IRS Schedule C (Form 1040) (2020): Business Profit or Loss

What is IRS Schedule C (Form 1040) (2020) for

IRS Schedule C (Form 1040) (2020) is used by a sole proprietor or self-employed person to report business income and business expenses to the Internal Revenue Service for the applicable tax year. This schedule applies to individuals who operate their own businesses, including single-member LLC owners who are taxed as sole proprietors. It enables taxpayers to calculate their profit or loss from their activities, ensuring that accurate information is included on their personal tax return.

When You’d Use IRS Schedule C (Form 1040) (2020)

You will use this schedule when reporting self-employment income and related business activity for tax purposes.

• Operating a sole proprietorship: Filing Schedule C is required when a sole proprietor must report income and expenses for their own business during a tax year.
  
  
• Working as an independent contractor: Independent contractors must use this schedule because it is the tax form used to report income received without employer withholding during tax season.
  
  
• Receiving statutory employee income: A statutory employee must use a separate Schedule C when their employer marks the statutory employee box on the W-2, as this income requires special reporting.
  
  
• Running a single-member LLC: A single-member LLC uses this schedule when reporting the results of its income statement because it is a disregarded legal business entity for federal tax purposes.
  
  
• Filing late or amended returns: Taxpayers must file Schedule C or amend their personal income tax return when they discover unreported income or missed deductions after the original filing season. Amending your return with a completed Schedule C can resolve an unfiled federal income tax return and help you avoid penalties from the IRS.

Key Rules or Details for IRS Schedule C (Form 1040) (2020)

Several key rules govern the correct completion of this schedule by taxpayers.

• Reporting gross receipts accurately: Taxpayers must accurately report all gross receipts, gross income, and other income received during the tax year, allowing the Internal Revenue Service to determine the correct taxable income.
  
  
• Deducting only allowable expenses: To be deductible for tax purposes, business expenses must be ordinary and necessary, meaning they are appropriate for the industry and directly related to operating the business.
  
  
• Handling the cost of goods sold correctly: The cost of goods sold must be calculated using the correct cost method, as inventory-based taxpayers must accurately report goods sold during the year.
  
  
• Maintaining mileage records for vehicle expenses: Taxpayers must maintain complete mileage records to support car and truck expenses, as these expenses require detailed documentation.
  
  
• Separating personal and business use: Filers must separate personal car use from business use so they can calculate exact expenses and avoid overstating deductions.
  
  
• Using the correct accounting method: Filers must consistently use either the cash or accrual accounting method, as this choice affects when they report income and expenses.
  
  
• Providing business address and identification: Filers must include the business name, business address, and employer identification number when applicable so the IRS can correctly identify the business activity.

Step-by-Step (High Level) 

The process follows a precise sequence, allowing taxpayers to report business results accurately.

• Enter basic business information: Taxpayers must first enter the principal business activity, business name, and business address so the Internal Revenue Service can identify the business.
  
  
• Report gross receipts and other income: Filers must enter their gross receipts, gross profit, and other income so that the Schedule C form can accurately reflect the results of their business activity.
  
  
• Calculate the cost of goods sold: Taxpayers with inventory must calculate the cost of goods sold using the correct method so that Form 1040 accurately reflects how the cost of goods sold affects taxable income.
  
  
• List and total all business expenses. Filers must include office expenses, legal services, professional services, and other relevant costs to ensure that the total expenses accurately reflect the actual cost of operating the business.
  
  
• Determine tentative profit or net profit: Taxpayers must calculate the tentative profit and then determine the final profit or loss, which can then be transferred to the personal tax return.
  
  
• Transfer amounts to the primary tax return: Filers must report profits on the income tax return because these amounts determine self-employment tax obligations.
  
  
• File a separate schedule when needed: Taxpayers must file a separate schedule or two Schedules Cs when different types of business activity require separate reporting.

Common Mistakes and How to Avoid Them

The following mistakes frequently cause delays or IRS notices.

• Mixing business and personal expenses: Taxpayers should maintain detailed records to ensure that only valid business expenses are deducted and all personal costs are excluded.
  
  
• Incorrect reporting of 1099 income: All 1099 amounts must match IRS records to avoid notices related to unreported or mismatched income reporting.
  
  
• Claiming unqualified home office deductions: Home office deductions can only be taken when the space meets exclusive and regular use requirements, thereby avoiding improper tax deductions.
  
  
• Incorrect mileage and vehicle logs: Taxpayers must maintain complete mileage records to support all car and truck expenses with documentation.
  
  
• Using the wrong form for business entities: Business entities, such as corporations or partnerships, must use the correct tax form and file the appropriate return to avoid compliance issues.
  
  
• Combining statutory employee income improperly: Statutory employee income must be reported on a separate Schedule C, allowing the Internal Revenue Service to apply the correct rules.
  
  
• Estimating deductions without documentation: Taxpayers must record exact expenses so they can support claims during tax preparation.

Consider using a business tax transcript service to verify that your reported income and expenses match IRS records before you file.

What Happens After You File

After filing a Schedule C, the Internal Revenue Service processes the information and incorporates the results into the income tax return. The profit or loss reported on the form is reflected in the personal tax return, where it impacts taxable income, credits, and self-employment taxes. If the filer reports a profit, the amount is used to calculate self-employment taxes, which include Social Security and Medicare obligations. For ongoing tax challenges or IRS notices, our business tax relief services can help you protect your business and get back on track.

FAQs

Do I need to file Schedule C if my business earned very little?

Yes, a filer must complete Schedule C when they have self-employment income, even when the amount is small, because the Internal Revenue Service requires reporting income for tax purposes.

Is Schedule C EZ still available?

No, the Schedule C EZ version is no longer accepted, so all filers must use the standard Schedule C form.

Can I file Schedule C for multiple businesses?

Yes, a filer must complete two Schedule Cs when separate business activities require separate reporting.

Do fuel tax credits apply to most small businesses?

Sometimes, a filer may claim fuel tax credits when they meet eligibility rules for qualified fuel usage.

Can professional services be deducted?

Yes, fees paid for professional services are deductible as long as they are ordinary and necessary business expenses.