| Instructions for Schedule C (Form 1040) (Revised 2004) |
2004 Tax Year |
Profit or Loss From Business
Specific Instructions
Filers of Form 1041.
Do not complete the block labeled “ Social security number (SSN).” Instead, enter your employer identification number (EIN) on line D.
Line A
Describe the business or professional activity that provided your principal source of income reported on line 1. If you owned
more than one
business, you must complete a separate Schedule C for each business. Give the general field or activity and the type of product
or service. If your
general field or activity is wholesale or retail trade, or services connected with production services (mining, construction,
or manufacturing), also
give the type of customer or client. For example, “wholesale sale of hardware to retailers” or “appraisal of real estate for lending
institutions.”
Line D
You need an employer identification number (EIN) only if you had a qualified retirement plan or were required to file an employment,
excise,
estate, trust, or alcohol, tobacco, and firearms tax return. If you need an EIN, see the Instructions for Form SS-4. If you
do not have an EIN, leave
line D blank. Do not enter your SSN.
Line E
Enter your business address. Show a street address instead of a box number. Include the suite or room number, if any. If you
conducted the business
from your home located at the address shown on Form 1040, page 1, you do not have to complete this line.
Line F Generally, you can use the cash method, accrual method, or any other method permitted by the Internal Revenue Code. In all
cases, the method used
must clearly reflect income. Unless you are a qualifying taxpayer or a qualifying small business taxpayer, you must use the
accrual method for sales
and purchases of inventory items. See the Part III instructions on page C-6 for the definition of a qualifying taxpayer and
a qualifying small
business taxpayer. Special rules apply to long-term contracts. See section 460 for details.
If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash,
property, or services).
Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually
paid during the year
for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends substantially
beyond the close
of the year, it may not be deductible or may be deductible only in part for the year of the payment. See Pub. 535.
If you use the accrual method, report income when you earn it and deduct expenses when you incur them even if you do not pay
them during the tax
year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer.
Other rules determine the
timing of deductions based on economic performance. See Pub. 538.
To change your accounting method, you generally must file Form 3115. You may also have to make an adjustment to prevent amounts
of income or
expense from being duplicated or omitted. This is called a section 481(a) adjustment.
Example.
You change to the cash method of accounting and choose to account for inventoriable items in the same manner as materials
and supplies that are not
incidental. You accrued sales in 2003 for which you received payment in 2004. You must report those sales in both years as
a result of changing your
accounting method and must make a section 481(a) adjustment to prevent duplication of income.
A net negative section 481(a) adjustment is taken into account entirely in the year of the change. A net positive section
481(a) adjustment is
generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the
net section 481(a)
adjustment is negative, report it in Part V.
For details on figuring section 481(a) adjustments, see the Instructions for Form 3115, Rev. Proc. 2004-23, 2004-16 I.R.B.
785, available at
www.irs.gov/irb/2004-16_IRB/ar11.html, and Rev. Proc. 2004-57,
2004-38 I.R.B. 498, available at
www.irs.gov/irb/2004-38_IRB/ar11.html.
Line G
If your business activity was not a rental activity and you met any of the material participation tests below or the exception
for oil and gas
applies (explained on page C-3), check the “Yes” box. Otherwise, check the “No” box. If you check the “No” box, this business is a
passive activity. If you have a loss from this business, see Limit on losses on page C-3. If you have a profit from this business activity
but have current year losses from other passive activities or you have prior year unallowed passive activity losses, see the
Instructions for Form
8582.
Material participation.
Participation, for purposes of the seven material participation tests listed below, generally includes any work you
did in connection with an
activity if you owned an interest in the activity at the time you did the work. The capacity in which you did the work does
not matter. However, work
is not treated as participation if it is work that an owner would not customarily do in the same type of activity and one
of your main reasons for
doing the work was to avoid the disallowance of losses or credits from the activity under the passive activity rules.
Work you did as an investor in an activity is not treated as participation unless you were directly involved in the
day-to-day management or
operations of the activity. Work done as an investor includes:
- Studying and reviewing financial statements or reports on the activity,
- Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
- Monitoring the finances or operations of the activity in a nonmanagerial capacity.
Participation by your spouse during the tax year in an activity you own can be counted as your participation in the
activity. This applies even if
your spouse did not own an interest in the activity and whether or not you and your spouse file a joint return.
For purposes of the passive activity rules, you materially participated in the operation of this trade or business
activity during 2004 if you met
any of the following seven tests.
- You participated in the activity for more than 500 hours during the tax year.
- Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals
(including
individuals who did not own any interest in the activity) for the tax year.
- You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any
other person for
the tax year. This includes individuals who did not own any interest in the activity.
- The activity is a significant participation activity for the tax year, and you participated in all significant participation
activities for
more than 500 hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you
participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any
of the material
participation tests (other than this test 4).
- You materially participated in the activity for any 5 of the prior 10 tax years.
- The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service
activity is
an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting,
actuarial science,
performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
- Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis
during the tax
year. But you do not meet this test if you participated in the activity for 100 hours or less during the tax year. Your participation
in managing the
activity does not count in determining if you meet this test if any person (except you) (a) received compensation for performing
management services
in connection with the activity or (b) spent more hours during the tax year than you spent performing management services
in connection with the
activity (regardless of whether the person was compensated for the services).
Rental of personal property.
A rental activity (such as long-term equipment leasing) is a passive activity even if you materially participated
in the activity. However, if you
met any of the five exceptions listed under Rental Activities in the Instructions for Form 8582, the rental of the property is not treated
as a rental activity and the material participation rules above apply.
Exception for oil and gas.
If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest
directly or through an
entity that does not limit your liability, check the “ Yes” box. The activity of owning the working interest is not a passive activity regardless
of your participation.
