How to Calculate Schedule C Income and Deductions

To calculate Schedule C income and deductions, you total your business receipts in Part I, subtract cost of goods sold if you sell products, then subtract ordinary and necessary business expenses in Part II along with any home office deduction. The result on Line 31 is your net profit or loss, and it feeds both your income tax and your 15.3% self-employment tax.¹

Schedule C is the form sole proprietors and single-member LLCs use to report business income or loss. A single-member LLC that hasn’t elected corporate tax treatment files Schedule C rather than a separate business return.¹ One threshold matters before you claim any deductions: the IRS needs to believe you’re running a business, not a hobby. If your activity doesn’t turn a profit in at least three of the last five tax years, the IRS may presume you’re not operating for profit and disallow your deductions.

Records You Need Before You Start

Federal law requires anyone liable for tax to keep adequate records.² For Schedule C, that means every document showing money coming in or going out of the business during the tax year.

For income, collect any Form 1099-NEC from clients who paid you $600 or more for services.³ If you took payments through third-party platforms like PayPal or Venmo, you may also receive Form 1099-K when your gross payments exceed $20,000 and you have more than 200 transactions.⁴ You owe tax on all business income whether or not a 1099 arrives, so pull bank statements, invoices, and sales receipts to capture what the forms miss.

For expenses, keep the actual receipts. Credit card statements work as backup, but a receipt carries more weight in an audit.

You also need to know your accounting method before filling anything in. Most small businesses use the cash method: income counts when you receive it, expenses count when you pay them. The accrual method recognizes income when earned and expenses when incurred, regardless of when money moves.¹

Part I: Calculating Gross Income

Part I totals everything the business brought in before a single expense comes off. It sets the ceiling for what follows.

Line 1 is your total gross receipts or sales for the year. If customers returned merchandise or you issued refunds, report those on Line 2. Line 1 minus Line 2 gives you net sales on Line 3.¹

Cost of Goods Sold for Product Sellers

If you sell physical products, complete Part III before you can finish Part I. Part III captures the direct costs of producing or purchasing the items you sold during the year.¹

Start with the value of inventory on hand at the beginning of the year. Add purchases and labor costs incurred during the year. Choose a valuation method for your inventory, typically cost or the lower of cost and market value. Subtract the value of inventory remaining at year’s end. The result is your cost of goods sold, which moves to Line 4 of Part I.

Line 5 is your gross profit: net sales minus COGS. Report any other business-related income, such as interest from a business bank account, on Line 6.¹ Line 7 adds those together to give you gross income, the starting point for deductions.

Part II: Deducting Business Expenses

Part II lists the expense categories you can subtract from gross income. The general rule: a deduction must be both ordinary (common in your line of work) and necessary (helpful and appropriate for the business).⁵ Lines 8 through 27 cover specific categories such as advertising, insurance premiums, office expenses, and supplies. You total them on Line 28.

A few categories carry special rules worth knowing before you fill in a number.

Home Office

If you use part of your home exclusively and regularly as your primary place of business, you can claim a deduction on Line 30.⁶ There are two calculation methods. The simplified method multiplies your office’s square footage by $5, up to 300 square feet, capping the deduction at $1,500.¹ The regular method takes your actual home expenses (mortgage interest, utilities, insurance, repairs) and allocates the business-use percentage. More work, but often a larger deduction.

Vehicle Use

If you drive for business, choose between the standard mileage rate and the actual expense method. For 2026, the standard mileage rate is 72.5 cents per mile.⁷ Multiply that by your business miles. The actual expense method lets you deduct a business-use percentage of gas, insurance, repairs, depreciation, and similar costs, but it requires detailed tracking.⁸ Either method requires a log of your business mileage. The IRS audits this deduction more than almost anything else on Schedule C.

Business Meals

You can deduct 50% of the cost of meals directly related to your business. The temporary 100% deduction for restaurant meals expired after 2022, so the standard 50% limit is back in full effect for 2026. Keep the receipt and note who you met with and the business purpose.

