Building Your Business Schedule C Instructions: How To Complete the Form, Step by Step By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on October 31, 2022 Reviewed by Khadija Khartit Reviewed by Khadija Khartit Twitter Website Khadija Khartit is a strategy, investment, and funding expert, and an educator of fintech and strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder. learn about our financial review board Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article What Is Schedule C? Who Should Use Schedule C? Before You Start Working on Schedule C Steps To Complete Schedule C Adding Schedule C to Your Tax Return Frequently Asked Questions (FAQs) Photo: Dean Mitchell / Getty Images Schedule C is a tax form for sole proprietors and other self-employed business owners use to report their business profits and losses. This article explains Schedule C and gives details on how to complete and file this form. Key Takeaways Sole proprietors and single-owner limited liability companies (LLCs) use Schedule C to calculate their business net income (profit or loss) for the year. The business owner adds the net income from Schedule C to their Form 1040/1040-SR, along with personal income, deductions, and credits. You can deduct expenses like business driving and home business costs on Schedule C. Businesses that make and sell products can deduct these costs as the cost of goods sold.Some business losses may be limited in some circumstances. What Is Schedule C? The IRS requires many small businesses to use Schedule C to report their profit or loss for federal income tax purposes each year. The information from this form is included with the owner’s other income, deductions, and credits on forms 1040, 1040-SR, 1040-NR, and 1041 to calculate total taxable income and any tax due. Who Should Use Schedule C? The two business types that use Schedule C are: Sole proprietors or small businesses that haven’t registered with their state as another business type. Owners of single-member (owner) limited liability companies (LLCs) who haven’t elected to file as a corporation. Before You Start Working on Schedule C Gathering your business financial information for the year is the first step in preparing your Schedule C. Even if you use a tax preparer or business tax software, you will need this information. Profit and Loss Statement A profit and loss statement (P&L), sometimes called an "income statement," calculates the net income of your business. It adds up all your income and subtracts all your business expenses. The information on this form is the basis for most of the information you’ll need for Schedule C. Note Don’t include amounts you pay yourself as a business owner on your P&L statement. You pay income tax on your business net income, not what you take out of the business for personal use. All business software programs or applications have this form, or you could use an Excel template and tailor it to your specific business. Information for Cost of Goods Sold If your business sells products, the cost of buying, making, and shipping those products is calculated separately to get a total for the year, called your "cost of goods sold." For this calculation, you’ll need to know the cost of inventory at the beginning and end of the year. You will also need to know all of the direct and indirect costs, including the cost of labor and materials. Information About Vehicle Mileage You may have business driving costs for driving your own car or one owned by your business. To prepare for including these costs on Schedule C, you’ll need to know: When (month/day/year) you bought and started using your car or other vehicleTotal number of miles you drive the car Total business miles (deductible)Total commuting miles (nondeductible) Total other miles driven (nondeductible) You’ll also have to answer questions on Schedule C about whether you have evidence to support your deduction and whether this evidence is in writing. The IRS looks closely at this deduction, so make sure you have adequate evidence for claiming driving miles. Information About Business Use of Your Home The space in your home that you use for business purposes is deductible on Schedule C, with several qualifications and limitations. It must be used exclusively (no personal use) and regularly for your business, either as your principal place of business or as a separate structure for storing inventory or product samples. To calculate this deduction, you will first need to find the percentage of your total home square footage that’s used by your business. Then you can use either actual expenses or a simplified method for calculating the deduction amount. Steps To Complete Schedule C Schedule C has five parts, some of which must be completed by all businesses and some parts that are specific for certain business situations. Identification and Other Information Line B: Your principal business or professional activity code. Find your code beginning on page C-18 of the Instructions for Schedule C. Line D: Enter your employer ID number (EIN). Line F: Enter your business accounting method. (Most small businesses use cash accounting.) Line G: Answer the question about “material participation” in case your business has a loss. Line I: You may have had to file one of several 1099 forms for payments you made. These include forms 1099-NEC and 1099-MISC. Part I: Income The process of recording