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Schedule C

Also known as Form 1040 or Profit or Loss from Business (Sole Proprietorship) Form

What is Schedule C?

The Schedule C tax form is used to report profit or loss from a business. It is a form that sole proprietors (single owners of businesses) must fill out in the United States when filing their annual tax returns. The Schedule C form is designed to let sole proprietors write off as much of their expenses as possible from their tax bill, in hopes of spurring entrepreneurship.

 

Schedule C

 

Eventually, some of the ventures will turn into highly profitable businesses that will bring in more tax revenue for the government. This is why the US Government wants to reduce the tax burden on small businesses during the time that they are most likely to fail, in expectation of seeing payback on that decision in the long term.

 

Beneficiaries of Schedule C

The Schedule C form benefits both small business owners and the US Internal Revenue Service (IRS). Within the parameters set out by the form, small business owners can deduct a lot of expenses from their tax bill. Expenses such as advertising, commissions, fees, supplies, automotive, utilities, home office, and so on are all tax-deductible. Anything that is deemed by the IRS to be an “ordinary and necessary” business expense can be used as a tax deduction.

Such an open-ended approach enables small businesses to retain as much revenue as possible in order to finance their operations. The approach is deemed to be fair since it is generally agreed upon that the majority of the tax burden should be borne by large multinational corporations and high net worth individuals.

It would take thousands, maybe even tens of thousands of schedule C filings to equal the tax revenue collected from a single, large multinational corporation.

 

Sole Proprietorship Model

The Schedule C form aims to help businesses that are set up as sole proprietorships. Unlike a limited liability corporation (LLC), sole proprietorships do not enjoy limited liability and the owner can be personally responsible for settlements in the event of losing a lawsuit. This means that the person suing the sole proprietor can go after the person’s personal assets such as his/her car, house, valuables, etc.

Within such a context, we can see how the schedule C form is helpful to smaller businesses that typically have lower levels of profitability. Several years of tax savings increase the likelihood of the business staying afloat for several years to come. Ideally, as the business grows and expands, it is able to acquire more assets, attract more investors, and, ultimately, pay more in taxes.

Thus, the US government is, in a sense, able to successfully “recover” all the lost tax revenue that business owners were able to write off during the early stages of their business.

In the later stages of growth, sole proprietors are likely to switch their business structure to either that of a limited liability corporation (LLC) or a C-corporation.

 

More Resources

Thank you for reading CFI’s explanation of Schedule C. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

  • EFTPS®
  • How to Use the IRS.gov Website
  • Schedule A
  • Tax Deductible

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