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Use Schedule C (Form 1040) to report income or loss from a business you operated or a profession you practiced as a sole proprietor. 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. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21, or Form 1040NR, line 21.
Also use Schedule C to report (a) wages and expenses you had as a statutory employee, (b) income and deductions of certain qualified joint ventures, and (c) certain income shown on Form 1099-K, Merchant Card and Third Party Network Payments, and Form 1099-MISC, Miscellaneous Income. See the instructions for line 1 and the Instructions for Recipient (back of Copy B of Form 1099-MISC) for the types of income to report on Schedule C.
Small businesses and statutory employees with business expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. See Schedule C-EZ for details.
You may be subject to state and local taxes and other requirements such as business licenses and fees. Check with your state and local governments for more information.
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Schedule A to deduct interest, taxes, and casualty losses not related to your business.
Schedule E to report rental real estate and royalty income or (loss) that is not subject to self-employment tax.
Schedule F to report profit or (loss) from farming.
Schedule J to figure your tax by averaging your farming or fishing income over the previous 3 years. Doing so may reduce your tax.
Schedule SE to pay self-employment tax on income from any trade or business.
Form 3800 to claim any of the general business credits.
Form 4562 to claim depreciation (including the special allowance) on assets placed in service in 2011, to claim amortization that began in 2011, to make an election under section 179 to expense certain property, or to report information on listed property.
Form 4684 to report a casualty or theft gain or loss involving property used in your trade or business or income-producing property.
Form 4797 to report sales, exchanges, and involuntary conversions (not from a casualty or theft) of trade or business property.
Form 6198 to figure your allowable loss if you have a business loss and you have amounts invested in the business for which you are not at risk.
Form 8582 to figure your deductible loss from passive activities.
Form 8594 to report certain purchases or sales of groups of assets that constitute a trade or business.
Form 8824 to report like-kind exchanges.
Form 8829 to claim expenses for business use of your home.
Form 8903 to take a deduction for income from domestic production activities.
If you received cash of more than $10,000 in one or more related transactions in your trade or business, you may have to file Form 8300. For details, see Pub. 1544.
If you and your spouse each materially participate (see Material participation, later, in the instructions for line G) as the only members of a jointly owned and operated business and you file a joint return for the tax year, you can make an election to be taxed as a qualified joint venture instead of a partnership. This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage. By making the election, you will not be required to file Form 1065 for any year the election is in effect and will instead report the income and deductions directly on your joint return. If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect.
Mere joint ownership of property that is not a trade or business does not qualify for the election.
Once made, the election can be revoked only with the permission of the IRS. However, the election technically remains in effect only for as long as the spouses filing as a qualified joint venture continue to meet the requirements for filing the election. If the spouses fail to meet the qualified joint venture requirements for a year, a new election will be necessary for any future year in which the spouses meet the requirements to be treated as a qualified joint venture.
The election generally does not require that you and your spouse obtain an employer identification number (EIN) since you and your spouse will file as sole proprietors. However, you may need an EIN to file other returns such as employment or excise tax returns. To apply for an EIN, see the Instructions for Form SS-4.
For more information on qualified joint ventures, go to IRS.gov. Enter “qualified joint venture” in the search box and select “Election for Husband and Wife Unincorporated Businesses.”
If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, the income and deductions are reported as follows.
If only one spouse participates in the business, all of the income from that business is the self-employment earnings of the spouse who carried on the business.
If both spouses participate, the income and deductions are allocated to the spouses based on their distributive shares.
If either or both you and your spouse are partners in a partnership, see Pub. 541.
If you and your spouse elected to treat the business as a qualifying joint venture, see Husband-Wife Qualified Joint Venture on this page.
The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity.
Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions.
Any listed transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
Any transaction offered to you or a related party under conditions of confidentiality for which you paid an advisor a fee of at least $50,000.
Certain transactions for which you or a related party have contractual protection against disallowance of the tax benefits.