Limit on losses.
If you checked the “ No” box and you have a loss from this business, you may have to use Form 8582 to figure your allowable loss, if any, to
enter on Schedule C, line 31. Generally, you can deduct losses from passive activities only to the extent of income from passive
activities. For
details, see Pub. 925.
Line H
If you started or acquired this business in 2004, check the box on line H. Also check the box if you are reopening or restarting
this business
after temporarily closing it, and you did not file a 2003 Schedule C or C-EZ for this business.
Part I. Income Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. Gross
income, however, does
not include extraterritorial income that is qualifying foreign trade income. Use Form 8873 to figure the extraterritorial
income exclusion. Report it
on Schedule C as explained in the Instructions for Form 8873.
Line 1
Enter gross receipts from your trade or business. Include amounts you received in your trade or business that were properly
shown on Forms
1099-MISC. If the total amounts that were reported in box 7 of Forms 1099-MISC are more than the total you are reporting on
line 1, attach a statement
explaining the difference.
Statutory employees.
If you received a Form W-2 and the “ Statutory employee” box in box 13 of that form was checked, report your income and expenses related to
that income on Schedule C or C-EZ. Enter your statutory employee income from box 1 of Form W-2 on line 1 of Schedule C or
C-EZ and check the box on
that line. Social security and Medicare tax should have been withheld from your earnings; therefore, you do not owe self-employment
tax on these
earnings. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons,
and certain
homeworkers.
If you had both self-employment income and statutory employee income, you must file two Schedules C. You cannot use
Schedule C-EZ or combine these
amounts on a single Schedule C.
Installment sales.
Generally, the installment method cannot be used to report income from the sale of (a) personal property regularly
sold under the installment
method, or (b) real property held for resale to customers. But the installment method can be used to report income from sales
of certain residential
lots and timeshares if you elect to pay interest on the tax due on that income after the year of sale. See section 453(l)(2)(B)
for details. If you
make this election, include the interest on Form 1040, line 62. Also, enter “ 453(l)(3)” and the amount of the interest on the dotted line to the
left of line 62.
If you use the installment method, attach a schedule to your return. Show separately for 2004 and the 3 preceding
years: gross sales, cost of goods
sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected.
Line 6
Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and
accounts receivable),
state gasoline or fuel tax refunds you got in 2004, credit for federal tax paid on gasoline or other fuels claimed on your
2003 Form 1040, prizes and
awards related to your trade or business, and other kinds of miscellaneous business income. Include amounts you received in
your trade or business as
shown on Form 1099-PATR. Also, include any recapture of the deduction for clean-fuel vehicles used in your business and clean-fuel
vehicle refueling
property. For details, see Pub. 535.
If the business use percentage of any listed property (defined in the instructions for line 13 on page C-4) decreased to 50%
or less in 2004,
report on this line any recapture of excess depreciation, including any section 179 expense deduction. Use Form 4797 to figure
the recapture. Also, if
the business use percentage drops to 50% or less on leased listed property (other than a vehicle), include on this line any
inclusion amount. See Pub.
946 to figure the amount.
Part II. Expenses Capitalizing costs of property.
If you produced real or tangible personal property or acquired property for resale, certain expenses attributable
to the property generally must be
included in inventory costs or capitalized. In addition to direct costs, producers of inventory property generally must also
include part of certain
indirect costs in their inventory. Purchasers of personal property acquired for resale must include part of certain indirect
costs in inventory only
if the average annual gross receipts for the 3 prior tax years exceed $10 million. Also, you must capitalize part of the indirect
costs that benefit
real or tangible personal property constructed for use in a trade or business, or noninventory property produced for sale
to customers. Reduce the
amounts on lines 8 through 26 and Part V by amounts capitalized. For details, see Pub. 538.
Exception for certain producers.
Producers who account for inventoriable items in the same manner as materials and supplies that are not incidental
can currently deduct
expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Cost of Goods Sold on page
C-6 for more details.
Exception for creative property.
If you are an artist, author, or photographer, you may be exempt from the capitalization rules. However, your personal
efforts must have created
(or reasonably be expected to create) the property. This exception does not apply to any expense related to printing, photographic
plates, motion
picture films, video tapes, or similar items. These expenses are subject to the capitalization rules. For details, see Pub.
538.
Line 9 You can deduct the actual expenses of running your car or truck or take the standard mileage rate. You must use actual expenses
if you used your
vehicle for hire (such as a taxicab) or you used more than four vehicles simultaneously in your business (such as in fleet
operations). You cannot use
actual expenses for a leased vehicle if you previously used the standard mileage rate for that vehicle.
You can take the standard mileage rate for 2004 only if you:
- Owned the vehicle and use the standard mileage rate for the first year you placed the vehicle in service, or
- Leased the vehicle and are using the standard mileage rate for the entire lease period (except the period, if any, before
1998).
If you deduct actual expenses:
- Include on line 9 the business portion of expenses for gasoline, oil, repairs, insurance, tires, license plates, etc., and
- Show depreciation on line 13 and rent or lease payments on line 20a.
If you take the standard mileage rate, multiply the number of business miles by 37.5 cents. Add to this amount your parking
fees and tolls, and
enter the total on line 9. Do not deduct depreciation, rent or lease payments, or your actual operating expenses.
For details, see Pub. 463.
Information on your vehicle.
If you claim any car and truck expenses, you must provide certain information on the use of your vehicle by completing
one of the following.
- Schedule C, Part IV, or Schedule C-EZ, Part III, if: (a) you are claiming the standard mileage rate, you lease your vehicle,
or your vehicle
is fully depreciated, and (b) you are not required to file Form 4562 for any other reason. If you used more than one vehicle
during the year, attach
your own schedule with the information requested in Schedule C, Part IV, or Schedule C-EZ, Part III, for each additional vehicle.
