How to Fill Out a Schedule C for a Sole Proprietor or Single-Member LLC
Schedule C is a tax form for small business owners. Here is how to fill out a Schedule C for a sole proprietor or single-member LLC.
Schedule C is a tax form for small business owners who are sole proprietors or single-member LLC owners. Schedule C (Form 1040) is a form attached to your personal tax return that you use to report the income of your business as well as business expenses, which can qualify as tax deductions. As you will see by reading this article, Schedule C can be complicated, overwhelming, or confusing. We highly recommend you consult a tax professional for help, or at the very least, use tax software to complete the calculations in the form, rather than trying to fill it out by hand. Regardless of how you choose to do it, it’s helpful to familiarize yourself with the form so you can gather and prepare all of the information you will need. Here is how to fill out a Schedule C for a sole proprietor or single-member LLC.
How to Fill Out Schedule C
The beginning of the form is straightforward. At the top of the form, you will notice a section for the “name of proprietor” which will be your personal name. Your name will be the same whether your business is a sole proprietorship or an LLC since there is a different section where you will put your business name. To the right of your name, you will use the space labeled “social security number” to supply that information or your ITIN (Individual Taxpayer Identification Number).
Section A asks for your “principle business or profession, including product or service.” You would put your title here or describe what it is your business does to make money. For example, perhaps you are a writer, photographer, or a social media expert. Or perhaps you own a restaurant or sell widgets. You would write your business description or title in section A.
Section B is for your industry code. Page 18 of Schedule C’s instructions has a list of industries and their codes. You would use this list to look up the industry within which your business falls under and fill out the corresponding number in section B.
Here is where you will put your business name. If you didn’t formally register your business, then your business shares your personal name and you would leave “business name” blank. If you registered your business name with your state, then you would put your business name here.
In section D, you will put your employer ID number (EIN), which you would have gotten from the IRS if you applied for one. If you don’t have an EIN, then leave this blank.
Section E is for your business address, whether you have a separate address or you do business just in your home.
Section F is where you will specify the “accounting method” for your business, whether it’s cash or accrual. It’s highly likely you are a cash business, which is how most small businesses operate. This means you record your income as you receive it and you record your expenses as you pay them. If this is the case, then you would check the box labeled “cash.”
An accrual business, on the other hand, means you have accounts receivable and accounts payable. People buy your product on credit and you pay people back on credit. If you have accounts receivable, you count that as income even before you receive it. You could have an expense that’s not due for thirty days, but you count it as paid and it goes into your accounting as “accounts payable.”
This section asks, “Did you ‘materially participate’ in the operation of this business during [the last year]?” It’s likely the answer would be “yes.” This basically means you participated in regular and continuous actions with the intention of producing income, as most small business owners do.
This section is self-explanatory. Section H asks the simple question, “If you started or acquired this business during [the last year], check here.” If so, check the box. If not, then leave the box empty.
Section I asks, “Did you make any payments in [the last year] that would require you to file Form(s) 1099?” A 1099 is a form you would fill out if you paid an independent contractor $600 or more during the year. These are not employees of your business, but people who do paid work for you here and there. You must give them a 1099 with the total amount you paid them. If you click yes, then you must fill out section J.
If you did not pay anyone $600 or more for services rendered, then you would leave this section blank. If you did, then you had better click “yes” and then make sure you have done what this section is asking, which is, “If ‘Yes,’ did you or will you file required Forms 1099?”
Part I: Income
This part of Schedule C is going to help you to calculate your gross income, or the total amount of money you made before taxes or other deductions.
“Gross receipts or sales” simply means the amount of money that someone paid you or how much cash you got in exchange for goods or services. This has nothing to do with expenses, but how much someone actually paid you. If you sold 10,000 sandwiches at $10 each, for example, then you would put $100,000 for this section, regardless of how much it cost to make the sandwiches.
