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Caution: DRAFT—NOT FOR FILING
This is an early release draft of an IRS tax form, instructions, or publication,
which the IRS is providing for your information. Do not file draft forms and do
not rely on draft forms, instructions, and publications for filing. We do not
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with respect to draft or final forms, please respond to the relevant information
collection through the Federal Register process; for more info, click here.Department of the Treasury
Internal Revenue Service
2020 Instructions for Schedule C
DRAFT AS OF
Profit or Loss
Use Schedule C (Form 1040) to report income or (loss) from a business you operated
or a profession you practiced as a sole proprietor. An activity qualifies as a business if
From Business
your primary purpose for engaging in the activity is for income or profit and you are
involved in the activity with continuity and regularity. For example, a sporadic activi-
ty, not-for-profit activity, or a hobby does not qualify as a business. To report income
December 2, 2020
from a nonbusiness activity, see the instructions for Schedule 1 (Form 1040), line 8.
Also, use Schedule C to report (a) wages and expenses you had as a statutory em-
ployee, (b) income and deductions of certain qualified joint ventures, and (c) certain
amounts shown on a Form 1099, such as Form 1099-MISC, Form 1099-NEC, and
Form 1099-K. See the instructions on your Form 1099 for more information about
what to report on Schedule C.
You may be subject to state and local taxes and other requirements such as business
licenses and fees. Check with your state and local governments for more information.
Section references are to the Internal amounts as “other income” on line 6. (loss) that is not subject to
Revenue Code unless otherwise noted. For more information about these cred- self-employment tax.
its, see Covid-19-Related Tax Credits • Schedule F (Form 1040) to report
Future Developments for Paid Sick and Paid Family Leave: profit or (loss) from farming.
For the latest information about devel- Overview. • Schedule J (Form 1040) to figure
opments related to Schedule C and its your tax by averaging your farming or
instructions, such as legislation enacted Reminders fishing income over the previous 3
after they were published, go to IRS.gov/ years. Doing so may reduce your tax.
ScheduleC.
Small Business and Self-Employed
(SB/SE) Tax Center. Do you need help
• Schedule SE (Form 1040) to pay
self-employment tax on income from
with a tax issue or preparing your return,
What's New or do you need a free publication or
any trade or business.
• Form 3800 to claim any of the
Standard mileage rate. The business form? SB/SE serves taxpayers who file general business credits.
standard mileage rate for 2020 de- Form 1040, Form 1040-SR, Schedules
C, E, F, or Form 2106, as well as small
• Form 4562 to claim depreciation
creased to 57.5 cents per mile. (including the special allowance) on
business taxpayers with assets under $10 assets placed in service in 2020, to claim
Excess business loss limitation. The
million. For additional information, visit amortization that began in 2020, to
excess business loss limitation under
the Small Business and Self-Employed make an election under section 179 to
section 461(l) has been retroactively re-
Tax Center at IRS.gov/SmallBiz. expense certain property, or to report
pealed and will not apply for 2020.
Gig Economy Tax Center. The gig (or information on listed property.
Deductibility of expenses related to
Paycheck Protection Program (PPP)
on-demand, sharing, or access) economy • Form 4684 to report a casualty or
refers to an activity where people earn theft gain or (loss) involving property
loan. Certain deductions are not availa-
income providing on-demand work, used in your trade or business or
ble for a business that received a PPP
services, or goods. Visit IRS.gov/Gig to income-producing property.
loan if that loan is forgiven or partially
forgiven. For additional information, see
get more information about the tax con- • Form 4797 to report sales,
sequences of participating in the gig exchanges, and involuntary conversions
Expenses related to a forgiven Paycheck
economy. (not from a casualty or theft) of trade or
Protection Program (PPP) loan.
business property.
The Families First Coronavirus Re-
sponse Act (FFCRA). From April 1, General • Form 6198 to apply a limitation to
your loss if you have a business loss and
2020, through December 31, 2020, the Instructions you have amounts invested in the
FFCRA provides businesses with tax business for which you are not at risk.
credits to cover certain costs of provid- Other Schedules and Forms • Form 6252 to report income from
ing employees with required paid sick You May Have To File an installment agreement.
leave and expanded family and medical
• Schedule A (Form 1040) to deduct • Form 7202 to figure a refundable
leave reasons related to the coronavirus. credit for certain self-employed persons
interest, taxes, and casualty losses not
Under the FFCRA, the amount of these impacted by the coronavirus.
