How to Calculate Schedule C Line 31 Net Profit or Loss

To calculate Schedule C Line 31, subtract your total business expenses (Line 28) and your home office deduction (Line 30) from your gross income (Line 7). A positive result is your net profit; a negative result, shown in parentheses, is your net loss. That single figure is what your sole proprietorship actually earned or lost for the year, and it flows straight into the rest of Form 1040 to drive both your income tax and your self-employment tax.¹

The Line 31 Formula in Plain Terms

Schedule C works top-down. Part I produces gross income on Line 7. Part II produces total expenses on Line 28. Line 29 is Line 7 minus Line 28, giving you a tentative profit or loss. Line 30 is your home office deduction. Line 31 is Line 29 minus Line 30.¹

Each of those inputs has its own rules. Getting Line 31 right means getting the three numbers that feed it right.

Building Line 7: Gross Income

Line 1 captures gross receipts, meaning every dollar the business brought in before any subtractions. Line 2 removes returns and allowances. Line 3 is the difference.

If you sell physical products, you complete Part III to calculate cost of goods sold, which covers materials, inventory, and direct labor. That total lands on Line 4 and comes off Line 3 to give you gross profit on Line 5. Service businesses that carry no inventory skip Part III.

Line 6 picks up any other business income that doesn’t belong in gross receipts, such as recovered bad debts. Line 5 plus Line 6 equals Line 7, your gross income, and that’s the starting point for everything below.¹

One thing worth flagging: whether or not a payment processor sends you a Form 1099-K, every dollar of business income belongs on Line 1. The 1099-K is a reporting mechanism, not a taxability trigger, and falling under its threshold does not exempt any income from tax.

Building Line 28: Total Expenses

Lines 8 through 27 list specific expense categories: advertising, vehicle costs, commissions, insurance, office supplies, rent, utilities, and more.¹ Every deduction must meet the “ordinary and necessary” standard under federal tax law, meaning it is the kind of expense common in your line of work and genuinely helpful for running the business.² A graphic designer buying design software is ordinary and necessary. A boat probably is not.

A few line items call for care. Line 16a is for mortgage interest paid to banks or financial institutions on property used in your business. Line 20 covers rent or lease payments for vehicles, machinery, and equipment. For vehicles, you choose between tracking actual costs (gas, repairs, insurance, depreciation) or using the standard mileage rate, which for 2026 is 72.5 cents per mile.³ If you claimed depreciation on a vehicle in a prior year, you cannot switch methods later for that vehicle, so the initial choice matters.

Every expense needs documentation: receipts, bank statements, mileage logs, or invoices. Sloppy or missing records on a Schedule C can trigger an accuracy-related penalty equal to 20 percent of the resulting underpayment.⁴

Add Lines 8 through 27 together and you have Line 28. Line 7 minus Line 28 produces Line 29, your tentative profit or loss.¹

Building Line 30: The Home Office Deduction

If you use part of your home exclusively and regularly for business, you can claim a home office deduction on Line 30. The IRS enforces exclusivity strictly. A kitchen table where you also eat dinner does not qualify, even if you work there eight hours a day.

Two methods are available.

Simplified Method

Deduct $5 per square foot of dedicated office space, up to 300 square feet, capping the deduction at $1,500.⁵ The deduction cannot exceed your gross income from the business, so it will not create or enlarge a loss.⁶ No utility tracking, no depreciation, less paperwork.

Actual Expense Method

The actual expense method requires Form 8829.⁷ Divide your office square footage by your home’s total square footage to get a business-use percentage. A 200-square-foot office in a 2,000-square-foot home is 10 percent. That percentage then applies to your mortgage interest or rent, property taxes, utilities, homeowner’s insurance, repairs, and depreciation. The math is longer, but the resulting deduction can exceed $1,500 for larger offices or higher-cost homes.

Whichever method you use, the number goes on Line 30 and comes off Line 29 to produce Line 31.

Reading the Result

A positive Line 31 is your net profit. A negative number, written in parentheses, is your net loss. That figure is what the rest of your return will work from.¹

If you run more than one sole proprietorship, you file a separate Schedule C for each. Each business produces its own Line 31, and each flows independently to the rest of your return.

