IRS Schedule C Form (1040) – Profit or Loss from Business (Sole Proprietorship)

IRS Schedule C Form – As a sole proprietor, managing your business taxes can feel overwhelming, but IRS Schedule C (Form 1040) simplifies the process by allowing you to report your business’s profit or loss directly on your personal tax return. This essential form helps calculate self-employment taxes, claim deductions, and ensure compliance with IRS rules. Whether you’re a freelancer, gig worker, or small business owner, mastering Schedule C is key to maximizing deductions and minimizing your tax liability. In this guide, we’ll break down everything you need to know about Schedule C for the 2025 tax year, including updates, filing requirements, and step-by-step instructions.

What is IRS Schedule C (Form 1040)?

Schedule C, officially titled “Profit or Loss From Business (Sole Proprietorship),” is an attachment to Form 1040 used by sole proprietors to report business income and expenses. It’s designed for individuals who operate a business or practice a profession without forming a separate legal entity, such as a corporation or partnership. This includes single-member LLCs that haven’t elected to be taxed as corporations—they file as sole proprietorships using Schedule C.

The form calculates your net profit or loss by subtracting allowable business expenses from gross income. This net figure flows to your Form 1040, where it impacts your adjusted gross income (AGI) and self-employment tax calculations via Schedule SE. Activities qualify as a business if they’re pursued for profit with continuity and regularity—not hobbies or sporadic ventures. If your business involves farming, use Schedule F instead.

Key sections of the form include:

  • Header: Basic business info like name, address, and accounting method.
  • Part I: Income: Gross receipts, returns, and other income.
  • Part II: Expenses: Deductible costs like advertising, utilities, and wages.
  • Part III: Cost of Goods Sold (COGS): For businesses with inventory.
  • Part IV: Information on Your Vehicle: If claiming car expenses.
  • Part V: Other Expenses: Catch-all for miscellaneous deductions.

Who Must File Schedule C?

You need to file Schedule C if you’re a sole proprietor with business income or losses, including:

  • Statutory employees (e.g., those receiving Form W-2 but treated as self-employed).
  • Participants in qualified joint ventures (e.g., spouses running a business together without forming a partnership).
  • Recipients of certain Forms 1099-NEC, 1099-MISC, or 1099-K for business payments.

Single-member LLCs file Schedule C unless they’ve elected corporate taxation. If you have multiple businesses, file a separate Schedule C for each. Community property states (e.g., California, Texas) may allow spouses to treat a joint business as a sole proprietorship.

Exemptions: If your activity is a hobby (no profit motive), report income on Schedule 1 (Form 1040) without deductions. Rental real estate typically uses Schedule E, unless you’re a real estate professional materially participating.

What’s New for Schedule C in 2025?

The IRS has introduced several updates for the 2025 tax year to reflect economic changes and new legislation. Here’s a summary:

  • Standard Mileage Rate: Increased to 70 cents per mile for business vehicle use, up from previous years.
  • Bonus Depreciation: 100% for qualified property placed in service after January 19, 2025; option to use phase-down rates.
  • Section 179 Deduction Limits: Maximum deduction raised to $2.5 million, phased out if property exceeds $4 million.
  • Domestic Research Expenditures: Deduct as current expenses or capitalize and amortize over 60+ months.
  • Qualified Sound Recording Productions: Deduct up to $150,000 for costs incurred after July 4, 2025, but before January 1, 2026.
  • Energy Efficient Commercial Buildings Deduction: Now reported on line 27a (attach Form 7205).
  • Other Expenses: Moved to line 27b from line 48.
  • New Deductions (Not on Schedule C): Qualified tips (up to $25,000), overtime (up to $12,500/$25,000 joint), and car loan interest for personal use are claimed on Schedule 1-A (Form 1040), not Schedule C.

Business meals remain deductible at 50%. Gig economy workers should review IRS resources for specific guidance.

How to Fill Out Schedule C? Step-by-Step Guide

Filling out Schedule C requires accurate records. Use tax software or consult a professional for complex situations. Here’s a high-level overview:

Header Section

  • Line A: Describe your principal business (e.g., “Freelance Graphic Design”).
  • Line B: Enter the 6-digit NAICS code (e.g., 541430 for graphic designers).
  • Line C: Business name (leave blank if none).
  • Line D: EIN (if applicable; otherwise, use SSN).
  • Line E: Business address.
  • Line F: Accounting method (cash, accrual, or other).
  • Line G: Material participation (yes/no; see below).
  • Line H: Check if you started or acquired the business in 2025.
  • Line I/J: 1099 filing questions.