related to your business.
credits shall be included in the recipient
• Schedule E (Form 1040) to report • Form 8582 to apply a limitation to
employers’ gross income. Report these your loss from passive activities.
rental real estate and royalty income or
C-1
Oct 16, 2020 Cat. No. 24329W• Form 8594 to report certain Business Owned and Making the election. To make this
purchases or sales of groups of assets
Operated by Spouses election, divide all items of income,
that constitute a trade or business. gain, loss, deduction, and credit attribut-
• Form 8824 to report like-kind Generally, if you and your spouse joint-
able to the business between you and
exchanges. ly own and operate an unincorporated
your spouse based on your interests in
• Form 8829 to claim actual business and share in the profits and los-
the business. Each of you must file a
expenses for business use of your home. ses, you are partners in a partnership,
separate Schedule C or F. Enter your
DRAFT AS OF
• Form 8990 to determine whether whether or not you have a formal part-
share of the applicable income, deduc-
your business interest deduction is nership agreement. You generally have
tion, or (loss), on the appropriate lines of
limited. to file Form 1065 instead of Schedule C
your separate Schedule C or F. Each of
• Form 8995 or 8995-A to claim a for your joint business activity; howev-
you also may need to file a separate
deduction for qualified business income. er, you may not have to file Form 1065
Schedule SE to pay self-employment
if either of the following applies.
Single-member limited liability com- tax. If the business was taxed as a part-
December 2, 2020
pany (LLC). Generally, a single-mem- • You and your spouse elect to be nership before you made the election,
treated as a qualified joint venture. See
ber domestic LLC is not treated as a sep- the partnership will be treated as termi-
Qualified Joint Venture next.
arate entity for federal income tax nating at the end of the preceding tax
purposes. If you are the sole member of • You and your spouse wholly own year. For information on how to report
the unincorporated business as commun-
a domestic LLC, file Schedule C (or the termination of the partnership, see
ity property and you treat the business as
Schedule E or F, if applicable) unless Pub. 541.
a sole proprietorship. See Community
you have elected to treat the domestic Revoking the election. The election
Income, later.
LLC as a corporation. See Form 8832 can be revoked only with the permission
Otherwise, use Form 1065. See Pub. 541
for details on making this election and of the IRS. However, the election re-
for information about partnerships.
for information about the tax treatment mains in effect only for as long as you
of a foreign LLC. and your spouse continue to meet the re-
Qualified Joint Venture
Single-member limited liability com- quirements to make the election. If you
panies (LLCs) with employees. A sin- You and your spouse can elect to treat and your spouse fail to meet the require-
gle-member LLC must file employment an unincorporated business as a quali- ments for any year, you will need to
tax returns using the LLC's name and fied joint venture instead of a partner- make a new election to be treated as a
employer identification number (EIN) ship if you: qualified joint venture in any future
rather than the owner's name and EIN, • Each materially participate in the year.
even if the LLC is not treated as a sepa- business (see Material participation, lat-
Employer identification number
rate entity for federal income tax purpo- er, in the instructions for line G),
(EIN). You and your spouse do not
ses. • Are the only owners of the busi- need to obtain an EIN to make the elec-
ness, and
Heavy highway vehicle use tax. If you tion. But you may need an EIN to file
use certain highway trucks, truck-trail- • File a joint return for the tax year. other returns, such as employment or ex-
ers, tractor-trailers, or buses in your Making the election will allow you to cise tax returns. To apply for an EIN,
trade or business, you may have to pay a avoid the complexity of Form 1065, but see the Instructions for Form SS-4 or
federal highway motor vehicle use tax. still give each of you credit for social se- visit IRS.gov/EIN.
See the Instructions for Form 2290 to curity earnings on which retirement ben-
Rental real estate business. If you and
find out if you must pay this tax and vis- efits, disability benefits, survivor bene-
your spouse make the election for your
it IRS.gov/Trucker for the most recent fits, and insurance (Medicare) benefits
rental real estate business, you must
developments. are based. In most cases, this election
each report your share of income and
will not increase the total tax owed on
Information returns. You may have to deductions on Schedule E. Rental real
the joint return.
