Schedule C (Form 1040): Profit or Loss From Business – A Complete Guide for 2015

If you run your own business as a sole proprietor, work as a freelancer, or earn income from a side hustle, Schedule C is the tax form you'll use to report your business income and expenses to the IRS. Understanding this form is crucial because it directly affects both your income tax and your self-employment tax obligations. This guide breaks down everything you need to know about the 2015 Schedule C in plain language.

What Schedule C (Form 1040) Is For

Schedule C (Form 1040) is the federal tax form used to report income or loss from a business you operated or a profession you practiced as a sole proprietor. The IRS considers something a business if your primary purpose for doing it is to make income or profit, and you engage in the activity with continuity and regularity—meaning it's not just a sporadic hobby or one-time event. IRS

This two-page form attaches to your main Form 1040 tax return and serves several important purposes. First, it helps you calculate your net business profit or loss by subtracting your allowable business expenses from your gross business income. Second, any profit you report flows to your Form 1040 as taxable income and also determines your self-employment tax liability, which covers your Social Security and Medicare contributions as a self-employed person. Third, if you report a loss, the form helps determine whether and how much of that loss you can deduct against your other income.

Schedule C is also used by statutory employees who receive a W-2 with the ""Statutory employee"" box checked, by certain qualified joint ventures where spouses jointly own and operate a business, and to report certain types of income shown on Form 1099-MISC. IRS

A simplified version called Schedule C-EZ exists for small businesses with expenses of $5,000 or less, but most businesses with significant operations will use the full Schedule C.

When You’d Use Schedule C (Form 1040) (Late/Amended Filing)

Schedule C is filed with your annual Form 1040, which for calendar year 2015 would normally be due on April 15, 2016. If you need more time, you can file for an extension using Form 4868, which gives you until October 15, 2016, to file—though remember that an extension to file is not an extension to pay any taxes owed.

If you discover an error after filing your return, you may need to amend it using Form 1040-X (Amended U.S. Individual Income Tax Return). However, you don't need to file an amended return for every mistake. The IRS automatically corrects many mathematical errors during processing, and if they catch something, they'll send you a notice explaining the change. IRS

You should file an amended return with a corrected Schedule C if you discover you forgot to report business income, claimed expenses you weren't entitled to, miscalculated your cost of goods sold, or made other substantive errors that change your tax liability. You generally have three years from the date you filed your original return to file an amendment and claim a refund. Amended returns typically take 8 to 12 weeks to process, though it can take longer depending on the complexity of the changes. IRS

Key Rules or Details for 2015

Several important rules govern who must file Schedule C and how to fill it out correctly:

Who Must File

Who Must File: You must file Schedule C if you're in business as a sole proprietor and had income from that business during the year. Even if your business lost money or barely broke even, you still need to report it. The key is whether you operated a business for profit—occasional activities and hobbies don't count.

Material Participation

Material Participation: Line G asks whether you ""materially participated"" in the business during 2015. This matters for passive activity loss limitations. You materially participated if you worked in the business more than 500 hours during the year, did substantially all the work yourself, worked more than 100 hours and at least as much as anyone else, or met one of several other specific tests. If you didn't materially participate and the business showed a loss, your ability to deduct that loss may be limited, and you'll need to file Form 8582. IRS

Accounting Method

Accounting Method: You must choose between the cash method (reporting income when received and deducting expenses when paid) or the accrual method (reporting income when earned and deducting expenses when incurred). Most small businesses use the cash method because it's simpler. However, if you maintain inventory, you generally must use the accrual method for purchases and sales of inventory items. IRS

Self-Employment Tax

Self-Employment Tax: If your Schedule C shows a net profit of $400 or more, you must also file Schedule SE (Self-Employment Tax) and pay self-employment tax on that profit. This tax covers your Social Security and Medicare contributions as a self-employed person. For 2015, the self-employment tax rate is 15.3% (12.4% for Social Security on the first $118,500 of net earnings, plus 2.9% for Medicare on all net earnings). The good news is you can deduct half of your self-employment tax as an adjustment to income on Form 1040, line 27. IRS

Standard Mileage Rate

Standard Mileage Rate: If you use your vehicle for business, you can either deduct your actual expenses (gas, oil, repairs, insurance, depreciation) or use the standard mileage rate. For 2015, the business standard mileage rate is 57.5 cents per mile. Whichever method you choose the first year you use a vehicle for business generally determines what methods you can use in later years for that vehicle. IRS

Step-by-Step (High Level)

Working through Schedule C follows a logical progression from identifying your business to calculating your final profit or loss:

Part I: Income

Part I: Income – Start by entering your gross receipts or sales (all the money your business took in) on line 1. Subtract any returns and allowances on line 2 to get your net receipts. If you sell products, you'll complete Part III to calculate your cost of goods sold and enter that figure on line 4. Subtract your cost of goods sold from line 3 to get your gross profit on line 5. Add any other business income (such as interest on business bank accounts, bad debts recovered, or prizes related to your business) on line 6. Line 7 shows your total gross income from the business. IRS

