Schedule C

Description

Schedule C is used to report income or loss from a business you operated as a sole proprieter (any business that is not incorporated or operated as a partnership). Schedule C is also used to report wages and expenses related to being a statutory employee. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. A one owner business operating as an LLC would also report income or loss on Schedule C. If two or more owners operate an LLC, a partnership tax return would be filed.

Schedule C Tax Tips

1. Make sure you have included every business related expense on your Schedule C. Every dollar of expense reduces not only your regular income tax but also the 15.3% self-employment tax.
2. Hobby Losses - Hobby expenses are deductible only up to the amount of hobby income. The IRS may try to disallow your Schedule C business losses by claiming that your business is really a "hobby". Examples of businesses that the IRS may categorize as hobbies include breeding horses and gentleman farming. What you need to do to take the losses is show a "profit motive". If you treat your business like a business instead of as a hobby, then you will have a solid claim to take any losses on your tax return. Some ways to show that you have a profit motive include (1) keeping businesslike records and a separate business bank account, (2) putting time and effort into the business, (3) and consulting with knowledgable advisors to develop a business plan.
3. Automobile Expenses - You can either deduct your actual automobile expenses or you can use a standard mileage rate. Commuting expenses are not deductible. However, if your home is your principal place of business (you qualify for the home office deduction), then any business-related commuting expenses are deductible. Also, if you are commuting to a temporary work location, your commuting expenses are deductible. Automobile expense related to your business are deductible on Schedule C. In 2006, the standard mileage rate is 44.5 cents a mile.
4. Depreciation Expense - The general rule is that if purchased property or improvements to property is expected to have a life of more than one year, you need to depreciate the property. First-year expensing (Section 179 deduction) allows many taxpayers to expense the property they purchased during the year instead of depreciating the property over several years.
5. Telephone - Long-distance phone calls related to your business are deductible. The basic local phone costs of the first phone line in a residence is considered personal and is not deductible. However, a second phone line or additional telephone services on the first line such as call waiting may be deductible expenses.
6. Travel Expense - Travel expenses while away from your "tax home" for your business are deductible on Schedule C. Your tax home is your regular place of business. You are considered away from your tax home if you are out of the general area of your tax home for a period longer than a normal workday, and you need to sleep or rest. Deductible travel expenses include meals, lodging, transportation, automobile expense, taxi fares, telephone expense, and laundry and dry-cleaning expenses.
   
   The travel expenses of your spouse are not deductible unless your spouse is also an employee and serves a legitimate business purpose on the trip. However, you can still deduct 100% of the expenses such as automobile and lodging expense that you would have incurred anyway if you had traveled alone instead of with your spouse.
   
   Your airfare in the United States is 100% deductible, if your trip is primarily for business (airfare is 100% nondeductible if the travel is primarily for pleasure). Any expenses related to personal travel such as a quick two-day sidetrip to the beach are not deductible. Expenses related to foreign travel must generally be allocated between business days and personal days unless certain exceptions are met.

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