The Internal Revenue Service expects a small business owner operating as a sole proprietor to complete a Schedule C along with the 1040 individual income tax form. This schedule, an information form, records profit or loss from a business. Sole proprietors who own more than one business must file a separate Schedule C for each enterprise.
Top of the Form
The first section of Schedule C asks for basic identifying information including the taxpayer's name, the business name if different, mailing address and employer's identification number or EIN. Mark yes or no answers to the general questions in this section, such as if the business started in the current tax year.
Cost of Goods Sold
Start with Part III of Schedule C to figure cost of goods sold. Enter the value of inventory at the start of the tax year. Subtract purchases, labor costs, materials and any other inventory-related expenses. From this total, subtract the value of the end-of-year inventory to get the cost of goods sold. Enter that amount on Line 4 in Part I to figure income.
The income section of Schedule C is used to compute the gross profit for the business. It's derived from the value of gross sales, minus returns and the cost of goods sold. Add any other income, such as earned interest or money from scrap sales, to get gross income.
Enter expenses in Part II. Expenses are split into types, such as advertising, taxes and licenses, and rent. Subtract the total expenses from the gross income to get a tentative profit or loss figure. Next, when applicable, list any expenses that came from using your home as a business. Subtract this figure from the tentative profit or loss amount for the net profit or loss. Transfer that figure to Line 12 of Form 1040.
Business Use of Vehicle
Complete Part IV if you claimed expenses for business use of a vehicle in Part II. Answer the simple questions and add the mileage figures in the provided blanks.
The last section is for any costs not included elsewhere on the form. These can include startup costs, bad debts included in sales in the income section or any other ordinary and necessary expenses.
- Internal Revenue Service: Instructions for Schedule C
- Internal Revenue Service: Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ)
- Internal Revenue Service: Schedule C Profit or Loss From Business
- Internal Revenue Service: Top Six Tax Tips for the Self-employed