Schedule C (Form 1040): Profit or Loss From Business – A Plain-English Guide (2020)
What Schedule C (Form 1040) Is For
Schedule C is the tax form that sole proprietors, independent contractors, freelancers, and single-member LLC owners use to report business income and expenses to the IRS. Whether you're a consultant, freelance writer, rideshare driver, online seller, or operate any other unincorporated business, Schedule C is where you'll calculate your profit or loss for the tax year. The form gets attached to your main Form 1040 tax return and becomes part of your annual filing.
Think of Schedule C as your business's financial report card. On the income side, you'll report all the money your business brought in—from client payments and sales to any business-related interest or miscellaneous income. On the expense side, you'll deduct ordinary and necessary costs of running your business, like supplies, advertising, vehicle expenses, and office costs. The bottom line—your net profit or net loss—flows to other parts of your tax return and determines both your income tax and self-employment tax obligations.
An important distinction: Schedule C is specifically for sole proprietorships and businesses you operate alone or with your spouse under certain conditions. If your business is structured as a partnership or corporation, you'll file different forms. The IRS considers an activity a business (not a hobby) if your primary purpose is making a profit and you engage in it regularly and continuously.
About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship)
When You'd Use Schedule C (Form 1040)
You'll file Schedule C with your annual Form 1040 by the standard tax deadline—typically April 15 of the year following the tax year, or mid-October if you filed for an extension. For your 2020 taxes, you would have filed by April 15, 2021 (or October 15, 2021 with an extension).
However, life happens, and you might need to file Schedule C after the regular deadline. If you missed the deadline entirely and never filed, you should file as soon as possible to minimize penalties and interest. The IRS charges both a failure-to-file penalty and a failure-to-pay penalty, plus interest on any tax owed. Filing late is always better than not filing at all—especially since you might be owed a refund, and you have three years from the original deadline to claim it.
If you already filed your return but discovered errors on your Schedule C—perhaps you forgot to report some income shown on a Form 1099-NEC, miscalculated an expense, or realized you're entitled to a deduction you didn't claim—you'll need to file an amended return using Form 1040-X. Common reasons for amending include discovering unreported business income, correcting expense amounts, or claiming depreciation you initially overlooked. You generally have three years from the original filing date (or two years from when you paid the tax, whichever is later) to file an amended return if you're seeking a refund.
One helpful note: you don't need to amend your return for simple math errors or if you forgot to attach a form—the IRS typically corrects these automatically. But if there's a change in your income or deductions that affects your tax liability, you'll want to file that amended return promptly.
Topic No. 308, Amended Returns
File an Amended Return
Key Rules or Details for 2020
Several fundamental rules govern how Schedule C works.
The $400 Self-Employment Threshold
First, the $400 threshold: if your net earnings from self-employment reach $400 or more, you must file Schedule C and pay self-employment tax via Schedule SE. This threshold applies even if your overall income is low enough that you wouldn't otherwise need to file a tax return.
What Counts as a Deductible Business Expense
Understanding what qualifies as a deductible business expense is critical. The IRS standard is that expenses must be both ""ordinary"" (common in your industry) and ""necessary"" (helpful and appropriate for your business). You can deduct the business portion of vehicle expenses, supplies, advertising, insurance, professional fees, and many other costs. However, personal expenses—even if they seem business-related—aren't deductible. For example, you cannot deduct the base rate for your home's first phone line, charitable contributions made personally, or fines and penalties paid to government agencies.
Home Office Deduction Rules
The home office deduction trips up many filers. To qualify, you must use a specific area of your home regularly and exclusively for business, and it must be your principal place of business or a place where you meet clients. You can use either the simplified method ($5 per square foot, up to 300 square feet) or calculate actual expenses using Form 8829. Either way, you must meet the strict use requirements—an office that doubles as a guest bedroom doesn't qualify.
Vehicle Expense Methods and Records
Vehicle expense rules offer two paths: the standard mileage rate (57.5 cents per mile in 2020) or actual expenses (gas, repairs, insurance, depreciation). Whichever method you choose for the first year generally determines what you can do in later years. You must keep careful records of business miles, dates, and purposes. Commuting from home to your regular workplace doesn't count as business mileage.
Depreciation and Section 179
Depreciation allows you to deduct the cost of business equipment and property over time rather than all at once. Listed property—including vehicles, computers, and equipment that could have personal use—faces extra scrutiny and recordkeeping requirements. You may also elect to use Section 179 to immediately expense certain property purchases rather than depreciating them over years.
Special Rules for Married Couples in Business
For married couples running a business together, special rules apply. Generally, spouses who jointly own an unincorporated business are considered partners and must file Form 1065. However, you can elect ""qualified joint venture"" status, which lets each spouse file their own Schedule C and claim Social Security credits without the complexity of partnership returns.
