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Taxmap/pubs/p911-012.htm#TXMP3038a01c Sample   Filled-In Forms

This section will familiarize you with Schedule C (Form 1040), used to report business income or loss, and Schedule SE (Form 1040), used to figure self-employment tax. The line numbers in bold type follow the line numbers on the form being discussed.

Taxmap/pubs/p911-012.htm#TXMP35ec7ccc Schedule C

Schedule C

If you are the sole owner of an unincorporated trade or business, report business income and expenses on Schedule C (Form 1040) or Schedule C–EZ (Form 1040). If you and your spouse each own one separate business, file a separate Schedule C or C–EZ for each business. If a person, as a sole owner, has more than one business, that person must file a Schedule C for each separate business.

Samples of Schedule C and Schedule SE for Kathleen Woods are illustrated on the following pages. (Amounts have been rounded to the nearest dollar.)

Kathleen Woods is a secretary for a small firm. She reports her salary of $25,000 on line 7 of Form 1040.

Kathleen is also a direct seller of household cleaning products manufactured and distributed by Spotless, Inc. She reports the income and expenses of her selling business on Schedule C because she is self-employed.

Kathleen uses the cash method of accounting and files her return on a calendar-year basis. She has no employees and does not keep an inventory of the products she sells. Any products ordered for personal use are not shown in purchases, sales, cost of goods sold, or inventory.

Kathleen's customers select the products they want from a catalog listing retail prices for each item. She places an order with Spotless every 10 days, at which time she also pays for her prior order. She receives the items ordered with an invoice payable within 10 days or, if sooner, with the next order. When she delivers the merchandise, she collects the retail (catalog) price for each item. She can get full credit for any items returned to Spotless within 10 days.

Kathleen's cost for each item is 65% of the retail price. During 2003, she had total retail sales of $14,600. She paid Spotless $9,490 for the merchandise she received in 2003. She also received an award of $200 in January for having over $20,000 in total sales in 2002.

Taxmap/pubs/p911-012.htm#TXMP561f8357 Lines 1–3.

Kathleen reports $14,600 as her gross sales on line 1. On line 2, she would enter any refunds she had to give on merchandise, as well as adjustments made to customers' purchases. Since she has no entry on line 2, she enters $14,600 on line 3.

Taxmap/pubs/p911-012.htm#TXMP74646f57 Line 4.

Kathleen uses Part III to figure her cost of goods sold for the year. She has no inventory at the beginning or end of the year. Therefore, she has no entry on line 35 or line 41 of Part III. She purchased $10,000 worth of household products during 2003 for $9,490. (She received trade discounts of $510.) She enters her net cost of $9,490 ($10,000 − $510) on line 36. She also enters this amount on lines 40 and 42 of Part III and on line 4 of Part I.

Taxmap/pubs/p911-012.htm#TXMP71b6bd42 Line 5.

Gross profit, $5,110, is the difference between Kathleen's net receipts of $14,600 on line 3 and the cost of goods sold of $9,490 on line 4.

Taxmap/pubs/p911-012.htm#TXMP6e549d55 Line 6.

Kathleen reports the $200 received as a bonus on line 6. She does not include on Schedule C any income not related to her direct-selling business, such as income from investments or her salary. She reports such income on other lines of Form 1040.

Taxmap/pubs/p911-012.htm#TXMP18a45b46 Line 7.

Kathleen's gross income from direct selling is $5,310, the sum of her gross profit of $5,110 on line 5 and the bonus of $200 on line 6.

Taxmap/pubs/p911-012.htm#TXMP60c3b877 Line 8.

Kathleen gave her customers samples that cost $48. This amount was not included in the cost of goods sold on line 4.

Taxmap/pubs/p911-012.htm#TXMP79d88938 Line 9.

Kathleen's business mileage was 2,100 miles, and her total 2003 mileage was 6,000 miles. She used her car 35% for business. She uses the standard mileage rate to figure the deduction of $756 (2,100 × .36).

Kathleen must also complete Part IV of Schedule C.

Taxmap/pubs/p911-012.htm#TXMP58ff3ca6 Line 16b.

$280 is 35% of the total interest of $800 paid during the year on Kathleen's car loan.

Taxmap/pubs/p911-012.htm#TXMP76999427 Line 18.

Kathleen spent $260 for various office supplies and postage for her direct-selling business.

