IRS Schedule C (Form 1040) (2019): Business Profit or Loss

What IRS Schedule C (Form 1040) (2019) Is For

IRS Schedule C (Form 1040) (2019) is used by a sole proprietor or self-employed person to report business income and business expenses to the Internal Revenue Service for tax purposes. It helps small business owners calculate the net profit that flows to their personal tax return and determines the self-employment taxes owed for the tax year. It applies to individuals running a sole proprietorship, operating a single-member LLC, or providing professional services as their primary business activity.

When You Would Use IRS Schedule C (Form 1040) (2019)

You would use Schedule C, Form 1040, when you must report income and related business activity for your own business.

1. Operating a sole proprietorship: This applies when you run your own business as a sole proprietor and must report business income and business expenses on your personal tax return.
   
   
2. Running a single-member LLC: This applies when an LLC has not elected corporate taxation, and the member must use the Schedule Cc tax form to report profit or loss for the tax year.
   
   
3. Working as an independent contractor: This applies when you receive Form 1099 for services and must report self-employment income and deductible expenses by filing Schedule C.
   
   
4. Receiving statutory employee income: This applies when your W2 contains the statutory employee designation, and you must complete a separate Schedule C for that income source.
   
   
5. Managing multiple business activities: This applies when you operate more than one business and must prepare two Schedule Cs to file Schedule C for each separate business activity accurately. Schedule C is submitted with your IRS Form 1040, ensuring all business income and expenses are accurately reflected in your personal tax return.

Key Rules or Details for the 2019 Tax Year

These rules help ensure that your IRS Schedule C (Form 1040) (2019) is completed accurately for tax purposes.

• Reporting gross receipts and gross income: This involves listing all amounts received from your business activities and adding other income that affects your overall taxable income for the tax year.
  
  
• Tracking the cost of goods sold: This involves calculating the beginning inventory, purchases, goods sold, and ending inventory to determine how the cost of goods sold reduces the total gross profit.
  
  
• Using a consistent accounting method: This requires choosing either the cash or accrual method and applying it consistently when entering exact expenses and income amounts.
  
  
• Following business use and vehicle rules: This requires keeping mileage records and documenting car and truck expenses or vehicle expenses related strictly to business use.
  
  
• Reporting legal and professional services: This requires listing payments made for legal services, tax preparation, and professional services that qualify as allowable business expense deductions.
  
  
• Maintaining an employer identification number when required: This applies when you have employees or specific pension plans and must list the employer identification number on the tax form.

Step by Step (High Level)

These steps outline how to complete IRS Schedule C (Form 1040) (2019) correctly for your personal income tax return.

1. Gather your income statement and records: This requires collecting all documents that show gross receipts, business income, mileage records, and business expenses so you can report accurate figures for your own business.
   
   
2. Enter your business profile: This requires listing the principal business, business name, business address, and the accounting method used for your Schedule C Form 1040.
   
   
3. Report income in Part I: This requires entering gross receipts, other income, fuel tax credits, and adjustments that will determine gross income for the tax year.
   
   
4. Calculate the cost of goods sold if applicable: This requires using the cost method to compute the cost of goods sold for goods sold by product-based operations.
   
   
5. Enter deductible expenses: This requires listing each business expense category, such as office expenses, car and truck expenses, legal and professional services, and other relevant expenses, to calculate the total costs.
   
   
6. Determine your tentative profit or loss: This involves subtracting all allowable costs from total income to calculate your tentative profit before it is transferred to your tax return.
   
   
7. Transfer results to other forms: This involves transferring the final net profit or loss to your income tax return, allowing the Internal Revenue Service to calculate self-employment tax and taxable income.

Common Mistakes and How to Avoid Them

These issues occur frequently when completing IRS Schedule C (Form 1040) (2019).

1. Missing or underreporting income: This can be avoided by confirming that all reported income items appear on the tax form and that payments from clients are fully reflected.
   
   
2. Mixing personal and business expense items: This can be avoided by documenting only legitimate business expenses and excluding personal car costs, personal meals, and household spending.
   
   
3. Overlooking eligible tax deductions: This can be avoided by reviewing the Schedule C instructions and evaluating whether all business expense categories apply to your small business.
   
   
4. Incorrect vehicle expense reporting: This can be avoided by maintaining accurate mileage records and selecting either the standard mileage method or exact expenses in a consistent manner.
   
   
5. Using inaccurate business information: This can be avoided by double-checking the business name, business address, and employer identification number to ensure that Schedule C contains correct data.

Use a business tax transcript service to double-check that all reported income and deductions on your Schedule C match IRS records before you file.

What Happens After You File

Once you file IRS Schedule C (Form 1040) (2019), the Internal Revenue Service uses your reported figures to calculate taxable income, self-employment tax, and credits that apply to your personal income tax return. The net profit or loss you report affects your overall tax return and determines how self-employment taxes apply to your business income. The information can also influence future tax deductions, reporting requirements, and records maintained for your business activities.

For help with tax debt or ongoing IRS challenges, explore our business tax relief services and get professional support for your small business.

FAQs

Do I need to file Form 1040 Schedule C-EZ instead of Form 1040 Schedule C?

Schedule C-EZ is no longer available, so you must use the current Schedule C form to report income and business expenses for your business activity.

Can a small business owner file Schedule C without a tax professional?

A small business owner can file Schedule C independently if they understand the tax form; however, many taxpayers choose to work with a tax professional to avoid errors and confirm allowable deductions.

Does every legal business entity use Schedule C?

Not every legal business entity qualifies because partnerships and corporations file separate tax returns, while only certain business entities, such as sole proprietors and single-member LLCs, file Schedule C.

Can office expenses and other expenses be combined on the form?

Office expenses and other expenses must be listed separately because each category is used differently when reporting costs that reduce taxable income.

Do I need Schedule C if I report income but have no expenses?

You still need to file Schedule C if you report income from self-employment because the Internal Revenue Service requires a complete summary of revenue even when no expenses apply.