Businesses with no formal entity structure and a single owner—called sole proprietorships—file Schedule C, Profit or Loss From Business, with their individual returns. By contrast, formally structured business entities such as corporations, partnerships, and some limited liability companies (LLCs) file separate tax returns.
The Schedule C tax form combines a sole proprietor's business income and expenses to determine the net profit reported on Form 1040, the individual income tax return.
Who files a Schedule C tax form?
Besides sole proprietorships, three other types of business may use Schedule C. This includes:
- Single-member LLCs (SMLLCs). The IRS “disregards" an LLC with only one member—called an SMLLC—unless the SMLLC files an election for corporate tax treatment. A disregarded SMLLC doesn't exist for federal income tax purposes and must allocate business income and expenses to its owner. In the case of an SMLLC owned by an individual—and not a corporation or partnership—that means filing Schedule C.
- Qualified joint ventures. Spouses who own a combined 100% of an unincorporated business may choose to each individually file Schedule C for their share of the income and expenses. The business must not be in the name of a state law entity (such as an LLC) to be classified as a qualified joint venture. Both spouses must also meet one of the IRS's tests for material participation—meaning they actively worked in the business. Otherwise, the business must file Form 1065 like most partnerships.
- Community income. Spouses who wholly own an unincorporated business (such as an LLC) as community property under state or foreign law may also choose to file Schedule C. No material participation requirement exists in this case. Currently, the nine community property states in the U.S. are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Schedule C does not include most rental real estate income, farm income, or hobbies. Those types of income are reported on separate forms and schedules (for example, Schedule E for rental income or Schedule F for farm income). For the IRS to consider an activity as a business instead of a hobby, the owner must attempt to earn a profit, and continually and regularly participate in the activity.
How to file Schedule C
Sole proprietors attach the Schedule C tax form to their 1040 and file it by the 1040 due date—April 15th or the next business day. Any extensions to the 1040 due date apply to Schedule C as well.
Lines A through J on Schedule C collect basic information about the business, including whether it uses the cash or accrual method of accounting.
Part I of the Schedule C tax form includes all business income then subtracts returns and allowances as well as cost of goods sold—itself calculated in Part III—to arrive at gross income.
Expenses—except for business use of the owner's home—go on Part II of Schedule C. Many special rules apply to certain expenses, and some expenses require other tax forms to calculate.
Finally, lines 28 through 32 calculate net income or loss, which then goes to Line 3 of Schedule 1, which in turn finally makes it onto Line 8 of Form 1040. Net income or loss also flows from Schedule C to line 2 of Schedule SE to help determine self-employment tax.
The IRS website has a copy of the Schedule C tax form as well as Instructions for Schedule C.
Even simple sole proprietorships usually require multiple other tax forms along with Schedule C. Some of the most common related forms include:
- Schedule SE. To calculate self-employment tax on business income.
- Form 3800. To claim general business credits. Schedule C does not directly calculate any credits.
- Form 4562. To claim and calculate depreciation and to expense certain depreciable assets.
- Form 4797. To report and calculate the tax consequences of sales and most other disposals of business property.
- Form 8829. To claim expenses for the business use of the owner’s home.
Reading the IRS instructions for Schedule C and the related forms takes a great deal of time. Moreover, the instructions alone don't provide a thorough understanding of all the tax issues involved.
Hiring a certified tax professional can ensure you prepare Schedule C correctly and don't pay more tax than legally required.
Find out more about Business Taxes