Part II: Expenses

Part II: Expenses – This is where you list all your ordinary and necessary business expenses. The form provides specific lines for common expenses like advertising, car and truck expenses, commissions and fees, contract labor, depreciation, employee benefit programs, insurance, interest, legal and professional services, office expenses, rent, repairs, supplies, taxes, travel and meals, utilities, and wages. You can deduct any expense that is both ordinary (common and accepted in your trade or business) and necessary (helpful and appropriate for your business). Each expense category has specific rules about what qualifies and any limitations. IRS

Line 30 is for home office expenses if you use part of your home regularly and exclusively for business. You can either use the actual expense method (filing Form 8829 to calculate the business percentage of your home expenses) or the simplified method (multiplying your business square footage by $5, up to 300 square feet). Total all your expenses on line 28, then subtract from your gross income (line 7) to get your tentative profit or loss on line 29. After subtracting any home office deduction on line 30, line 31 shows your final net profit or loss.

Part III: Cost of Goods Sold

Part III: Cost of Goods Sold – If you manufacture products or purchase goods for resale, you must complete this section to determine the actual cost of the inventory you sold during the year. This involves starting with your beginning inventory, adding purchases and costs of production, then subtracting your ending inventory. The result on line 42 flows to line 4 in Part I. IRS

Part IV: Vehicle Information

Part IV: Vehicle Information – If you claimed car or truck expenses on line 9 and aren't filing Form 4562, answer questions about when you placed your vehicle in service, how many business miles versus personal miles you drove, and whether you have evidence to support your deduction. This information helps the IRS verify that you're entitled to the vehicle expense deduction you claimed.

Part V: Other Expenses

Part V: Other Expenses – List any legitimate business expenses that don't fit the categories in Part II. These might include bank fees, professional dues, business licenses, subscriptions to trade publications, or other miscellaneous costs.

Common Mistakes and How to Avoid Them

Several errors repeatedly trip up Schedule C filers. Being aware of these pitfalls can save you headaches and potential audits:

Mixing Personal and Business Expenses

Mixing Personal and Business Expenses – One of the most common mistakes is deducting personal expenses as business expenses. Your morning coffee isn't deductible just because you thought about work while drinking it. Only expenses that are specifically for your business qualify. Keep separate bank accounts and credit cards for business to make this distinction crystal clear. If you use something for both personal and business purposes (like your car or home internet), only deduct the business-use percentage.

Inadequate Record-Keeping

Inadequate Record-Keeping – The IRS requires that you have records to substantiate the expenses you claim. Receipts, cancelled checks, bank statements, credit card statements, and mileage logs are essential. For vehicle expenses especially, you need detailed records showing the date, destination, business purpose, and miles driven for each business trip. Many taxpayers estimate their expenses or rely on memory—that won't hold up if the IRS questions your return.

Misclassifying Workers

Misclassifying Workers – If you pay other people to help with your business, you need to determine whether they're employees or independent contractors. The distinction matters because employees trigger payroll tax obligations and reporting requirements, while independent contractors receive Form 1099-MISC for payments of $600 or more. Don't automatically treat everyone as an independent contractor just because it's easier—the IRS has specific rules about who qualifies, based primarily on how much control you have over how they do their work.

Forgetting Information Returns

Forgetting Information Returns – Line I asks whether you made payments that require you to file Forms 1099. If you paid any individual or unincorporated business $600 or more for services during the year, you generally must file Form 1099-MISC for that person. Many taxpayers overlook this requirement, which can result in penalties. IRS

Incorrectly Calculating Cost of Goods Sold

Incorrectly Calculating Cost of Goods Sold – If you have inventory, errors in Part III can significantly distort your profit. Make sure you conduct an actual physical count of inventory at year-end rather than relying on your bookkeeping records alone. Choose an appropriate inventory valuation method (cost, lower of cost or market, etc.) and use it consistently.

Claiming 100% Business Use of Listed Property

Claiming 100% Business Use of Listed Property – Listed property includes vehicles, computers, and other items that might be used personally. The IRS is skeptical of claims that these items are used 100% for business. Be realistic and honest about your business-use percentage, and maintain detailed logs to prove it.

Overlooking Depreciation Rules

Overlooking Depreciation Rules – When you buy equipment, machinery, vehicles, or other assets that will last more than one year, you generally can't deduct the entire cost immediately. Instead, you depreciate the cost over several years, or you may be able to expense part or all of it immediately under Section 179. Form 4562 is required to claim depreciation or a Section 179 deduction, and it has complex rules. Many taxpayers either forget to claim depreciation they're entitled to or claim it incorrectly.