file information returns for wages paid estate income generally is not included
to employees, certain payments of fees Jointly owned property. You and your in net earnings from self-employment
and other nonemployee compensation, spouse must operate a business to make subject to self-employment tax and gen-
interest, rents, royalties, real estate trans- this election. Do not make the election erally is subject to the passive loss limi-
actions, annuities, and pensions. See for jointly owned property that is not a tation rules. Electing qualified joint ven-
Line I, later, and the 2020 General In- trade or business. ture status does not alter the application
structions for Certain Information Re- Only businesses that are owned of the self-employment tax or the pas-
turns for details and other payments that ! and operated by spouses as sive loss limitation rules.
may require you to file a Form 1099. CAUTION co-owners (and not in the name More information. For more informa-
If you received cash of more than of a state law entity) qualify for the elec- tion on qualified joint ventures, go to
$10,000 in one or more related transac- tion. Thus, a business owned and oper- IRS.gov/QJV.
tions in your trade or business, you may ated by spouses through a limited liabil-
have to file Form 8300. For details, see ity company (LLC) does not qualify for Community Income
Pub. 1544. the election of a qualified joint venture.
If you and your spouse wholly own an
unincorporated business as community
C-2property under the community property tax year or $4 million in any combina-
laws of a state, foreign country, or U.S. tion of tax years. (At least $50,000 for a Line B
possession, you can treat your wholly single tax year if the loss arose from a Enter on line B the six-digit code from
owned, unincorporated business as a foreign currency transaction defined in the Principal Business or Professional
sole proprietorship, instead of a partner- section 988(c)(1), whether or not the Activity Codes chart at the end of these
ship. Any change in your reporting posi- loss flows through from an S corpora- instructions.
tion will be treated as a conversion of tion or partnership.)
Line D
DRAFT AS OF
the entity. • Certain transactions of interest en-
Report your income and deductions tered into after November 1, 2006, that
are the same or substantially similar to Enter on line D the employer identifica-
as follows. tion number (EIN) that was issued to
• If only one spouse participates in one of the types of transactions that the
IRS has identified by published guid- you on Form SS-4. Do not enter your
the business, all of the income from that SSN on this line. Do not enter another
business is the self-employment earn- ance as a transaction of interest.
December 2, 2020
taxpayer's EIN (for example, from any
ings of the spouse who carried on the See the Instructions for Form 8886 Forms 1099-MISC that you received). If
business. for more details. you do not have an EIN, leave line D
• If both spouses participate, the in- blank.
come and deductions are allocated to the Capital Construction Fund
spouses based on their distributive Do not claim on Schedule C the deduc- You need an EIN only if you have a
shares. tion for amounts contributed to a capital qualified retirement plan or are required
• If either or both spouses are part- construction fund set up under chap- to file employment, excise, alcohol, to-
ners in a partnership, see Pub. 541. ter 535 of title 46 of the United States bacco, or firearms returns, or are a payer
• If both spouses elected to treat the Code. Instead, reduce the amount you of gambling winnings. If you need an
business as a qualifying joint venture, would otherwise enter on Form 1040 or EIN, see the Instructions for Form SS-4.
see Qualified Joint Venture, earlier. 1040-SR, line 15, by the amount of the Single-member LLCs. If you are the
States with community property laws deduction. Next to line 15, enter “CCF” sole owner of an LLC that is not treated
include Arizona, California, Idaho, Lou- and the amount of the deduction. For de- as a separate entity for federal income
isiana, Nevada, New Mexico, Texas, tails, see Pub. 595. tax purposes, enter on line D the EIN
Washington, and Wisconsin. See Pub. that was issued to the LLC (in the LLC's
555 for more information about com-
Additional Information legal name) for a qualified retirement
munity property laws. See Pub. 334 for more information for plan, to file employment, excise, alco-
small businesses. hol, tobacco, or firearms returns, or as a
Reportable Transaction payer of gambling winnings. If you do
Disclosure Statement not have such an EIN, leave line D
Use Form 8886 to disclose information Specific blank.
for each reportable transaction in which
you participated. Form 8886 must be Instructions Line E
filed for each tax year that your federal Filers of Form 1041. Do not complete Enter your business address. Show a
income tax liability is affected by your the block labeled “Social security num- street address instead of a box number.
participation in the transaction. You may ber (SSN).” Instead, enter the employer Include the suite or room number, if
have to pay a penalty if you are required identification number (EIN) issued to any. If you conducted the business from
to file Form 8886 but do not do so. You the estate or trust on line D. your home located at the address shown
also may have to pay interest and penal- on page 1 of your tax return, you do not
ties on any reportable transaction under-
statements. The following are reportable
Line A have to complete this line.
Describe the business or professional ac-
transactions.
