IRS Instruction 1040 (Schedule C)

IRS Instruction 1040 (Schedule C) – If you’re a sole proprietor, freelancer, gig worker, or self-employed professional, understanding IRS Instructions for Schedule C (Form 1040) is essential for accurately reporting your business income and expenses. Schedule C calculates your net profit or loss from business operations, which flows directly to your Form 1040 and affects both income tax and self-employment tax.

This comprehensive guide, based on the official 2025 IRS instructions, walks you through who must file, key changes for 2025, and a step-by-step breakdown of the form. Always download the latest instructions and form from IRS.gov, and consult a tax professional or use reliable tax software for your specific situation.

Download the official PDF: Instructions for Schedule C (Form 1040) and the form itself from IRS.gov/ScheduleC.

What Is Schedule C (Form 1040)?

Schedule C, titled “Profit or Loss From Business (Sole Proprietorship),” reports income and deductible expenses from a business you operate as a sole proprietor or single-member LLC (treated as a disregarded entity). It also covers statutory employees, certain qualified joint ventures, and income reported on Forms 1099-NEC, 1099-MISC, or 1099-K.

An activity qualifies as a business if its primary purpose is income or profit and you conduct it with continuity and regularity. Hobby or sporadic activities generally do not qualify.

File a separate Schedule C for each business. Your net profit (or loss) on line 31 goes to Schedule 1 (Form 1040) and may require Schedule SE for self-employment tax.

Who Must File Schedule C in 2025?

You generally need to file Schedule C if you:

  • Operated a business or practiced a profession as a sole proprietor.
  • Are a statutory employee (e.g., full-time life insurance salesperson, certain commission drivers) with wages reported on Form W-2 where the “statutory employee” box is checked.
  • Participate in a qualified joint venture with your spouse (both materially participate, file jointly, and elect this treatment).
  • Received business income on 1099 forms that requires reporting as self-employment income.
  • Are a single-member LLC (unless you elected corporate taxation).

Exceptions and notes: Use Schedule F for farming. Rental real estate typically goes on Schedule E unless you qualify as a real estate professional or elect qualified joint venture treatment. Report excess business losses on Form 461.

What’s New for Tax Year 2025?

Key updates in the 2025 instructions include:

  • Standard mileage rate — 70 cents per mile for business use of your car.
  • Bonus depreciation — 100% for certain qualified property placed in service after January 19, 2025 (or elect prior phase-down rates).
  • Section 179 deduction — Maximum $2.5 million, phased out if property placed in service exceeds $4 million.
  • New reporting lines — Line 27a for energy efficient commercial buildings deduction (Form 7205); line 27b for other expenses from Part V.
  • New personal deductions on Schedule 1-A — Qualified tips (up to $25,000), qualified overtime (up to $12,500 single/$25,000 joint), and personal portion of car loan interest for mixed-use vehicles.
  • Business meals — Remain at 50% deductibility.
  • Domestic research and experimental expenditures — Deduct currently or capitalize and amortize over 60+ months.
  • Qualified sound recording productions — Potential deduction up to $150,000 for qualifying costs in a specific window.
  • Form 1040-SS filers — Now use Schedule C for business use of home expenses (replaces prior Part IV).

Other reminders: Excess business loss limitation via Form 461, gig economy resources at IRS.gov/Gig, and lowered e-filing thresholds for information returns.

Step-by-Step Guide to Completing Schedule C (Form 1040)

General Information (Lines A–J)

  • Line A — Describe your principal business or profession (e.g., “freelance graphic design services”).
  • Line B — Enter the 6-digit Principal Business Activity (PBA) code from the IRS list (NAICS-based; e.g., 541430 for graphic design).
  • Line C — Business name (if any).
  • Line D — Employer Identification Number (EIN) if you have one (recommended for most businesses).
  • Line E — Business address (street, no P.O. box).
  • Line F — Accounting method: Cash, accrual, or other (most small businesses use cash).
  • Line G — Did you materially participate? (Yes/No; affects passive loss rules).
  • Line H — Check if you started or acquired the business in 2025.
  • Line I/J — Did you make payments requiring Forms 1099? (Yes/No and confirmation of filing).

Part I: Income (Lines 1–7)

  • Line 1 — Gross receipts or sales (include 1099-NEC amounts; check box for statutory employee income from W-2).
  • Line 2 — Returns and allowances.
  • Line 3 — Subtract line 2 from line 1.
  • Line 4 — Cost of goods sold (from Part III).
  • Line 5 — Gross profit.
  • Line 6 — Other income (e.g., tax refunds, prizes, recovered bad debts).
  • Line 7 — Gross income (add lines 5 and 6).