2020 Instructions for Schedule C
Self-Employed Individuals Tax Center
Step-by-Step (High Level)
Basic Information
Start by filling in the basic information at the top: your name, Social Security number, and business details including your principal business activity and the corresponding business code. If you have an Employer Identification Number (EIN)—required if you have employees or a retirement plan—enter it; otherwise, this can be left blank for most sole proprietors.
Part I: Income
Part I focuses on income. On Line 1, report your gross receipts—all the money your business took in before expenses. This should include amounts reported on any Forms 1099-NEC, 1099-K, or 1099-MISC you received. If you're a statutory employee, you'll check a special box and report W-2 income here. Subtract returns and allowances on Line 2, then account for cost of goods sold (if you sell products) on Line 4. Add any other income on Line 6—like bad debts recovered, interest on business accounts, or state fuel tax refunds. The result is your gross income on Line 7.
Part II: Expenses
Part II is where you list your business expenses. The form provides pre-printed categories: advertising, vehicle expenses, commissions and fees, contract labor, depreciation, employee benefit programs, insurance, interest, legal and professional services, office expenses, rent, repairs, supplies, taxes, travel, meals, utilities, and wages. Each expense has its own line, so you'll total up each category separately. Line 27 lets you list other expenses not covered by the pre-printed categories, but you must itemize these separately on Part V.
After totaling all expenses on Line 28 and calculating tentative profit on Line 29, you'll subtract expenses for business use of your home (Line 30) to reach your net profit or loss on Line 31. If you have a profit, this amount gets reported on Schedule 1 (which feeds into your Form 1040) and also on Schedule SE for calculating self-employment tax. If you have a loss and didn't materially participate in the business, passive activity loss rules may limit how much you can deduct.
Part III: Cost of Goods Sold
Part III asks about your cost of goods sold if you maintain inventory.
Part IV: Vehicle Information
Part IV requests vehicle information if you're claiming car or truck expenses.
Part V: Other Expenses
Part V requires you to itemize any expenses you claimed on Line 27. Throughout the form, you'll need to answer yes/no questions about when you started the business, whether you materially participated, and whether you made payments requiring information returns.
Common Mistakes and How to Avoid Them
Mixing Personal and Business Expenses
One of the most frequent errors is mixing personal and business expenses. The IRS won't allow deductions for personal costs, even if they seem business-related. Keep meticulous records and separate bank accounts so there's a clear line between business and personal spending. If an expense serves both purposes—like a vehicle—only deduct the business percentage.
Misreporting Form 1099 Income
Many taxpayers incorrectly report Form 1099 income. If you received Forms 1099-NEC reporting nonemployee compensation, that entire amount should generally appear in your gross receipts unless you have a legitimate reason for the discrepancy. If your Line 1 doesn't match your Forms 1099, attach a statement explaining why. Failing to report 1099 income is a red flag that can trigger IRS matching programs and potential audits.
Home Office Deduction Misuse
The home office deduction is commonly claimed incorrectly. Remember that you must meet strict requirements: regular and exclusive use for business in a space that serves as your principal place of business or client meeting location. Using a bedroom desk that's also the family computer station doesn't qualify. If you do qualify, choose between the simplified method (easier) and actual expense method (potentially larger deduction), but don't try to claim both.
Vehicle Expense Errors
Vehicle expense errors abound. If you use the standard mileage rate, you cannot also deduct actual expenses like gas and repairs—it's one or the other. Keep a contemporaneous mileage log showing dates, destinations, business purposes, and miles driven. Estimates and reconstructed records after the fact often don't satisfy IRS requirements. Also remember: commuting between home and your regular workplace isn't deductible, though traveling from your home office to client locations is.
Depreciation and Listed Property Issues
Depreciation mistakes are common, especially regarding ""listed property"" like vehicles and computers that could have personal use. If business use of listed property drops below 50%, you may have to recapture previously claimed depreciation. File Form 4562 when required—if you're claiming depreciation on property placed in service during 2020, reporting any listed property, or taking a Section 179 deduction, Form 4562 is mandatory.
Incorrectly Combining Different Types of Income
Some taxpayers try combining statutory employee income with regular self-employment income on a single Schedule C—this isn't allowed. You must file separate Schedules C for each. Similarly, married couples running a joint business usually need to file as a partnership (Form 1065) unless they qualify for and elect qualified joint venture status.
Disallowed Expenses
Finally, don't deduct expenses that aren't allowed: charitable contributions (these go on Schedule A if you itemize personal deductions), fines and penalties paid to government agencies, the cost of capital assets that should be depreciated, or amounts paid to yourself as wages.
