Beginning Schedule C

• 1). Determine that you have a sole proprietorship. If you contract your labor or services to someone or if you sell products for a profit and are not an employee, corporation, limited liability company or member of a partnership, then you are a sole proprietor.
  
  
• 2). Verify that your business is not farming or fishing. The rules and form (Schedule F) are different for farming and fishing.
  
  
• 3). Obtain a Schedule C from an Internal Revenue Service office. You may use a Schedule C-EZ if your expenses were $2,500 or less and you had no inventory, used cash accounting, did not have a loss, had only one sole proprietor business, had no employees, are not deducting depreciation, are not claiming business use of your home, and don't have prior year passive-activity losses from this business.
  
  
• 4). Fill in your name, Social Security Number and address on the form. You must also fill in the Employer Identification Number if you have to send in any alcohol, tobacco, firearms, excise, employment or fiduciary returns or if you have a Keogh plan.
  
  
• 5). Describe your primary business or professional activity and enter the six-digit business code. Enter the name of your business if you have one.
  
  
• 6). Check the box explaining your accounting method. Most people use a simple cash method. Schedule C-EZ uses only the cash method. The accrual and hybrid methods are commonly used only by those who keep inventory records.
  
  
• 7). Check the box "yes" or "no" as to whether you "materially participated" (took an active role) in the business. Also check the box if you started or bought this business in the tax year. These questions are not asked on a Schedule C-EZ.