Part II – Expenses:
Line A – A brief description of what your business activities were to produce the income you’re claiming on this form. For example you would enter something like “website design and coding for restaurants” or “appraisal of real estate for lending institutions.”
Line B – Every sole-proprietor is required to classify their business with a six-digit code based on what your business activities are. For example, Carpet and Upholstery Cleaning Services use code 561740 and Data Hosting would use 518210. A full list of codes can be found here.
Line C – Your business name. If you don’t have a name for your business you can leave this blank.
Line D – Your EIN (Employer Identification Number). If you do not have an EIN leave line D blank. Some people confuse their SSN (Social Security Number) for their EIN – these are different identifiers, so make sure you’re using the right one.
Line E – Your business address. Do not use a PO Box. If your business address is the same as the one used on page one of your 1040 form (your home address) you can leave Line E blank.
Line F – Check off the accounting method you have used when calculating your income and expenses. If this is the first time filing your Schedule C you can choose whichever method you prefer. If you have filed before, you have to use the same method as previous years unless you have requested a change from the IRS. For more details about the difference between accounting methods check out the IRS’ website.
Line G – Check off whether you had an active role in this business this year. The IRS has criteria for what counts as an active role – for example, you spent at least 500 hours on business activities, or you spent at least 100 hours on business activities which is least as much as the other people involved in your business, or your business activities were the substantial majority of all activities for this business for the tax year, regardless of number of hours. The IRS has a list of full criteria.
Line H – If you started the business or acquired the business in 2014 check the box. Otherwise leave it blank.
Line I – Did you make any payments that would have required you to file a 1099? You may have had to file one for any employees or contractors you paid, royalties, rents, real estate transactions, among other things. If you filed any 1099 forms or made any payments that will require you to file a 1099 form, check yes. If you’re unsure about whether you filed any, or whether you should file any, check out the IRS’ guidelines.
Line J – If you checked yes on Line I, select whether you have (or you plan to) file any 1099 forms. If you selected “No” on Line I, leave this blank.q
PART I – Income
Line 1 – Enter the total amount of income you’ve brought in through business activities. If you received a W-2 form and the “Statutory employee” box (box 13) of that form was checked, check the box on this form as well. Otherwise, leave it unchecked.
Line 2 – Enter the total amount of sales returns or allowances given in 2014. This is the amount you’ve refunded people, whether through cash or credit, for returning one of your products. An allowance is a reduction in the price of a product, instead of a refund. Enter the value as a positive number on this line. Most service-based businesses won’t have anything for this line since you’re not selling product.
Line 3 – The value of Line 1 minus the value of Line 2
Line 4 – Your total cost of goods sold. You’ll need to jump down to Line 33 to get this value.
Line 5 – The value of Line 3 minus the value of Line 4
Line 6 – The total amount of any miscellaneous business income. The rules for this can be relatively complex, but in general any money your business received that wasn’t from regular business activities. For example, bad debts you recovered, interest, fuel tax refunds or awards you’ve won would all count here. For specifics check out the IRS’ website.
Line 7 – The value of Line 5 plus the value of Line 6
PART II – Expenses
Line 8 – The amount spent on advertising expenses that are directly related to your business activities. If you have any political or legislative lobbying expenses, those are generally not deductible
Line 9 – The amount spent on car and truck expenses. There are some rules regarding how you can claim your car and truck expenses, so if you’re unsure you can read up on them here.
The first way to claim this is using the Standard Mileage Rate. The 2014 rate is $0.56/mile – so for every mile you drove for business, you can claim $0.56.
(Note – if you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses. The IRS has more information on choosing between the two.
The second way is to claim your actual car expenses – gas, parking, tires, registration fees, etc. You would first need to figure out what percentage of your vehicle use is business versus personal, and then claim that percentage of the actual money spent.
For example, if you used your vehicle 60% of the time for business and 40% of the time for personal use, you would be able to claim 60% of your car expenses.
Line 10 – The total you spent on commissions and fees for 2014. For example, if you hired a broker to help you make a purchase and the broker took a commission, that would be accounted for here.
