Spring is coming! That means it’s time to sift through income reports and paper receipts from last year’s business travel to prep for my annual accountant visit. At the end of the year, every business owner wants to know how much they earned. Really earned. When you go beyond a tally of invoices and fill out a Schedule C Profit or Loss From Business (Form 1040) for your annual tax filing, you’ll learn exactly how much money gets to stay in your checking account after all the deductions and expenses.
Who Needs to File Schedule C?
If you’re an individual running a business without employees (and you haven’t incorporated or filed for an LLC), you’re probably a sole proprietor — which means you need to submit a Schedule C with your annual tax return.
This form is a tally of dollars going in and out of your business that quickly determines how much of your income is taxable. If your expenses are $5,000 or less, you can opt for the shorter C-EZ form.
To keep track of my income and expenses, I use a home-based accounting software on my computer. Right now I’m using Bookkeeper, but in the past I’ve used QuickBooks and Sage 50 Accounting. The key is to choose a program that keeps you organized and lets you print reports that summarize each month and year in just a few clicks. Trust me, it’ll make your tax filing so much easier. I like to print out an annual invoice register, checks payable register, retail sales tax registers by state and a general ledger to see everything at a glance on paper.
A Form 1040 Breakdown
Each January, I visit my accountant with a stack of reports in hand, and we work through the Schedule C together. Why? She knows what changes have been made to the tax laws that year, and she gives me tips on new deductions — or defunct deductions I can no longer claim.
Her advice has saved me thousands of possible missed dollars over the years. I’ve learned to deduct new business equipment or home repairs in-part, since my home office is my primary business location.
The IRS has put together an 18-page guide for the Schedule C. If this is your first year to file Schedule C, take some time to read this document thoroughly. It’ll make all those future filings much simpler, since you’ll already know what to expect. Here are the highlights:
- Basic information: Your name, business name and social security number kick off this form. If you’ve been issued an Employer Identification Number (EIN) by the Internal Revenue Service, have it ready. For example, I received one when I applied for retail sales tax permits for the states in which I traveled and conducted business when I first launched. Keep in mind that you’ll also be asked to designate your accounting system as cash or accrual.
- Income information: Grab your invoice register and get ready to talk about your gross income. If you create or resell products as part of your business, you’ll need to know the types of expenses that count toward your Costs of Goods Sold. Each year, you should keep track of the inventory you buy for your business to report in this section. Since calculating Costs of Goods Sold and Information on Your Vehicle is a multi-step process, their sections will be near the bottom of the form — and there will be very detailed instructions for their calculations in the yearly Schedule C guide.
- Expenses information: This is where you can itemize all the costs that keep your business running. This section includes advertising, office equipment, supplies, business travel, car expenses and so much more. Utilities and mortgage payments can also be deducted if they relate to the business use of your home. For example, since my home office and business storage space takes up about 20 percent of my home, I can deduct 20 percent of my annual mortgage payment and utility fees. Tip: If you work from home, save receipts for utilities and mortgage payments.
Finally, the Schedule C wraps up with a place for you to write in any additional expenses that don’t fall into common categories. This is where you can note donations made to charities in the name of your business, fees to register trademarks or other non-tangible items that were paid from your business funds.
Once you’ve learned what goes on each line of this form, you’ll be able to complete it without any hesitation. Many of the same itemized expenses pop up year after year, so you simply fill in the new dollar amount and move forward. Remember: Every year gets a little easier. Soon, you’ll be a pro.