Schedule C: Line-by-Line Guide for Sole Proprietors

TaxKiln Editorial · Last reviewed: May 25, 2026

Schedule C reports the profit or loss from a sole proprietorship or single-member LLC on Form 1040. Gross receipts on line 1, returns and COGS reduce to gross income on line 7, Part II expenses produce tentative profit on line 28, and home office on line 30 produces net profit on line 31 that flows to Schedule 1 and Schedule SE.

Part I — Income

Line 1 reports gross receipts or sales — every 1099-NEC and 1099-K plus cash and check income. Line 2 subtracts returns and allowances. Line 4 subtracts cost of goods sold (computed in Part III). Line 6 adds other income (interest on business accounts, bad debt recoveries). Line 7 is gross income — the figure the IRS reconciles against third-party 1099 reporting.

Part II — Expenses

Lines 8–27 capture the deductible expense categories: advertising, car and truck (Part IV), commissions, contract labor, depreciation (Form 4562), insurance, interest, legal and professional, office, rent, repairs, supplies, taxes and licenses, travel, deductible meals (50%), utilities, wages, and other expenses (with itemised list). Each line is an IRS audit lens — group expenses to match the line categories cleanly.

Part III — Cost of Goods Sold

Required if you sell inventory. Beginning inventory + purchases + labor + materials and supplies + other costs − ending inventory = COGS. Small businesses with average annual gross receipts ≤ $30 million (2026 threshold under §471(c)) may use the cash method and treat inventory as non-incidental materials and supplies.

Part IV — Vehicle information

If you deduct car and truck expenses on line 9, Part IV captures business miles, commuting miles, other personal miles, and whether you have written evidence of business use. The 2026 standard mileage rate is set by IRS Rev. Proc. each November. The actual-expense method requires receipts and a depreciation schedule.

Line 30 — Home office deduction

Simplified method: $5 per square foot, capped at 300 sq ft for a maximum $1,500. Regular method: business-use-percentage of actual home expenses on Form 8829, including utilities, insurance, repairs, and a depreciation component (with future recapture on sale).

Common mistakes

- Mixing personal and business expenses on a single card or account, then attempting to allocate after the fact. - Failing to issue Form 1099-NEC to contractors paid ≥ $600 (which can disallow the deduction on audit). - Deducting commuting miles between home and a regular work location. - Taking a home office deduction without meeting the exclusive-and-regular-use test. - Reporting 1099-K gross before fees — the gross amount is reportable on line 1; the fees are deducted on line 10 or 17.

Worked example: Maya Ortiz, freelance UX designer (Austin, TX)

Maya invoiced $112,000 of design work in 2026. She received six 1099-NEC forms totalling $98,000 plus $14,000 paid through her business checking account. Direct expenses: software subscriptions $4,200, professional development $1,800, contract labor $6,500 (issued 1099-NEC), business insurance $1,400, home office 180 sq ft (simplified method).

Line 1 Gross receipts: $112,000 Line 7 Gross income: $112,000 Line 17 Legal/professional + 22 Supplies (software/PD): $6,000 Line 11 Contract labor: $6,500 Line 15 Insurance: $1,400 Line 28 Total expenses: $13,900 Line 29 Tentative profit: $98,100 Line 30 Home office (180 × $5): $900 Line 31 Net profit: $97,200 → Schedule 1 line 3 and Schedule SE

Statute references

Trade or business deductions — IRC §162
Home office deduction (exclusive and regular use) — IRC §280A(c)
Principal place of business — administrative-or-management safe harbour codified after the Court rejected the home-office deduction for an anaesthesiologist whose home was not his principal place of business — Commissioner v. Soliman, 506 U.S. 168 (1993); IRC §280A(c)(1)(A) (1997 amendment)
Inventory cash-method election for small business — IRC §471(c)
Self-employment tax flow-through — IRC §1402(a)
Cohan rule — where the existence of a deductible expense is established but exact records are missing, the court may allow a reasonable estimate (does not apply to listed property or items subject to strict §274 substantiation) — Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930); IRC §274(d) (listed-property exception)

Last reviewed: May 25, 2026