Schedule C Instructions: Income, Expenses, and Net Profit

Schedule C is the IRS form sole proprietors and single-member LLCs use to report business profit or loss with their Form 1040, and these Schedule C instructions walk through the form line by line: header details, gross income in Part I, expenses in Part II, the supporting sections for cost of goods sold, vehicles, and the home office, and where the bottom-line profit or loss goes next. Your net figure on Line 31 flows to Schedule 1 as personal income and to Schedule SE for self-employment tax, so accuracy on Schedule C sets the numbers for the rest of your return.

Who Files Schedule C

You file Schedule C if you operated a business as a sole proprietor or owned a single-member LLC that hasn’t elected corporate tax treatment. A single-member LLC is treated as a “disregarded entity” for federal tax purposes, so its income and expenses go on your Schedule C as if you ran the business in your own name.¹

Statutory employees also use Schedule C even though they receive a W-2. Their W-2 has the “Statutory employee” box checked, and the four categories are commission drivers distributing products like beverages or baked goods, full-time life insurance sales agents, home workers producing goods with employer-supplied materials, and full-time traveling salespeople turning in orders for their principal.² Statutory employees do not owe self-employment tax on Schedule C income because their employer already handles Social Security and Medicare withholding.³

One boundary worth knowing: rental income usually belongs on Schedule E, not Schedule C. The exception is when you provide substantial services alongside the rental, such as a bed-and-breakfast where you cook meals and clean rooms.

Filling In the Header

The top of Schedule C asks for your name, Social Security Number (or EIN if you have one), and a six-digit Principal Business or Professional Activity Code from the North American Industry Classification System. The correct code is in the chart at the back of the Schedule C instructions.¹

You also pick an accounting method. Most small businesses use the cash method, recording income when payment arrives and expenses when they’re paid. The accrual method records income when earned and expenses when incurred. Once you choose, you must stick with it; switching requires Form 3115 and IRS consent.⁴

Line G asks whether you “materially participated” in the business. Answer honestly. Checking “No” classifies the activity as passive, which triggers separate loss limitation rules under Form 8582.⁵

Part I: Gross Income

Part I calculates what came in before expenses. Start with total gross receipts, then subtract returns and allowances to get net receipts.

If you sell physical products, complete Part III on the second page first. That section asks for beginning and ending inventory, plus the cost of materials, labor, and other direct production costs. The resulting cost of goods sold flows back to Part I and reduces net receipts to produce your gross profit. Getting inventory valuations right here prevents problems throughout the rest of the form.

Part II: Business Expenses

Part II is where most of the work happens. Each numbered line covers a specific expense category. The lines you’re most likely to use include:

Line 8, Advertising: website costs, online ads, business cards, promotional materials.
Line 11, Contract labor: payments to independent contractors. You may need to issue 1099s for payments of $600 or more.
Line 13, Depreciation and Section 179: the cost of business equipment and property spread over its useful life, or expensed immediately.
Line 15, Insurance: business liability, professional malpractice, and property insurance. Health insurance is deducted elsewhere.
Lines 16a and 16b, Interest: interest on business mortgages (16a) and on other business loans or credit cards (16b).
Line 17, Legal and professional services: attorney fees, accountant fees, and tax preparation costs tied to the business.
Line 18, Office expense: supplies, postage, and similar workspace costs.

Legitimate expenses that don’t fit the standard categories go on the “Other expenses” section (Part V on page 2). List each expense individually with its dollar amount; professional membership dues, licensing fees, and specialized software subscriptions are common entries. The total feeds back into Part II on line 27a.¹

Every deduction you claim needs backup: receipts, bank statements, invoices, or cancelled checks. The IRS doesn’t want them with your return, but if your Schedule C gets questioned, the burden of proof is yours. Undocumented expenses get disallowed, and you’ll owe the additional tax plus interest.⁶

Business Meals

You can deduct 50% of the cost of business meals when you or an employee is present and the meal isn’t lavish or extravagant.⁷ The temporary 100% restaurant-meal deduction from 2021 and 2022 has expired. Entertainment expenses are not deductible at all, even if business is discussed during the event. Keep receipts noting who attended and the business purpose.

