Schedule C (Profit or Loss from Business)

Detailed Explanation

Schedule C is the heart of the self-employed individual's tax return. It captures gross receipts (Part I), then subtracts cost of goods sold (Part III, for businesses with inventory) and operating expenses (Part II, including advertising, car/truck, contract labor, depreciation, insurance, legal/professional, office, rent, supplies, utilities, wages, and other) to compute net profit or loss. Net profit flows in two directions simultaneously: (1) as ordinary income on Form 1040 line 8 (via Schedule 1), and (2) to Schedule SE for self-employment tax of 15.3% on the first $184,500 of 92.35% of net SE income for 2026, plus 2.9% Medicare with no cap, plus 0.9% Additional Medicare above $200K single / $250K MFJ. Self-employed taxpayers deduct half of SE tax above the line on Schedule 1 to compute AGI. Schedule C income is also QBI under Section 199A, eligible for the 20% QBI deduction subject to phaseouts. Common deduction categories require contemporaneous substantiation: vehicle expenses (use Form 4562 if depreciating, mileage log either way), home office (Form 8829 if actual method, simplified $5/sq ft up to $1,500 if not), business meals (50% deductible), and Section 179 equipment expensing (up to $2.56M in 2026, phased out above $4.09M in total purchases). Persistent Schedule C losses (3+ years out of 5) may trigger hobby-loss reclassification under Section 183, disallowing the loss. For consistent net profit above roughly $50,000 to $80,000, electing S-Corp status often saves significant SE tax.