An income tax return is a disclosure to the Internal Revenue Service (IRS) about the economic and income generating activities, that we undertook in the past financial year. For income tax returns, Form 1040 is the most important one. It is divided into different 'schedules', the most prominent ones being Schedule A, Schedule B, Schedule C, and Schedule D. Each of them address to different elements of the income. The Schedule C is used to fill up the information about income, which is derived from the profit and loss of a business.
Who Should File a Form 1040, Schedule C?
It should be filed by any person who is connoted to be sole proprietor of a business, or has a profession, and is to be attached to the Form 1040 series, along with a Form 1040NR or a Form 1041. People engaged in partnerships are not connoted to be sole proprietors, and hence they need to file a Form 1065 and Form 1065-B.
It is divided into 5 different parts, each giving the details about the business income.
The actual Form begins with 8 lines of introductory part, which are named alphabetically. Before Line A, you need to fill in the name of the proprietor and your Social Security Number.
- Line A consists of the description of the profession along with the product and services rendered.
- Line B is where you include codes from pages C-9, 10, and 11 of the Form.
- Line C is for your business name or enterprises title.
- You need to address Line D, if you are employed, or your profession or business is connoted to be an employment one. In the latter case, you also have to include the Employer Identification Number (EIN).
- Line E includes postal address of the business.
- Line F is an important part and you will have to check the box of the accounting technique that you follow. This may include cash, accrual, or others.
- Line G asks, whether you participated in the business materially or not.
- Line H asks, if you have acquired the business in the current fiscal year or not.
Part 1 is divided into 7 lines. Line 1- you will have to state your computed gross income, sales, and receipts for the year. If you are under employment, then you will have to take into consideration, the Form W-2 figures as well. For joint venture members, several exemptions, limits, and losses are imposed. Line 2- a total of all the returns and allowances that have been used in the due course of business, are entered here. Line 3- line 2 total to be subtracted from line 1 total.
On line 4, you need to depict the cost of goods that have been sold. Line 5 consists of the gross profit of the business. Line 6 consists of all other incomes such as credits and exemptions, or quasi-incomes. The gross income is reported on line 7.
It depicts all types of expenses incurred in the business workings. These include everything from employee welfare and benefits to advertising expenses. Lines 8 to 17 are used in this process. Lines 18 to 27 deal with various expenses related to office, pension, travel, utilities, and wages. Next, the total expenses are computed on line 28, following which, tentative profit or loss is computed on line 29. Line 30 is a bit confusing one. There are some personal or household expenses which you may need to include in the business expenses. This information has to be included in Form 8829.
Line 31 consists of the net profit of the business. You need to include these figures on Form 1040 Schedule SE and Form 1040NR. Line 32 is used to depict a loss in the volume of money that you have invested in the business. Apart from that, you would also need to fill the Form 6198, to describe the loss.
It is used to report the total cost of goods sold. This part begins with line 33, where you will have to disclose the type of inventory valuation you used. This may include cost, lower of cost or market, or other methods (as per directions of the IRS). In case of any changes in the costing and inventory valuation techniques, they need to be depicted on line 34. On line 35, you have to fill in the cost of inventory at the beginning of the year, which is also known as the opening stock. Line 36 consists of the purchase cost minus withdrawals for items of personal use.
The total cost of labor is to be depicted on line 37, while line 38 is used for the depiction of materials and supplies cost. Line 39 includes additional costs, and line 40 consists of adding lines 35 to 39. Line 41 closes the inventory of the year, and the entire total is depicted on line 42 which consists of the cost of goods sold; line 41 has to be subtracted from line 40.
This part is for your vehicle details. You will have to disclose whether you have used any vehicle to conduct business in the past year on line 43. In the next line, you will need to depict the miles traveled by your vehicle, which was used for business, commutation, and other purposes. Line 45 asks whether the vehicle was available for personal use after off-duty hours. In the lines 46 and 47, you will have to describe whether you or your spouse have another vehicle for personal use, and whether there is any evidence to claim this for the tax deductions.
It is made available so that you have the facility to disclose expenses and claim deductions, that have not been included in Part 2. As always, authentic proof is required to claim the deduction. Line 48 concludes the schedule with the summation of all additions and subtractions.
This schedule of the Form 1040 is difficult to fill, as there are several complications relating to proofs of expenses and exemptions that need to be claimed properly. If you have any difficulty filling information in this form, you will have to visit the IRS resources. Don't hesitate and don't hold back as any non-compliance or mistakes (because of ignorance or oversight) has legal implications, which you would certainly not welcome.