Part I: Income

  • Line 1: Gross receipts (include 1099 forms and statutory employee wages).
  • Line 2: Returns and allowances.
  • Line 3: Subtract line 2 from 1.
  • Line 4: COGS from Part III.
  • Line 5: Gross profit.
  • Line 6: Other income (e.g., refunds, credits).
  • Line 7: Total gross income.

Part II: Expenses

Deduct ordinary and necessary expenses. Categories include:

  • Line 8: Advertising.
  • Line 9: Car and truck (use standard mileage or actual; attach Form 4562 if needed).
  • Line 10: Commissions and fees.
  • Line 11: Contract labor (file 1099-NEC if $600+).
  • Line 13: Depreciation/Section 179 (Form 4562).
  • Line 15: Insurance.
  • Line 16: Interest.
  • Line 17: Legal/professional services.
  • Line 18: Office expense.
  • Line 19: Pension plans.
  • Line 20: Rent/lease.
  • Line 21: Repairs.
  • Line 22: Supplies.
  • Line 23: Taxes/licenses.
  • Line 24: Travel/meals (50% for meals).
  • Line 25: Utilities.
  • Line 26: Wages.
  • Line 27a: Energy deduction.
  • Line 27b: Other expenses from Part V.
  • Line 28: Total expenses.
  • Line 30: Business use of home (Form 8829 or simplified method: $5/sq ft up to 300 sq ft).
  • Line 31: Net profit/loss.
  • Line 32: At-risk rules (attach Form 6198 if applicable).

Part III: Cost of Goods Sold

Required for inventory-based businesses (small businesses may qualify for exemptions). Includes inventory valuation, purchases, labor, and ending inventory.

Part IV: Information on Your Vehicle

Complete if claiming car expenses without Form 4562. Report miles, evidence, etc.

Part V: Other Expenses

List items not fitting elsewhere (e.g., amortization, bad debts, startup costs up to $5,000).

Material Participation Rules

Check “Yes” on line G if you materially participated, which affects passive activity loss rules. You qualify if you meet any of seven tests, such as working 500+ hours or being the primary participant. Spouse’s hours count. Rental activities are generally passive unless you’re a real estate pro.

Business Use of Home Deduction

Deduct home office expenses if the space is exclusively and regularly used for business. Use Form 8829 for actual expenses or the simplified method ($5 per square foot, max 300 sq ft). Limitations apply based on gross income.

Common Business Expenses and Deductions

Eligible deductions must be ordinary (common in your industry) and necessary (helpful for business). Examples:

  • De minimis safe harbor: Deduct tangible property up to $2,500/$5,000 per item.
  • Startup costs: Up to $5,000 deductible immediately.
  • Bad debts: If using accrual method.
  • Nontaxable Medicaid waivers: Report fully but offset nontaxable portion.
Expense Category Examples Deduction Rules
Advertising Marketing materials, online ads Fully deductible
Car/Truck Mileage or actual costs 70 cents/mile standard; records required
Contract Labor Freelancers, subcontractors 1099-NEC if $600+
Depreciation Equipment, vehicles Form 4562; bonus/Section 179 apply
Home Office Portion of rent/utilities Exclusive use; simplified or actual
Meals Business-related 50% deductible
Travel Lodging, airfare Away from home; no entertainment

Filing Tips and Common Mistakes to Avoid

  • Keep detailed records: Substantiate all deductions with receipts.
  • File electronically: Faster refunds and fewer errors.
  • Watch for excess business losses: Use Form 461 if losses exceed thresholds.
  • Report all income: Including gig economy earnings.
  • Common errors: Mixing personal/business expenses, incorrect NAICS codes, forgetting 1099 filings.
  • Deadlines: April 15, 2026, for 2025 taxes (extensions available).

If you’re in the gig economy, visit IRS.gov/Gig for tailored advice.

Where to Download Schedule C and Instructions?

Download the latest Schedule C form and instructions directly from the IRS website:

For more resources, check IRS Publication 334 (Tax Guide for Small Business) or consult a tax advisor.

In summary, Schedule C is a powerful tool for sole proprietors to report business finances accurately. By staying updated on 2025 changes and maintaining good records, you can optimize your tax return and focus on growing your business. If your situation is complex, professional help ensures compliance and maximizes savings.