even if not yet received) and expenses when incurred (even if not yet paid), is more complex but may be required if you maintain inventory, unless you qualify as a small business taxpayer.

Material Participation

The form asks whether you "materially participated" in your business. This matters for passive activity loss rules. Generally, if you worked more than 500 hours in the business, your participation was substantially all the participation in the activity, or you participated more than 100 hours and at least as much as anyone else, you materially participated. If you didn't materially participate and you have a loss, special limitations may apply.

Business Use Percentage

Any expense you claim must relate to your actual business operations. If you use something for both business and personal purposes (like your car or phone), you can only deduct the business percentage. Keep records showing how you determined this percentage—the IRS will want to see your documentation if they examine your return.

Capitalization Rules

Not all business expenses are immediately deductible. Larger purchases that have a useful life beyond the current year—like equipment, furniture, or vehicles—must typically be depreciated over several years. However, Section 179 allows you to expense (immediately deduct) up to a certain amount of qualifying property in the year you place it in service, which for 2018 was up to $1 million.

Standard Mileage Rate

For 2018, if you drove your car for business, you could deduct actual vehicle expenses or use the standard mileage rate of 54.5 cents per mile. Once you choose a method for a particular vehicle, you're generally stuck with it (with some exceptions for leased vehicles).

Home Office Deduction

If you use part of your home exclusively and regularly for business, you may qualify for home office deductions. The space must be your principal place of business or where you regularly meet with clients. You can calculate actual expenses or use a simplified method ($5 per square foot, up to 300 square feet).

Step-by-Step (High Level)

Working through Schedule C becomes manageable when you break it into sections. Here's the general flow of completing the form.

Part I—Income

Start by entering your gross receipts—all the money your business took in during 2018. This includes cash, checks, credit card payments, and amounts reported on Forms 1099-MISC you received. If you issued any refunds or allowances to customers, subtract those on line 2. If you sell products and maintain inventory, you'll need to complete Part III first to calculate your cost of goods sold, which gets subtracted on line 4. Add any other business income (like interest on business accounts or scrap sales) on line 6. The result is your gross income.

Part II—Expenses

This is where your careful recordkeeping pays off. Schedule C lists common business expense categories: advertising, car and truck expenses, commissions and fees, contract labor, depreciation, employee benefits, insurance, interest, legal and professional services, office expenses, rent, repairs, supplies, taxes, travel, meals, utilities, and wages. You'll enter the appropriate amounts for each category based on your records. Remember that meals are only 50% deductible (the form specifically breaks this out), and entertainment expenses are no longer deductible for 2018.

Part V allows you to list "Other Expenses" that don't fit the standard categories—things like bank fees, business licenses, professional dues, or education related to your current business. After adding all expenses (including home office expenses from Form 8829 if applicable), you'll subtract the total from your gross income.

Part III—Cost of Goods Sold

If you manufacture products, purchase goods for resale, or maintain inventory, you must complete this section. You'll report your inventory value at the beginning and end of the year, add your purchases and production costs, and calculate the cost of goods sold. This figure flows to line 4 of Part I.

Part IV—Vehicle Information

If you claimed car or truck expenses and aren't filing Form 4562 for depreciation, you'll answer questions about when you placed the vehicle in service, how many miles you drove for different purposes, and whether you have evidence to support your deduction.

The Bottom Line

Line 31 shows your net profit or loss. If you have a profit, this amount increases your taxable income and flows to Schedule 1 (Form 1040) and typically to Schedule SE for self-employment tax. If you have a loss, you'll need to determine whether all your investment in the business was "at risk" (generally yes for most sole proprietors), which affects whether you can deduct the full loss.

Common Mistakes and How to Avoid Them

Even experienced business owners stumble over certain Schedule C pitfalls. Here are the most frequent errors and how to sidestep them.

Mixing Personal and Business Expenses

This is the number-one mistake. That dinner with your spouse isn't deductible just because you discussed business ideas. The new laptop you bought isn't fully deductible if your kids also use it for homework. Only genuine business expenses qualify, and for mixed-use items, only the business percentage is deductible. The solution: keep business and personal finances separate whenever possible. Use a dedicated business bank account and credit card, which makes tracking much easier and provides clear documentation.

