Profit and loss on IRS Schedule C represent the final financial result of a business activity for the tax year. This result is determined by comparing reported business income with allowable costs and expenses and is used to integrate business activity into the individual income tax return.
How Profit or Loss Is Calculated
Schedule C calculates profit or loss by starting with gross income and subtracting ordinary and necessary business expenses. If expenses exceed income, the result is a net loss. This calculation reflects how business performance is measured within the tax reporting system.
Relationship Between Income and Expenses
The profit or loss outcome depends on how income and expenses are reported throughout the form. Income concepts are explained in Gross Receipts and Business Income, while expense reporting is covered in Business Expenses in Schedule C. How inventory-related costs affect income is explained in Cost of Goods Sold in Schedule C.
Where Profit or Loss Appears on Schedule C
The net profit or net loss is calculated near the end of Schedule C and represents the summary result of the reported business activity. This figure serves as the connection point between Schedule C and the rest of the individual tax return.
How Profit or Loss Affects the Tax Return
The profit or loss from Schedule C flows into Form 1040 and may affect other schedules and calculations. How this result connects to self-employment tax reporting is explained in Schedule C and Schedule SE. The filing relationship with the main return is described in How Schedule C Relates to Form 1040.
Profit, Loss, and Special Limitations
In some situations, additional rules may limit how losses reported on Schedule C are treated. These include passive activity limitations, 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 step-by-step explanation of how Schedule C is completed is available in How to Complete IRS Schedule C. A general overview of the form is provided 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.