- Form 4562, Part V, if you are claiming depreciation on your vehicle or you are required to file Form 4562 for any other reason
(see the
instructions for line 13).
Line 11 Enter the total cost of contract labor for the tax year. Do not include contract labor deducted elsewhere on your return such
as contract labor
that you included in Part III. Also, do not include salaries and wages paid to your employees, instead see line 26.
Line 12 Enter your deduction for depletion on this line. If you have timber depletion, attach Form T. See Pub. 535 for details.
Line 13
Depreciation and section 179 expense deduction.
Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property
having a useful life
substantially beyond the tax year. You can also depreciate improvements made to leased business property. However, stock in
trade, inventories, and
land are not depreciable. Depreciation starts when you first use the property in your business or for the production of income.
It ends when you take
the property out of service, deduct all your depreciable cost or other basis, or no longer use the property in your business
or for the production of
income. You can also elect under section 179 to expense part of the cost of certain property you bought in 2004 for use in
your business. See the
Instructions for Form 4562 to figure the amount to enter on line 13.
When to attach Form 4562.
You must complete and attach Form 4562 only if:
- You are claiming depreciation on property placed in service during 2004;
- You are claiming depreciation on listed property (defined below), regardless of the date it was placed in service; or
- You are claiming a section 179 expense deduction.
If you acquired depreciable property for the first time in 2004, see Pub. 946.
Listed property generally includes, but is not limited to:
- Passenger automobiles weighing 6,000 pounds or less;
- Any other property used for transportation if the nature of the property lends itself to personal use, such as motorcycles,
pickup trucks,
etc.;
- Any property used for entertainment or recreational purposes (such as photographic, phonographic, communication, and video
recording
equipment);
- Cellular telephones or other similar telecommunications equipment; and
- Computers or peripheral equipment.
Exceptions.
Listed property does not include photographic, phonographic, communication, or video equipment used exclusively in
your trade or business or at
your regular business establishment. It also does not include any computer or peripheral equipment used exclusively at a regular
business
establishment and owned or leased by the person operating the establishment. For purposes of these exceptions, a portion of
your home is treated as a
regular business establishment only if that portion meets the requirements under section 280A(c)(1) for deducting expenses
for the business use of
your home.
See the instructions for line 6 on page C-3 if the business use percentage of any listed property decreased to 50%
or less in 2004.
Line 14 Deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan included
on line 19. Examples
are accident and health plans, group-term life insurance, and dependent care assistance programs. If you made contributions
on your behalf as a
self-employed person to a dependent care assistance program, complete Form 2441, Parts I and III, to figure your deductible
contributions to that
program.
Do not include on line 14 any contributions you made on your behalf as a self-employed person to an accident and health plan
or for group-term life
insurance. You may be able to deduct on Form 1040, line 31, the amount you paid for health insurance on behalf of yourself,
your spouse, and
dependents, even if you do not itemize your deductions. See the instructions for Form 1040, line 31, for details.
Line 15 Deduct premiums paid for business insurance on line 15. Deduct on line 14 amounts paid for employee accident and health insurance.
Do not deduct
amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for your lost earnings due to sickness
or disability. For
details, see Pub. 535.
Lines 16a and 16b Interest allocation rules.
The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment
interest are treated
differently. “ Interest allocation” rules require you to allocate (classify) your interest expense so it is deducted (or capitalized) on the
correct line of your return and receives the right tax treatment. These rules could affect how much interest you are allowed
to deduct on Schedule C
or C-EZ.
Generally, you allocate interest expense by tracing how the proceeds of the loan were used. See Pub. 535 for details.
If you paid interest on a debt secured by your main home and any of the proceeds from that debt were used in connection
with your trade or
business, see Pub. 535 to figure the amount that is deductible on Schedule C or C-EZ.
How to report.
If you have a mortgage on real property used in your business (other than your main home), enter on line 16a the interest
you paid for 2004 to
banks or other financial institutions for which you received a Form 1098 (or similar statement). If you did not receive a
Form 1098, enter the
interest on line 16b.
If you paid more mortgage interest than is shown on Form 1098, see Pub. 535 to find out if you can deduct the additional
interest. If you can,
include the amount on line 16a. Attach a statement to your return explaining the difference and enter “ See attached” in the margin next to line
16a.
If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid
interest on the mortgage and the
other person received the Form 1098, include your share of the interest on line 16b. Attach a statement to your return showing
the name and address of
the person who received the Form 1098. In the margin next to line 16b, enter “ See attached.”
If you paid interest in 2004 that applies to future years, deduct only the part that applies to 2004.
Line 17 Include on this line fees for tax advice related to your business and for preparation of the tax forms related to your business.
Line 19 Enter your deduction for contributions to a pension, profit-sharing, or annuity plan, or plans for the benefit of your employees.
If the plan
included you as a self-employed person, enter contributions made as an employer on your behalf on Form 1040, line 32, not
on Schedule C.
Generally, you must file the applicable form listed below if you maintain a pension, profit-sharing, or other funded-deferred
compensation plan.
The filing requirement is not affected by whether or not the plan qualified under the Internal Revenue Code, or whether or
not you claim a deduction
for the current tax year. There is a penalty for failure to timely file these forms.
Form 5500.
File this form for a plan that is not a one-participant plan (see below).
Form 5500-EZ.
File this form for a one-participant plan. A one-participant plan is a plan that only covers you (or you and your
spouse).
For details, see Pub. 560.