Poor Recordkeeping

Claiming expenses you can't document is asking for trouble. If the IRS examines your return, "I know I spent it, but I can't find the receipt" doesn't work. Keep organized records of all income and expenses—receipts, invoices, bank statements, mileage logs, and explanatory notes. Digital tools and apps can make this easier, but even a simple filing system works if you maintain it consistently throughout the year, not just at tax time.

Misunderstanding the Difference Between Statutory Employees and Independent Contractors

If you received a Form W-2 with the "statutory employee" box checked, you report that income on Schedule C but don't owe self-employment tax on it. Regular independent contractor income (reported on Form 1099-NEC or 1099-MISC) gets reported on Schedule C and is subject to self-employment tax. Confusing these categories leads to calculation errors.

Forgetting About Required Information Returns

If you paid anyone $600 or more for services in 2018, you likely needed to file Form 1099-MISC. The question on line I asks whether you made such payments and filed the required forms. Answering this incorrectly or failing to file required 1099s can result in penalties. Keep track of all contractor and service provider payments throughout the year.

Incorrectly Calculating Vehicle Expenses

You can't deduct both actual expenses and the standard mileage rate—it's one or the other. If you use the standard mileage rate, you don't separately deduct gas, oil, repairs, or depreciation; those are already built into the rate. You can add parking fees and tolls on top of the mileage deduction. Keep a contemporaneous mileage log showing date, destination, business purpose, and miles driven for each business trip.

Overclaiming the Home Office Deduction

The home office deduction has strict requirements: exclusive and regular use for business. If your "home office" is the kitchen table where your family eats dinner every night, it doesn't qualify. The space must be your principal place of business or where you regularly meet with clients or customers. When you do qualify, calculate carefully—using either actual expenses (complicated but potentially more valuable) or the simplified method (easier but capped at $1,500).

Not Understanding the New Tax Law Changes

The 2018 tax year brought significant changes due to the Tax Cuts and Jobs Act. Entertainment expenses became non-deductible (though 50% of business meals remained deductible). Several employment credits required adjustments to your wage deduction. The new qualified business income deduction (calculated on Form 1040, not Schedule C) potentially allowed you to deduct up to 20% of your qualified business income. Missing these changes could mean overpaying or underpaying your taxes.

What Happens After You File

Once you've filed Schedule C as part of your Form 1040, several things happen—some immediately, others over time.

Processing and Initial Review

The IRS processes your return, typically within a few weeks if filed electronically. Their computers perform automatic checks, comparing your reported income against information returns filed by others (Forms 1099, W-2, etc.). If something doesn't match, you may receive a notice asking for clarification or proposing changes. These "matching notices" are common and don't necessarily mean you did anything wrong—often there's a simple explanation.

Self-Employment Tax Calculation

If you showed a profit on Schedule C, you'll owe self-employment tax (Social Security and Medicare taxes for self-employed individuals) calculated on Schedule SE. For 2018, the self-employment tax rate was 15.3% on the first $128,400 of net earnings, plus 2.9% on earnings above that threshold. Half of this self-employment tax is deductible on your Form 1040, which slightly reduces your income tax burden.

Refund or Payment

Your Schedule C profit or loss combines with all your other income and deductions to determine whether you get a refund or owe additional tax. If you owe and didn't pay enough through estimated quarterly payments during 2018, you might face an underpayment penalty. For future years, you're generally required to make estimated tax payments if you expect to owe $1,000 or more when you file your return.

Audit Possibilities

Schedule C filers face higher audit rates than wage earners because there's more opportunity for error or manipulation. The IRS uses computer algorithms to flag returns that look unusual compared to similar businesses. Common audit triggers include consistently reporting losses (suggesting hobby activity rather than a real business), very high expenses relative to income, or round numbers suggesting estimates rather than actual figures. However, don't let fear of an audit prevent you from claiming legitimate deductions. Just ensure you have documentation for everything you claim.

