Welcome to the Center for Economic Progress’ Schedule C Training!
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Welcome to Module 5 of the Schedule C Training: Form Preparation.
We will now go over line by line the form preparation for the Schedule C and C-EZ forms.
Click the next button to go to the next slide.
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Let’s go over the Schedule C-EZ first.
The first part of the Schedule C-EZ covers general taxpayer or business information.
It should be noted that if the client has two different businesses, Schedule C-EZ cannot be
used. Both businesses must be reported on Schedule C.
Business codes can be accessed using the TaxWise online help feature. It's a good idea to
mark the business codes as favorites for easy access. To access the codes on TaxWise
Desktop, use the F1 key.
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For Line 1, Income: link from Line 1 to Form Form 1099-MISC for non-employee
compensation.
Link from Line 1 to a scratch pad and enter any income not reported on Form 1099 MISC.
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Line two consists of the clients expenses.
Total of all business expenses are listed or populate to this line from the Scratch Pad option
in TaxWise.
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Complete this Section for the mileage amount and add that amount to the scratch pad:
Business miles: From one point of work to another, these are
deductible.
Commuting miles: From home to work or work to home. These miles
are not deductible.
Personal miles: These are not deductible.
Once you complete Section III for mileage expenses, the total should be added to the
Scratch Pad as a separate expense item.
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Once all revenues and expenses are entered, TaxWise will calculate the net profit,
associated self-employment taxes and carry these amounts over to the 1040.
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This section should be relatively straight forward with only Line 1 and Line 6 being utilized.
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As an example, a consultant’s fee for creating marketing materials may be classified under
either the Advertising, Commissions, or Legal/Professional services lines.
Of course, an expense can be reported in only one category or line. The Scratch Pad should
be used to clearly identify the expenses in each category.
Expenses can also be allocated as “Other” on Line 27a.
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The standard mileage rate changes annually. In most cases the IRS forms and TaxWise will
have the most current rate applicable for each tax year.
It should also be noted that the Actual Expense Method for vehicles for car and truck
expenses is out of scope.
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The preparer will need to go to Page 2, Part IV of the Schedule C to complete the
information necessary to calculate the mileage deduction.
It should be noted that once a taxpayer uses the Actual Expense Method for one particular
vehicle, he or she cannot switch or go back to using the Standard Mileage Rate Method.
The Actual Expense Method must be used for subsequent years for as long as the taxpayer
plans to claim expenses related to the vehicle.
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Line 10: Commissions and fees. Enter any fees or commissions paid to a third
party.
Line 11: Contract labor. Enter any amounts paid to independent contractors or
consultants.
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Line 13: Depreciation: Link to Form 4562, Depreciation and Amortization.
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In order to claim the Section 179 deduction, link to the Business Asset Worksheet from Line
1 of Form 4562 (Depreciation and Amortization).
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Identify the asset and the date it was placed in service for the business on the Asset
Worksheet along with an Asset type from the drop down box.
Tools and office equipment are the most common asset types for customers.
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TaxWise will automatically calculate the Depreciation Method and Recovery Period once
the asset type has been selected.
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TaxWise will automatically calculate Lines 1-4 in Section 179.
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Information is carried over from the Business Asset Worksheet to Part I of the Form 4562
[pronounced forty-five sixty-two].
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We will not complete returns for businesses with employees so line 14 is not applicable.
In some cases a taxpayer will need to split the interest expenses on his/her mortgage
between the Schedule C and Schedule A.
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The use of this deduction can have a significant impact on the net income of the business.
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Taxpayers need to know how much space of the home is dedicated or used for the
business. They will also need to know the total Square Footage of the home.
Note that this information might be available on the previous year’s tax return.
Taxpayers must provide the information for lines 1 and 2. If the taxpayer is using the
simplified method, enter the total square footage of the home and the square footage of
the portion of the home used for business on Schedule C, line 30. Do not complete Form
8829.
If the taxpayer is claiming business use of the home using the regular method, complete
Form 8829.
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A preparation issue to be aware of for Form 8829 is the difference between Direct and
Indirect expenses.
Direct expenses are those items that are entirely related to the business and are
100% deductible. For example, paint for an area that is used exclusively for business
is a direct expense.
Indirect expenses are general expenses for running the entire home, such as utilities
and rent.
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The full amount of expenses are entered under either the “Direct” or “Indirect" columns.
The system will complete Indirect expenses based on the percentage of business use. This
is calculated on Line 7 in Part I.
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Again, these are relatively straight forward categories where the scratch pad should be
used to itemize the various expenses.
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Rental and leasing expenses for equipment and other property are entered on Line 20A or
20B, as appropriate.
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Any supply expenses should be entered on line 22. Expenses for taxes or license fees
should be entered on line 23.
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Expenses for travel should be entered on the Line 24a.
Expenses for meals should be entered on the appropriate line.
Although the chart indicates that some Meals and Entertainment can be deducted at
higher levels, such cases are rare and are out of scope.
A common misconception by new business owners is that meals and entertainment
expenses are 100% deductible. In most cases meals are only deductible at the 50% rate.
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Utilities will be taken on line 25, only if the business has rental or occupancy expenses.
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Line 27a is where you list expenses not otherwise accounted for in other categories.
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TaxWise automatically calculates the total of all expenses, along with the net profit
amounts.
Once net income is calculated on Schedule C, self-employment tax is automatically
calculated and transferred over to line 56 of Form 1040. Additionally, 50% of selfemployment tax is transferred to line 27 of the Form 1040, as an adjustment to income.
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Businesses with a loss when some or all “Investment is not at risk” are out of scope. For
virtually all VITA clients, all investment is at risk.
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