Lines 20a and 20b If you rented or leased vehicles, machinery, or equipment, enter on line 20a the business portion of your rental cost. But
if you leased a vehicle
for a term of 30 days or more, you may have to reduce your deduction by an amount called the inclusion amount. See Pub. 463
to figure your inclusion
amount.
Enter on line 20b amounts paid to rent or lease other property, such as office space in a building.
Line 21 Deduct the cost of repairs and maintenance. Include labor, supplies, and other items that do not add to the value or increase
the life of the
property. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must
be capitalized.
Line 22 Generally, you can deduct the cost of supplies only to the extent you actually consumed and used them in your business during
the tax year (unless
you deducted them in a prior tax year). However, if you had incidental supplies on hand for which you kept no inventories
or records of use, you can
deduct the cost of supplies you actually purchased during the tax year, provided that method clearly reflects income.
Line 23 You can deduct the following taxes and licenses on this line.
- State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you
must also
include the amount collected in gross receipts or sales on line 1.
- Real estate and personal property taxes on business assets.
- Licenses and regulatory fees for your trade or business paid each year to state or local governments. But some licenses, such
as liquor
licenses, may have to be amortized. See Pub. 535 for details.
- Social security and Medicare taxes paid to match required withholding from your employees' wages. Also, federal unemployment
tax paid.
Reduce your deduction by the amount shown on Form 8846, line 4.
- Federal highway use tax.
Do not deduct the following on this line.
- Federal income taxes, including your self-employment tax. However, you can deduct one-half of your self-employment tax on
Form 1040, line
30.
- Estate and gift taxes.
- Taxes assessed to pay for improvements, such as paving and sewers.
- Taxes on your home or personal use property.
- State and local sales taxes on property purchased for use in your business. Instead, treat these taxes as part of the cost
of the
property.
- State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments.
These taxes
are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed
you to retain any
part of the sales tax you collected, you must include that amount as income on line 6.
- Other taxes and license fees not related to your business.
Line 24a Enter your expenses for lodging and transportation connected with overnight travel for business while away from your tax home.
Generally, your tax
home is your main place of business regardless of where you maintain your family home. You cannot deduct expenses paid or
incurred in connection with
employment away from home if that period of employment exceeds 1 year. Also, you cannot deduct travel expenses for your spouse,
your dependent, or any
other individual unless that person is your employee, the travel is for a bona fide business purpose, and the expenses would
otherwise be deductible
by that person.
Do not include expenses for meals and entertainment on this line. Instead, see the instructions for lines 24b and 24c on this
page.
Instead of keeping records of your actual incidental expenses, you can use an optional method for deducting incidental expenses
only if you did not
pay or incur meal expenses on a day you were traveling away from your tax home. The amount of the deduction is $3 a day. Incidental
expenses include
fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and
hotel servants in foreign
countries. They do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams
or telephone calls.
You cannot use this method on any day that you use the standard meal allowance (as explained in the instructions for lines
24b and 24c).
You cannot deduct expenses for attending a foreign convention unless it is directly related to your trade or business and
it is as reasonable for
the meeting to be held outside the North American area as within it. These rules apply to both employers and employees. Other
rules apply to luxury
water travel.
For details, see Pub. 463.
Lines 24b and 24c On line 24b, enter your total business meal and entertainment expenses. Include meal expenses while traveling away from home
for business. Instead
of the actual cost of your meals while traveling away from home, you can use the standard meal allowance for your daily meals
and incidental expenses.
Under this method, you deduct a specified amount, depending on where you travel, instead of keeping records of your actual
meal expenses. However, you
must still keep records to prove the time, place, and business purpose of your travel.
The standard meal allowance is the federal M&IE rate. You can find these rates on the Internet at
www.policyworks.gov/perdiem. For
locations outside the continental United States, the applicable rates are published monthly. You can find these rates on the
Internet at
www.state.gov.
See Pub. 463 for details on how to figure your deduction using the standard meal allowance, including special rules for partial
days of travel.
Business meal expenses are deductible only if they are (a) directly related to or associated with the active conduct of your
trade or business, (b)
not lavish or extravagant, and (c) incurred while you or your employee is present at the meal.
You cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually
considered
entertainment, amusement, or recreation.
Also, you cannot deduct membership dues for any club organized for business, pleasure, recreation, or other social purpose.
This includes country
clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to
business discussion. But it
does not include civic or public service organizations, professional organizations (such as bar and medical associations),
business leagues, trade
associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization
is to entertain, or
provide entertainment facilities for, members or their guests.
There are exceptions to these rules as well as other rules that apply to sky-box rentals and tickets to entertainment events.
See Pub. 463.
Generally, you can deduct only 50% of your business meal and entertainment expenses, including meals incurred while away from
home on business. For
individuals subject to the Department of Transportation (DOT) hours of service limits, that percentage is increased to 70%
for business meals consumed
during, or incident to, any period of duty for which those limits are in effect. Individuals subject to the DOT hours of service
limits include the
following persons:
- Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under
Federal
Aviation Administration regulations.
- Interstate truck operators who are under DOT regulations.
- Certain merchant mariners who are under Coast Guard regulations.
However, you can fully deduct meals, incidentals, and entertainment furnished or reimbursed to an employee if you properly
treat the expense as
wages subject to withholding. You can also fully deduct meals, incidentals, and entertainment provided to a nonemployee to
the extent the expenses are
includible in the gross income of that person and reported on Form 1099-MISC. See Pub. 535 for details and other exceptions.
If you provide daycare in your home, see Pub. 587 for information on deducting the cost of meals and snacks you provide to
your daycare recipients.
Figure how much of the amount on line 24b is not deductible and enter that amount on line 24c.
Line 25 Deduct only utility expenses for your trade or business.
