Business expenses reported on IRS Schedule C represent ordinary and necessary costs incurred in carrying on a trade or business. These expenses are used to reduce gross income and determine the net profit or loss from business activity reported on the form.
What Qualifies as a Business Expense
For Schedule C purposes, a business expense is a cost that is both ordinary and necessary in the context of the business activity. Ordinary expenses are common and accepted in the trade or business, while necessary expenses are appropriate and helpful for operating the business. These concepts define which costs may be reported on the form.
Expense Categories on Schedule C
Schedule C provides predefined categories for reporting business expenses in Part II of the form. Each category represents a type of cost, allowing expenses to be grouped in a standardized way. A detailed explanation of how these categories appear on the form is provided in Schedule C Line-by-Line Explanation.
How Business Expenses Affect Income
Reported business expenses are subtracted from gross income to calculate net profit or net loss. This relationship explains how expense reporting directly affects the overall business result. How income flows into the expense calculation is explained in Gross Receipts and Business Income.
Expenses and Cost of Goods Sold
Some costs related to producing or acquiring products are reported as part of cost of goods sold rather than as expenses in Part II. Understanding this distinction helps ensure that amounts are reported in the correct section of the form. How cost of goods sold is calculated is explained in Cost of Goods Sold in Schedule C.
Expenses With No Income or a Net Loss
Business expenses may be reported even in years when the business has little or no income. How expenses interact with no-income situations and net losses is explained in Schedule C With No Income and Understanding Profit and Loss.
Limits and Special Rules
Certain limitations may affect how business expenses are treated for tax purposes. These include passive activity limits, at-risk rules, and excess business loss limitations. Overviews of these frameworks are provided in Passive Activity Limits, At-Risk Rules, and Excess Business Loss Framework.
Related Guidance and Reference
A practical walkthrough of completing Schedule C is provided in How to Complete IRS Schedule C. A general overview of Schedule C is available in IRS Schedule C Overview, and the official definitions and rules issued by the Internal Revenue Service are available in the reference entry at IRS Form 1040 Schedule C.