“Returns and allowances” means you should add up and include all cash or credit refunds you had to make throughout the year to customers. This could include rebates or other allowances or discounts that you paid back after collecting the actual sales price.
For section 3, you will subtract line 2 (returns and allowances) from line 1 (gross receipts or sales.)
Section 4 is where you will put the cost of goods sold. This is where you list the total expenses you paid in order provide your goods. For example, if your sandwich ingredients cost $30,000, then you would put that here. In other words, you put here what you spent in order to acquire what you later sold.
To calculate gross profit, subtract line 4 (cost of goods) from line 3 (sales minus returns and allowances.)
Here is where you will document other income, including interest income, and federal and state tax credits or refunds. This will generally be zero, unless you are earning interest from your business bank account, in which case you would enter that here.
To calculate gross income, add lines 5 (gross profit) and 6 (other income.)
Part II: Expenses
This section will detail your business’s expenses.
Section 8 is where you put the total amount spent on advertising for your business. This could include business cards, flyers, and social media advertising. You cannot list meals and entertainment under advertising costs; that will go in a different section.
Section 9 is for car and truck expenses, including car insurance, repairs, and all other vehicle expenses paid, including mileage, but excluding loan interest and taxes. Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car or truck is 58 cents per mile driven for business use.
If you had to pay anyone commissions and fees to help you drum up business and sales, you could list those fees here.
Enter the total cost of contract labor for the tax year. Contract labor includes payments to persons you pay for business-related services who are not considered employees (for example, independent contractors). These would be people for whom you supplied 1099 forms.
It’s likely you will leave this section blank. Depletion refers to the use of natural resources by mining, drilling, quarrying stone, or cutting timber. The depletion deduction allows an owner to account for the reduction of a product’s reserves.
This section is about the depreciation of business assets. If you purchased assets for your business, such as equipment or furniture, you can’t expense it all at once when you buy it. You have to depreciate it over a set number of years, depending on the asset type. You also can depreciate improvements made to leased business property.
If you have any employee benefit programs, these expenses would go here. You should deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan (see section 19). Examples are accident and health plans, group-term life insurance, and dependent care assistance programs.
In section 15, you should add up all insurance you pay for your business other than health. For most small business owners, this will typically mean business liability insurance.
In section 16, you will include all interest you pay to banks, such as mortgage interest paid on a building you use for your business, interest paid on your car loan, or other interest you paid on a business loan.
This line will include legal and professional services, such as what you would pay a tax preparer or lawyer.
Office expenses could include writing implements, stamps, printer paper, maybe even a printer.
You probably won’t need to include anything for this section, as this refers to deductions for the contributions made for the benefit of employees to a pension, profit-sharing, or annuity plan (including SEP, SIMPLE, and SARSEP plans.)
Section 20 includes money paid for rent or lease, including vehicles, machinery, and equipment, and other business property.
Section 21 is where you will document money paid for repairs and maintenance. If your machinery or computer breaks, for example, you would have to pay someone to fix it. This section would not include improvements, such as property renovations, which would go under depreciations.
Section 22 is where you put what you paid for supplies to run your business. You can deduct the cost of books, professional instruments, and equipment, for example.
Section 23 includes all taxes you paid, such as sales tax, payroll tax, and property tax. You can also deduct all fees paid for business licenses.
Section 24 is for travel and meals. Enter your expenses for lodging and transportation connected with overnight travel for business. You can write off flights, hotels, rental cars, taxis, and any other travel expenses. Incidental expenses include fees and tips given to porters, baggage carriers, bellhops, and hotel maids.
You should also enter your deductible business meal expenses. This includes expenses for meals while traveling away from home for business. According to the IRS, your deductible business meal expenses are a percentage of your actual business meal expenses. In most cases, the percentage is 50%. You can deduct a percentage of the actual cost of a meal if the following conditions are met.