When a Loss on Line 31 Gets Limited

A net loss on Line 31 is not automatically deductible in full. Three sets of rules can shrink or defer it.

At-Risk Rules

Line 32 asks whether all your investment in the business is “at risk,” meaning you would actually bear the loss if the business failed. Under federal tax law, you can deduct losses only up to the amount you stand to lose personally.⁸ If everything in the business is your own cash, equipment, or personally guaranteed debt, check box 32a. If part of your investment is protected by nonrecourse financing or similar arrangements, check box 32b and file Form 6198 to figure out how much loss you can claim.¹

Passive Activity Rules

If you did not materially participate in the business during the year, the IRS treats it as passive. Passive losses can only offset passive income, not wages, investment returns, or profits from businesses you actively run. The most common test for material participation is spending more than 500 hours on the business during the year, and several alternatives exist. Most hands-on sole proprietors clear the bar without difficulty.

Excess Business Loss Limitation

Even after clearing the at-risk and passive activity rules, there is a ceiling on how much business loss you can deduct against other income in a single year. For 2026, the threshold is $256,000 for single filers and $512,000 for joint filers. Any loss above that becomes a net operating loss you carry forward to future years, where it can offset up to 80 percent of taxable income in each subsequent year. The carryforward does not expire.

Where Line 31 Goes Next

Line 31 does not stay on Schedule C. It feeds several other calculations, and each is a reason to get the number right.

Schedule 1 and Your AGI

Your net profit or loss transfers to Line 3 of Schedule 1 (Form 1040) and combines with any other additional income.⁹ The Schedule 1 total flows to Form 1040 and moves your adjusted gross income up or down. Because AGI drives eligibility for credits, deductions, and other benefits, a wrong Line 31 has consequences well beyond the Schedule C itself.

Self-Employment Tax

If your net profit is $400 or more, you owe self-employment tax on Schedule SE, which covers Social Security and Medicare.¹⁰ The combined rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. You first multiply net earnings by 92.35 percent before applying the rate. The Social Security portion applies only to the first $184,500 of combined earnings in 2026; Medicare has no cap.¹¹ You can deduct the employer-equivalent portion of your self-employment tax on Schedule 1, Line 15, which reduces your AGI and therefore your income tax, though not the self-employment tax itself.¹²

Qualified Business Income Deduction

Line 31 also forms the basis for the qualified business income deduction under Section 199A, made permanent in 2025. Eligible sole proprietors can deduct up to 20 percent of qualified business income from taxable income.¹³ The deduction is taken on Form 1040 and reduces income tax but not self-employment tax. Higher earners face additional limits tied to business type, W-2 wages paid, and qualified property. For most sole proprietors under the income thresholds, the calculation is 20 percent of Line 31 profit, capped at 20 percent of total taxable income.

Self-Employed Health Insurance

If you pay for your own health insurance and had a net profit, you may deduct premiums for yourself, your spouse, and your dependents on Schedule 1, Line 17, calculated on Form 7206.¹⁴ The deduction is unavailable for any month you were eligible to join a subsidized employer plan, including through a spouse. It also cannot exceed net profit from the business under which the plan is established.

1
Internal Revenue Service. 2025 Instructions for Schedule C (Form 1040)
2
Office of the Law Revision Counsel. 26 USC 162 – Trade or Business Expenses
3
Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents
4
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
5
Internal Revenue Service. Simplified Option for Home Office Deduction
6
Internal Revenue Service. FAQs – Simplified Method for Home Office Deduction
7
Internal Revenue Service. Instructions for Form 8829 (2025)
8
Office of the Law Revision Counsel. 26 USC 465 – Deductions Limited to Amount at Risk
9
Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
10
Internal Revenue Service. Instructions for Schedule SE (Form 1040)
11
Social Security Administration. Contribution and Benefit Base
12
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
13
Internal Revenue Service. Qualified Business Income Deduction
14
Internal Revenue Service. Instructions for Form 7206