Equipment and Section 179

When you buy equipment, furniture, or other assets that last more than a year, you generally can’t deduct the full cost the year you buy it. You spread the deduction over the asset’s useful life through depreciation. The Section 179 election lets you deduct the full purchase price of qualifying business assets in the year you place them in service, up to $2,560,000 for tax year 2026. That limit begins to phase out once total qualifying property placed in service exceeds $4,090,000.⁹ For most small businesses, the Section 179 cap comfortably covers every asset purchased during the year.

A Deduction That Doesn’t Belong on Schedule C

Self-employed individuals can often deduct health insurance premiums for themselves, a spouse, and dependents, but this deduction does not go on Schedule C. It’s reported on Schedule 1 (Form 1040), Line 17, using Form 7206. The distinction matters because a Schedule C deduction would reduce your self-employment tax, which the IRS doesn’t allow for health insurance premiums. You can’t claim the deduction for any month you were eligible to participate in a subsidized employer health plan through a spouse or other source.¹⁰

Line 31: Net Profit or Loss

The core calculation is straightforward. Take gross income from Line 7. Subtract total expenses from Line 28. Subtract your home office deduction from Line 30 if you’re claiming one. The result on Line 31 is your net profit or net loss.¹

A profit on Line 31 flows to Form 1040 through Schedule 1, Line 3, where it becomes part of your adjusted gross income.¹

A loss can generally offset other income on your return, but two sets of rules can limit how much you actually deduct. The at-risk rules restrict your deductible loss to the amount you actually have at stake in the business. The passive activity rules further limit losses from activities you don’t materially participate in. Apply the at-risk rules first (Form 6198 if they apply), then the passive activity rules (Form 8582).¹¹ For most sole proprietors who actively run the business themselves, neither limitation kicks in, but if someone else does most of the work, check these rules before assuming you can deduct the full loss.

Errors on Schedule C can trigger a 20% accuracy-related penalty on the underpaid portion of your tax, rising to 40% for gross valuation misstatements.¹² The usual cause isn’t fraud. It’s sloppy recordkeeping that inflates deductions or misses income.

What Line 31 Triggers Next

Two calculations run directly off your Schedule C profit, so it helps to know what you’re setting up.

Self-employment tax kicks in when net earnings from self-employment are $400 or more.¹³ The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.¹⁴ The tax doesn’t hit your full net profit; you first multiply net earnings by 92.35% to get the taxable base. For 2026, the Social Security portion applies only to the first $184,500 of combined wages and self-employment earnings.¹⁵ The Medicare portion has no cap. You can deduct half of your self-employment tax as an adjustment to income on Schedule 1.

The Section 199A qualified business income deduction lets eligible self-employed filers deduct up to 20% of qualified business income, which for most Schedule C filers is simply their net profit.¹⁶ Single filers with taxable income at or below $201,750 in 2026, or joint filers at or below $403,500, generally claim the full 20% without further limitation. Above those thresholds the deduction phases out based on the wages your business pays and the value of its depreciable property, and for certain service businesses like consulting, law, and accounting the deduction can disappear entirely once taxable income reaches $276,750 (single) or $553,500 (joint).⁹ The QBI deduction itself is claimed on Form 1040, not on Schedule C, but it’s driven entirely by the number you put on Line 31.

1
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
2
Office of the Law Revision Counsel. 26 USC 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns
3
Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return
4
Internal Revenue Service. IRS Issues FAQs on Form 1099-K Threshold Under the One, Big, Beautiful Bill
5
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
6
Office of the Law Revision Counsel. 26 USC 280A – Disallowance of Certain Expenses in Connection With Business Use of Home
7
Internal Revenue Service. 2026 Standard Mileage Rates
8
Internal Revenue Service. Publication 463 (2025), Travel, Gift, and Car Expenses
9
Internal Revenue Service. Revenue Procedure 2025-32, 2026 Adjusted Items
10
Internal Revenue Service. Instructions for Form 7206
11
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
12
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
13
Internal Revenue Service. Topic No. 554, Self-Employment Tax
14
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
15
Social Security Administration. Contribution and Benefit Base
16
Internal Revenue Service. Qualified Business Income Deduction