Certain transactions resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership.)
Certain transactions of interest entered into after November 1, 2006, that are the same or substantially similar to one of the types of transactions that the IRS has identified by published guidance as a transaction of interest.
See the Instructions for Form 8886 for more details.
Do not claim on Schedule C or C-EZ the deduction for amounts contributed to a capital construction fund set up under chapter 535 of title 46 of the United States Code. Instead, reduce the amount you would otherwise enter on Form 1040, line 43, by the amount of the deduction. Next to line 43, enter “CCF” and the amount of the deduction. For details, see Pub. 595.
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Describe the business or professional activity that provided your principal source of income reported on line 1b-d. If you owned more than one business, you must complete a separate Schedule C for each business. Give the general field or activity and the type of product or service. If your general field or activity is wholesale or retail trade, or services connected with production services (mining, construction, or manufacturing), also give the type of customer or client. For example, “wholesale sale of hardware to retailers” or “appraisal of real estate for lending institutions.”
Enter on line D the employer identification number (EIN) that was issued to you on Form SS-4. Do not enter your SSN. Do not enter another taxpayer's EIN (for example, from any Forms 1099-MISC that you received). If you do not have an EIN, leave line D blank.
You need an EIN only if you have a qualified retirement plan or are required to file employment, excise, alcohol, tobacco, or firearms returns, or are a payer of gambling winnings. If you need an EIN, See the Instructions for Form SS-4.
Enter your business address. Show a street address instead of a box number. Include the suite or room number, if any. If you conducted the business from your home located at the address shown on Form 1040, page 1, you do not have to complete this line.
Generally, you can use the cash method, accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a qualifying taxpayer or a qualifying small business taxpayer (see the Part III instructions), you must use the accrual method for sales and purchases of inventory items. Special rules apply to long-term contracts (see Code section 460 for details).
If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends substantially beyond the close of the year, it may not be deductible or may be deductible only in part for the year of the payment. See chapter 1 of Pub. 535.
If you use the accrual method, report income when you earn it and deduct expenses when you incur them even if you do not pay them during the tax year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer. Other rules determine the timing of deductions based on economic performance. See Pub. 538.
To change your accounting method, you generally must file Form 3115. You also may have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.
Example.
You change to the cash method of accounting and choose to account for inventoriable items in the same manner as materials and supplies that are not incidental. You accrued sales in 2010 for which you received payment in 2011. You must report those sales in both years as a result of changing your accounting method and must make a section 481(a) adjustment to prevent duplication of income.
A net negative section 481(a) adjustment is taken into account entirely in the year of the change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the net section 481(a) adjustment is negative, report it in Part V.
For details on figuring section 481(a) adjustments, see the Instructions for Form 3115, and Rev. Proc. 2006-12, 2006-3 I.R.B.
310, available at
www.irs.gov/irb/2006-38_IRB/ar10.html.
If your business activity was not a rental activity and you met any of the material participation tests, explained next, or the exception for oil and gas applies (explained later), check the “Yes” box. Otherwise, check the “No” box. If you check the “No” box, this business is a passive activity. If you have a loss from this business, see Limit on losses, later. If you have a profit from this business activity but have current year losses from other passive activities or you have prior year unallowed passive activity losses, see the Instructions for Form 8582.
Work you did as an investor in an activity is not treated as participation unless you were directly involved in the day-to-day management or operations of the activity. Work done as an investor includes:
Studying and reviewing financial statements or reports on the activity,
Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
Monitoring the finances or operations of the activity in a nonmanagerial capacity.
Participation by your spouse during the tax year in an activity you own can be counted as your participation in the activity. This rule applies even if your spouse did not own an interest in the activity and whether or not you and your spouse file a joint return. However, this rule does not apply for purposes of determining whether you and your spouse can elect to have your business treated as a qualified joint venture instead of a partnership (see Husband-Wife Qualified Joint Venture, earlier).
