Profit or Loss from Business — demystifying the tax form used by sole proprietors. Learn how to translate your P&L statement into Schedule C with confidence.
Navigating tax forms can be daunting for any business owner. This guide demystifies Schedule C (Form 1040), the form used by sole proprietors to report their business income and expenses to the IRS.
We break down each section, providing clear, straightforward explanations to help you understand what information is required and where it goes. Our goal is to simplify the process, especially when translating information from a standard Profit and Loss (P&L) statement.
Schedule C is used to report income or (loss) from a business you operated or a profession you practiced as a sole proprietor. 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. — IRS Instructions for Schedule C
You must file Schedule C if you operated a business as a sole proprietor or are a single-member LLC (not electing corporate treatment). This includes:
If you and your spouse jointly own a business, you may qualify to file as a "Qualified Joint Venture," where each spouse files a separate Schedule C.
Critical rates and limits you'll need when completing your Schedule C
Basic information about you and your business that sets the stage for financial details
| Line | Description | Simplified Explanation |
|---|---|---|
| A | Principal business or profession | Describe your primary business activity in a few words (e.g., "Graphic Design Services," "Retail Sales") |
| B | Business activity code | Enter the six-digit NAICS code that best describes your business (see Schedule C instructions) |
| C | Business name | If your business has a name other than your own (a "DBA" or trade name), enter it here |
| D | Employer Identification Number (EIN) | Enter your EIN if you have one. Sole proprietors with no employees may not need one |
| E | Business address | Enter street address of your business. If same as home on Form 1040, leave blank |
| F | Accounting method | Cash: report when received/paid. Accrual: report when earned/incurred. Most small businesses use cash |
| G | Material participation | Check Yes if you actively participated on a regular, continuous, substantial basis |
| H | New business | Check if you started or acquired this business in 2025 |
| I | Required to file 1099s | Check Yes if you paid a contractor $600 or more |
| J | Payments received | This line is for filers of Form 1040-SS |
Report all the money your business earned to arrive at your Gross Income
| Line | Description | Simplified Explanation |
|---|---|---|
| 1 | Gross receipts or sales | Total revenue from sales or services. Should match your P&L total income. Include 1099-NEC and 1099-K amounts |
| 2 | Returns and allowances | Any refunds to customers or discounts provided. Subtracted from gross receipts |
| 3 | Subtotal | Line 1 minus Line 2 |
| 4 | Cost of goods sold | If you sell products, enter from Part III (Line 42). Service businesses typically enter zero |
| 5 | Gross profit | Line 3 minus Line 4. Your profit from sales before operating expenses |
| 6 | Other income | Other business income: interest earned on business account, scrap sales, fuel tax credits |
| 7 | Gross income | Line 5 plus Line 6. Total income before deducting expenses |
The largest section — deduct ordinary and necessary costs of running your business
An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. — IRS Instructions
| Line | Category | Explanation |
|---|---|---|
| 8 | Advertising | Marketing costs: online ads, website costs, business cards, flyers |
| 9 | Car and truck expenses | Standard mileage ($0.70/mile) OR actual expenses. Must keep mileage log |
| 10 | Commissions and fees | Fees paid to agents or others to generate sales |
| 11 | Contract labor | Payments to independent contractors. Must issue 1099-NEC if $600+ |
| 12 | Depletion | For natural resource extraction. Most businesses skip this |
| 13 | Depreciation & Section 179 | Annual deduction for business assets (computers, equipment, furniture). Use Form 4562 |
| 14 | Employee benefit programs | Benefits for employees (not yourself) — health insurance, dependent care |
| 15 | Insurance (other than health) | Business liability, property, or malpractice insurance. Not your health insurance |
| 16a | Interest (mortgage) | Interest on mortgage for business property (Form 1098) |
| 16b | Interest (other) | Interest on business loans, credit cards, lines of credit |
| 17 | Legal and professional services | Lawyers, accountants, bookkeepers, consultants — business-related |
| 18 | Office expense | General office costs: small supplies, postage, software subscriptions |
| 19 | Pension and profit-sharing | Employer contributions to employee retirement plans. Your own go on Schedule 1 |
| 20a | Rent (vehicles, equipment) | Payments to rent vehicles, machinery, or equipment |
| 20b | Rent (other property) | Payments to rent your office, store, or business space |
| 21 | Repairs and maintenance | Routine upkeep that doesn't add value or extend life. Major improvements = depreciate |
| 22 | Supplies | Materials consumed in your business (cleaning supplies, packaging) |
| 23 | Taxes and licenses | State/local business taxes, license fees, employer's share of payroll taxes |
| 24a | Travel | Business travel away from tax home: airfare, lodging, transportation |
| 24b | Deductible meals | Business meals are 50% deductible. Keep records of purpose and attendees |
| 25 | Utilities | Electricity, gas, water, trash, phone, internet for business location |
| 26 | Wages | Gross salaries/wages paid to W-2 employees. Not payments to yourself |
| 27a | Energy efficient buildings | Special deduction for energy-efficient improvements. Requires Form 7205 |
| 27b | Other expenses | Total from Part V (Line 48) — expenses not listed above |
| 28 | Total expenses | Sum of Lines 8 through 27b |
The bottom line — after listing all income and expenses
| Line | Description | Explanation |
|---|---|---|
| 29 | Tentative profit (or loss) | Line 7 (Gross Income) minus Line 28 (Total Expenses) |
| 30 | Business use of home | Home office deduction. Use Form 8829 OR simplified method: $5/sq.ft, max 300 sq.ft = $1,500 |
| 31 | Net profit or (loss) | Line 29 minus Line 30. Your final profit/loss. Profit = income tax + self-employment tax. Loss may be deductible |
| 32 | At-risk rules | If loss + not fully at risk (certain nonrecourse loans), may need Form 6198 to limit loss |
If you have a dedicated home office, the simplified method lets you deduct $5 per square foot up to 300 square feet, for a maximum deduction of $1,500 — no Form 8829 required!
