Schedule C Returns Information Articles | Taxes

By: J.Morgan

Schedule C returns are used by sole proprietorships to report their record of earnings and expense in their business to the Internal Revenue Service. The complexity of the form, coupled with the interpretations of the tax code, often send small business owners in the direction of the CPA, or the tax professional in order to complete the necessary paperwork. But what information will we be required to provide to the tax professional preparing our Schedule C? Omission of vital information can mean the difference between a small tax liability, and a huge tax liability. Educating yourself about the information necessary to complete the form is the surest way to achieve the maximum benefit, and receive the minimum tax assessment possible. The following article takes a look at the information that you’ll need to furnish, and where to find it.

The most important piece of information that you will be asked to furnish is your business income for the year. Depending upon your line of business, your receipts and records can be kept in a variety of ways. For some retail businesses, daily sales receipts may be all that is necessary; for others, invoices and service receipts may be the record that must be kept. Either way, the ability to provide your annual income will be the first item of business.

Next, your expense must be recorded. You need to remember here, that your tax professional will not require you to furnish all the receipts for the expenditures that you report; only the IRS will require written, valid receipts. However, in reporting the expenditures, you don’t need to use dollar values that you cannot substantiate. Examples of expenses you incur in the course of business are your cost of goods sold, advertising expense, labor expense, insurance expense, office expense, licensing expense, and legal and professional services expense. While these are not all the examples of expenses incurred, they are the most common.

Your cost of goods sold is a computation based on inventory level at the beginning of the year, versus inventory levels at the end of the year; if you don’t maintain an inventory, your cost of goods might only be actual monies spend over the course of the year in the production of your goods and services sold.

Advertising and all the other expense listed above are reported on Part II of Schedule C and are expenses incurred as a direct result of business operations. The sum of the expenses will be based on your actual expenditures; there are a couple of exceptions: depreciation and section 179 expenses. These two expenses are a little bit different, and as a result the records kept to track these expenses are a little different.

Depreciation expense refers the loss in value of a particular asset over the course of its useful life. The Internal Revenue Service recognizes this depletion of value and allows for a deduction of the depletion, on a certain schedule. This value does not always coincide with the determined book value of the asset, and sometimes when assets are sold if there is a profit above the already depreciated value, tax will be assessed after the sale.

Section 179 deduction also relates to the depreciation of certain assets. Assets with a short life expectancy or assets that a business can use to offset net income can be depreciated all at once, for the year in which they are purchased, and up to a specified dollar value. The use of depreciation and Section 179 expense to offset taxable income is a common practice in business today. Usually, it can be used during the first few years of business to provide a cushion for the business, and to hold at bay income tax liability for a fledgling company.

Another form often associated with the Schedule C is the Expenses for Business Use of Your Home, or Form 8829. This deduction is allowed only if there is a net profit. Any expense for the business use of your home that is disallowed in one year because of a net business loss may be carried over to an upcoming year.

Well, that just about covers the Schedule C information. As with any tax preparation, seek the advice and counsel of a tax professional.