For purposes of the passive activity rules, you materially participated in the operation of this trade or business activity during 2011 if you met any of the following seven tests.
You participated in the activity for more than 500 hours during the tax year.
Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year.
You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other person for the tax year. This includes individuals who did not own any interest in the activity.
The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500 hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4).
You materially participated in the activity for any 5 of the prior 10 tax years.
The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis for more than 100 hours during the tax year. Your participation in managing the activity does not count in determining if you meet this test if any person (except you) (a) received compensation for performing management services in connection with the activity, or (b) spent more hours during the tax year than you spent performing management services in connection with the activity (regardless of whether the person was compensated for the services).
Generally, you can deduct losses from passive activities only to the extent of income from passive activities. For details, see Pub. 925.
If you started or acquired this business in 2011, check the box on line H. Also check the box if you are reopening or restarting this business after temporarily closing it, and you did not file a 2010 Schedule C or C-EZ for this business.
If you made any payment in 2011 that would require you to file any Forms 1099, check the “Yes” box. Otherwise, check the “No” box.
You may have to file information returns for wages paid to employees, certain payments of fees and other non-employee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You may also have to file an information return if you sold $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other similar basis for resale.
On page 15 of the General Instructions for Certain Information Returns, you can find a chart showing which Forms 1099 must be filed, the amounts to report, and the due dates for the required Forms 1099.
Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. In certain circumstances, however, gross income does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873 to figure the extraterritorial income exclusion. Report it on Schedule C as explained in the Instructions for Form 8873.
If you were a debtor in a chapter 11 bankruptcy case during 2011, see Chapter 11 Bankruptcy Cases under Income in the instructions for Form 1040 and the Instructions for Schedule SE (Form 1040).
Enter gross receipts from your trade or business. If you received merchant card and third party network payments in 2011, you should receive a Form 1099-K for those payments. These payments should have been reported to you in box 1 of Form 1099-K, Merchant Card and Third Party Network Payments. Merchant cards include, but are not limited to, Visa and MasterCard. Third party networks include, but are not limited to, PayPal and Google Checkout. For 2011, you are not required to report income received via merchant card or third party network payers, so enter zero on line 1a and report all income, regardless of how it was received, on line 1b.
If you had both self-employment income and statutory employee income, you must file two Schedules C. You cannot use Schedule C-EZ or combine these amounts on a single Schedule C.
Qualified joint ventures should report rental real estate income not subject to self-employment tax on Schedule E. See Husband-Wife Qualified Joint Venture, earlier, and the Instructions for Schedule E.
If you use the installment method, attach a schedule to your return. Show separately for 2011 and the 3 preceding years: gross sales, cost of goods sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected.
Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you received in 2011, credit for biodiesel and renewable diesel fuels claimed on line 8 of Form 8864, credit for alcohol and cellulosic biofuel fuels claimed on line 7 of Form 6478, credit for federal tax paid on fuels claimed on your 2010 Form 1040, prizes and awards related to your trade or business, and other kinds of miscellaneous business income. Include amounts you received in your trade or business as shown on Form 1099-PATR.
If the business use percentage of any listed property (defined in the instructions for line 13) dropped to 50% or less in 2011, report on this line any recapture of excess depreciation, including any section 179 expense deduction. Use Part IV of Form 4797 to figure the recapture. Also, if the business use percentage drops to 50% or less on leased listed property (other than a vehicle), include on this line any inclusion amount. See chapter 5 of Pub. 946 to figure the amount.
Producers who account for inventoriable items in the same manner as materials and supplies that are not incidental can currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Part III. Cost of Goods Sold for more details.
If you are a freelance artist, author, or photographer, you may be exempt from the capitalization rules. However, your personal efforts must have created (or reasonably be expected to create) the property. This exception does not apply to any expense related to printing, photographic plates, motion picture films, video tapes, or similar items. These expenses are subject to the capitalization rules. For details, see Uniform Capitalization Rules in Pub. 538.
