How to Prepare Schedule C on Form 1040

1). Fill out the taxpayer's name under "Name of proprietor" and social security number in the appropriate areas.
2). On line A, describe the business or profession.
3). On line B, place your business activity code. Please visit www.irs.gov/pub/irs-pdf/i1040sc.pdf page C-9 for specific codes.
4). On line C, place the taxpayer's business name or DBA ("Doing Business As").
5). On line D, place the taxpayer's EIN ("Employer Identification Number" if obtained through the IRS).
6). On line E, place the principal address of the business.
7). On line F, place the accounting method in which the business records its income and expenses. If recording daily receipts and expenses, then this would be "Cash" basis. If recording accounts receivable and accounts payable, then this would be "Accrual" basis. Although the balance sheet is not required for the schedule C, using accounts receivable is a form of revenue recognition.
8). On line G, check the box "Yes" or "No" if the taxpayer's "Materially Participate" in the operation of the business. "Materially Participate" is defined from the following 7 tests below:
1. Participated in the activity for more than 500 hours during the tax year.
2. Participation was substantially all of the participation than all individuals.
3. Participated more than 100 hours during the tax year.
4. Participated in more than 500 hours and had a significant participation for the year.
5. Materially participated in the activity in any of the 5 prior 10 tax years.
6. Activity is a personal service activity.
7. Participated on a regular, continuous, and substantial basis for more than 100 hours during the tax year.
9). On line H, check the box if the business was new for the related tax year.
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In part 1, fill out the total income and subtract the cost of goods sold.
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In part 2, fill out the expenses paid for during the tax year. Beware of excessive deductions taken for car and truck, commissions and fees, contract labor, interest, repairs and maintenance, and other expenses. Car and truck expenses can be audited for deduction methods (the taxpayer has to choose between standard mileage or actual expenses and show the depreciation of the vehicle). Commissions and fees and contract labor paid out in excess of $500 to an individual will need to be supported by a 1099-MISC form). Interest expense will also need to be supported by a 1099-MORT form provided from a lender. Excessive repairs and maintenance will throw a red flag to the IRS as this has been an account of inquiry. Other deductions will also be reviewed if excessive and not detailed.

Capital expenses can be elected for section 179 expense up to $250,000 in 2009 for purchases placed in service up to a maximum of $800,000. Please review the instructions for form 4562 for more details.
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Total the expenses and place in Line 28.
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On line 29, subtract line 28 from line 7.
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If the taxpayer elected to deduct business expenses for the use of the home, place the amount from form 8829 on line 30. Must have substantial support for calculations home use deductions if inquired by the IRS.
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On line 31, subtract line 30 from line 29.
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Place the net income/(loss) on line 12 of form 1040.
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If there is a net income, also fill out Schedule SE, line 2.
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If there is a net loss, check the box 32a or 32b. If this is a material activity, please check box 32a.