Schedule C Explained

Filing your tax return can get a little confusing when you start a small business or work as an independent contractor, knowing what you can and cannot utilize as expenses can be a little daunting. In this article I am going to break down the Federal Schedule C which is the form that your tax preparer will use to report your income and expenses as an individual (gig worker), independent contractor, sole-proprietor, or single member LLC (disregarded entity) for more on California LLC Explained read our article. If you have rental income, see our article Schedule E Explained.

There are 2 pages with the Federal Schedule C Form, let’s start from the top. Your personal name will be on the first line, your doing business as (dba) name will be listed on line C, what type of business you run will be on line A, (ie: Rideshare Driver, Consultant, Plumbing, etc) then you will list if you are a “Service” or “Product” provider, in box B this is where your business code goes, you can look this up yourself, however, it is best to have a tax preparer complete this to ensure that you have chosen the code specific to your business (example, plumbing has 10 codes) you will use this same code every year you file your Schedule C. You probably noticed I skipped the social security field, yes, that was intentional, you will not put your SSN on this document if you have requested and received a Federal Employer Identification Number (EIN) you will only need to put your EIN on the document, if you do not have a EIN then you will use your SSN.

If you rent an office or shop space you will put that address on the Schedule C, if you work from home your home address or mailing address will go on line E. F is your accounting method is Cash, meaning you report income/expenses as they occur, Accrual, meaning your report income/expenses regardless of if you have actually earned or expensed it. See our Accounting Methods and Recording article for more in-depth explanation on all three accounting methods. G-J are simple yes or no responses, I-J are specific to did you hire an individual or sub-contractor that would require you to file a 1099 (not if you received a 1099 from another company) you can check out our article on 1099’s Explained if you would like to know more about this form and how it effects your small business.

Part 1: This is where you are going to report your Gross Income, this is your earned revenue before any deductions, if you have received 1099’s (1099-NEC or 1099-MISC) for work that you had performed for another company or individual they will get reported separately within your tax return and flow to your schedule C, so you will deduct your 1099 income totals from your gross income (Gross Income $100,000 - 1099 reported income $25,000 = $75,000 gross income) this ensures that you do not overstate your gross income. When you look at the printed version of your schedule C it will show your gross income at $100,000. You can check out our article on Understanding W-9 and 1099 for more information.

Returns and allowances are refunds or discounts that you have given to your customers on services or products, this can be in the form of line-item discounts or credits or refunds given on return product or undelivered services or even bad debit (uncollectable income). #6 Other income, this is used specifically for other income that came into the business that was not a direct service or product, example, earned interest, insurance payments for lost income, settlement compensation, etc.

Part II: Not every business will utilize every aspect of the categories within the expense area, #8 advertising = money used specifically to advertise, promote or market the business, this does not mean you get to write off your vehicle because you’ve put vinyl lettering or did a whole wrap on it, you can expense the cost of the lettering or wrap only, if you have clothing, hats or other items printed with your company logo that you give away is promotional marketing, business cards, brochures, website, etc. #9: Car and Truck: see are article specific to your Car and Truck Expenses because this is extremely important, you cannot just write off a vehicle because you drive it to and from the office or because you slap magnetic signs, vinyl lettering or other marketing gimmicks on it, this expense is specific to the use of your vehicle in the process of doing business, meaning if you drive from your house to your office this is not business use it’s just you going to work, correct mileage is when you need to travel to your clients location or job site, again you can find more details in our Car and Truck Expenses article. #10 Commissions and Fees & #11 Contract Labor, both require you to collect information on a W9 so that you can send them a 1099 at the end of the year if you have paid them $600 or more that you are not reporting as a Wage.

#12 Depletion, is when utilizing natural resources that are extracted by mining, drilling, examples cutting timber or quarrying stone. #13 Depreciation, is based on your business assets and entered on Form 4562 Explained (check out this article to get details on assets and deprecation) asset depreciation is calculated based on the basis and useful life of the asset, this is why it is important to Understand Your Assets by reading our breakout article. #14 Employee benefit programs this line is used for employer portion of benefits like Health Insurance, 401K program or any other employer paid benefit to the employee (with exception to meals). #15 Insurance (other than health) business general liability, professional liability, inland insurance, etc. #16 Interest (Expense) a Mortgage is not your home mortgage read our Home Office Expense article, this Interest expense is specific to Business Property Mortgage Interest, and b Other is specific to Business credit card, line of credit or other loan interest expense.