income walks you through several types of income to calculate gross income on Line 7: Gross receipts or salesMinus returns and allowancesMinus cost of goods sold (from Line 42)Plus other types of income, including interest, refunds, and tax credits You’ll enter this information on Line 29, subtracting total expenses (Line 28) from this number to get a tentative profit or loss. Part II: Expenses This section is for tax-deductible business expenses. Each expense must be for your trade or business and be: Ordinary (common and accepted)Necessary (helpful and appropriate) Some notes on a few of the more common items on this list: Line 9 car and truck expenses are those you calculated as business driving miles. Depreciation is a yearly deduction on long-term assets owned by your business, like vehicles, buildings, equipment, and furniture. Line 23 taxes and licenses include state income taxes and certain employment taxes, but not federal income taxes. Line 24b meals are usually deductible at 50%, with some exceptions. Use line 30 to enter your calculation for the simplified method for your home office space. Use Form 8829 to enter your calculation for the actual expenses method and attach it to your Schedule C. Line 31 is your net profit or loss (line 29 net profit or loss minus line 30). This is your business’s net income, the number you’ll use on your Form 1040. Note The qualified business income (QBI) deduction of an additional 20% on qualified business income is important but not included on Schedule C. Use IRS Form 8995 to apply for this deduction, or get help from your tax preparer. Part III: Cost of Goods Sold Here’s where you include the details from your calculation of cost of goods sold, with the total to be entered on line 4 on page 1. Part IV: Information on Your Vehicle Enter the information you collected to calculate your business-driving deduction. Use Form 4562 to calculate depreciation on vehicles owned by your business. Part V: Other Expenses Use this section to claim additional expenses that you couldn't include in other sections on your Schedule C: Various amortization costsBad debtsA portion of startup costs for a business you started during the year Adding Schedule C to Your Tax Return There are several steps to adding your Schedule C information to your Form 1040, depending on whether you have a profit or a loss. If you have a profit for the year—that is, if your total income is greater than your total expenses—enter the amount on Line 31. Then, you must enter this information on the following forms: Schedule 1 (Line 3) of Form 1040 Schedule SE (Line 2) to calculate the amount of self-employment tax you owe Add totals from these two schedules to your Form 1040, along with your other income. If you had a loss for the year—that is, your total expenses were greater than your total income—you must follow some steps before entering the loss on line 32 of Schedule C. There are limits to the amount of loss you can take in certain circumstances, including whether you are a passive investor or an active part of your business. You may need to complete IRS Form 6198 and possibly other forms to see how much of your loss is allowed. This process is complicated and should be done with the help of a licensed tax professional. Frequently Asked Questions (FAQs) Do I have to complete Schedule C if I didn’t make any money this year? If your small business had no income or expenses during the year, you don’t need to file a Schedule C for that year. But if your business is inactive and you received any payments (from insurance, for example) that relate to your business, you must file Schedule C to report those payments. Can I complete Schedule C on my own? If you have a simple Schedule C and can follow the instructions for this form, you may be able to complete it on your own. But if you have a loss or complicated deductions, like cost of goods sold, it’s best to get help. Look for a licensed tax professional or use business tax software so you don’t miss anything and you get the maximum number of deductions to keep your tax bill low. What does “contract labor” mean? Contract laborers are individuals who work for your business and are not employees. This category of workers can include independent contractors, freelancers, or other workers who receive a 1099-NEC from you. Do not include amounts you paid to: Employees, including tipped employees and part-time employees on line 26Attorneys, CPAs, or other professionals you paid on line 17 Contractors you paid for repairs or maintenance on line 21Other workers you paid for other expenses on line 27aCost of labor included in cost of goods sold on line 37 What is self-employment tax? Self-employment tax is the tax paid by small business owners for Social Security and Medicare taxes. For small businesses, the tax is calculated on Schedule SE and is based on the owner’s net earnings on Schedule C. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Schedule C: Profit or Loss From Business," Page 1. IRS. "2021 Instructions for Schedule C." IRS. "Form 1125-A: Cost of Goods Sold." IRS. "Publication 463 (2021), Travel, Gift, and Car Expenses." IRS. "Instructions for Schedule C (2021)." Internal Revenue Service. "Qualified Business Income Deduction." IRS. "Schedule C: Profit and Loss From Business," Page 2. Internal Revenue Service. "Self-Employment Tax (Social Security and Medicare Taxes)."