Schedule C-EZ: The Sole Proprietor Short-Form

Q: Tax Playa, what are the rules for using the shorter business form?  Is there a "standard deduction"?
Chris, Arlington VA

A: Unincorporated single-owner businesses (including LLCs) account for their taxes owed on their 1040s by attaching a Schedule C, Business Income or Loss.  Under certain conditions, a much shorter form can be used: Schedule C-EZ, Net Profit from Business.  This form is much easier to use, but can only be used by a limited scope of taxpayers...

For more information on this, see the Form and Instructions for Schedule C-EZ.

All trade or business income is taxable.  If you are in business on your own and are not incorporated, you are taxed as a sole proprietor.  Most often, you will receive a 1099-MISC reporting income received, but not always.

Against this income, you can deduct ordinary and necessary business expenses.  This can include meals and entertainment, travel, supplies, utilities, a home office, business assets, an inventory, use of a vehicle, etc.  Under normal circumstances, these expenses must be itemized and deducted.

Some taxpayers qualify to use the Schedule C-EZ, which is a much simpler way of reporting this income.  There are only three lines of income to report (as well as general information on your vehicle if it was used as a business asset):

1. Total self-employment income for the business;
2. Aggregate ordinary and necessary business expenses (limited to the lesser of total self-employment income for the business or $5000, whichever is less);
3. Net income from self employment (Line 1 minus Line 2)

Not surprisingly, this ridiculously-easy form cannot be used by everyone.  Excluded taxpayers would have one or more of the following characteristics:

1. You have business expenses of more than $5000.  I suppose you could still file, but why would you?
2. You use the accrual method of accounting (unlikely in most cases, since individuals are required to use the cash method of accounting).
3. You carry an inventory.  This needs to be tracked over multiple years, so this eliminates business owners dealing in actual goods.
4. You had a net loss.  The most the Schedule C-EZ can do is cancel out business income.
5. You had more than one business as a sole proprietor or statutory employee (traveling salesman).
6. You had employees during the year.
7. You are required to file a 4562 asset depreciation form because you placed business assets into service this year (normally structures, computers, and furniture).
8. You have a home office deduction.  This requires a separate form.
9. You have prior-year passive losses from the business.

Even more than the restrictions, it should not be used by everyone--in particular, those with more than $5000 in ordinary and necessary business expenses.  This form is meant mostly for those with small amounts of business expenses and (probably) business income.

I also want to dispel a notion that has gotten out there: the Schedule C-EZ is not a "standard deduction" for business.  Rather, it is a simplified method of reporting actual ordinary and necessary expenses incurred, within the limits listed above.

In any case, if you have a net profit from all self-employed activities of more than $400, you must also pay self-employment tax.  The good news is that you take take three adjustments to income in this case:

1. One-half of self-employment tax (roughly equating you with an incorporated business);
2. Self-employed health insurance premiums paid;
3. SEP, Simple, and Qualified Plans associated with your small business