Should You File a Schedule C or C-EZ with Your Federal Tax Form 1040?

The 1040 Federal Income Tax form is the standard form used to report income from a variety of sources. To simply matters, sub-forms called schedules are used to report changes to taxable income. This schedule method reduces the complexity of the 1040 and allows tax payers to use only portions of the 1040 that pertain to them.

Schedule C is a form used to report profit or losses from the operation of a small business. It is generally used to report this change in income for sole proprietorships, or businesses owned by just one person. Partnerships and corporations, two other types of business organizations, usually use other forms to report income. However, some sole proprietorships have such simple income to report, that the Internal Revenue Service allows the filing of the C-EZ rather than the standard Schedule C form.

Schedule C-EZ is reserved for sole proprietors who fall into several special categories. Business owners with $5,000 or less in business expenses are eligible to file Schedule C-EZ. They must also use the cash method of accounting. This means that income is recognized when an actual cash flow occurs, when they actually receive money for goods or services rendered. This is in contrast to the accrual method of accounting where income is recorded when it is reasonably accurate to do so, like when goods are delivered or services are rendered and the money owed to the business can be counted as a receivable. For Schedule C-EZ, the business owner must have cash on the barrelhead before income can be recorded.

Filers of Schedule C-EZ must not have carried any inventory at any time during the tax year and must not be claiming a loss from operations of the business. In addition, the filer must not have multiple businesses as a sole proprietor, qualified joint venture, or statutory employee. The Schedule C-EZ is for business owners who have no employees and are not required to file Form 4562 for depreciation and amortization for the business in question. Also, they must not be claiming a deduction for business use of the home and are not claiming prior-year unallowed passive activity losses.

Qualifications to file Schedule C-EZ instead of Schedule C are quite narrowly defined. The purpose of the form is to simplify filing for tax payers running a small business on the side or in addition to other income. People offering services to the public often find they qualify for the C-EZ because unlike retailing or construction work, there are fewer out-of-pocket expenses and a much greater chance that they use the cash method of accounting. Consultants and public accountant often fall into this category. Regardless of which form must be filed by a business owner, both Schedules C and C-EZ are straight-forward methods to properly declare income from a business.

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