CARL WATTS & ASSOCIATES

March 25, 2019

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Schedule C
Profit or Loss from Business
A trade or business includes, but is not limited to:

  • Schedule C and Schedule F (Profit or Loss From Farming) activities;

  • being an employee;

  • certain activities reported on Schedule E (Supplemental Income and Loss).

If you report a loss on line 31 of your Schedule C (Form 1040), you may be subject to the new business loss limitation.

The disallowed loss resulting from this new limitation will not be reflected on line 31 of your Schedule C. Instead, use the new Form 461, Limitation on Business Losses, to determine the amount of your excess business loss, which will be included as income on Schedule 1, line 21. Any disallowed loss resulting from this limitation will be treated as a net operating loss that must be carried forward and deducted in a subsequent year.


Deduction For Qualified Business Income

For tax years beginning after 2017, you may be entitled to a deduction of up to 20% of your qualified business income from your qualified trade or businesses plus 20% of the aggregate amount of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership income.

The deduction is subject to various limitations, such as limitations based on the type of your trade or business, your taxable income, the amount of W-2 wages paid with respect to the qualified trade or business, and the unadjusted basis of qualified property held by your trade or business.

You can claim this deduction on Form 1040, not on Schedule C. Unlike other deductions, this deduction can be taken in addition to the standard or itemized deductions.



Business Interest Expense Limitation

For tax years beginning after Dec. 31, 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income, and floor plan financing interest (floor plan financing applies to dealers of self-propelled motor vehicles designed for transporting persons or property on a public street, highway, or road; boats; or self- propelled farm machinery or equipment.)

You must use new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report your deduction and the amount of disallowed business interest expense to carry forward to the next tax year.

This limit does not apply to taxpayers whose average annual gross receipts are $25 million or less for the three prior tax years. This amount will be adjusted annually for inflation starting in 2019.

Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities. Taxpayers must elect to exempt a real property trade or business or a farming business from this limit.

Deductions For Business Meal And Entertainment Expenses

You can no longer deduct entertainment expenses. You may still deduct 50% of your business meal expenses, that are not entertainment expenses, which include expenses for meals while traveling away from home for business.

Standard Mileage Rate

As you know, local transportation costs are deductible as business operating expenses if they are ordinary and necessary during the course of your business.

You have two options for deducting your vehicle expenses: you can use the standard mileage rate or you can deduct your actual expenses for gas, depreciation, and other driving costs.

Most people use the standard mileage rate because it is simpler and requires less record-keeping: You only need to keep track of how many business miles you drive, not the actual expenses for your car, such as the amount you pay for gas.

Under the standard mileage rate, you deduct a specified number of cents for every business mile you drive. The IRS sets the standard mileage rate each year. The business standard mileage rate for 2018 increased to 54.5 cents per mile.

For self-employed business owners the deduction of half of your self-employment tax is not a business deduction, it is an adjustment to gross income on your personal income tax return.


Also, owners of pass-through entities cannot treat their state and local income taxes on business income as a business write-off. These are personal taxes deductible only on Schedule A (and for 2018 through 2025, are subject to a $10,000 cap for all state and local taxes).

Of course, there are exceptions to what is or is not considered business income and business expense on your schedule C, and elsewhere on your tax return, so it is highly recommended that you enroll help from a professional to make sure that you include the right type of income on your tax return, take advantage of any deduction you may be entitled to, and pay the right amount of taxes you are legally required to.
There are more than 23 million sole proprietorships all over the country, making this the most common type of business entity in the U.S. A sole proprietorship is an unincorporated business owned by an individual.

The sole proprietorship is such a popular business form due to its simplicity, ease of setup, and nominal cost. while also giving you complete control of your business.




You are automatically considered to be a sole proprietorship if you do business activities but don't register as any other kind of business. A sole proprietorship has no existence apart from its owner. Therefore, business debts are personal debts of the owner.

A limited liability company (LLC) owned by one individual is treated as a sole proprietorship for federal income tax purposes, unless the owner elects to treat the LLC as a corporation.

If you are a sole proprietor, you already know that you must report all business income or losses on your personal income tax return; once again, the business itself is not taxed separately. The IRS calls this "pass-through" taxation, because business profits pass through the business to be taxed on your personal tax return.

You must use Schedule C 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.


Also, use Schedule C to report:

  1. wages and expenses you had as a statutory employee,

  2. income and deductions of certain qualified joint ventures, and

  3. certain income shown on Form 1099-MISC, Miscellaneous Income.

A statutory employee is an independent contractor under American common law who is treated as an employee, by statute, for purposes of tax withholdings For a standard independent contractor, an employer cannot withhold taxes.

Statutory employees are also permitted to deduct work-related expenses on IRS Schedule C instead of Schedule A. As a result, they are allowed a greater tax deduction for business expenses than standard employees.

Statutory employees must fall within any one of the following four categories (and meet the three conditions required by Social Security and Medicare taxes).


  • A driver who distributes beverages (other than milk) or meat, vegetable, fruit, or bakery products; or who picks up and delivers laundry or dry cleaning, if the driver is your agent or is paid on commission.

  • A full-time life insurance sales agent whose principal business activity is selling life insurance or annuity contracts, or both, primarily for one life insurance company.

  • An individual who works at home on materials or goods that you supply and that must be returned to you or to a person you name, if you also furnish specifications for the work to be done.

  • A full-time traveling or city salesperson who works on your behalf and turns in orders to you from wholesalers, retailers, contractors, or operators of hotels, restaurants, or other similar establishments. The goods sold must be merchandise for resale or supplies for use in the buyer’s business operation. The work performed for you must be the salesperson's principal business activity.




Small businesses and statutory employees with business expenses of $5,000 or less may be able to file Schedule C-EZ, which is the simplified version of Schedule C.

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.

As sole business owner, you will be taxed on all profits of the business (that’s total income minus expenses) regardless of how much money you actually withdraw from the business. Therefore, to keep your small business profitable, you should take every available business deduction on your Schedule C, and not only.


We have explored Schedule C and the business income and expenses topics many times in our newsletters. In this newsletter, we would like to concentrate more on the changes brought by the Tax Cuts and Jobs Act to sole proprietorships.

Excess Business Loss Limitation

Noncorporate taxpayers may be subject to excess business loss limitations.

An excess business loss is the amount by which the total deductions attributable to all of your trades or businesses exceed your total gross income and gains attributable to those trades or businesses plus $250,000 (or $500,000 in the case of a joint return).
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