Tax Guide

Get answers to all your questions about taxes, personal finance, insurance and more.

Basics of Schedule C

The centerpoint of doing your taxes when you have your own business is Schedule C. This is where you enter most of your business's income and deductions. Let's take a step-by-step look at filling out the form.

Starting from the top of the Schedule C screen on your 1040.com return, you'll first enter a short description of your business. Remember: each Schedule C is for the profit or loss from just one business, so if you had more than one business, use a Schedule C screen for each.

Next, you’ll choose a business code for your operation. The dropdown list has lots of choices, arranged alphabetically. If you don’t see a description that fits your business, click the search icon to search by keyword.

Enter the name of your business on line C. If you don’t enter a business name here, the default is the taxpayer’s name as entered on the Name & Address screen. Next, enter your Employer Identification Number (EIN), if you have one, then your business address.

Next, choose the type of accounting method the business uses, if you're not using the cash method. Your choices are the accrual method or “Other.” The accounting method is all about how and when you count income and expenses for your business. With the cash method, you report income in the year it’s received, and deduct expenses in the year you pay them. With the accrual method, income is reported in the year it’s earned, and expenses are deducted in the year they’re incurred – even if you receive the income or pay the expenses in a future year. For more info on this, see Publication 583 – Starting a Business and Keeping Records.

On line G, choose the business activity type – basically, passive or not passive. And if your business has a special tax treatment code, choose that too.

The Heart of Schedule C

Now we get into the real meat of the Schedule C. Part I – Income starts by asking if you had income to report from self-employment, independent contracting, freelancing or consulting during the year. If you answer “Yes,” you'll get fields for gross receipts, returns and allowances, and other income.

Expanding Business Expenses

Once you’re done on the income side, it’s time to move on to expenses. Once again, answer “Yes” to show the various boxes for expenses your business paid during the year.

Most of the lines are pretty straightforward – fields for items such as contract labor or utilities you paid, for example. Line 9 – Car and Truck Expenses – doesn’t have a place to enter any numbers. That’s because you’ll need to fill out the Auto Expense Worksheet screen to provide vehicle mileage or expenses. To get it, first save your Schedule C, then click Review on the left, and use the forms search box at the bottom of your screen to search for the Auto Expense Worksheet.

In filling out the worksheet screen, remember that you can claim either mileage or expenses for your vehicle, but not both. You’ll need a separate screen for each vehicle you claim. Also take care not to double-enter data; if an amount is entered on the worksheet, for example, don’t put that same amount on Schedule C. If you’ve set the initial control correctly (the “Worksheet is for:” field), your data from the worksheet will flow to the Schedule C automatically when the return is calculated.

Back on Schedule C, Part III is for Cost of Goods Sold. Think retail inventory here. If you sell items, but not as the main part of your business, you may not need to enter anything in this section. A mechanic who charges for parts, for example, probably wouldn’t use this section. His parts supplier, however, would.

That brings us to Part V – Other Business Expenses. Basically, this section is for expenses that, for whatever reason, just don’t seem to fit in the other expense sections. Refrain from putting depreciation here; that’s handled on the Form 4562 screen.

Below Part V is a modest-looking line that can positively effect on your return. It’s for family health coverage. Enter the total amount you paid for self-employed health insurance for you, your spouse and dependents. This entry will cut your taxes, so don't neglect it if it applies to you.