What Happens After You File

Once you file your Form 1040 with Schedule C attached, several things happen:

The IRS processes your return, which typically takes several weeks. During processing, the IRS computers automatically check for mathematical errors, missing information, and common issues. If they find a simple math error, they'll correct it and send you a notice explaining the change. Most refunds are issued within 21 days when you e-file and choose direct deposit. IRS

Your Schedule C net profit flows to two places on your Form 1040. First, it goes to line 12 (Business income or loss), adding to or reducing your total income. Second, if you had a profit of $400 or more, that amount goes to Schedule SE to calculate your self-employment tax, which then goes on Form 1040, line 57. If you had a loss, it reduces your overall income, potentially lowering your tax bill (unless passive activity loss limitations apply).

The IRS has three years from when you filed to audit your return, though this extends to six years if you substantially understated your income. Schedule C filers face somewhat higher audit rates than wage earners because of the opportunity for errors and the potential for understated income or overstated expenses. Keeping thorough records makes an audit much less stressful.

If you owe additional tax beyond what you paid through estimated quarterly payments, you'll need to pay by the filing deadline to avoid interest and penalties. If you're consistently profitable, you should be making quarterly estimated tax payments using Form 1040-ES to avoid an underpayment penalty.

FAQs

Do I need to file Schedule C if my business lost money or barely made any profit?

Yes. If you operated a business during the year, even if it wasn't profitable, you must report it on Schedule C. The loss may reduce your overall tax liability by offsetting other income you had during the year. However, be aware that the IRS expects most businesses to make a profit eventually—if you report losses for multiple consecutive years, the IRS might classify your activity as a hobby rather than a business, which would disallow the loss deductions.

Can I deduct my home office expenses, and how does that work?

You can deduct home office expenses if you use a portion of your home regularly and exclusively for your business as either your principal place of business or a place where you regularly meet with customers or clients. The space must be used only for business—a corner of your bedroom where you keep your desk doesn't qualify if you also use that bedroom for sleeping. For 2015, you can use the simplified method (square footage of your office multiplied by $5, up to 300 square feet, for a maximum deduction of $1,500) or the regular method using Form 8829 to calculate your actual expenses.

What if I use my personal car for business trips?

You can deduct the business use of your vehicle using either the standard mileage rate (57.5 cents per mile for 2015) or your actual expenses (gas, oil, repairs, insurance, depreciation) multiplied by your business-use percentage. Whichever method you choose, you need to keep detailed records of your business mileage, including the date, destination, business purpose, and miles driven for each trip. Your commute from home to your regular work location doesn't count as business mileage, but trips from your office to meet clients or run business errands do.

What's the difference between an expense I can deduct immediately and something I have to depreciate?

If you buy something that will last less than one year or that you use up quickly (like office supplies, postage, or advertising), you can generally deduct the full cost immediately. If you buy an asset that will last more than one year and help produce income over time (like equipment, furniture, a computer, or a vehicle), you usually must depreciate it—spreading the deduction over several years. However, Section 179 allows you to immediately expense up to a certain dollar amount of qualifying property purchased and placed in service during the year, which can be beneficial for small businesses.

If my spouse and I run a business together, how do we report it?

Normally, if spouses jointly own and operate an unincorporated business, it's treated as a partnership and requires filing Form 1065. However, you can elect to treat it as a ""qualified joint venture"" instead, which allows each spouse to file their own Schedule C reporting their share of income and expenses. This avoids the complexity of Form 1065 while still giving both spouses credit for Social Security earnings. To qualify, you must be the only two owners, each must materially participate in the business, you must file a joint tax return, and you must divide income and expenses based on your respective ownership interests. IRS

What records should I keep and for how long?

Keep all receipts, invoices, bank statements, credit card statements, cancelled checks, and other documents that support the income and expenses you report on Schedule C. For vehicle expenses, maintain a mileage log showing the date, destination, business purpose, and miles for each trip. Generally, you should keep records for at least three years from the date you filed the return or two years from when you paid the tax, whichever is later. If you file a claim for a loss from worthless securities or bad debt deduction, keep records for seven years. Records related to property should be kept until the period of limitations expires for the year in which you dispose of the property.

Do I need to make quarterly estimated tax payments?

If you expect to owe $1,000 or more in taxes after subtracting withholding and credits, you generally need to make quarterly estimated tax payments using Form 1040-ES. These payments cover both your income tax and self-employment tax on your business profit. The quarterly due dates are typically April 15, June 15, September 15, and January 15 of the following year. Failing to make adequate estimated payments can result in an underpayment penalty, even if you pay all the tax you owe when you file your return.

This guide is based on official IRS publications and instructions for the 2015 tax year, including the Schedule C instructions and forms available at IRS.gov. Tax laws change over time, so consult current IRS guidance or a tax professional for filing returns for other years.

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