Schedule C is the tax form used by businesses and sole proprietors to report profit or loss. It’s then attached to their federal income tax return: Form 1040 or Form 1040-SR.
Filling out Schedule C is relatively easy. It generally takes about five hours for information gathering and an hour to fill out. Schedule C is also the tax form used for claiming the business mileage deduction. As someone self-employed, there is a high chance that you operate a vehicle every day, and this is the deduction that will help you save up on your vehicle expenses and get a big tax break. Learn more about the mileage tax break and see how it works in 2021.
You will report the following using Schedule C – Profit or Loss From Business in order:
- Cost of Goods Sold
- Vehicle Expenses
- Other Expenses
The above will determine, along with your gross income, whether you incurred profit or loss from your business. Schedule C is one of the necessary tax forms that every sole proprietor or business owner must file in order to report to the IRS that whether you made money during the tax year or lost. Schedule C will also further help you understand your tax liability as it directly impacts the taxable income.
Income and Expenses on Schedule C
On the first section of Schedule C, report the total gross income earned during the tax year. This includes gross sales, returns, allowances, cost of goods sold, and taxable credits and refunds you received.
Schedule C is then followed by the expenses which you incited during the tax year on your business. There are a variety of the expenses section on Schedule C. Some of them are:
- Advertising costs
- Car expenses, including the purchase of one
- Insurance expenses (not health)
- Interest paid
Then, you’ll follow up with whether you ended up with profit or loss as you’ve already entered your gross income.
Cost of Goods Sold
The Part III of Schedule C is where you report: cost of labor, materials and supplies, and inventory at the beginning and end of the year.
Displayed on Schedule C as “Information on Your Vehicle”, this is where you enter your vehicle expenses. You can either enter your actual expenses, which you paid to operate a vehicle or vehicles for business purposes, or claim the deduction based on the mileage rate. It would be best if you calculate this deduction both ways and see which one reduced your taxable income the most. Further on, you can use the method that grants you the highest tax break.
The last section of Schedule C speak for itself. Enter your other business-related expenses.