Local telephone service.
If you used your home phone for business, do not deduct the base rate (including taxes) of the first phone line into
your residence. But you can
deduct expenses for any additional costs you incurred for business that are more than the cost of the base rate for the first
phone line. For example,
if you had a second line, you can deduct the business percentage of the charges for that line, including the base rate charges.
Line 26 Enter the total salaries and wages for the tax year. Do not include salaries and wages deducted elsewhere on your return or
amounts paid to
yourself. Reduce your deduction by the amounts claimed on:
- Form 5884, Work Opportunity Credit, line 2;
- Form 8844, Empowerment Zone and Renewal Community Employment Credit, line 2;
- Form 8845, Indian Employment Credit, line 4;
- Form 8861, Welfare-to-Work Credit, line 2; and
- Form 8884, New York Liberty Zone Business Employee Credit, line 2.
If you provided taxable fringe benefits to your employees, such as personal use of a car, do not deduct as wages the amount
applicable to
depreciation and other expenses claimed elsewhere.
Line 30 Business use of your home.
You may be able to deduct certain expenses for business use of your home, subject to limitations. You must attach
Form 8829 if you claim this
deduction. For details, see the Instructions for Form 8829 and Pub. 587.
Line 31 If you have a loss, the amount of loss you can deduct this year may be limited. Go to line 32 before entering your loss on
line 31. If you answered
“No” to Schedule C, Question G, also see the Instructions for Form 8582. Enter the net profit or deductible loss here. Combine
this amount with
any profit or loss from other businesses, and enter the total on Form 1040, line 12, and Schedule SE, line 2. Estates and
trusts should enter the
total on Form 1041, line 3.
If you have a net profit on line 31, this amount is earned income and may qualify you for the earned income credit. See the
instructions for Form
1040, lines 65a and 65b, for details.
Statutory employees.
Include your net profit or deductible loss from line 31 with other Schedule C amounts on Form 1040, line 12. However,
do not report this amount on
Schedule SE, line 2. If you are required to file Schedule SE because of other self-employment income, see the Instructions
for Schedule SE.
Line 32
At-risk rules.
Generally, if you have (a) a business loss and (b) amounts in the business for which you are not at risk, you will
have to complete Form 6198 to
figure your allowable loss. The at-risk rules generally limit the amount of loss (including loss on the disposition of assets)
you can claim to the
amount you could actually lose in the business.
Check box 32b if you have amounts for which you are not at risk in this business, such as the following.
- Nonrecourse loans used to finance the business, to acquire property used in the business, or to acquire the business that
are not secured by
your own property (other than property used in the business). However, there is an exception for certain nonrecourse financing
borrowed by you in
connection with holding real property.
- Cash, property, or borrowed amounts used in the business (or contributed to the business, or used to acquire the business)
that are
protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and
insurance against tort
liability).
- Amounts borrowed for use in the business from a person who has an interest in the business, other than as a creditor, or who
is related
under section 465(b)(3) to a person (other than you) having such an interest.
If all amounts are at risk in this business, check box 32a and enter your loss on line 31. But if you answered “ No” to Question G, you may
need to complete Form 8582 to figure your deductible loss. See the Instructions for Form 8582 for details.
If you checked box 32b, see Form 6198 to determine the amount of your deductible loss. But if you answered “ No” to Question G, your loss may
be further limited. See the Instructions for Form 8582. If your at-risk amount is zero or less, enter -0- on line 31. Be sure
to attach Form 6198 to
your return. If you checked box 32b and you do not attach Form 6198, the processing of your tax return may be delayed.
Any loss from this business not allowed for 2004 because of the at-risk rules is treated as a deduction allocable
to the business in 2005. For
details, see the Instructions for Form 6198 and Pub. 925.
Part III. Cost of Goods Sold Generally, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing
factor, you must
take inventories into account at the beginning and end of your tax year.
However, if you are a qualifying taxpayer or a qualifying small business taxpayer, you can account for inventoriable items
in the same manner as
materials and supplies that are not incidental. To change your accounting method, see the instructions for line F on page
C-2.
A qualifying taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less,
and (b) whose
business is not a tax shelter (as defined in section 448(d)(3)).
A qualifying small business taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are more
than $1 million but
not more than $10 million, (b) whose business is not a tax shelter (as defined in section 448(d)(3)), and (c) whose principal
business activity is not
an ineligible activity as explained in Rev. Proc. 2002-28. You can find Rev. Proc. 2002-28 on page 815 of Internal Revenue
Bulletin 2002-18 at
irb02-18.pdf.
Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise
purchased for resale
are deductible in the year the finished goods or merchandise are sold (but not before the year you paid for the raw materials
or merchandise, if you
are also using the cash method). Enter amounts paid for all raw materials and merchandise during 2004 on line 36. The amount
you can deduct for 2004
is figured on line 42.
Additional information.
For additional guidance on this method of accounting for inventoriable items, see Rev. Proc. 2001-10 if you are a
qualifying taxpayer or Rev.
Proc. 2002-28 if you are a qualifying small business taxpayer. You can find Rev. Proc. 2001-10 on page 272 of Internal Revenue
Bulletin 2001-2 at
irb01-02.pdf, and Rev. Proc. 2002-28 on
page 815 of Internal Revenue Bulletin 2002-18 at
irb02-18.pdf .
Certain direct and indirect expenses may have to be capitalized or included in inventory. See the instructions for Part II
beginning on page C-3.
Line 33 Your inventories can be valued at cost; cost or market value, whichever is lower; or any other method approved by the IRS.
However, you are
required to use cost if you are using the cash method of accounting.