You can deduct the actual expenses of operating your car or truck or take the standard mileage rate. This is true even if you used your vehicle for hire (such as a taxicab). You must use actual expenses if you used five or more vehicles simultaneously in your business (such as in fleet operations). You cannot use actual expenses for a leased vehicle if you previously used the standard mileage rate for that vehicle.
You can take the standard mileage rate for 2011 only if you:
Owned the vehicle and used the standard mileage rate for the first year you placed the vehicle in service, or
Leased the vehicle and are using the standard mileage rate for the entire lease period (except the period, if any, before 1998).
If you take the standard mileage rate:
Multiply the number of business miles driven by 51 cents for miles driven before July 1, 2011, and 55.5 cents per mile for miles driven after June 30, 2011, and
Add to this amount your parking fees and tolls, and enter the total on line 9.
Do not deduct depreciation, rent or lease payments, or your actual operating expenses.
If you deduct actual expenses:
Include on line 9 the business portion of expenses for gasoline, oil, repairs, insurance, tires, license plates, etc., and
Show depreciation on line 13 and rent or lease payments on line 20a.
For details, see chapter 4 of Pub. 463.
Schedule C, Part IV, or Schedule C-EZ, Part III, if: (a) you are claiming the standard mileage rate, you lease your vehicle, or your vehicle is fully depreciated, and (b) you are not required to file Form 4562 for any other reason. If you used more than one vehicle during the year, attach your own schedule with the information requested in Schedule C, Part IV, or Schedule C-EZ, Part III, for each additional vehicle.
Form 4562, Part V, if you are claiming depreciation on your vehicle or you are required to file Form 4562 for any other reason (see the instructions for line 13).
Enter the total cost of contract labor for the tax year. Contract labor includes payments to persons you do not treat as employees (for example, independent contractors) for services performed for your trade or business. Do not include contract labor deducted elsewhere on your return, such as contract labor includible on line 17, 21, 26, or 37. Also, do not include salaries and wages paid to your employees; instead, see line 26.
You must file Form 1099-MISC, Miscellaneous Income, to report contract labor payments of $600 or more during the year. See the Instructions for Form 1099-MISC for details.
Enter your deduction for depletion on this line. If you have timber depletion, attach Form T. See chapter 9 of Pub. 535 for details.
Depreciation on property placed in service during 2011;
Depreciation on listed property (defined below), regardless of the date it was placed in service; or
A section 179 expense deduction.
If you acquired depreciable property for the first time in 2011, see Pub. 946.
Listed property generally includes but is not limited to:
Passenger automobiles weighing 6,000 pounds or less;
Any other property used for transportation if the nature of the property lends itself to personal use, such as motorcycles, pickup trucks, etc.;
Any property used for entertainment or recreational purposes (such as photographic, phonographic, communication, and video recording equipment); and
Computers or peripheral equipment.
See the instructions for line 6 if the business use percentage of any listed property dropped to 50% or less in 2011.
Deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan included on line 19. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs. If you made contributions on your behalf as a self-employed person to a dependent care assistance program, complete Form 2441, Parts I and III, to figure your deductible contributions to that program.
You cannot deduct contributions you made on your behalf as a self-employed person for group-term life insurance.
Do not include on line 14 any contributions you made on your behalf as a self-employed person to an accident and health plan. However, you may be able to deduct on Form 1040, line 29, or Form 1040NR, line 29, the amount you paid for health insurance on behalf of yourself, your spouse, and dependents, even if you do not itemize your deductions. See the instructions for Form 1040, line 29, or Form 1040NR, line 29, for details.
You must reduce your line 14 deduction by the amount of any credit for small employer health insurance premiums determined on Form 8941. See Form 8941 and its instructions to determine which expenses are eligible for the credit.
