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Business Income & Expenses


Definition: An individual person, conducting business as an independent contractor or as a sole proprietor, reports the income and expenses of the business activity on a Schedule C. Any type of business activity can be reported on a Schedule except for farming (Schedule F) and rental activities (Schedule E). On the Schedule C, the individual reports total business income from all sources, reports various types of business expenses, and calculates the net profit or loss for the business. The net profit or loss is carried to Form 1040, line 12. As a self-employed person, the individual must also calculate the Self-Employment Tax using Schedule SE. The IRS may consider a business to be a hobby if the business continues to lose money year after year. Generally, the IRS will use a rule of thumb to determine if a business is a hobby: if a business loses money in 3 out of 5 years, then it may be a hobby. If the IRS determines your business is really a hobby, then your Schedule C loss will be disallowed. Any profit from your hobby is included as "Other Income" on Form 1040, line 21. Any loss from a hobby is not reported on your tax return.
Also Known As: self employment income, schedule C income, sole proprietor income.
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