Schedule C Tax Tips - What Income Tax Forms Should You File?

Are you running a small business as a sole proprietor? Are you confused about which tax forms you are required to file? Here's an overview of the most common forms you'll need to prepare this tax season.

1. Schedule C, Profit or Loss From Business.

Be sure you really are a sole proprietor before using this form. If your business entity is not a corporation or a partnership, then your small business could be a sole proprietorship. Other common synonyms for sole proprietor include independent contractor or self-employed.

Note: If your business entity is a limited liability company (LLC) and you are the only owner (aka "member" in LLC lingo) of the LLC, you may be taxed like a sole proprietorship. Any single-member LLC can also choose to be taxed like a corporation by filing Form 8832. If you haven't filed Form 8832 and told the IRS you want to be taxed like a corporation, then by default you are considered a sole proprietor for tax purposes and should file Schedule C.

Schedule C is the form on which all the major income and expense items for your sole proprietorship are reported. This form also tells you the "bottom line" for the business. Line 31 shows whether you made a profit (and therefore have taxable income) or a loss (which can typically be used to offset other sources of income).

The amount from Line 31 is then transferred to Form 1040, Line 12, where it becomes part of the calculation for total personal income.

2. Form 4562, Depreciation and Amortization.

Don't let the name of this form scare you. Depending on your situation, you may not have to touch deprecation or amortization with a ten-foot pole. If you bought any business equipment during the year, and you meet the requirements, you can deduct 100% of the cost in the year of purchase rather than depreciating it over several years. See the form instructions for details, or talk with your accountant about Section 179, which allows virtually all sole proprietors to say goodbye to those complex depreciation rules. Even if you do qualify for the Section 179 deduction, you still have to complete Form 4562. The total expense from Form 4562 is reported on Schedule C, Line 13.

3. Form 8829, Expenses for Business Use of Your Home.

If you qualify, you can take a deduction for a home office. This is one of the best tax breaks available, because you are getting a business deduction for money you would have spent anyway for things like mortgage interest (or rent), property taxes, homeowner's (or renter's) insurance, and utilities. So this is definitely worth looking into. The total expense from Form 8829 is transferred onto Schedule C, Line 30.

4. Schedule SE, Self-Employment Tax.

If your business has a profit of $400 or more, you must calculate and pay self-employment tax on that profit via Schedule SE. Your self-employment tax is then transferred from Schedule SE onto Form 1040, where it is added to your federal income tax and becomes part of your total federal tax liability.