Line 11 – The total amount spent on contract labor for the 2014. This includes any payments to people not considered employees who performed a service for your business. Don’t include any payments here that you include elsewhere (for example, if you hired a repair person you could include that on Line 21, Repairs, as opposed to Line 11). The IRS has more info.
Line 12 – If your business is based on extracting natural resources (oil for example) you can claim a value of the amount depleted from the reserve. Very few service-based small business owners need to worry about this line. If you think you may qualify, you can get into the nitty gritty on the IRS’ website.
Line 13 – Depreciation is an annual deduction that allows you to recover the cost of property that has a life beyond a single tax year. You would enter your eligible depreciation deductions on this line. If you’re unsure about what you can claim or how much you can claim, you can learn more from the IRS here and here.
Line 14 – The total contributed to any employee benefit programs. There are limits to what you can claim if contributions were made on your behalf as a self-employed person, so it’s wise to read up on the limits and how they apply to your specific situation.
Line 15– The total of premiums you’ve paid for business insurance. Do not include amounts that go towards an insurance policy that covers lost earnings due to sickness or disability. You can see here if your policies count or not.
Line 16 – The amount of interest you’ve paid. The IRS has strict rules about how you allocate your interest expenses, so if you have paid any interest this year and plan to claim it, it is worth reading up on the regulations here and here.
Line 17 – The total of fees you’ve paid for accounting or legal services that relate directly to your business. You can also include any fees paid for tax advice or tax preparation services. For more information check out the IRS’ guide.
Line 18 – This is where you include the total spent on office supplies and postage. For example, stamps, envelopes, paper, and printer ink would all fall into this category. Remember, though, you only want to include office expenses that were used in 2014 – things like furniture or computers would qualify as a capital cost and need to be depreciated accordingly. For more info on office supplies check out the IRS’ guide. You can also learn more about depreciation.
Line 19 – Contributions you have made to pension, profit-sharing or annuity plan for the benefit of your employees. If the plan included contributions for yourself (as a self-employed person) you would need to include those on your form 1040, not here. If you made contributions you will also have to file another form – check out which form you need here.
Line 20 – In line 20a, enter the amount you spent to rent or lease machinery, vehicles, or equipment. If you rented a vehicle for more than 30 days there may be limits to how much you can deduct, which you can read up on here. In line 20b enter the amount you spent to rent or lease other property (an office for example.) The IRS has more info if you need it.
Line 21 – The amount spent on incidental repairs or maintenance to business property. You can only make a claim if the repair doesn’t add to the property’s value or appreciably prolong the property’s life. Fixing a toilet or patching a hole would both be examples for Line 21. More info can be found courtesy of the IRS.
Line 22 – This is where you would deduct miscellaneous business supplies that don’t fall under Line 18 (Office Expenses). Things that you can claim on Line 22 are toilet paper, cleaning supplies, or tissues. You can also claim any a reference material here as long it is something that is only good for that tax year (for example an accountant may need to purchase reference materials that are only good for one tax season).
Line 23 – You can deduct some taxes and licenses, but not all of them. For example, you can include licenses or regulatory fees paid to the government for your business as well as unemployment taxes you’ve paid, but you cannot include taxes on your home or estate taxes. If you have paid any tax or collected any taxes from your clients, it would be worth checking up on what your business situation allows you to claim.
Line 24a – This is where you want to include the total amount spent on travel and lodging for overnight business travel that takes you away from your “tax home” (your main place of business.) Do not include the cost of meals or entertainment on this line, but rather on line 24b. Instead of keeping records all of your incidental expenses while traveling (tips to bellhops or hotel maids for instance) you can use a standard deduction of $5 per day. You can only use this standard deduction if you do not have any meal expenses for that day. For more information see the IRS’ guide.
Line 24b – Here is where you can include the cost of meals and entertainment. You can claim meal expenses incurred while travelling for work as well as meals that are business related. The IRS has three rules for meal expenses:
- The meal must be directly related to business activities AND
- The meal cannot be lavish or extravagant AND
- You or an employee must be present at the meal
As for entertainment expenses, you cannot claim any expense paid for a facility used for an activity usually considered entertainment – a yacht for example. Similarly, you cannot deduct membership fees to any club intended for business, pleasure, recreation, or social purpose – golf or country clubs for example. You can include memberships to memberships to public service organizations, professional organizations, business leagues, trade associations, real estate boards and chambers of commerce, unless their primary goal is entertainment. For more details see the IRS’ guidelines.