Line 35
If you are changing your method of accounting beginning with 2004, refigure last year's closing inventory using your new method
of accounting and
enter the result on line 35. If there is a difference between last year's closing inventory and the refigured amount, attach
an explanation and take
it into account when figuring your section 481(a) adjustment. See the example on page C-2 for details.
Line 41
If you account for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line
41 the portion of your
raw materials and merchandise purchased for resale that are included on line 40 and were not sold during the year.
Part V. Other Expenses Include all ordinary and necessary business expenses not deducted elsewhere on Schedule C. List the type and amount of each
expense separately in
the space provided. Enter the total on lines 48 and 27. Do not include the cost of business equipment or furniture, replacements
or permanent
improvements to property, or personal, living, and family expenses. Do not include charitable contributions. Also, you cannot
deduct fines or
penalties paid to a government for violating any law. For details on business expenses, see Pub. 535.
Amortization.
Include amortization in this part. For amortization that begins in 2004, you must complete and attach Form 4562.
You can amortize:
- The cost of pollution-control facilities.
- Amounts paid for research and experimentation.
- Qualified revitalization expenditures.
- Amounts paid to acquire, protect, expand, register, or defend trademarks or trade names.
- Goodwill and certain other intangibles.
In general, you cannot amortize real property construction period interest and taxes. Special rules apply for allocating
interest to real or
personal property produced in your trade or business.
At-risk loss deduction.
Any loss from this activity that was not allowed as a deduction last year because of the at-risk rules is treated
as a deduction allocable to this
activity in 2004.
Business start-up costs.
You can elect to amortize certain business start-up costs paid or incurred before October 23, 2004, over 60 months
or more, beginning with the
month your business began. For certain business start-up costs paid or incurred after October 22, 2004, you can elect to deduct
up to $5,000 for the
year your business began. This limit is reduced by the amount by which your start-up costs exceed $50,000. You can elect to
amortize any remaining
business start-up costs over 15 years. For details, see Pub. 535. For amortization that begins in 2004, you must complete
and attach Form 4562.
Capital construction fund.
Do not claim on Schedule C or C-EZ the deduction for amounts contributed to a capital construction fund set up under
the Merchant Marine Act of
1936. Instead, reduce the amount you would otherwise enter on Form 1040, line 42, by the amount of the deduction. Next to
line 42, enter “ CCF”
and the amount of the deduction. For details, see Pub. 595.
Clean-fuel vehicles and clean-fuel vehicle refueling property.
You may be able to deduct part of the cost of qualified clean-fuel vehicle property used in your business and qualified
clean-fuel vehicle
refueling property. See Pub. 535 for details.
Disabled access credit and the deduction for removing barriers to individuals with disabilities and the elderly.
You may be able to claim a tax credit of up to $5,000 for eligible expenditures paid or incurred in 2004 to provide
access to your business for
individuals with disabilities. See Form 8826 for details. You can also deduct up to $15,000 of costs paid or incurred in 2004
to remove architectural
or transportation barriers to individuals with disabilities and the elderly. However, you cannot take both the credit and
the deduction on the same
expenditures.
Film and television production expenses.
You can elect to deduct costs of certain qualified film and television productions that begin after October 22, 2004.
For details, see Pub. 535.
Forestation and reforestation costs.
You can elect to amortize certain forestation and reforestation costs over 84 months. You can also elect to expense
up to $10,000 ($5,000 if
married filing separately) of certain forestation and reforestation costs paid or incurred after October 22, 2004, for each
qualified timber property.
The amortization election does not apply to trusts and the expense election does not apply to estates and trusts. For details,
see Pub. 535. For
amortization that begins in 2004, you must complete and attach Form 4562.
Principal Business or Professional Activity Codes
These codes for the Principal Business or Professional Activity classify sole proprietorships by the type of activity they
are engaged in to
facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry
Classification System
(NAICS).
Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity
that best identifies
the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this
activity (for example,
531210, the code for offices of real estate agents and brokers) and enter it on Schedule C or C-EZ, line B.
Note. If your principal source of income is from farming activities, you should file Schedule F.
