Taxes are often a convoluted, confusing time and it can be even more confusing when trying to understand what needs to be filed, what does not need to be, and what your tax requirements are personally and professionally.
One of the more confusing filings for many can be a Schedule C filing, especially as a small business owner. Before embarking on any filings, it is important to understand what exactly a Schedule C is and what it is needed for to see if it is relevant to you.
What Is A Schedule C?
The Schedule C is a form that is part of the larger 1040 and according to the IRS, its usage is for reporting income or loss from a business that you may have operated, or as a profession where you chose to practice as a sole practitioner.
If this sounds like what you have been doing for the taxable year, then yes, you should be filling out a Schedule C. However, there are exceptions to this form that must be noted before actually filing it. If your business is incorporated, either as an LLC or a corporation, then you do not need to fill out this form. Similarly, if your business is a partnership, or you have chosen taxation as a partnership for your LLC, then you will need a different form.
Before You File
Before filing your Schedule C, there is certain information you must gather and have handy to expedite the process and proactively deal with any issues that arise. According to The Balance, this is a general list of the information that is needed from the end of the business year prior to filing
- An income statement for the year, this is also referred to as a profit and loss statement
- A balance sheet that ends at December 31st
- Statement of assets that must demonstrate any assets purchased during the year
- For product-based businesses, inventory information will be necessary in order to calculate the cost of goods sold
- Details regarding personal expenses such as travel, vehicle and entertainment - this can also include any expenses incurred as a home business
If you have ascertained that you that are not incorporated, and are not engaged in a partnership, then you are one step closer. However, it is also important to note the IRS definition of a "business" within this context, and see if your activity qualifies for a Schedule C form.
The IRS defines a business as an operation wherein the primary goal of the practitioner was to earn income or profit, and these activities were conducted on a frequent and consistent basis. There are two criteria that must be met in order to file a Schedule C to report profits and loss.
If you choose to fill out a Schedule C on your own, that may get confusing but there are plenty of helpful guides to help get you started - one such guide can be found here.
Other Aspects to Think About
Generally, one of the more difficult parts of filing a Schedule C is compiling all of the information needed. The best way to prevent last-minute hunts for receipts and other common issues is to keep detailed reports throughout the year of your expenses and designate specific filing cabinets where these documents can be stored.
Keeping organized is incredibly important, whether you are a sole practitioner or a small business employer. Keeping detailed financial records is important, as is checking in with an accountant or other members of your financial team to ensure that everything is being documented and stored correctly. In order to avoid scrambling at the last minute, talk to a tax professional early on to ensure you have met all of the guidelines and have the necessary paperwork.
What We Can Do For You
Worried about Schedule C's, taxes or even have general concerns about your business and whether you are taking advantage of the right tax benefits? Please do not hesitate to contact us.