Last Updated : January 14, 2009
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Schedule C

Schedule C

Profit or Loss from Business

Use Schedule C (Form 1040) to report income or loss from a business operated or a profession practiced as a sole proprietor. Also, use Schedule C to report wages and expenses taxpayer had as a statutory employee. An activity qualifies as a business if taxpayer’s primary purpose for engaging in the activity is for income or profit and taxpayer are involved in the activity with continuity and regularity.

Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. See Schedule C-EZ for details.

Line A – Principal Business or Profession
Describe the business or professional activity that provided principal source of income reported on line 1. If taxpayer owned more than one business, he/she must complete a separate Schedule C for each business.

Line B – Business Code
Enter the business code from Schedule C instructions issued by IRS.

Line D - EIN
An EIN is considered necessary only if taxpayer has a qualified retirement plan or was required to file an employment, excise, estate, trust, or alcohol, tobacco, and firearms tax return.

Line G – Participation in Operation of Business
If business activity of taxpayer is not a rental activity and he/she met any of the material participation tests or the exception for oil and gas applies, check the “Yes” box. Otherwise check the “No” box. If “No” box is checked, this business is passive activity.

If “No” box is checked and taxpayer have a loss from this business, taxpayer have to use Form 8582 to figure allowable loss, if any, to enter on Schedule C, line 31. Normally, taxpayer can deduct losses from passive activities only to the extent of income from passive activities only to the extent of income from passive activities.

Line H – Business Started in 2006
If business is started or acquired in 2006, check the box on this line. Also required to check this box if business is reopened or restarted after temporarily closing it, and did not file a 2005 Schedule C or C-EZ for this business.

Part I – Income:

Line 1 – Gross Receipt or Sales:
Enter gross receipts from your trade or business. Include amounts you received in your trade or business that were properly shown on Forms 1099-MISC. If the total amounts that were reported in box 7 of Forms 1099-MISC are more than the total you are reporting on line 1, attach a statement explaining the difference.

Statutory Employee:
If taxpayer received a Form W-2 and the “Statutory employee” box in box 13 of that form was checked, report  income and expenses related to that income on Schedule C or C-EZ.

The program transfers the amount from Form W-2 on this line, if “Statutory employee” box on line 13 of that form is checked. However it is required to indicate at the bottom of Form W-2, the number of Schedule C to which this income required to be transferred.

Line 4:
Amount on this line comes from Part III, page 2 of Schedule C. Complete this part and program will transfer the amount form Part III on this line.

Part II – Expenses:

Line 9 – Car and Truck Expenses
Amount on this line comes from Part VII of the Vehicle depreciation worksheet. Complete the vehicle depreciation worksheet and program will automatically transfers the amount on this line.

Line 12 – Depletion
Enter here deduction for depletion.

Line 13 – Depreciation and Section 179 Expense Deduction
Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year.

Amount on this line comes from Form 4562. Fill up the Depreciation worksheets for each assets and program transfers the amount of Depreciation on this line.

Line 15 – Insurance
Enter on this line a premium paid for business insurance which is deductible on this line. Do not enter the amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for taxpayer’s lost earnings due to sickness or disability.

Line 17 – Legal and professional services
Enter on this line fees for tax advice related to business only and for preparation of the tax forms related to business.

Line 19 – Pension and Profit-Sharing Plans
Enter on this line contributions made to a pension, profit-sharing, or annuity plan, or plan for the benefit of taxpayer’s employees.

Line 21 – Repairs and Maintenance
Deduct the cost of repairs and maintenance. Include labor, supplies, and other items that do not add to the value or increase the life of the property. Do not deduct the value of taxpayer’s own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized.

Line 23 – Taxes and Licenses
Following taxes and licenses can be entered on this line;

  • State and local sales taxes.
  • Real estate and personal property taxes on business assets.
  • Licenses and regulatory fees for your trade or business paid each year to state or local governments. But some licenses, such as liquor licenses, may have to be amortized.
  • Social security and Medicare taxes paid.
  • Federal highway use tax.

Do not enter following items on this line.

  • Federal income taxes, including self-employment tax
  • Estate and gift taxes.
  • Taxes assessed to pay for improvements, such as paving and sewers.
  • Taxes on home or personal use property.
  • State and local sales taxes on property purchased for use in business. Instead, treat these taxes as part of the cost of the property.
  • State and local sales taxes imposed on the buyer that taxpayer is required to collect and pay over to state or local governments
  • Other taxes and license fees not related to taxpayer’s business.

Line 24a – Travel Expenses
Enter on this line expenses incurred by taxpayer for lodging and transportation connected with overnight travel for business while away from tax home.

Line 24b – Meals and Entertainment
Enter your total deductible business meal and entertainment expenses. Include meal expenses while traveling away from home for business.

Business meal expenses are deductible only if they are
(a) directly related to or associated with the active conduct of taxpayer’s trade or business,
(b) not lavish or extravagant, and
(c) incurred while taxpayer or taxpayer’s employee is present at the meal.

Taxpayer cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement, or recreation.

Line 25 – Utilities
Enter on this line utility expenses only for trade or business.

Line 27 – Other Expenses
Enter on Part V of this form, other expenses related to business not included on line 8 through 26. The program transfers the amount form line 48 to here.

Line 30 – Expenses for Business use of Home
Taxpayer can claim the expenses for business use of home, subject to some limitations. To claim this deduction, complete the Form 8829. Form more details, see the instructions for Form 8829.

Line 32 – At-risk Rules
Normally, if taxpayer have a business loss and amounts invested in the business for which taxpayer are not at risk, he/she must complete Form 6198 to figure allowable loss.

Check the box 32b if taxpayer have amounts invested in the business for which he/she is not at risk.

Part III – Cost of Goods Sold:
Normally, if taxpayer engaged in a trade or business in which the production, purchase, or sale of merchandise is an income-producing factor, taxpayer must take inventories into account at the beginning and end of tax year.

Line 33 – Method used to Value Closing Inventory
Inventories can be valued at cost; cost or market value, whichever is lower; or any other method approved by the IRS. However, required to use cost method if using the cash method of accounting.

Line 35 – Inventory at the Beginning of the Year
If you are changing your method of accounting beginning with 2006, refigure last year's closing inventory using your new method of accounting and enter the result on line 35. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation.

Line 41 – Inventory at the end of the Year
If you account for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 41 the portion of your raw materials and merchandise purchased for resale that are included on line 40 and were not sold during the year.

Part IV – Vehicle Information:
This part is required to complete only if claiming car or truck expenses on line 9 and are not required to file Form 4562 for this business.

Line 44b – Commuting Miles
Normally, commuting is travel between a home and a work location. If use of vehicle is converted during the year from personal to business use (or vice versa), entre commuting miles only for the period vehicle is droven for business.

Part V – Other Expenses:
Enter in this part all ordinary and necessary buisness expenses not included elswhere on Schedule C lines 8 through 26. Enter the total on line 48 and line 27 of Schedule C.

Do not enter in this part the cost of business equipment or furniture, replacements or permanent inprovements to property, or personal, living, and family expeses. Also do not enter charitable contributions and fines or penalties paid to a government for violating any law.

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