Sole Proprietorships and Schedule C: Here’s What You Really Need to Know

February 1, 2017
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What is a Sole Proprietorship?

A sole proprietorship is a business that you own and control by yourself. What makes a sole proprietorship an appealing business structure is its simplicity, easy setup and inexpensive cost. When starting a sole proprietorship, you do not have to fill out any formal paperwork or register with your state. You must, though, obtain licenses and permits just like any other business.

As a sole proprietorship, there is no legal separation between you and your business. The income and losses from your business are taxed on your personal tax return. Also, you are personally accountable for any of your business’ debts, losses, and liabilities. If your business runs into any legal trouble, your personal assets are unprotected and potentially jeopardized.

How to File Taxes – Schedule C?

Along with Form 1040, your main tax return form, you must also complete and attach Schedule C. The purpose of this form is to report how much money your business made or lost during the tax year.

Schedule C consists of five sections:

  • Part 1: You list all of your business’ income including gross receipts or sales, returns and allowances, and federal and state fuel tax credits. This information is needed to calculate your gross profit and gross income.
  • Part 2: This section is for reporting business expenses which include costs for travel, utilities, insurance, and advertising, among others. Then, subtract your total expenses from your gross income to receive your net profit or loss. You must report this result on Form 1040.
  • Part 3: This part is designated for costs of goods sold. If you operate a business that doesn’t require you to purchase inventory or sell products, then this section isn’t applicable to you.
  • Part 4: If you are claiming deductions for car or truck expenses, you must complete this section. It is important to keep detailed records of your mileage and vehicle expenses during the tax year.
  • Part 5: This section is for reporting any expenses that weren’t listed in Part 2. Some of these expenses might include education or costs specifically related to your industry.

Schedule C-EZ and Self-Employment Tax.

If you’re qualified, you can prepare your taxes using Schedule C-EZ, which is a simplified version of Schedule C. You can only use this form if:

  • You operate just one sole proprietorship.
  • Your reported business expenses do not exceed over $5,000.
  • Your business did not have a net loss.
  • You did not hold business inventory during the year.
  • You are the only employee.
  • You’re not claiming the home office deduction.

If you operate more than one sole proprietorship, you need to file a separate Schedule C for each of your businesses.

Unless your sole proprietorship made less than $400 during the tax year, you must pay self-employment tax by completing Schedule SE.

Work with the Experts

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This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.