Accommodation, Food Services, & Drinking Places
Accommodation 721310 - Rooming & boarding houses721210 - RV (recreational vehicle) parks & recreational camps721100 - Travel accommodation (including hotels, motels, & bed & breakfast inns)
Food Services & Drinking Places 722410 - Drinking places (alcoholic beverages)722110 - Full-service restaurants722210 - Limited-service eating places722300 - Special food services (including food service contractors & caterers)
Administrative & Support and Waste Management & Remediation Services
Administrative & Support Services 561430 - Business service centers (including private mail centers & copy shops)
561740 - Carpet & upholstery cleaning services
561440 - Collection agencies
561450 - Credit bureaus
561410 - Document preparation services
561300 - Employment services
561710 - Exterminating & pest control services
561210 - Facilities support (management) services
561600 - Investigation & security services
561720 - Janitorial services
561730 - Landscaping services
561110 - Office administrative services
561420 - Telephone call centers (including telephone answering services & telemarketing bureaus)
561500 - Travel arrangement & reservation services
561490 - Other business support services (including repossession services, court reporting, & stenotype services)
561790 - Other services to buildings & dwellings
561900 - Other support services (including packaging & labeling services, & convention & trade show organizers)
Waste Management & Remediation Services 562000 - Waste management & remediation services
Agriculture, Forestry, Hunting, & Fishing 112900 - Animal production (including breeding of cats and dogs)
114110 - Fishing
113000 - Forestry & logging (including forest nurseries & timber tracts)
114210 - Hunting & trapping
Support Activities for Agriculture & Forestry 115210 - Support activities for animal production (including farriers)
115110 - Support activities for crop production (including cotton ginning, soil preparation, planting, & cultivating)
115310 - Support activities for forestry
Arts, Entertainment, & Recreation
Amusement, Gambling, & Recreation Industries 713100 - Amusement parks & arcades
713200 - Gambling industries
713900 - Other amusement & recreation services (including golf courses, skiing facilities, marinas, fitness centers, bowling centers,
skating
rinks, miniature golf courses)
Museums, Historical Sites, & Similar Institutions 712100 - Museums, historical sites, & similar institutions
Performing Arts, Spectator Sports, & Related Industries 711410 - Agents & managers for artists, athletes, entertainers, & other public figures
711510 - Independent artists, writers, & performers
711100 - Performing arts companies
711300 - Promoters of performing arts, sports, & similar events
711210 - Spectator sports (including professional sports clubs & racetrack operations)
Construction of Buildings 236200 - Nonresidential building construction
236100 - Residential building construction
Heavy and Civil Engineering Construction 237310 - Highway, street, & bridge construction
237210 - Land subdivision
237100 - Utility system construction
237990 - Other heavy & civil engineering construction
Specialty Trade Contractors 238310 - Drywall & insulation contractors
238210 - Electrical contractors
238350 - Finish carpentry contractors
238330 - Flooring contractors
238130 - Framing carpentry contractors
238150 - Glass & glazing contractors
238140 - Masonry contractors
238320 - Painting & wall covering contractors
238220 - Plumbing, heating & air- conditioning contractors
238110 - Poured concrete foundation & structure contractors
238160 - Roofing contractors
238170 - Siding contractors
238910 - Site preparation contractors
238120 - Structural steel & precast concrete construction contractors
238340 - Tile & terrazzo contractors
238290 - Other building equipment contractors
238390 - Other building finishing contractors
238190 - Other foundation, structure, & building exterior contractors
238990 - All other specialty trade contractors
Educational Services 611000 - Educational services (including schools, colleges, & universities)
Finance & Insurance
Credit Intermediation & Related Activities 522100 - Depository credit intermediation (including commercial banking, savings institutions, & credit unions)
522200 - Nondepository credit intermediation (including sales financing & consumer lending)
522300 - Activities related to credit intermediation (including loan brokers)
Insurance Agents, Brokers, & Related Activities 524210 - Insurance agencies & brokerages
524290 - Other insurance related activities
Securities, Commodity Contracts, & Other Financial Investments & Related Activities 523140 - Commodity contracts brokers
523130 - Commodity contracts dealers
523110 - Investment bankers & securities dealers
523210 - Securities & commodity exchanges
523120 - Securities brokers
523900 - Other financial investment activities (including investment advice)
Health Care & Social Assistance
Ambulatory Health Care Services 621610 - Home health care services
621510 - Medical & diagnostic laboratories
621310 - Offices of chiropractors
621210 - Offices of dentists
621330 - Offices of mental health practitioners (except physicians)
621320 - Offices of optometrists
621340 - Offices of physical, occupational & speech therapists, & audiologists
621111 - Offices of physicians (except mental health specialists)
621112 - Offices of physicians, mental health specialists
621391 - Offices of podiatrists
621399 - Offices of all other miscellaneous health practitioners
621400 - Outpatient care centers
621900 - Other ambulatory health care services (including ambulance services, blood, & organ banks)
Hospitals 622000 - Hospitals
Nursing & Residential Care Facilities 623000 - Nursing & residential care facilities
Social Assistance 624410 - Child day care services
624200 - Community food & housing, & emergency & other relief services
624100 - Individual & family services
624310 - Vocational rehabilitation services
Information 511000 - Publishing industries (except Internet)
Broadcasting (except Internet) & Telecommunications 515000 - Broadcasting (except Internet)
517000 - Telecommunications
Internet Publishing & Broadcasting 516110 - Internet publishing & broadcasting
Internet Service Providers, Web Search Portals, & Data Processing Services 518210 - Data processing, hosting, & related services
518111 - Internet service providers
518112 - Web search portals
519100 - Other information services (including news syndicates and libraries)
Motion Picture & Sound Recording 512100 - Motion picture & video industries (except video rental)
512200 - Sound recording industries
Manufacturing 315000 - Apparel mfg.
312000 - Beverage & tobacco product mfg.
334000 - Computer & electronic product mfg.
335000 - Electrical equipment, appliance, & component mfg.
332000 - Fabricated metal product mfg.
337000 - Furniture & related product mfg.
333000 - Machinery mfg.
339110 - Medical equipment & supplies mfg.
322000 - Paper mfg.
324100 - Petroleum & coal products mfg.
326000 - Plastics & rubber products mfg.
331000 - Primary metal mfg.
323100 - Printing & related support activities
313000 - Textile mills
314000 - Textile product mills
336000 - Transportation equipment mfg.
321000 - Wood product mfg.
339900 - Other miscellaneous mfg.
Chemical Manufacturing 325100 - Basic chemical mfg.
325500 - Paint, coating, & adhesive mfg.
325300 - Pesticide, fertilizer, & other agricultural chemical mfg.
325410 - Pharmaceutical & medicine mfg.
325200 - Resin, synthetic rubber, & artificial & synthetic fibers & filaments mfg.
325600 - Soap, cleaning compound, & toilet preparation mfg.
325900 - Other chemical product & preparation mfg.
Food Manufacturing 311110 - Animal food mfg.
311800 - Bakeries & tortilla mfg.
311500 - Dairy product mfg.
311400 - Fruit & vegetable preserving & speciality food mfg.
311200 - Grain & oilseed milling
311610 - Animal slaughtering & processing
311710 - Seafood product preparation & packaging
311300 - Sugar & confectionery product mfg.