Line 25 – Total you have spent on utilities (such as electricity or water) specifically for your business.
Line 26 – Wages paid to employees. Do not include any wages you have paid to yourself. If you have claimed any employee credits you need to deduct them from the total before filling in Line 26. Check out the IRS’ website for more info.
Line 27 – Jump down to Line 48 to find what to include here.
Line 28 – Add up all the totals in boxes 8 through 27a and enter the total here
Line 29 – The value of line 7 minus the value of line 28
Line 31 – The value of line 29 minus the value of line 30. For the nitty-gritty about alloweable losses check out the IRS’ site.
Line 32 – If you have a positive value in Line 31 you can skip this line because you have a Net Profit. If you have a Net Loss, a negative value in Line 31, you must complete this line. For information about allowable losses and whether all or some of your investment is at risk, check out the IRS’s site.
PART III – Cost of Goods Sold
Most service-based small businesses won’t have any dollar values to enter in this section out since you aren’t producing and selling product, but rather selling your time and expertise. If your business does involve selling product though and you have an inventory, you’ll need to pay close attention to PART III. The IRS has more info if you’re curious.
Line 33 – Check off which method did you use to calculate the value of your inventory. Remember, if you use the “Cash” method of accounting, you must use the “Cost” method of valuing your inventory. For more info about accounting methods check out the IRS’ guide.
Line 34 – If you measured the opening and closing values of your inventory using different methods check yes and include an explanation of why. Otherwise, if the methods were the same, check no.
Line 35 – Enter the value of inventory at the beginning of the year. If this value is different than the inventory you ended last year with, attach an explanation of why. The IRS has more information.
Line 36 – Value of purchases you made. Do not include the value of any purchases removed for personal reasons. The IRS has more information.
Line 37 – Enter the amount you spent on labour producing your product. Do not include any amounts you paid to yourself. This is generally only applicable to manufacturing or mining businesses. If you’re unsure whether your business qualifies, check out the IRS’s website.
Line 38 – Enter the value of materials and supplies used in manufacturing your product (if applicable)
Line 39 – Enter any other expenses required in the manufacturing of your product. For example, if you need a specialty container to store your product during the manufacturing process, it could be accounted for here. The IRS can let you know if your business activities qualify for this.
Line 40 – Add all the values on lines 35 through 39 together and enter the result on Line 40
Line 41 – Enter the value of the inventory you had at the end of the year. For more information check out the IRS’ website.
Line 42 – Line 40 minus Line 41. Enter the total on Line 42 and also on Line 4.
Part IV – Information on Your Vehicle
Line 43 – The date you started using your vehicle for business purposes
Line 44 – In Line 44a enter the number of miles you used your vehicle for business. In Line 44b enter the number of miles you used your vehicle to commute (the drive between work and home). If you only started using your vehicle for business purposes partway through the year, only include commuting miles for when your vehicle entered business use. See more from the IRS here. On Line 44c enter the number of miles you drove the vehicle for non-business or commuting purposes – in other words, personal use.
Line 45 – If you were able to use your vehicle for personal use when you were not working, check yes. If it was only available for business use check no.
Line 46 – If you or your spouse have another vehicle that you can use for personal trips, check yes. Otherwise check no.
Line 47 – Do you have evidence to support your mileage claims? Have you kept a logbooks of your business trips? Or maybe you use a mileage tracking app? If you have any way to back up your claims checks yes on line 47a.
Part V – Other Expenses
This is the catch-all for other expenses you may have incurred that weren’t included elsewhere. For example you can include bad-debts or business start-up costs. For more information about what you can and cannot deduct here check out the IRS’ guide.
Line 48 – This is where you could claim any other business expenses. For example, your FreshBooks subscription would be included here. The IRS has a lot of information of what can and can’t be included here. Fill out Line 48 and also enter the value in Line 27