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How To Complete Schedule C for a Sole Proprietorship or Single-member LLC

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Check for 2013 tax changes
Before you begin this tax document, check for changes in Schedule C for 2013 taxes.

Purpose of the form/Type of business reported
The Schedule C is used to report net profit for a sole proprietorship or single-member limited liability company (LLC). A sole proprietorship reports its business income by completing Schedule C and including the net income on the owner's personal tax return (on Form 1040/1040A/1040EZ). For purposes of reporting taxes, a single-member LLC is considered a sole proprietorship.

Difficulty: Average

Time Required: Several hours, depending on complexity of business

Here's How:

  1. Where and How to File this Form
    The information from Schedule C showing the net profit of the business is included on Line 12 of the individual's Form 1040, and on Schedule SE (to determine self-employment tax). Schedule C is included with the tax filing for the individual income tax return.

  2. Information needed to complete this form
    General information needed to complete this form includes:

  3. Information on Income
    Collection information on your business income, including income from products or services, returns and allowances, and other income (tax credits or refunds, for example).

  4. Calculate Cost of Goods Sold
    To calculate Cost of Goods Sold, you will need to know:

    • Beginning inventory
    • Additional goods produced or purchased
    • Inventory sold or disposed of
    • Ending inventory.

    The calculation of COGS is in Part III, lines 34-42. You will also need to know the ending inventory valuation method (line 33). You will probably need help from your CPA or tax adviser for this section.

  5. Calculate Gross Profit - Part I
    Now that you have information on your income and cost of goods sold, you can calculate Gross Profit. The calculation is:

    • Gross Receipts from sales
    • Less returns and allowances
    • Equals Net Receipts
    • Less Cost of Goods Sold
    • Equals Gross Profits
    • Plus other income (from tax credits or other sources
    • Equals Gross Income
  6. List Business Expenses.
    Business expenses which you may deduct are listed alphabetically on lines 8-27. They include:

  7. Office expenses
  8. Pension and profit-sharing plans
  9. Rent or lease of vehicles or other business equipment
  10. Repairs and Maintenance
  11. Supplies, including office supplies
  12. Taxes and licenses
  13. Travel expenses(at 100%), meals and entertainment (at 50%)
  14. Utilities
  15. Wages
  16. Other - including bank fees, uniforms and clothing, dues for clubs and organizations, internet and web site charges, books,magazines, and software, phone and cell phone costs
  17. Wages and other Payroll expenses
    Wages, salaries, and payroll tax expenses are deductible costs. The total wages paid, the employer portion of FICA taxes (Social Security and Medicare), unemployment insurance, and workers compensation insurance (federal and state), are all deductible expenses.

  18. Vehicle Expenses
    If you claimed a deduction for auto expenses on line 9, you will need to provide additional information to substantiate your deduction for business use of your car/truck. Information on company-owned vehicles and other assets owned by the business is captured in Part IV (lines 43-47). Note that on line 47 you are asked if you can provide evidence to support your deduction. Be sure you can answer "yes." Information on other business assets
  19. Other Expenses
    Part V allows you to provide more detail on other expenses you are deducting. This is the place to include cell phone, internet provider and website expenses, as well as bank charges and other miscellaneous expenses. Try to fit as many of these as possible within lines 8-27. The total of these other expenses goes on line 27.

  20. Business Use of Home
    Beginning with 2013 taxes, you have two options for including information on business use of your home. Option A: complete Form 8829 and include the total allowable expenses on line 30 of Schedule C. Option B: Use a simplified calculation, which is currently using $5 per square foot of home business space times the square footage, up to 300 sq. ft., for a maximum $1500 deduction, on line 30. Read more about the simplified deduction method.  For either deduction method, you may only use space that is used regularly AND exclusively for your business.

  21. Calculating Net Profit
    The final calculation is for Net Profit.
    Subtract the Total Expenses on Line 28 from Gross Income on Line 7. Then subtract Expenses from Business Use of your home (line 30), to get the Net Profit/Loss. This number is what you must report on your income tax return.

  22. Filing the Schedule C
    When you have completed Schedule C, take the Net Profit/(Loss) from Line 31 to your Form 1040, Line 12. Add/subtract your income from this business to other income from other businesses (not your wages from an employer).

  23. Calculating Self-Employment Tax
    The total Net Profit from the Schedule C is also used to calculate self-employment taxes to be paid by the owner of the business. If the business has a loss, no self-employment tax is owed. Self-employment tax is calculated on Schedule SE.

Tips:

  1. Qualified Joint Venture
    A Qualified Joint Venture is an LLC owned by you and your spouse, which may be treated as a sole proprietorship for tax purposes. In this case, both spouses must complete a separate Schedule C. The requirements for this "Qualified Joint Venture" are outlined in the instructions for Schedule C.

     

  2. Sales of Services
    If your income is from selling services, like consulting, you will not have to calculate cost of goods sold. In this case, your gross income and your gross profit are the same (unless you have tax credits or other income sources).
  3. Limits on Deductions
    Note that most business expenses have restrictions on their deductibility or conditions that must be met before they can be deducted. Check Business Tax Deductions A-to-Z or discuss this subject with your tax professional.
  4. Important Disclaimer
    The information on Schedule C is provided for general information purposes and is not intended to be used for the purpose of completing a tax return without the assistance of a tax professional. This Guide is not an attorney or CPA or Enrolled Agent.

  5. Back to All About Single-Member LLCs

    More information on Schedule C, including instructions on how to prepare, when you can use Schedule C-EZ, and more.

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