Special rules: Report full Medicaid waiver payments on line 1 if applicable, then deduct the nontaxable portion in Part V (reference “Notice 2014-7”).

Part II: Expenses (Lines 8–30)

Deduct ordinary and necessary business expenses. Capitalize certain costs (e.g., inventory-related) unless you qualify for small business exceptions.

Common deductible categories include:

  • Advertising (line 8)
  • Car and truck expenses (line 9) — Standard mileage (70¢/mile) or actual expenses; complete Part IV.
  • Commissions and fees (line 10)
  • Contract labor (line 11) — Independent contractors (issue 1099-NEC if ≥$600).
  • Depreciation and Section 179 (line 13) — Use Form 4562.
  • Insurance (line 15), interest (line 16), legal/professional fees (line 17), office expense (line 18).
  • Rent or lease (line 20)
  • Repairs and maintenance (line 21), supplies (line 22), taxes and licenses (line 23).
  • Travel (line 24a) and deductible meals (line 24b — 50% limit, with records of business purpose).
  • Utilities (line 25), wages (line 26).
  • Energy efficient commercial buildings (new line 27a) and other expenses (line 27b from Part V).

Line 28 — Total expenses (before home office).
Line 29 — Tentative profit or loss.
Line 30 — Business use of your home (Form 8829 for actual method or simplified method worksheet: $5 per sq ft, max 300 sq ft).

Home office rules: The space must be used regularly and exclusively for business. Simplified method has a gross income limitation.

Part III: Cost of Goods Sold (Lines 33–42)

Required if you sell merchandise and maintain inventory (unless small business exception: average gross receipts ≤ $31 million and treat as nonincidental materials/supplies).

Calculate beginning inventory + purchases + labor/other costs – ending inventory.

Part IV: Information on Your Vehicle

Provide details if claiming car/truck expenses: date placed in service, total miles, business miles, commuting miles, etc. Strong recordkeeping is required (mileage logs).

Part V: Other Expenses (Line 48)

List miscellaneous ordinary/necessary expenses not reported elsewhere (e.g., amortization, startup costs up to $5,000, bad debts, de minimis safe harbor for tangible property up to $2,500–$5,000, barrier removal for accessibility).

Total flows to line 27b.

Line 31: Net Profit or Loss — Subtract line 30 from line 29. Positive amounts go to Schedule 1 and Schedule SE (self-employment tax). Losses may be limited by at-risk (Form 6198) or passive activity rules (Form 8582) and excess business loss rules (Form 461).

Recordkeeping and Common Mistakes to Avoid

Maintain accurate records for income, expenses, vehicle use, home office, and meals (who, when, where, business purpose). Electronic records are acceptable if they meet IRS standards (see Pub. 583).

Common pitfalls:

  • Mixing personal and business expenses.
  • Failing to issue or report 1099s.
  • Incorrect vehicle or home office documentation.
  • Missing capitalization rules for inventory or improvements.
  • Overlooking self-employment tax (15.3% on net earnings).

Tax Implications and Tips for Self-Employed Individuals

Your Schedule C net profit is subject to self-employment tax (calculated on Schedule SE) and may qualify for the Qualified Business Income (QBI) deduction (up to 20% via Form 8995 or 8995-A). Pay estimated taxes quarterly to avoid penalties.

Maximize deductions legally:

  • Home office, vehicle, health insurance, retirement contributions.
  • Track all ordinary and necessary expenses.

For gig economy workers, visit IRS.gov/Gig.

Resources and Next Steps

  • Official IRS page: IRS.gov/ScheduleC
  • Publication 334: Tax Guide for Small Business
  • Publication 463: Travel, Gift, and Car Expenses
  • Publication 587: Business Use of Your Home
  • Small Business and Self-Employed Tax Center: IRS.gov/SmallBiz

Tax rules are complex and subject to change. This guide summarizes the 2025 instructions for educational purposes and is not a substitute for professional tax advice. Review your specific circumstances with a qualified tax preparer or CPA, especially for depreciation, at-risk rules, or new 2025 provisions.

Filing accurately with proper documentation helps you claim all eligible deductions while staying compliant. Start gathering your records early and consider tax software that automates Schedule C calculations.

Last updated based on IRS publications as of early 2026. Always verify with the latest official documents.