Income received and expenses paid in operating as a sole proprietor are reported on Schedule C, Profit or Loss from a Business.  A sole proprietor is someone who owns an unincorporated business by him/herself.  A sole proprietor can also be the sole member of a limited liability company (LLC) who is treated as a sole proprietor because they have not elected to treat the LLC as a corporation.  Income is all gross income received by an individual from any trade or business carried on by the sole proprietor, whether received directly or indirectly.  Expenses are costs incurred or paid in connection with selling products and services.  The following are examples of the types of business activities that generate gross income and expenses that should be reported on Schedule C.

Industries and Professions

Income and expenses from business activities listed below should be reported on Schedule C.  Adequate records should also be maintained in order to support the amounts reported.  Establishing a system that you understand can lead to long-term success.

• Agriculture
• Attorney (Lawyer)
• Artist
• Automation Tax
• Child ad Adult Care Facilities
• Electrical Services
• Fishing
• Gas Retailers
• Gig Economy
• Marijuana Industry
• Money Services Business Information Centers
• Painter
• Payroll Professionals
• Plumbing Services
• Real Estate Dealer
• Restaurants
• Trailer Park Owner
• Trucking

Income

Most of the income received from operating a business as a sole proprietor is reported on Schedule C, unless otherwise noted.  Schedule SE, Self-employment tax should also be completed to compute the tax due on the net earnings form the business.  Included are sources that can be reviewed for more information about treatment and reporting of the income.

• Damages – amounts received from patent infringement, breach of contract or fiduciary duty or anti-trust jury related to a trade or business are taxable income.
• Depreciable Property – gain from sale or exchange of depreciable property used in a trade or business is taxable income.
• Dividends – are distributions of money, stock, or other property paid to you by a corporation or mutual fund, partnership, estate, trust, or an association that is taxed as a corporation.  Amounts received from business activities are taxable income and are reported on Form 1099-DIV, Dividends and Distributions.
• Executor or Administrator fees – are fiduciaries of a deceased person’s estate and fees received for providing services are reported as taxable income.
• Interest income – are amounts received or credited to your account, that you can withdraw, from banks, savings and loans, governments, and other financial institutions that provide financial services.  These amounts are reported to you on Form 1099-INT, Interest Income.
• Gig Economy Income – also called the sharing economy or access economy is activity where people earn income for providing on-demand work, services, or goods.  Income received for providing these services are taxable income that may be reported on Form 1099-K, 1099-MISC, W-2, or other income statement.
• Lost Income Payments – amounts received from insurance and other sources when you reduce or stop your business activities is reportable as taxable income.
• Marijuana Dispensaries – income received from operating a marijuana dispensary in compliance with state law is taxable even though the federal government considers such business activity to be illegal.  Federal courts have upheld the IRS determination that state compliant marijuana dispensaries have taxable income.
• Newspaper Carrier or Distributor – who receives pay for providing this service and who signs a contract that they are not an employee should report the amounts received as taxable income.
• Notary Public – fees received for these services are taxable income but are not subject to self-employment tax.
• Original Issue Discount – is a form of interest that accrues over the term of the debt instrument, whether or not you actually receive any payment from the issuer of the debt.  Form 1099-OID will be issued for these amounts.
• Property – amounts received from property held primarily for sale to customers is taxable income.
• Punitive Damages – amounts received from a court decision related to business activities are taxable income.
• Real Estate Agent – amounts received for performing services as a licensed real estate agent is taxable income if the you sign a contract that you will not be treated as an employee and substantially all of your pay directly relates to sales rather than hours worked.  Use Schedule E, Supplemental Income and Loss.
• Rental income – amounts received from rental, use, or occupancy of real property is taxable income that should be reported on Schedule E, Supplemental Income and Loss.  Amounts received from use of personal property is also taxable income that should be reported on Schedule C, Profit or Loss from a Business.
• Securities Dealers – are persons who deal or trade in options or commodities such as regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and other property.  Gain or loss from these transactions are taxable income.  See Internal Revenue Code section 1256 and 1402(i).
• Securities Trader – is a person engaged in the business of buying and selling securities for your own account.  Gain or loss from these transactions are taxable income.
• Virtual Currency – VC is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.  VC transactions are taxable as a transaction in property.

Expenses

Business expenses that are ordinary and necessary can be used to reduce gross income.  This would include: (i) business use of your home expenses such as mortgage interest, insurance, taxes, utilities, repairs, and depreciation; (ii) business use of your car; (iii) pay to employees for performing business services; (iv) payments to retirement plans for yourself and your employees; (vi) rent for use of property in your trade or business; (vii) interest on business loans; and (viii) taxes paid to federal, state, local, and foreign governments.

In addition to the above expenses, some common expenses that can be deducted using Schedule C, E, and F include –

• Advertising
• Bad debt – a deduction is allowed if someone owes you money and you cannot collect it.
• Banking fees
• Car and truck – expenses related to operating a vehicle for use in your business.  Actual expenses can be claimed or a standard allowance.
• Costs of goods sold – are expenses required when there is a sale of inventory that represents a material amount of gross receipts.  The cost amount for an inventory item includes all costs to acquire or produce the item such as actual purchase price and delivery costs.
• Depreciation – is a recovery cost allowance for wear and tear, deterioration, or obsolescence of an asset.  You can elect to expense the cost of property or assets described in Internal Revenue Code section 179 and deduct it in the year the property or asset was placed in service or you first began to use it.  See Form 4562, Depreciation and Amortization.
• Donations to business organizations
• Education expenses
• Insurance – a deduction is allowed for (i) fire, theft, flood, or similar occurrences; (ii) credit insurance that covers loss from bad debts; (iii) group hospitalization and medical insurance; (iv) liability insurance; (v) malpractice insurance that covers personal liability for professional negligence that results in injury to a client or patient; (vi) workers’ compensation; (vii) contributions to state unemployment insurance; (viii) overhead insurance that pays for overhead expenses during long periods of disability caused by injury or sickness; (ix) car and vehicle insurance; (x) life insurance; (xi) business interruption that pays for lost profits if your business is shut down due to fire or other cause.
• Interest – a deduction is allowed for interest paid on debt related to your business.
• Labor and wages – a deduction is allowed for amounts paid to individuals who perform services in carrying out your business activities.  An individual is an employee if you exercise behavioral control or financial control of the individual.  See Pub. 1779, Independent Contractor or Employee for more information.  See also Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
• Legal and Professional fees – that are ordinary and necessary expenses directly related to operating your business are deductible.  Legal fees paid to acquire business assets are not deductible and should be added to the cost of the asset.
• License and Regulatory fees
• Repair and Maintenance to real or tangible personal property.
• Reimbursement of employee expenses – paid by an employee to carry out business activities.
• Tax Prep fees – are deductible along with fees paid to resolve tax inquiries and disputes.
• Taxes – such as income, employment, one-half of self-employment tax, personal property, real estate, sales, and excise.
• Transportation costs – for travel by airplane, bus, taxi, and train between home and business destination.