2020 Instructions for Schedule C
What Happens After You File
Once you submit Schedule C with your Form 1040, several things occur. The net profit or loss from Line 31 gets reported on Schedule 1, which flows into your main 1040 form and affects your adjusted gross income. This impacts not only your income tax but also various credits and deductions that phase out at higher income levels.
If you showed a net profit of $400 or more, you're required to file Schedule SE (Self-Employment Tax) along with your return. Self-employment tax covers your Social Security and Medicare obligations—essentially, the employer and employee portions combined, which totals 15.3% of your net earnings (12.4% for Social Security up to the wage base limit, plus 2.9% for Medicare on all earnings). The good news: you can deduct one-half of your self-employment tax as an adjustment to income on Schedule 1, Line 14.
The IRS will process your return, typically within 21 days if filed electronically. The agency may make mathematical corrections automatically, but if something looks questionable—unexplained discrepancies with Forms 1099, unusually high expense ratios, or suspicious deductions—your return could be selected for examination. An audit doesn't necessarily mean you did something wrong, but it does mean the IRS wants documentation to verify your reported income and expenses.
Your Schedule C information gets transmitted to the Social Security Administration, which uses it to calculate your future Social Security retirement, disability, and survivor benefits. This is why properly reporting self-employment income matters beyond just current taxes—it affects your benefit calculations down the road.
If you showed a profit, you might also need to make estimated tax payments for the following year. The federal tax system is pay-as-you-go, and since you don't have an employer withholding taxes, you're generally expected to make quarterly estimated payments if you'll owe $1,000 or more in tax. See Publication 505 for guidance on estimated taxes.
If you had a net loss, that loss generally reduces your other income on your tax return. However, if you didn't materially participate in the business, passive activity loss rules may limit your ability to deduct the loss. Some losses carry forward to future years when you can use them.
About Schedule SE (Form 1040), Self-Employment Tax
Self-Employment Tax (Social Security and Medicare Taxes)
FAQs
Do I need to file Schedule C if my business had no profit or loss?
If your sole proprietorship had zero profit or loss for the full year, you generally don't need to file Schedule C. However, if you have any amount of profit or loss, you should file it. Remember that if you have net earnings of $400 or more, you must file to report self-employment tax obligations.
What's the difference between a hobby and a business for tax purposes?
A business operates with the primary intention of making a profit and involves regular, continuous activity. A hobby is pursued mainly for recreation or pleasure. This distinction matters because business losses can offset other income (subject to certain limitations), while hobby expenses can't exceed hobby income and face stricter deduction rules. The IRS looks at factors like whether you operate in a businesslike manner, put in the time and effort to make it profitable, depend on the income, and have a history of making profits in similar activities.
Can I use Schedule C if I have a side business in addition to my regular job?
Yes. Having W-2 income from a regular job doesn't prevent you from filing Schedule C for self-employment income from a side business. You'll report both types of income on your Form 1040—the W-2 wages on Line 1 and the Schedule C profit on Schedule 1 (which carries to Form 1040). Just keep good records separating your side business expenses from personal expenses.
How long should I keep records related to my Schedule C?
The IRS generally recommends keeping tax records for at least three years from the date you filed your return (or two years from the date you paid the tax, whichever is later). However, keep records for longer in certain situations: six years if you underreported income by more than 25%, seven years for worthless securities or bad debt deductions, and indefinitely for unfiled returns or fraudulent returns. Keep documentation for property and assets until the statute of limitations expires for the year you dispose of them.
What if I receive a Form 1099 that's incorrect or for income that wasn't really mine?
First, contact the payer immediately and request a corrected Form 1099. If the payer refuses or you can't resolve it, you still need to report what's on the 1099 (since the IRS received a copy), but you can then back it out with an offsetting entry or explanation. Attach a statement to your return explaining the discrepancy. Don't simply omit the income—the IRS matching program will flag the difference and send you a notice.
Can married couples file a joint Schedule C for a business we run together?
Generally, no—if you jointly own and operate an unincorporated business, you're considered partners and must file Form 1065. However, there's an exception: married couples can elect to be treated as a ""qualified joint venture"" if both spouses materially participate in the business, are the only owners, and file a joint tax return. This election lets each spouse file their own Schedule C, reporting their share of income and expenses, while avoiding partnership filing requirements. Each spouse then gets Social Security credit for their earnings.
If I work from home, do I automatically qualify for the home office deduction?
No. Simply working from home isn't enough. You must use a specific area of your home regularly and exclusively for business, and that space must be your principal place of business or a place where you regularly meet clients or customers. ""Exclusive use"" means that area is used only for business—a desk in the corner of your bedroom where your kids also do homework doesn't qualify. If you do qualify, you can choose the simplified method ($5 per square foot up to 300 square feet) or calculate actual expenses.
Schedule C & Schedule SE FAQs
Topic No. 509, Business Use of Home