Taxmap/pubs/p911-012.htm#TXMP71cf3d0a Line 22.

Kathleen paid $392 in 2003 for order blanks, bags, and miscellaneous selling supplies.

Taxmap/pubs/p911-012.htm#TXMP68d40c4b Line 23.

$168 is 35% of the personal property tax of $480 Kathleen paid on her car in 2003.

Taxmap/pubs/p911-012.htm#TXMP27959a8c Line 24.

Kathleen attended two direct-selling seminars during 2003. Her travel expenses, including lodging, were $515, which she entered on line 24a. Her meals and entertainment, subject to the 50% limit, were $200 and were entered on line 24b. The nondeductible amount of $100 is shown on line 24c and the net deduction of $100 is shown on line 24d.

Taxmap/pubs/p911-012.htm#TXMP3e8eabcd Line 25.

Kathleen uses her second telephone 100% for business purposes. She paid $264 for local service on her second phone and $62 for long-distance calls. She enters the total of $326 on this line. She has no deduction for other utilities because she does not use any part of her home exclusively for business.

Taxmap/pubs/p911-012.htm#TXMP0cb8c94f Line 27.

This line is for other direct-selling expenses not listed separately on the schedule. These expenses are listed in Part V on page 2. Kathleen paid $35 to her bank for check printing and account charges for her separate business bank account. She paid membership dues of $30 to a local business association and $38 for a 1-year subscription to a retail sales magazine. She enters these expenses, along with the $199 she paid for catalogs, in Part V. She totals the expenses, $302, on line 48 and enters the total on line 27.

Taxmap/pubs/p911-012.htm#TXMP74df2a80 Line 28.

Kathleen adds all her business deductions listed on lines 8 through 27 and enters the total of $3,147 on this line.

Taxmap/pubs/p911-012.htm#TXMP6dc41b3f Line 29.

Kathleen subtracts her total deductions on line 28 from her Schedule C gross income on line 7. Because her gross business income is greater than her total deductions, she has a tentative profit of $2,163.

Taxmap/pubs/p911-012.htm#TXMP423b35bf Line 30.

Kathleen did not use any part of her home for business, so she does not make an entry here.

Taxmap/pubs/p911-012.htm#TXMP5b2004fe Line 31.

Kathleen has a net profit of $2,163 (line 29 − line 30). She enters her net profit here, on line 12 of Form 1040, and on line 2, Section A of Schedule SE (Form 1040).

Taxmap/pubs/p911-012.htm#TXMP700d573d Line 32.

Kathleen does not have a loss, so she skips this line. If she had a loss and was not at risk for all her investment in the business, she would have to attach Form 6198. See the Schedule C instructions for the meaning of at risk.

Taxmap/pubs/p911-012.htm#TXMP25046d79 Short Schedule SE

Kathleen uses Short Schedule SE (Form 1040), because her net earnings from self-employment are more than $400 and the total of her net earnings plus her wages subject to social security and Medicare taxes (FICA) are not more than $87,000.

Taxmap/pubs/p911-012.htm#TXMP65d3af03 Line 2.

Kathleen enters $2,163, the amount from line 31 of Schedule C (Form 1040).

Taxmap/pubs/p911-012.htm#TXMP7cc89e42 Line 3.

Kathleen enters the amount from line 2, $2,163.

Taxmap/pubs/p911-012.htm#TXMP09b04215 Line 4.

Kathleen multiplies her net profit by .9235 and enters the result, $1,998.

Taxmap/pubs/p911-012.htm#TXMP0ddad90a Line 5.

Kathleen multiplies $1,998 (line 4) by .153 and enters $306 as her self-employment tax. She also enters this amount on line 55 of Form 1040.

Taxmap/pubs/p911-012.htm#TXMP3b86d86d Line 6.

Kathleen enters one-half of the amount from line 5. She also enters this amount on line 28 of Form 1040 as an adjustment to income.

Taxmap/pubs/p911-012.htm#TXMP323c5da2

schedule c (form 1040), page 1, for kathleen woods  

Taxmap/pubs/p911-012.htm#TXMP307ae3fb

schedule c (form 1040), page 2, for kathleen woods  

Taxmap/pubs/p911-012.htm#TXMP31b889cc

schedule se (form 1040), page 1, for kathleen woods  

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