311900 - Other food mfg. (including coffee, tea, flavorings, & seasonings)
Leather & Allied Product Manufacturing 316210 - Footwear mfg. (including leather, rubber, & plastics)
316110 - Leather & hide tanning & finishing
316990 - Other leather & allied product mfg.
Nonmetallic Mineral Product Manufacturing 327300 - Cement & concrete product mfg.
327100 - Clay product & refractory mfg.
327210 - Glass & glass product mfg.
327400 - Lime & gypsum product mfg.
327900 - Other nonmetallic mineral product mfg.
Mining 212110 - Coal mining
212200 - Metal ore mining
212300 - Nonmetallic mineral mining & quarrying
211110 - Oil & gas extraction
213110 - Support activities for mining
Other Services
Personal & Laundry Services 812111 - Barber shops
812112 - Beauty salons
812220 - Cemeteries & crematories
812310 - Coin-operated laundries & drycleaners
812320 - Drycleaning & laundry services (except coin-operated) (including laundry & drycleaning dropoff & pickup sites)
812210 - Funeral homes & funeral services
812330 - Linen & uniform supply
812113 - Nail salons
812930 - Parking lots & garages
812910 - Pet care (except veterinary) services
812920 - Photofinishing
812190 - Other personal care services (including diet & weight reducing centers)
812990 - All other personal services
Repair & Maintenance 811120 - Automotive body, paint, interior, & glass repair
811110 - Automotive mechanical & electrical repair & maintenance
811190 - Other automotive repair & maintenance (including oil change & lubrication shops & car washes)
811310 - Commercial & industrial machinery & equipment (except automotive & electronic) repair & maintenance
811210 - Electronic & precision equipment repair & maintenance
811430 - Footwear & leather goods repair
811410 - Home & garden equipment & appliance repair & maintenance
811420 - Reupholstery & furniture repair
811490 - Other personal & household goods repair & maintenance
Professional, Scientific, & Technical Services 541100 - Legal services
541211 - Offices of certified public accountants
541214 - Payroll services
541213 - Tax preparation services
541219 - Other accounting services
Architectural, Engineering, & Related Services 541310 - Architectural services
541350 - Building inspection services
541340 - Drafting services
541330 - Engineering services
541360 - Geophysical surveying & mapping services
541320 - Landscape architecture services
541370 - Surveying & mapping (except geophysical) services
541380 - Testing laboratories
Computer Systems Design & Related Services 541510 - Computer systems design & related services
Specialized Design Services 541400 - Specialized design services (including interior, industrial, graphic, & fashion design)
Other Professional, Scientific, & Technical Services 541800 - Advertising & related services
541600 - Management, scientific, & technical consulting services
541910 - Market research & public opinion polling
541920 - Photographic services
541700 - Scientific research & development services
541930 - Translation & interpretation services
541940 - Veterinary services
541990 - All other professional, scientific, & technical services
Real Estate & Rental & Leasing
Real Estate 531100 - Lessors of real estate (including miniwarehouses & self-storage units)
531210 - Offices of real estate agents & brokers
531320 - Offices of real estate appraisers
531310 - Real estate property managers
531390 - Other activities related to real estate
Rental & Leasing Services 532100 - Automotive equipment rental & leasing
532400 - Commercial & industrial machinery & equipment rental & leasing
532210 - Consumer electronics & appliances rental
532220 - Formal wear & costume rental
532310 - General rental centers
532230 - Video tape & disc rental
532290 - Other consumer goods rental
Religious, Grantmaking, Civic, Professional, & Similar Organizations 813000 - Religious, grantmaking, civic, professional, & similar organizations
Retail Trade
Building Material & Garden Equipment & Supplies Dealers 444130 - Hardware stores
444110 - Home centers
444200 - Lawn & garden equipment & supplies stores
444120 - Paint & wallpaper stores
444190 - Other building materials dealers
Clothing & Accessories Stores 448130 - Children's & infants' clothing stores
448150 - Clothing accessories stores
448140 - Family clothing stores
448310 - Jewelry stores
448320 - Luggage & leather goods stores
448110 - Men's clothing stores
448210 - Shoe stores
448120 - Women's clothing stores
448190 - Other clothing stores
Electronic & Appliance Stores 443130 - Camera & photographic supplies stores
443120 - Computer & software stores
443111 - Household appliance stores
443112 - Radio, television, & other electronics stores
Food & Beverage Stores 445310 - Beer, wine, & liquor stores
445220 - Fish & seafood markets
445230 - Fruit & vegetable markets
445100 - Grocery stores (including supermarkets & convenience stores without gas)
445210 - Meat markets
445290 - Other specialty food stores
Furniture & Home Furnishing Stores 442110 - Furniture stores
442200 - Home furnishings stores
Gasoline Stations 447100 - Gasoline stations (including convenience stores with gas)
General Merchandise Stores 452000 - General merchandise stores
Health & Personal Care Stores 446120 - Cosmetics, beauty supplies, & perfume stores
446130 - Optical goods stores
446110 - Pharmacies & drug stores
446190 - Other health & personal care stores
Motor Vehicle & Parts Dealers 441300 - Automotive parts, accessories, & tire stores
441222 - Boat dealers
441221 - Motorcycle dealers
441110 - New car dealers
441210 - Recreational vehicle dealers (including motor home & travel trailer dealers)
441120 - Used car dealers
441229 - All other motor vehicle dealers
Sporting Goods, Hobby, Book, & Music Stores 451211 - Book stores
451120 - Hobby, toy, & game stores
451140 - Musical instrument & supplies stores
451212 - News dealers & newsstands
451220 - Prerecorded tape, compact disc, & record stores
451130 - Sewing, needlework, & piece goods stores
451110 - Sporting goods stores
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