Deduct premiums paid for business insurance on line 15. Deduct on line 14 amounts paid for employee accident and health insurance. Do not deduct amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for your lost earnings due to sickness or disability. For details, see chapter 6 of Pub. 535.
Generally, you allocate interest expense by tracing how the proceeds of the loan were used. See chapter 4 of Pub. 535 for details.
If you paid interest on a debt secured by your main home and any of the proceeds from that debt were used in connection with your trade or business, see chapter 4 of Pub. 535 to figure the amount that is deductible on Schedule C or C-EZ.
If you paid more mortgage interest than is shown on Form 1098, see chapter 4 of Pub. 535 to find out if you can deduct the additional interest. If you can, include the amount on line 16a. Attach a statement to your return explaining the difference and enter “See attached” in the margin next to line 16a.
If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on the mortgage and the other person received the Form 1098, include your share of the interest on line 16b. Attach a statement to your return showing the name and address of the person who received the Form 1098. In the margin next to line 16b, enter “See attached.”
If you paid interest in 2011 that also applies to future years, deduct only the part that applies to 2011.
Include on this line fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business.
Include fees for tax advice related to your business and for preparation of the tax forms related to your business. Also include expenses incurred in resolving asserted tax deficiencies relating to your business.
For more information, see Pub. 334 or 535.
Enter your deduction for contributions to a pension, profit-sharing, or annuity plan, or plan for the benefit of your employees. If the plan included you as a self-employed person, enter contributions made as an employer on your behalf on Form 1040, line 28, or Form 1040NR, line 28, not on Schedule C.
In most cases, you must file the applicable form listed below if you maintain a pension, profit-sharing, or other funded-deferred compensation plan. The filing requirement is not affected by whether or not the plan qualified under the Internal Revenue Code, or whether or not you claim a deduction for the current tax year. There is a penalty for failure to timely file these forms.
For details, see Pub. 560.
If you rented or leased vehicles, machinery, or equipment, enter on line 20a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an amount called the inclusion amount. See Leasing a Car in chapter 4 of Pub. 463 to figure this amount.
Enter on line 20b amounts paid to rent or lease other property, such as office space in a building.
Deduct the cost of incidental repairs and maintenance that do not add to the property's value or appreciably prolong its life. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized.
In most cases, you can deduct the cost of materials and supplies only to the extent you actually consumed and used them in your business during the tax year (unless you deducted them in a prior tax year). However, if you had incidental materials and supplies on hand for which you kept no inventories or records of use, you can deduct the cost of those you actually purchased during the tax year, provided that method clearly reflects income.
You can also deduct the cost of books, professional instruments, equipment, etc., if you normally use them within a year. However, if their usefulness extends substantially beyond a year, you must generally recover their costs through depreciation.
You can deduct the following taxes and licenses on this line.
State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you must also include the amount collected in gross receipts or sales on line 1.
Real estate and personal property taxes on business assets.
Licenses and regulatory fees for your trade or business paid each year to state or local governments. But some licenses, such as liquor licenses, may have to be amortized. See chapter 8 of Pub. 535 for details.
Social security and Medicare taxes paid to match required withholding from your employees' wages. Reduce your deduction by the amount shown on Form 8846, line 4.
Federal unemployment tax paid.
Federal highway use tax.
Contributions to state unemployment insurance fund or disability benefit fund if they are considered taxes under state law.
Do not deduct the following.
Federal income taxes, including your self-employment tax. However, you can deduct a portion of your self-employment tax on Form 1040, line 27, (or Form 1040NR, line 27, when covered under the U.S. social security system due to an international social security agreement).
Estate and gift taxes.
Taxes assessed to pay for improvements, such as paving and sewers.
Taxes on your home or personal use property.
State and local sales taxes on property purchased for use in your business. Instead, treat these taxes as part of the cost of the property.
State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6.
Other taxes and license fees not related to your business.
