US Tax series -5

Business Income –Schedule C

Schedule C

Schedule C is used to report income or loss from a business you operated or a profession you practiced as a sole proprietor.

An activity qualifies as a business if your primary purpose of engaging in the activity is income or profit and you are in the activity with continuity and regularity (i.e. materially participation).

What should be done in case both the taxpayer and spouse have different businesses?
A)They should file separate Sch Cs
Q) What if the tax payer and spouse jointly own a business?
A) They do not file a schedule C even if they don’t have a formal partnership agreement, in that case 1065 would be filed.

Schedule C is divided into 5 parts
- General Information

- Part I Income
- Part II Expenses
- Part III Cost of Good Sold
- Part IV Vehicle Information
- Part V Other Expenses

- Part I Income
- Gross Receipts or Sales.
- Statutory Employees (From W2)

Income reported in the Sch C includes cash, property, and services received from all sources.

- Part II Expenses

- Depreciation
- Travel, Meals & Entertainment Expenses
- Vehicle Expenses
- Other Expenses

To be deductible, a business expense must be both ordinary and necessary.

An ordinary expenses is the one which is common and accepted in the taxpayer’s respective field of business. A necessary expenses is one which is helpful and useful for the trade.

Examples are 1. reasonable allowance for salaries and other compensation, 2. traveling expenses while away from home etc.

Automobile & truck expenses: Expenses incurred on a personal automobile used for business purposes can be deducted. The standard mileage rate for the cost of operating the car is 48 ½ cents a mile for all business miles.

Home Office Expense

Generally, you can deduct business expenses that apply to a part of your home only if that part is exclusively used on a regular basis:
-As your principal place of business for any of your trades or businesses,
-As a place of business used by your patients, clients, or customers to meet or deal with you in the normal course of your trade or business, or
- In connection with your trade or business if it is a separate structure that is not attached to your home.

Exceptions to this rule apply to space used on a regular basis for:
- Storage of inventory or product samples, and
- Certain daycare facilities.

Use Form 8829 to figure the allowable expenses for business use of your home on Schedule C (Form 1040) and any carryover to 2007 of amounts not deductible in 2006.Only certain expenses are deductible.and The primary home must be used as a principal place of business.

includes
-Real estate taxes
-Deductible mortgage interest
-Casualty losses
-Rent
-Utilities and services
-Insurance
-Repairs
-Security systems etc.
The business percentage can be determined by the dividing the area used for business by the total area of home.

Expenses are deductible if the part of the home is used to provide day care facility.Must be in a trade or business of providing such facilities.