Part IV: Vehicle Expenses

Part IV collects vehicle details if you use a car or truck for business. You report total miles driven during the year, broken down by business, commuting, and personal use. Commuting miles, meaning your regular drive from home to a fixed workplace, are never deductible.

You choose between two methods. The standard mileage rate for 2026 is 72.5 cents per mile driven for business purposes.⁸ The actual expense method lets you deduct the business-use percentage of gas, insurance, repairs, depreciation, and other vehicle costs. Once you choose actual expenses for a vehicle, you generally cannot switch back to the standard rate for that same vehicle.

Either way, keep a contemporaneous mileage log recording the date, destination, business purpose, and miles for each trip. A spreadsheet, notebook, or app works. Reconstructing a log after the fact rarely holds up in an audit.⁹

Home Office Deduction

If you use part of your home exclusively and regularly for business, you can deduct a portion of your housing costs. “Exclusively” is the operative word; a kitchen table where you also eat dinner doesn’t qualify. The space must be your principal place of business, or at minimum the place where you handle administrative and management tasks with no other fixed location for those activities.¹⁰

Two exceptions loosen the exclusive-use rule: space regularly used to store inventory or product samples (if your home is the business’s sole fixed location), and areas used for daycare services.¹⁰

The simplified method lets you deduct $5 per square foot of your home office, up to 300 square feet, for a maximum of $1,500.¹¹ The regular method uses Form 8829 to allocate actual expenses (mortgage interest, property taxes, utilities, insurance, depreciation) by the business-use percentage of the home. The regular method takes more recordkeeping but often produces a larger deduction.

Line 13: Depreciation, Section 179, and Bonus Depreciation

When you buy equipment, furniture, or other business property that lasts more than a year, you generally can’t deduct the full cost in the year of purchase. Instead, the deduction is spread over the asset’s useful life through depreciation on Line 13.

Two provisions accelerate that write-off. Section 179 lets you immediately expense up to $2,560,000 of qualifying property placed in service during 2026, with the benefit phasing out once total equipment purchases exceed $4,090,000. Bonus depreciation, which had been phasing down under the original Tax Cuts and Jobs Act schedule, has been restored to 100% for qualified property acquired after January 19, 2025.¹² Unlike Section 179, bonus depreciation applies automatically unless you elect out, and it can create a net loss.

Deductions That Don’t Go on Schedule C

Some deductions tied to self-employment are claimed elsewhere on your return, even though your Schedule C figures determine them.

Self-employed health insurance is one. If you pay for your own health, dental, or vision coverage and the plan is established under your business, you can deduct 100% of premiums for yourself, your spouse, dependents, and children under age 27. You cannot take the deduction for any month when you were eligible for a subsidized employer plan through your own job, your spouse’s employer, or a parent’s plan. The deduction is calculated on Form 7206 and claimed on Schedule 1, Line 17.¹³ It reduces adjusted gross income but does not reduce self-employment tax.

The Section 199A qualified business income deduction is another. It lets eligible Schedule C filers deduct up to 20% of qualified business income, but it’s claimed on Form 1040, not on Schedule C. The deduction is available in full to single filers with 2026 taxable income below approximately $203,000 and joint filers below roughly $406,000, then phases out for specified service businesses like law, accounting, consulting, medicine, and financial services.

Line 31: Net Profit or Loss

Line 30 subtracts your home office deduction from total expenses. Line 31 is the bottom line: gross income minus total expenses equals your net profit or loss.

