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Learn Whether You Need to File a Schedule C with Your Income Taxes

written by: John Garger•edited by: Laurie Patsalides•updated: 1/21/2011

Schedule C of the standard Federal Income Tax form 1040 is used to claim profit or loss from a Sole Proprietorship business. However, Schedule C is also used for other income reporting purposes as well. Learn when you need to file a Schedule C with Tax Form 1040 to the IRS.

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    The Schedules included as part of the Federal tax form 1040 allow tax payers to properly claim income from a variety of sources under many different situations. Schedule C is a very common form that allows sole proprietors to declare income, losses, and expenses while running a business.

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    Who Must File Schedule C

    Schedule C is reserved for tax payers who operated a business or who practiced any profession as a sole proprietor during the tax year. Most people who have filed a Doing Business Under an Assumed Name (sometimes called a DBA) document with local or state agencies will, generally, have to file a Schedule C with the IRS. Also, any person required to hold an Employer Identification Number (EIN) as a sole proprietor will probably need to file this schedule. According to the Instructions for Schedule C:

    “An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity."

    Regardless of state and local requirements for operating a business, the current Federal Tax Laws stipulate that any significant amount of time spent trying to collect income as sole proprietor is enough to designate the tax payer as a business owner. State and local agencies typically get much more specific about this definition because of sales tax collection purposes, licensing, and other fees associated with running a business.

    Husband and Wife business teams are technically not classified as sole proprietors as the very definition of such as business is a business owned by just one person. An unincorporated business run by a husband and wife is considered a partnership even if the formal declaration of a partnership was not made. Partnerships are usually required to file special forms with state and local agencies so as to declare the nature of the partnership and the distribution of assets in case one of the partners dies. Generally, a partnership is dissolved whenever one of the owners dies. However, a husband and wife team who file jointly may qualify as a joint venture rather than a partnership. However, as the instructions state for Schedule C:

    “Mere joint ownership of property that is not a trade or business does not qualify for the election [for a joint venture]."

    On the Schedule C, lines are available to declare income, expenses, costs of goods sold, information for vehicle use, and other expenses. These lines are used to figure taxable income from operating a business to ultimately be declared on the standard Federal Income tax form 1040.

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    Conclusion

    Schedule C is a common form for people operating a business. Tax payers should take care as to whether they are considered to be operating a business or if the extra income is simply considered to derive from a hobby or occasional deal. In these cases, Schedule C should not be used. To report sporadic income, see line 21 on form 1040.

    Always consult with a tax professional for questions about your tax liability.