How to Prepare Part I of Schedule C

Are you a Sole Proprietor and prepare your own tax return every year? Do you ever need some help with Schedule C? Get out a copy of Schedule C and let's take a look at Part I, Income. The purpose of Part I is to report your income, aka "sales" or "revenue". In other words, how much money did you make during the year from the sale of products or services.

Service-based businesses. If your business sells a service but no product, you've got it easy. The only line you will fill out in Part I is Line 1, Gross receipts or sales. The one critical question you must know the answer to in order to correctly report income is this: do you use the Cash method or the Accrual method of accounting? Simply look up to Line F and see which box you checked.

If you use the Cash method, then you should report all income that customers/clients actually paid you in the current year. So if you did some work in December but have yet to receive payment as of December 31, you will not include that in your annual sales total. Assuming you get paid for that work in the following year, you will report that payment as income on the following year's return. If you use the Accrual method, you must report all income for work you've done and invoiced in the current tax year, regardless of whether you've been paid for it in that year.

If all your income comes from the sale of services, you will put your annual sales total on Line 1 and you are done with Part I. Lines 2-6 will have zeroes and Line 7 will be the same as Line 1. Easy enough?

Product-based businesses. If you sell a product, you've got more work to do in Part I than a service-only business. After putting your total product sales amount in Line 1, you've also got to put amounts in Lines 2-5 as follows: Line 2 - Returns and allowances. Any product returns must be reported here. Line 3 - Subtract Line 2 from line 1 and put the difference on Line 3. Line 4 - Cost of Goods Sold. This amount will come from Line 42 on Schedule C, Page 2, which is the section of Schedule C known as Part III, Cost of Goods Sold. So you must complete Part III before you can put a number in Line 4. So go over to Part III and complete Lines 33-42; then take the total from Line 42 and transfer it to Line 4. Line 5 - Gross profit. Subtract Line 4 from Line 3 and put the difference in Line 5. "Gross profit" is the amount of profit you made from the sale of your products.

That's an overview of Schedule C, Part I. Follow these simple instructions and you can complete this form without breaking into a sweat.


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Wayne Davies is the Internet's Top Tax Preparer and author of 3 ebooks on tax deduction strategies for small business owners and the self-employed. For a free copy of his Special Report, "How To Instantly Double Your Small Business Tax Deductions" visit YouSaveOnTaxes.