Self-employed taxpayers report their business income and expenses on Schedule C. TurboTax can help make the job easier.
The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.
Schedule C: Consider income, expenses and vehicle information
Each year, sole proprietors have the chore of preparing and filing Schedule C with their 1040 to show the IRS whether their business had a taxable profit or a deductible loss. (If your business expenses were $5,000 or less for the year, you may qualify to file the short form, Schedule C-EZ.) Schedule C can seem daunting, but filing will be easier if you plan ahead and keep good records. We've broken down the form into sections, so you can see what the IRS expects from you and what records you'll need at tax time.
Part I: Income
In this section, you calculate your gross income.
Start by reporting gross receipts or sales for the year, including amounts reported on 1099 forms that were issued by clients or others for whom you provided services. Other types of income you must report include: the value of goods or services you received through barter transactions; any bad debts you recovered if they were written off on prior-year tax returns; and interest on business bank accounts. Total up these items and subtract your cost of goods sold (which is calculated in Part III and explained below) to arrive at gross income.
Part II: Expenses
This is where good record keeping can really save you money on your taxes. You can write off a wide variety of business expenses you paid during the year, including things like the cost of advertising, commissions, supplies, legal fees, repairs and maintenance, and office expenses. You can also deduct:
Car and truck expenses: You can report these costs in one of two ways: Enter your actual expenses—for gas, oil changes, repairs, insurance, etc.—if you have supporting documentation, or take the IRS standard mileage rate. The rate for 2017 is 53.5 cents per mile.
Depreciation and Section 179 expense deduction: The law allows businesses to depreciate—or gradually deduct the cost of —assets such as equipment, fixtures, furniture, etc., that will last more than one year. For these assets, you first fill out Form 4562: Depreciation and Amortization, and enter the result on Schedule C. You also use Form 4562 if you elect the Section 179 "expensing" deduction, which lets you, subject to certain limits, deduct the full cost of assets (both new and used) in the year they are placed in service. For tax years beginning in 2015, you can deduct under Section 179 certain real property improvement costs.
Bonus Depreciation: Bonus depreciation has been changed for qualified assets acquired and placed in service after September 27, 2017. The old rules of 50% bonus depreciation still apply for qualified assets acquired before September 28, 2017. These assets had to be purchased new, not used. The new rules allow for 100% bonus "expensing" of assets that are new or used. The percentage of bonus depreciation phases down in 2023 to 80%, 2024 to 60%, 2025 to 40%, and 2026 to 20%. After 2026 there is no further bonus depreciation. This bonus "expensing" should not be confused with expensing under Code Section 179 which has entirely separate rules, see above.
The 100% expensing is also available for certain productions (qualified film, television, and live staged performances) and certain fruit or nuts planted or grafted after September 27, 2017.
50% bonus first year depreciation can be elected over the 100% expensing for the first tax year ending after September 27, 2017.
Pension and profit-sharing plans: Only enter contributions you made for your employees on Schedule C. If you also made pay-ins for yourself, report those on Line 28 of your 1040.
Travel, meals and entertainment: For business travel, deductible expenses include those for lodging, transportation, tips, fax services, Internet connections, and certain other incidental expenses. You'll see that travel is reported separately from business meals and entertainment: That's because for meals and entertainment you can deduct only 50 percent of your allowable expenses.
Wages: This category may seem straightforward, but is a little tricky if you produce and sell goods. Here you report amounts paid to employees, such as bookkeepers, receptionists, salespeople, etc. However, If you have production workers, you'll report their wages as part of the cost of goods sold in Part III.
Expenses for business use of your home: You qualify for this deduction if you use part of your home regularly and exclusively for your business. That means the home office has to be a separate area in your home where you don't mix business with other activities. It must be used for business on an ongoing basis, not just once in a while. You calculate the deduction first on Form 8829: Expenses for Business Use of Your Home and enter the result here.
Once you've entered all your deductions, subtract them from gross income to get your net Schedule C profit or loss, which you enter on Line 12 of your 1040. But be careful. If you have a loss, you're not done yet. You have to go through some additional steps in this section before transferring that loss to your 1040, because it may not be fully-deductible. You must declare whether you're fully "at risk" for amounts invested in the business. If you are, then you can go ahead and take the full write-off. If not, you'll have to fill out Form 6198: At-Risk Limitations to determine whether your deduction is limited.
Part III: Cost of goods sold
This section is for any business that sells goods to customers, so skip Part III if you're in a service business—consultant, yoga teacher,software programmer, day care center owner, etc.
- Start by reporting the value of your inventory at the beginning of the year, which normally is the same as what you reported for closing inventory on last year's Schedule C.
- Next, report how much you spent to buy merchandise, but don't include the value of anything withdrawn from sale or for your personal use.
- If you're in manufacturing or construction, you also report wages paid to production workers, factory supervisors and the like, as well as expenses for supplies and other overhead.
- Add those costs to your beginning inventory.
- From that total, subtract the value of your closing inventory. The result is your cost of goods sold. Enter that amount in Part I to reduce your gross income.
Part IV: Information on your vehicle
In this section, you give the IRS information about any vehicles for which you're deducting expenses in Part II. The IRS uses the answers in this section when reviewing your vehicle deduction to see if it seems legitimate. So it's important, for example, to be able to answer YES to the question about whether you have written documentation for your deduction. If you answer NO, don’t be surprised if the IRS asks you to justify the deduction.
Part V: Other expenses
You may incur many types of business costs that don't fit into the categories listed in Part II, so you detail them here in Part V and then enter the total on the line for "Other Expenses" in Part II.
Examples of other expenses:
- Membership dues for professional organizations
- Subscriptions to business publications
- Penalties you paid for nonperformance of a contract
- Fees you paid to credit card companies for processing customer card transactions
- Business-related gifts to suppliers, clients, contractors, etc.
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