Enter your expenses for lodging and transportation connected with overnight travel for business while away from your tax home. In most cases, your tax home is your main place of business, regardless of where you maintain your family home. You cannot deduct expenses paid or incurred in connection with employment away from home if that period of employment exceeds 1 year. Also, you cannot deduct travel expenses for your spouse, your dependent, or any other individual unless that person is your employee, the travel is for a bona fide business purpose, and the expenses would otherwise be deductible by that person.
Do not include expenses for meals and entertainment on this line. Instead, see the instructions for line 24b.
Instead of keeping records of your actual incidental expenses, you can use an optional method for deducting incidental expenses only if you did not pay or incur meal expenses on a day you were traveling away from your tax home. The amount of the deduction is $5 a day. Incidental expenses include fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries. They do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls. You cannot use this method on any day that you use the standard meal allowance (as explained in the instructions for line 24b).
You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless the meeting is directly related to your trade or business and it is as reasonable for the meeting to be held outside the North American area as within it. These rules apply to both employers and employees. Other rules apply to luxury water travel.
For details on travel expenses, see chapter 1 of Pub. 463.
Enter your total deductible business meal and entertainment expenses. This includes expenses for meals while traveling away from home for business and for meals that are business-related entertainment.
You cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement, or recreation.
Also, you cannot deduct membership dues for any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion. But it does not include civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests.
There are exceptions to these rules as well as other rules that apply to sky-box rentals and tickets to entertainment events. See chapters 1 and 2 of Pub. 463.
The standard meal allowance is the federal M&IE rate. You can find these rates on the Internet at www.gsa.gov. Click on “Per Diem Rates” for links to locations inside and outside the continental United States.
See chapter 1 of Pub. 463 for details on how to figure your deduction using the standard meal allowance, including special rules for partial days of travel.
Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
Interstate truck operators who are under DOT regulations.
Certain merchant mariners who are under Coast Guard regulations.
However, you can fully deduct meals, incidentals, and entertainment furnished or reimbursed to an employee if you properly treat the expense as wages subject to withholding. You can also fully deduct meals, incidentals, and entertainment provided to a nonemployee to the extent the expenses are includible in the gross income of that person and reported on Form 1099-MISC. See Pub. 535 for details and other exceptions.
Deduct utility expenses only for your trade or business.
Enter the total salaries and wages for the tax year. Do not include salaries and wages deducted elsewhere on your return or amounts paid to yourself. Reduce your deduction by the amounts claimed on:
Form 5884, Work Opportunity Credit, line 2;
Form 8844, Empowerment Zone and Renewal Community Employment Credit, line 2;
Form 8845, Indian Employment Credit, line 4; and
Form 8932, Credit for Employer Differential Wage Payments, line 2.
If you provided taxable fringe benefits to your employees, such as personal use of a car, do not deduct as wages the amount applicable to depreciation and other expenses claimed elsewhere.
In most cases, you are required to file Form W-2, Wage and Tax Statement, for each employee. See the Instructions for Forms W-2 and W-3.
If you have a loss, the amount of loss you can deduct this year may be limited. Go to line 32 before entering your loss on line 31. If you answered “No” on line G or are a qualified joint venture reporting only rental real estate, also see the Instructions for Form 8582. Enter the net profit or deductible loss here. Combine this amount with any profit or loss from other businesses and enter the total on both Form 1040, line 12, and Schedule SE, line 2, or on Form 1040NR, line 13. Nonresident aliens using Form 1040NR should also enter the total on Schedule SE, line 2, if you are covered under the U.S. social security system due to an international social security agreement currently in effect. See the Schedule SE instructions for information on international social security agreements. Estates and trusts should enter the total on Form 1041, line 3.
To figure your EIC, use the instructions for Form 1040, lines 64a and 64b. Complete all applicable steps plus Worksheet B. If you are required to file Schedule SE, remember to enter the deductible portion of your self-employment tax in Part 1, line 1d, of Worksheet B.
Check box 32b if you have amounts invested in this business for which you are not at risk, such as the following.
