What the Form Is For

Schedule C (Form 1040) is the IRS form sole proprietors use to report income or loss from a business they operated or profession they practiced during the tax year. Whether you were a freelance graphic designer, ran an Etsy shop, worked as a consultant, or drove for a ride-sharing service, this form was where you told the IRS about your business earnings and expenses. IRS.gov

The form asks one simple question: Did your business make money or lose money? To answer it, you subtract your business expenses (like supplies, advertising, and vehicle costs) from your gross receipts (the money you brought in). The resulting number—your net profit or loss—flows directly onto your Form 1040, affecting your total taxable income. If you made a profit, you'd also need to file Schedule SE to calculate self-employment tax, which covers your Social Security and Medicare obligations.

Schedule C is specifically designed for sole proprietorships—businesses with one owner where there's no legal separation between you and your business. It also applies to single-member LLCs that haven't elected corporate tax treatment, statutory employees who received a W-2 with the "statutory employee" box checked, and certain qualified joint ventures where spouses run a business together.

When You’d Use Schedule C

Late/Amended Filing

The standard deadline for filing your 2014 Schedule C was April 15, 2015, since it attaches to your Form 1040. If you requested an extension, you had until October 15, 2015. But life happens—maybe you discovered income you forgot to report, or you found receipts for deductible expenses after you filed. That's where amended returns come in.

To correct a 2014 Schedule C, you'd file Form 1040-X (Amended U.S. Individual Income Tax Return) with an updated Schedule C attached. The IRS gave you three years from the date you filed your original 2014 return (or April 15, 2015, whichever was later) to claim a refund. Alternatively, you had two years from when you actually paid the tax. For most 2014 filers, the deadline to amend and claim a refund would have been April 15, 2018. IRS.gov

If you owed additional tax, you could file an amended return anytime, but the IRS charged interest and possibly penalties on late payments. The failure-to-file penalty was 5% of unpaid tax for each month the return was late, up to 25%. The message: if you discover you owed more, amend quickly to minimize penalties.

Key Rules or Details for 2014

The business standard mileage rate was 56 cents per mile.

If you drove your car for business purposes, you could either deduct 56 cents for every business mile driven (plus parking fees and tolls), or calculate your actual vehicle expenses and deduct the business-use percentage. Once you chose the standard mileage rate in the first year you used a vehicle for business, you had flexibility in future years; if you started with actual expenses, you were locked into that method for that vehicle.

The Section 179 expense deduction allowed business owners to immediately deduct (rather than depreciate over time) the cost of certain property purchased for business use in 2014.

This was particularly valuable for equipment, computers, and machinery.

Accounting methods mattered significantly.

Most small businesses used the cash method—reporting income when received and deducting expenses when paid. Larger businesses or those maintaining inventory typically had to use the accrual method—reporting income when earned and expenses when incurred, regardless of when cash changed hands. IRS.gov

Passive activity rules could limit your losses.

If you checked "No" on Line G (indicating you didn't materially participate in your business), the IRS considered it a passive activity. Passive losses could generally only offset passive income, not your regular wages or other active income. To materially participate, you needed to meet specific tests—such as working more than 500 hours in the activity during the year or doing substantially all the work yourself.

Step-by-Step (High Level)

Part I: Income

Completing Schedule C followed a logical flow. You started with Part I: Income, entering your gross receipts on Line 1—all the money customers paid you. Line 2 accounted for returns and allowances (refunds given to customers), and Line 4 gave you gross income. Line 6 captured other income like interest on business accounts, prizes, or recovered bad debts. Line 7 showed your total gross income from the business.

Part II: Expenses

Next came Part II: Expenses, the comprehensive section where you listed everything you spent to run your business. The form provided dedicated lines for common expenses: Line 9 for car and truck expenses, Line 11 for contract labor, Line 13 for depreciation, Line 15 for insurance, Lines 16a and 16b for interest on business loans, Line 18 for office expenses, and so on through Line 27a. Part V at the bottom provided additional space for "Other Expenses" that didn't fit the standard categories—things like professional memberships, business publications, or credit card processing fees.

Totals, Home Office, and Net Profit or Loss

After totaling all your expenses on Line 28, you subtracted them from your gross income. If you claimed expenses for business use of your home (Line 30), you filled out Form 8829 or used the simplified method. Line 31 showed your net profit or net loss—the bottom line. A profit went on Form 1040, Line 12, and triggered self-employment tax on Schedule SE. A loss also went on Form 1040 but reduced your taxable income (subject to passive activity limitations).

Part III: Cost of Goods Sold and Part IV: Vehicle Information

Part III asked about your cost of goods sold if you maintained inventory. Part IV collected information about vehicles used in your business—total miles driven, business miles, commuting miles, and whether you had evidence to support your deduction. This section was critical because vehicle deductions are frequent audit targets.

Common Mistakes and How to Avoid Them

The most common mistake was mixing personal and business expenses.

Your morning coffee on the way to a client meeting? Not deductible. Your car payment for the vehicle you drove 50% for business and 50% for personal use? Only 50% of the business-related operating expenses qualified. Keep meticulous records separating business from personal expenses. The IRS in audits routinely disallowed deductions when taxpayers couldn't prove business purpose.

Forgetting the business code on Line B tripped up many filers.

The six-digit Principal Business or Professional Activity Code helped the IRS categorize your business. Using the wrong code or leaving it blank could trigger confusion or processing delays. The instructions included a comprehensive list of codes.

Underreporting income was dangerous.

