Definition
Schedule C (Form 1040), titled “Profit or Loss From Business,” is used by sole proprietors to report income or loss from their business. The form details the business’s income, deductible expenses, and net profit or loss, which is then transferred to Form 1040, the individual income tax return.
Examples
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Freelance Graphic Designer:
- A freelance graphic designer reports income received from clients, deducts business-related expenses such as software subscriptions, equipment purchases, office supplies, and travel expenses on Schedule C.
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Small Retail Store Owner:
- A small retail store owner uses Schedule C to declare sales revenue. Deductible expenses include the cost of goods sold, employee wages, rent for the store, utility bills, and other operational costs.
Frequently Asked Questions
What types of income are reported on Schedule C?
Income reported on Schedule C includes earnings from sole proprietorships, independent contractor work, and other self-employed activities. This encompasses sales revenue, service fees, and payments for freelance work.
What expenses can be deducted on Schedule C?
Deductible expenses include advertising costs, office supplies, vehicle expenses, rent or lease payments, utilities, education and training costs, business insurance, and other ordinary and necessary expenses related to business activities.
Do I need to file Schedule C if I’m a part-time freelancer?
Yes, part-time or full-time status does not affect the requirement to file Schedule C if you have income and related expenses from a business or self-employed activity.
How is net profit or loss calculated on Schedule C?
Net profit or loss is calculated by subtracting total business expenses from total business income.
Can I file Schedule C without having a registered business?
Yes, Schedule C can be filed even if you haven’t officially registered a business, as long as you engage in activities intended to make a profit.
Does filing Schedule C increase the chances of an IRS audit?
Certain factors like consistently reporting losses, high expense claims, or running a cash-based business, may increase audit risk. However, properly documenting and substantiating expenses reduces audit risks.
Related Terms
- Form 1040: The standard IRS form used by individuals to file their annual income tax return.
- Schedule SE: A form used to calculate self-employment tax.
- 1099-NEC Form: A form used to report non-employee compensation.
- Deduction: Expenses allowed to be subtracted from income; reducing taxable income.
Online References
- IRS Official Website: Schedule C (Form 1040)
- TurboTax Guide: Schedule C Instructions
- H&R Block: Using Schedule C to Reduce Tax Burden
Suggested Books for Further Studies
- “J.K. Lasser’s Small Business Taxes 2023: Your Complete Guide to a Better Bottom Line” by Barbara Weltman
- “Tax Savvy for Small Business” by Frederick W. Daily
- “Self-Employed Tax Solutions” by June Walker
Fundamentals of Schedule C: Taxation Basics Quiz
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