#17 Legal and Professional Services: is just that, any legal fees that you might have incurred in direct relation to the operation of your business, an example of professional services would be if you utilized a consultant to help in improving efficiency in your business or outsourcing your bookkeeping. #18 Office Expense, any expense that is in direct relation to running your office (Not Home Office) paper, ink, stamps and other office supplies. #19 Pension and profit-sharing plans very rare on a schedule C but you never know, this would only be the company portion of this expense. #20 Rent or Lease, an example for a: is if you rented a truck from U-Haul to deliver items a client purchased from your location or you're a contractor and you need to rent a chainsaw for a day, b: is specific to your space rent, if you rent an office or shop in order to provide services or product to your clients. #21 Repairs and Maintenance any lease hold repairs or maintenance that you are directly responsible for.

#22 Supplies these are supplies that you utilize in direct relation to performing services and production that is not included in your Cost of Goods Sold (check out our article to better understand C.O.G.S) if you are an artist this would be paint brushes, paint, acetone, cleaning cloths, drop cloths, etc. Supplies are your typical “Expendable” items like toilet paper, paper towels, paper cups, straws etc. #23 Taxes and Licenses all of your licensing including annual certifications along with taxes paid (not to confuse with taxes you paid that were due from the previous year) are taxes that are incurred in direct relation to business activity example: property taxes, employer portion of withholdings and sales taxes paid directly to taxing authorities for the sale of products sold.

#24 Travel and Meals: this is one that always causes a little confusion or are the most misused categories, okay, you can only report travel expense that is directly related to business, just because you talk about business doesn’t mean you get to expense the whole trip to Hawaii (just an example) you need to be attending a seminar, continued education, meeting with a new client, etc., and this doesn’t mean that you go to a one day seminar and stay for the week and expense the whole trip. Travel does include; Airfare, hotels/airbnb, meals, rental car or mileage on your vehicle to and from, however there is a limit on all of these, see our article on Travel and Meals Explained for a better understanding on these deductions. As for meals, just because you pull out your business visa doesn’t make it a business meal, and at no time is alcohol an expense, you need to be talking business directly with a client (and not over the phone), or be over 60 miles away from your place of practice, as for employees daily lunches are not an expense, unless you are on a job site where the employee is not able to store or grab a meal easily and or the job site is over 60 miles away, but again there are restrictions and limits so make sure to read our Travel and Meals Explained article.

#25 Utilities (Not Home Office Utilities) these are utilities that are directly related to your place of business, which can be a portable office or job site office for contractors. #26 Wages is just wages paid directly to your employees on a W4 meaning you withhold and pay on their behalf the appropriate Federal and State withholding and provide them with a W2 at the end of the year. #27 Other Expenses: this is where you would list any expense that was not previously categorized example: you rent a storage space to hold your equipment, for b Energy efficient commercial bldgs, this will get completed when you fill in form 7205.

Part III: Okay on to C.O.G.S hopefully you have reviewed our article Cost of Goods Sold #33 Method it is important to understand your method of inventory (if you have inventory) the majority of the time the method is Cost meaning your valuation is based on your cost. #34 Change in valuation is typically No unless of course you have made a change. #35 Beginning Inventory if this is your first year you will start with 0.00 valuation, if you had inventory from last year but did not list it or you did an audit and found an error, you will need to write an explanation and then list the current valuation for your inventory. #36 Product or Materials used for personal use, if you provide samples to your employees, family or friends that total will be deducted here. #37 Cost of Labor if any of your wages reported on Part II: line #26 or #11 are directly related to your C.O.G.S you will add it to Part III: line #37 and subtract it from the other associated line in order to not overstate your expenses, example if you have 2 warehouse workers and 3 office workers, your warehouse employees will be reported on Part III: your C.O.G.S #37 and your office employees go on Part II: #26.

#38 Materials and supplies: these are directly related to your C.O.G.S, we’ll keep the example with warehouse, supplies will be boxes, tape, packing materials, markers/pens, etc., and materials purchased for resale or raw materials used to assemble products for sale. #39 Other Cost, that are a direct relation to C.O.G.S and not recorded in any category. Then a simple little calculation occurs, and you have your year-end inventory. Now it is extremely important that you use some form of inventory management to ensure that your numbers are as accurate as possible, most inventory is counted quarterly unless it rotates frequently. This helps you mitigate theft and ensures that if you order 200 pieces of something that you not only receive 200pcs but that they are all in sellable condition or useable condition if they are raw materials.

Part IV: if you have a vehicle and motorized equipment (forklifts, tractors, etc.) you will need to have the information ready to give to your tax preparer or CPA so that they can add to your Form 4562, when reporting mileage you should have a log, I use my google calendar for all my appointments and when I travel I put the location in my appointment so that at the end of the month I can refer back to my calendar for my monthly business mileage, now there are apps you can download on your phone that will help you track your mileage if you drive a lot, you will be able to designate personal or business mileage and have a printed report at the end of the year. Part V: is automatically completed if anything gets put in Part II: #27a. Okay so that is it, if you have any further questions in regard to correctly logging your expenses for your specific industry, please feel free to contact us