How to Prepare the Easy Part of Schedule C

Are you a Sole Proprietor who faces the daunting task of filling out Schedule C every year? If you break out into a sweat just thinking about, you came to the right place. To get the most out of this article, get a copy of Schedule C and have it in front of you as you read on. You can open up your tax return software program to Schedule C, download a copy from the IRS website, or use the printed paper version from a recently filed return.

Schedule C does have a few tricky parts, but it starts out nice and easy. Let's take a look at the section at the very top of the page, what I call "The Easy Part."

Name - this should be your full legal personal name in the same format as it appears on Form 1040, Page 1. Important: Do not put your business name here; that goes on Line C.

Social security number - again, make sure this matches your Form 1040 info.

Then comes information that is labeled alphabetically from A to H.
A - Principal business or profession. Use a brief description of the business activity, such as "pest control" or "retail store" or "consultant".
B - This is a numeric code for your particular business. Refer to the chart on pages 9-11 of the instructions to find the right code for your business. If you are using a software program, this chart is likely built right into the program.
C - Business name. If you have one, put that in here. If you don't have a separate business name, which is quite common among self-employed people, leave this line blank.
D - Employer ID number. If you have employees, you should have an Employer ID number, aka the Federal ID number. But it you don't have employees, you probably don't have an Employer ID (which is OK); if that's the case, leave this blank.
E - Business address. If you have a business address that is different than the home address listed on Form 1040, Page 1, put that here. Otherwise, just use your home address.
F - Accounting method. There are three choices: Cash, Accrual, and Other. Most Sole Proprietors use the Cash method, which means that you report income when it is received and you report expenses when they are paid. The Accrual method means that you report income when you have earned the right to receive it, regardless of when it is actually received; and you report expenses when you are legally obligated to pay them, regardless of when you actually pay them. The "Other" method is used by those who do a combination of both Cash and Accrual. If you are not sure which method to pick, you can read up on this in the Schedule C instructions or consult a tax professional.
G - This is a question: Did you "materially participate" in the operation of this business during the year? If you were involved in the business, check "Yes."
H - Another question: If you started or acquired this business during the year, check the box. That's a pretty easy question to answer - in other words, is this the first year for this Sole Proprietorship? If so, check the box. If not, leave it blank.