- The meal expense was an ordinary and necessary expense in carrying on your trade or business;
- The expense was not lavish or extravagant under the circumstances;
- You or your employee was present at the meal;
- The meal was provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food or beverages provided during or at an entertainment event, the food and beverages were purchased separately from the entertainment, or the cost of the food and beverages was stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Instead of deducting the actual cost of your meals while traveling away from home, you can use the standard meal allowance for your daily meals and incidental expenses. Under this method, you deduct a specified amount, depending on where you travel, instead of keeping records of your actual meal expenses. However, you must still keep records to prove the time, place, and business purpose of your travel.
You can deduct utilities for a business, such as gas, electricity, and water.
If you have employees, you can deduct the wages (fewer employment credits) you paid on this line. If you paid yourself from your LLC, you can put what wages you paid yourself here.
Section 27 deals with other expenses. Anything you paid that doesn’t fall under all of the other sections we already covered under expenses will go here. This could be conference fees or education, for example.
In section 28, you will total expenses except the expenses incurred for the business use of your home. This means you are going to add up lines 8 through 27 and put the total sum on this line.
Section 29 will show your tentative profit or loss. Subtract line 28 from line 7, your gross income.
Here is where you record expenses for the business use of your home. Enter the total square footage of: (a) your home, and (b) the part of your home used only for business. Use the Simplified Method Worksheet in the Schedule C instructions to figure the amount to enter on line 30.
Finally, you come to your net profit or (loss) by subtracting line 30 from line 29. This is the amount of money you will have to pay taxes on if you made a profit.
If you have a loss, check the box that describes your investment in this activity. You will have to see the instructions for Schedule C to determine your investment.
Part III: Cost of Goods Sold
if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.
Section 33 is about the methods used to value closing inventory. Your inventories can be valued at cost, the lower of cost, or market.
Was there any change in determining quantities, costs, or valuations between opening and closing inventory?
What was your inventory at beginning of the year?
What is the total cost of purchases, minus the cost of items withdrawn for personal use?
Section 37 is the cost of labor, not including any amounts paid to yourself.
Section 38 details the cost of materials and supplies.
In section 39, you should tally up any other costs of goods sold.
On line 40, you will add lines 35 through 39.
On line 41, put the inventory you have at end of year.
Section 42 is where you figure out the cost of goods sold by subtracting line 41 from line 40.
Part IV: Information on Your Vehicle
Complete this part only if you are claiming car or truck expenses on line 9. In most cases, commuting is travel between your home and a work location. If you converted your vehicle during the year from personal to business use (or vice versa), enter your commuting miles only for the period you drove your vehicle for business. Travel that meets any of the following conditions isn’t commuting.
- You have at least one regular work location away from your home and the travel is to a temporary work location in the same trade or business, regardless of the distance. Generally, a temporary work location is one where your employment is expected to last 1 year or less.
- The travel is to a temporary work location outside the metropolitan area where you live and normally work.
- Your home is your principal place of business (for purposes of deducting expenses for business use of your home) and the travel is to another work location in the same trade or business, regardless of whether that location is regular or temporary and regardless of distance.
When did you place your vehicle in service for business purposes (month, day, year)?
Of the total number of miles you drove your vehicle during the last year, enter the number of miles you used your vehicle for business and commuting.
Was your vehicle available for personal use during off-duty hours?
Do you (or your spouse) have another vehicle available for personal use?
Do you have evidence to support your deduction?
Part V: Other Expenses
In this section, you will detail business expenses not included on lines 8 through 26 or line 30.
You will total up all other expenses.
As a small business owner, your time is very valuable. As you can see, this form can be a long and confusing endeavor to fill out, and making mistakes on your tax return can be costly. If at all possible, we highly recommend using a professional tax preparer to fill out the form for you. A professional tax preparer can also assist you with maximizing your deductions safely and legally, as they are very familiar with tax law. If you can’t afford to hire a professional, then the next best thing will be to get good tax preparation software. Whatever you decide to do, be sure to keep detailed records of all of your expenses so you can back up your deductions for peace of mind in case of an audit.