Building Your Business Tax Record

The information on your Schedule C becomes part of your long-term tax record. If you're building a business, your historical Schedule C filings demonstrate business income and growth—useful if you ever apply for business loans, mortgages, or need to prove income for other purposes. Keep copies of your filed Schedule C and supporting documentation for at least three years (the standard audit period), though seven years is safer, and some records (like those related to property) should be kept even longer.

Impact on State Taxes

Don't forget that your Schedule C affects your state income tax return, too. Most states use your federal adjusted gross income (which includes Schedule C profit or loss) as the starting point for state tax calculations. Some states have their own rules about what business expenses are deductible, so you might need to make adjustments on your state return.

FAQs

Can I file Schedule C if I only did freelance work part-time while keeping my regular job?

Absolutely. Schedule C isn't just for full-time entrepreneurs. Many people file Schedule C for side businesses, freelance work, or gig economy income while working a regular job that generates a W-2. You'll report your W-2 wages separately and complete Schedule C for your self-employment income. Just remember that even part-time business income triggers self-employment tax obligations once your net earnings exceed $400.

What's the difference between Schedule C and Schedule C-EZ, and can I use the simpler version?

Schedule C-EZ is a simplified version for small businesses with straightforward finances. You can use it if your business expenses are $5,000 or less, you use the cash accounting method, didn't have inventory, didn't have a net loss, only had one business, didn't have employees, aren't claiming depreciation, and aren't deducting home office expenses. Most businesses with any complexity at all won't qualify for C-EZ, but if you do, it can save some time.

Do I need a separate business bank account and EIN to file Schedule C?

Not legally, but it's highly recommended. While you can operate under your Social Security number and mix business finances with personal accounts, separating them makes recordkeeping infinitely easier and looks more professional if you're ever audited. You need an Employer Identification Number (EIN) only if you have employees, have a qualified retirement plan, or are required to file certain employment, excise, or alcohol/tobacco/firearms tax returns. Otherwise, using your SSN is fine, though getting an EIN is free and easy through the IRS website.

My spouse and I run a business together—do we file one Schedule C or two?

It depends on how you structure things. If you're in a community property state and want to keep things simple, one spouse can file a Schedule C reporting all the income as a sole proprietorship. Alternatively, you can elect "qualified joint venture" status, which lets each spouse file their own Schedule C reporting their share of income and expenses, giving each partner Social Security credit for their earnings without the complexity of filing partnership returns. If you're not married or want a more formal structure, you'd typically form a partnership and file Form 1065 instead.

How many years of losses can I claim before the IRS considers my business a hobby?

There's no hard rule, but the IRS uses a "3-out-of-5 years" guideline: if your business shows a profit in at least three of the last five years (including the current year), it's presumed to be for-profit. However, this is just a presumption, not an absolute rule. You can have losses for many years and still be considered a legitimate business if you can demonstrate you're operating in a businesslike manner, keeping good records, adjusting your approach to improve profitability, and genuinely intending to make a profit. Conversely, if you're consistently claiming losses on what looks like a hobby, expect scrutiny.

What should I do if I receive a notice from the IRS about my Schedule C after filing?

Don't panic—most IRS notices are straightforward requests for information or corrections of simple errors. Read the notice carefully to understand what they're asking. Common notices include requests to verify income (when they have different numbers than you reported), questions about specific deductions, or proposed adjustments based on mathematical errors. Respond by the deadline shown in the notice with the requested information or explanation. If you disagree with a proposed change, you have the right to dispute it, but you must respond within the timeframe given. If the notice is confusing, consider consulting a tax professional.

Can I deduct health insurance premiums as a business expense on Schedule C?

No—health insurance premiums for yourself (as opposed to for your employees) don't go on Schedule C. However, as a self-employed person, you can deduct health insurance premiums you paid for yourself, your spouse, and your dependents on Schedule 1 (Form 1040), line 29, as an "adjustment to income." This is actually better than deducting it on Schedule C because it reduces both your income tax and your self-employment tax. To qualify, you must have a net profit on Schedule C, and you can't be eligible to participate in an employer-subsidized health plan through your own or your spouse's employer.

For more information and to access official forms and instructions, visit IRS.gov/ScheduleC.

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