If you received Forms 1099-MISC showing payments from clients, the IRS received copies too. If the 1099s showed more income than you reported on Line 1, you needed to attach a statement explaining the difference. Some independent contractors forgot to include all cash payments or payments under $600 that didn't trigger 1099s—but legally, all business income was reportable.

Overstating vehicle deductions raised red flags.

If your business use percentage seemed unreasonably high or you claimed 100% business use for a vehicle you clearly used personally, auditors noticed. Keep a contemporaneous mileage log documenting each business trip's date, destination, purpose, and miles driven.

Claiming excessive losses year after year could trigger IRS scrutiny.

If you reported Schedule C losses for three out of five consecutive years, the IRS might classify your activity as a "hobby" rather than a business. Hobby losses weren't deductible beyond hobby income. To prove business intent, demonstrate you operated for profit: kept good records, changed methods to improve profitability, depended on the income, and operated in a businesslike manner.

Missing Form 1099 filing requirements was another pitfall.

If you paid any contractor $600 or more during 2014, you were required to file Form 1099-MISC with the IRS and provide a copy to the contractor. Line I asked if you made payments requiring 1099s. Checking "No" when you should have checked "Yes" could result in penalties.

What Happens After You File

Once you filed your 2014 Form 1040 with Schedule C attached, the IRS processed your return. If you reported a profit, that income was subject to both regular income tax and self-employment tax (15.3% covering Social Security and Medicare). The self-employment tax, calculated on Schedule SE, could be substantial—a surprise for first-time business owners used to having these taxes withheld from paychecks.

If you owed taxes, you paid them by the April 15, 2015 deadline to avoid interest and penalties. If you were entitled to a refund, the IRS typically issued it within 21 days of e-filing or six weeks of mailing a paper return.

Your Schedule C information also established your Social Security earnings record, crucial for future Social Security retirement, disability, and survivor benefits. Even though self-employment tax felt painful, it was building your safety net.

If you reported a loss, it generally reduced your taxable income dollar-for-dollar (unless passive activity rules applied), potentially lowering your tax bill or increasing your refund. However, consistent losses could eventually trigger hobby-loss scrutiny.

Some Schedule C filers received IRS notices requesting additional documentation or clarification. Common inquiries included requests for vehicle mileage logs, receipts for large deductions, or explanations for income discrepancies. Responding promptly with organized records usually resolved issues without escalation.

Audit rates for Schedule C filers were historically higher than W-2 wage earners—roughly 1% of sole proprietors faced audits. High-income Schedule C filers, those reporting losses, and those with large meal and entertainment or vehicle deductions faced heightened scrutiny. If audited, the IRS typically examined your last three years of returns, sometimes going back six years for substantial underreporting.

FAQs

1. Do I need to file Schedule C if I only made a few hundred dollars from my side business?

Yes, if you had any self-employment income, regardless of amount, you're required to file Schedule C. Even small amounts count as business income and must be reported. However, if your business expenses were $5,000 or less, you might have qualified to use the simpler Schedule C-EZ instead.

2. Can I deduct my home office expenses?

Yes, if you used a portion of your home regularly and exclusively for business. For 2014, you had two options: the simplified method ($5 per square foot, up to 300 square feet, for a maximum $1,500 deduction) or the actual expense method (calculating the percentage of your home used for business and deducting that percentage of mortgage interest, utilities, insurance, and depreciation). The simplified method, introduced in 2013, made this deduction much easier to claim.

3. What if I lost money in my business this year?

Report the loss on Schedule C, Line 31. Generally, business losses reduce your other taxable income, potentially lowering your overall tax bill. However, if you didn't materially participate in the business, passive activity loss rules might limit your deduction. Also, remember that consistent losses could trigger hobby-loss scrutiny, requiring you to prove profit motive.

4. How long should I keep my Schedule C records?

The IRS recommends keeping tax records for at least three years from the filing date, which is how long they have to audit most returns. However, if you underreported income by more than 25%, they can look back six years. For employment tax records, keep them at least four years. If you claimed a deduction for bad debt or worthless securities, keep records seven years. When in doubt, longer is safer—many tax professionals recommend seven years for business records.

5. Can both my spouse and I file separate Schedule Cs for the same business?

If you jointly own and operate an unincorporated business, you're typically considered a partnership and should file Form 1065. However, for 2014, married couples in community property states could elect to treat a wholly-owned business as a sole proprietorship, or couples in any state could elect "qualified joint venture" status. This election let each spouse file their own Schedule C, reporting their share of income and expenses, avoiding the complexity of partnership filing while each earning Social Security credits.

6. What's the difference between an independent contractor and an employee for Schedule C purposes?

If you worked for yourself—setting your own hours, using your own equipment, and controlling how work got done—you were likely an independent contractor filing Schedule C. If an employer controlled when, where, and how you worked, provided equipment, and withheld taxes from your paycheck, you were an employee receiving a W-2, not filing Schedule C. Misclassification can have serious tax consequences; when unsure, the IRS's 20-factor test or Form SS-8 helped determine worker status.

7. Do I need a business license or EIN to file Schedule C?

You didn't need either to file the form itself. Most sole proprietors without employees used their Social Security number and left Line D (EIN) blank. You only needed an Employer Identification Number if you had employees, a qualified retirement plan, or filed certain excise or alcohol/tobacco/firearms returns. However, state and local governments often required business licenses depending on your business type and location—Schedule C filing didn't exempt you from those requirements.

This summary is based on 2014 IRS instructions for Schedule C. For official guidance, visit IRS.gov.