Nonrecourse loans used to finance the business, to acquire property used in the business, or to acquire the business that are not secured by your own property (other than property used in the business). However, there is an exception for certain nonrecourse financing borrowed by you in connection with holding real property.
Cash, property, or borrowed amounts used in the business (or contributed to the business, or used to acquire the business) that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).
Amounts borrowed for use in the business from a person who has an interest in the business, other than as a creditor, or who is related under section 465(b)(3)(C) to a person (other than you) having such an interest.
If all amounts are at risk in this business, check box 32a. If you answered “Yes” on line G, enter your loss on line 31. But if you answered “No” on line G, you may need to complete Form 8582 to figure your allowable loss to enter on line 31. See the Instructions for Form 8582 for details.
Any loss from this business not allowed for 2011 only because of the at-risk rules is treated as a deduction allocable to the business in 2012.
For details, see the Instructions for Form 6198 and Pub. 925.
In most cases, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.
This is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less, and (b) whose business is not a tax shelter (as defined in section 448(d)(3)).
This is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $10 million or less, (b) whose business is not a tax shelter (as defined in section 448(d)(3)), and (c) whose principal business activity is not an ineligible activity as explained in Rev. Proc. 2002-28. You can find Rev. Proc. 2002-28 on page 815 of Internal Revenue Bulletin 2002-18 at www.irs.gov/pub/irs-irbs/irb02-18.pdf.
File Form 3115 if you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies.
For additional guidance on this method of accounting for inventoriable items, see the following.
Pub. 538 discusses both exceptions.
If you are a qualifying taxpayer, see Rev. Proc. 2001-10, on page 272 of Internal Revenue Bulletin 2001-2 at
www.irs.gov/pub/irs-irbs/irb01-02.pdf.
If you are a qualifying small business taxpayer, see Rev. Proc. 2002-28, on page 815 of Internal Revenue Bulletin 2002-18 at www.irs.gov/pub/irs-irbs/irb02-18.pdf .
Your inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS. However, you are required to use cost if you are using the cash method of accounting.
If you are changing your method of accounting beginning with 2011, refigure last year's closing inventory using your new method of accounting and enter the result on line 35. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring your section 481(a) adjustment. For details, see the example under Line F.
In most cases, commuting is travel between your home and a work location. If you converted your vehicle during the year from
personal to business use (or vice versa), enter your commuting miles only for the period you drove your vehicle for business. For information on certain travel that
is considered a business expense rather than commuting, see the Instructions for
Form 2106.
Include all ordinary and necessary business expenses not deducted elsewhere on Schedule C. List the type and amount of each expense separately in the space provided. Enter the total on lines 48 and 27a. Do not include the cost of business equipment or furniture, replacements or permanent improvements to property, or personal, living, and family expenses. Do not include charitable contributions. Also, you cannot deduct fines or penalties paid to a government for violating any law. For details on business expenses, see Pub. 535.
You can elect to amortize such costs as:
The cost of pollution-control facilities;
Amounts paid for research and experimentation;
Qualified revitalization expenditures;
Amounts paid to acquire, protect, expand, register, or defend trademarks or trade names; or
Goodwill and certain other intangibles.
In most cases, you cannot amortize real property construction period interest and taxes. Special rules apply for allocating interest to real or personal property produced in your trade or business.
For a complete list, see the Instructions for Form 4562, Part VI.
For details, see chapters 7 and 8 of Pub. 535. For amortization that begins in 2011, you must complete and attach Form 4562.
You can elect to amortize the remaining costs over 84 months. For amortization that begins in 2011, you must complete and attach Form 4562.
The amortization election does not apply to trusts, and the expense election does not apply to estates and trusts. For details on reforestation expenses, see chapters 7 and 8 of Pub. 535.
These codes for the Principal Business or Professional Activity classify sole proprietorships by the type of activity they are engaged in to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS).
Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.