Business / Self Employment / Sole Proprietorship

Most people who individually engage in an activity for the purpose of making a profit (with the exception of wage earners and investors) are sole proprietors of a business.  This is also referred to as being self employed or an independent contractor.  In the eyes of the IRS they are all the same and you report the income and expenses from these activities on either Form 1040, Schedule C, Profit or Loss From Business, or on Form 1040, Schedule C-EZ, Net Profit From Business.  You are a sole proprietor if you own an unincorporated business, including a limited liability company, by yourself.

If you conduct your business activity under a different legal structure, such as a corporation or partnership, you need to prepare tax returns for those entities and report your share of the income allocated to you on your K-1 or as dividends received and reported on a 1099-DIV. 

More than one Business.  If you have more than one sole proprietorship business, or if you and your spouse have separate businesses, you must use a separate Schedule C for each business.

Business Expenses.  The expenses you deduct must be reasonable and necessary for conducting the business.   

Depreciation and Amortization.  You will take depreciation or amortization expense for assets you used in the business.

Business Use of Home.  If you use part of your home in your business, you should complete Form 8829 Expenses for Business Use of Your Home. For more information, refer to Publication 587, Business Use of Your Home (Including Use by Day–Care Providers).

Profit of Loss.  The difference between your gross receipts and our total expenses is your net profit or loss. Report net profit or loss on your Form 1040.

Self Employment Tax.  If the total of your net earnings from all businesses is $400 or more, you must compute your self–employment tax on Form 1040 Schedule SE, Self-Employment Tax.

Business Losses.  Some people are under the impression that they must make a profit on their business 3 out of 5 years to be able to consider it a business for tax purposes.  This not true.  Making a profit 3 out of 5 years will give the IRS less reason to question the business loss but just because your business is not successful does not mean you can not claim the loss.  You must be able to demonstrate that your motivation for carrying out the activity is primarily to make a profit and not done solely for personal enjoyment.  One way of doing this to show that you conduct your business in a manner that is similar to profitable businesses. 

Organize your Business Data with this Download Business Activity (requires Microsoft Excel)

If you are new in business, refer to Publication 583, Starting a Business and Keeping Records.

For more information, refer to: Publication 334, Tax Guide for Small Business, Form 1040 Instructions, or Publication 17.