A net profit goes to two places: Schedule 1 (Form 1040), Line 3, where it joins your other income, and Schedule SE, Line 2, where it drives self-employment tax.⁶

A net loss needs more attention. If you checked Line 32a saying all investment is at risk, the loss flows to Schedule 1 and Schedule SE the same way. If some investment is not at risk, complete Form 6198 to determine how much of the loss you can actually use. Large losses face an additional cap: for 2026, business losses exceeding roughly $256,000 for single filers or $512,000 for joint filers get suspended and converted into a net operating loss carryforward. Calculate this on Form 461.⁵

Self-Employment Tax on Your Profit

Schedule C net profit owes income tax and also triggers self-employment tax covering Social Security and Medicare. The combined rate is 15.3%, made up of 12.4% for Social Security and 2.9% for Medicare, and as a self-employed person you pay both the employee and employer shares.¹⁴

The Social Security portion applies only to net earnings up to $184,500 in 2026.¹⁵ Medicare has no cap, and combined earnings above $200,000 ($250,000 married filing jointly) trigger an additional 0.9% Medicare surtax.

Self-employment tax is calculated on Schedule SE, using the Line 31 figure as the starting point.¹⁶ You can deduct the employer-equivalent half of that tax when calculating adjusted gross income. The deduction appears on Schedule 1 rather than on Schedule C.¹⁴

Estimated Payments and Filing Deadlines

Schedule C filers send tax payments to the IRS throughout the year rather than through paycheck withholding. If you expect to owe $1,000 or more when you file, you’re generally required to make quarterly estimated payments.¹⁷ The four calendar-year deadlines:

April 15, for income earned January through March
June 15, for income earned April and May
September 15, for income earned June through August
January 15 of the following year, for income earned September through December

If a deadline falls on a weekend or holiday, the payment is due the next business day.¹⁸ Missing a deadline triggers an underpayment penalty that accrues daily. You avoid the penalty by paying at least 90% of the current year’s tax or 100% of last year’s total tax, whichever is smaller. If your prior-year AGI exceeded $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110%.¹⁹

Schedule C is filed with your Form 1040. For the 2025 tax year, the deadline is April 15, 2026. Form 4868 gives you an automatic six-month extension to October 15, 2026.²⁰ An extension to file is not an extension to pay. Interest still runs on any unpaid tax after April 15, so estimate and send what you owe with the extension request.

How Long to Keep Your Records

Keep your business records for at least three years from the date you filed the return or two years from the date you paid the tax, whichever is later. Some situations require more:

Six years if you underreported income by more than 25% of the gross income shown on your return.
Seven years if you claimed a deduction for worthless securities or bad debts.
Indefinitely if you didn’t file a return.

For depreciable property, keep records until the statute of limitations expires for the year you sell or dispose of the asset; you’ll need the original purchase documentation to calculate gain or loss. Employment tax records require at least four years of retention.²¹

1
Internal Revenue Service. Instructions for Schedule C (Form 1040)
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Internal Revenue Service. Statutory Employees
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Internal Revenue Service. Exempt Organizations: Who Is a Statutory Employee?
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Internal Revenue Service. About Form 3115, Application for Change in Accounting Method
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Internal Revenue Service. Instructions for Schedule C (Form 1040)
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Internal Revenue Service. Schedule C (Form 1040) – Profit or Loss From Business
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Internal Revenue Service. Tax Cuts and Jobs Act – Businesses
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Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile
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Internal Revenue Service. Topic No. 510, Business Use of Car
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Internal Revenue Service. Topic No. 509, Business Use of Home
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Internal Revenue Service. Simplified Option for Home Office Deduction
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Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill
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Internal Revenue Service. Instructions for Form 7206
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Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
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Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. About Schedule SE (Form 1040), Self-Employment Tax
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Internal Revenue Service. Estimated Taxes
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Internal Revenue Service. Estimated Tax
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Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty
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Internal Revenue Service. Form 4868 Application for Automatic Extension of Time To File U.S. Individual Income Tax Return
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Internal Revenue Service. How Long Should I Keep Records?