IRS Form 1040 Schedule C Analysis

The IRS Form 1040 Schedule C is the basic income statement / profit & loss statement that a Credit Analyst may enounter. It is filed when a single owner or single member LLC has business income and / or expenses related to a commercial enterprise (it may not be a hobby). If you see income on the IRS Form 1040, Line 12, then there must be a Schedule C attachment. The Schedule C may be used by business owners where you will see just a few expenses entered to a business that may have several million dollars in gross revenue. The advantage in using the form to the owner is that they do not have the additional task and expense of filing separate tax returns for a corporation or partnership.

IRS Form 1040 Schedule C,-Profit-or-Loss-From-Business

Sole Proprietorship

A sole proprietor is someone who owns an unincorporated business by himself or herself (the single owner and the business are one entity). All profits made by the business are reported on Schedule C of the individual income tax return (1040) and taxed at the same rate as other personal income.

The main underwriting issues are that a sole proprietor has unlimited personal liability for the business losses and debts, and the companyís borrowing power is limited to the sole proprietorís personal borrowing capabilities. In addition, as there is only one owner, the death of the owner may result in the termination of the business, and the assets of the business being placed in probate. Since all business income paid to or passed through to the individual is reported on the individualís personal tax return, there is no additional analysis of business tax returns for income.

IRS Schedule C (Form 1040), Profit or Loss from Business

Schedule C lists income and expenses related to self-employment, and is used by unincorporated sole proprietors, and unincorporated self-employed / temporary / freelance / contract workers. An activity qualifies as a business if the primary purpose for engaging in the activity is for income or profit, and the taxpayer is involved in the activity with continuity and regularity. Sporadic activity or a hobby does not qualify as a business.

The form is divided into two parts: Part I / Income and Part II / Expenses. Net Income or loss (line 31) is reported on Form 1040, line 12. The net profit will also need to be shown on Schedule SE in order to calculate the self-employment tax. Schedule SE is not required unless there is a profit of $400 or more.

Taxpayers who are independent contractors should receive Form 1099-MISC showing the income they earned from payers. Generally, the amounts for independent contractors will be shown in box 7. The amount from the Form(s) 1099-MISC, along with any other business income payments, are reported on the tax return.

Non-Form 1099 income such as cash and check payments / income must be reported.

More than one Schedule C can be prepared if the taxpayers have more than one business.

Schedule C Cash Flow
The basic business cash flow constructed from the information on the Schedule C:
  • Net Profit or Loss (Line 31)
  • + Depletion (Line 12)
  • + Depreciation (Line 130
  • - 20% Exclusion for Meals and Entertainment (Line 24b)
  • You may also add back Interest (line 16) if the loan / financing you are extending to the applicant is going to completely pay off the loan from which the interest expense was incurred as now that interest expense will be applied to the loan payment for the new loan you are extending to the applicant.