Only for businesses that sell physical products — service businesses can skip this
| Line | Description | Explanation |
|---|---|---|
| 33 | Inventory method | How you value inventory: Cost, Lower of cost or market, or Other |
| 34 | Section 263A | Do uniform capitalization rules apply? Most small businesses (under $31M gross receipts) = No |
| 35 | Beginning inventory | Inventory value on January 1st. Should match last year's ending inventory |
| 36 | Purchases | Cost of inventory/materials purchased, minus items for personal use |
| 37 | Cost of labor | Wages for employees directly involved in producing/acquiring goods |
| 38 | Materials and supplies | Costs of materials/supplies used in production |
| 39 | Other costs | Any other costs related to producing/acquiring inventory |
| 40 | Total | Add Lines 35 through 39 |
| 41 | Ending inventory | Inventory value on December 31st |
| 42 | Cost of goods sold | Line 40 minus Line 41. Enter this on Line 4 of Part I |
Required if you claimed car and truck expenses on Line 9
| Line | Description | Explanation |
|---|---|---|
| 43 | Date placed in service | Date you started using the vehicle for business |
| 44a | Business miles | Total miles driven for business purposes |
| 44b | Commuting miles | Miles between home and regular workplace — NOT deductible |
| 44c | Other personal miles | All other personal miles driven |
| 45 | Vehicle availability | Was vehicle available for personal use during off-duty hours? |
| 46 | Another vehicle | Did you/family have another vehicle available for personal use? |
| 47 | Evidence | Do you have written evidence (mileage log) to support your deduction? |
The IRS requires contemporaneous records of business mileage. Without a mileage log, your vehicle deduction could be disallowed in an audit. Track date, destination, business purpose, and miles for each trip.
Ordinary and necessary business expenses that don't fit Part II categories
Use this section to list expenses that don't have a dedicated line in Part II. Common examples include:
List each expense type and amount separately, then enter the total on Line 48 and carry it to Line 27b.
Your Profit and Loss statement is the most important document for preparing Schedule C
The core idea is to categorize every item on your P&L into the specific buckets the IRS provides. While some P&L accounts have a direct one-to-one match, others may need to be grouped or split.
| P&L Account | Schedule C Line | Notes |
|---|---|---|
| Revenue / Income | ||
| Sales, Service Revenue | Line 1 | Total business income before expenses |
| Discounts, Refunds, Returns | Line 2 | Subtraction from gross receipts |
| Interest from Business Account | Line 6 | Only interest earned on business funds |
| Cost of Goods Sold (Part III) | ||
| Beginning Inventory | Line 35 | Inventory at start of year |
| Purchases / Raw Materials | Line 36 | Cost of inventory/materials bought |
| Direct Labor for Production | Line 37 | Wages for production employees |
| Ending Inventory | Line 41 | Inventory at end of year |
| Operating Expenses (Part II & V) | ||
| Advertising & Marketing | Line 8 | Web ads, print, social media |
| Bank Fees & Service Charges | Line 48 (Part V) | List as "Bank Fees" |
| Business Insurance | Line 15 | Liability, property, malpractice |
| Contract Labor / Subcontractors | Line 11 | Remember to issue 1099s |
| Dues & Subscriptions | Line 48 (Part V) | Professional memberships |
| Equipment Rental | Line 20a/20b | 20a for vehicles, 20b for other |
| Legal & Accounting Fees | Line 17 | Lawyers, accountants, consultants |
| Office Supplies & Postage | Line 18 / 22 | Be consistent year to year |
| Rent (Office/Store) | Line 20b | Physical business location |
| Repairs & Maintenance | Line 21 | Routine upkeep only |
| Salaries & Wages (Employees) | Line 26 | Gross W-2 wages |
| Payroll Taxes (Employer Share) | Line 23 | FICA match, FUTA, SUTA |
| Software & Web Hosting | Line 48 (Part V) | List as "Technology" |
| Telephone & Internet | Line 25 | Utilities |
| Travel (Flights, Hotels) | Line 24a | Away from tax home |
| Business Meals | Line 24b | 50% limitation applies |
| Utilities (Electric, Gas, Water) | Line 25 | Business location |
| Vehicle Expenses | Line 9 | Standard mileage or actual |
The most important principle is to be consistent. Use the same mapping from your P&L to Schedule C each year. This makes year-over-year comparisons easier and can reduce scrutiny.
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