• Any listed transaction that is the tivity that provided your principal Line F
same as or substantially similar to tax source of income reported on line 1. If Generally, you can use the cash method,
avoidance transactions identified by the you owned more than one business, you an accrual method, or any other method
IRS. must complete a separate Schedule C for permitted by the Internal Revenue Code.
• Any transaction offered to you or a each business. Give the general field or In all cases, the method used must clear-
related party under conditions of confi- activity and the type of product or serv- ly reflect income. Unless you are a small
dentiality for which you paid an advisor ice. If your general field or activity is business taxpayer (defined later in Part
a fee of at least $50,000. wholesale or retail trade, or services III), you must use an accrual method for
• Certain transactions for which you connected with production services sales and purchases of inventory items.
or a related party have contractual pro- (mining, construction, or manufactur- Special rules apply to long-term con-
tection against disallowance of the tax ing), also give the type of customer or tracts (see section 460 for details).
benefits. client. For example, “wholesale sale of
hardware to retailers” or “appraisal of If you use the cash method, show all
• Certain transactions resulting in a real estate for lending institutions.” items of taxable income actually or con-
loss of at least $2 million in any single structively received during the year (in
C-3cash, property, or services). Income is 2019-43) for a list of automatic changes, can elect to have your business treated
constructively received when it is credi- including a description of its effect on as a qualified joint venture instead of a
ted to your account or set aside for you prior lists of automatic changes. Rev. partnership (see Qualified Joint Venture,
to use. Also, show amounts actually paid Proc. 2019-43 is available at earlier).
during the year for deductible expenses. IRS.gov/irb/2019-48_IRB#RP-2019-43. For purposes of the passive activity
However, if the payment of an expendi- rules, you materially participated in the
ture creates an asset having a useful life Line G operation of this trade or business activi-
DRAFT AS OF
that extends beyond 12 months or the ty during 2020 if you met any of the fol-
If your business activity was not a rental
end of the next taxable year, it may not lowing seven tests.
activity and you met any of the material
be deductible or may be deductible only
participation tests, explained next, or the 1. You participated in the activity
in part for the year of the payment. See
exception for oil and gas applies, check for more than 500 hours during the tax
chapter 1 of Pub. 535.
the “Yes” box. Otherwise, check the year.
December 2, 2020
For amounts includible in income and “No” box. If you check the “No” box, 2. Your participation in the activity
deductible as expense under an accrual this activity is passive. If you have a loss for the tax year was substantially all of
method, see Pub. 538. from a passive activity, see Limit on los- the participation in the activity of all in-
ses, later. If you have a profit from the dividuals (including individuals who did
To change your accounting method, rental of property to a nonpassive activi- not own any interest in the activity) for
you generally must file Form 3115. You ty, see Recharacterization of Passive In- the tax year.
also may have to make an adjustment to come in Pub. 925 to find out how to re-
prevent amounts of income or expense 3. You participated in the activity
port the net income.
from being duplicated or omitted. This for more than 100 hours during the tax
is called a section 481(a) adjustment. Material participation. For purposes year, and you participated at least as
of the seven material participation tests much as any other person for the tax
Example. You change to the cash year. This includes individuals who did
method of accounting and choose to ac- listed later, participation generally in-
cludes any work you did in connection not own any interest in the activity.
count for inventoriable items in the same
manner as non-incidental materials and with an activity if you owned an interest 4. The activity is a significant par-
supplies for the 2020 tax year. You ac- in the activity at the time you did the ticipation activity for the tax year, and
crued sales in 2019 for which you re- work. The capacity in which you did the you participated in all significant partici-
ceived payment in 2020. You must re- work does not matter. However, work is pation activities for more than 500 hours
port those sales in both years as a result not treated as participation if it is work during the year. An activity is a “signifi-
of changing your accounting method that an owner would not customarily do cant participation activity” if it involves
and must make a section 481(a) adjust- in the same type of activity and one of the conduct of a trade or business, you
ment to prevent duplication of income. your main reasons for doing the work participated in the activity for more than
was to avoid the disallowance of losses 100 hours during the tax year, and you
A net negative section 481 adjust- or credits from the activity under the did not materially participate under any
ment is generally taken into account in passive activity rules. of the material participation tests (other
the year of change. A net positive sec- than this test 4).
tion 481(a) adjustment is generally taken Work you did as an investor in an ac-
into account over a period of 4 years. In- tivity is not treated as participation un- 5. You materially participated in the
clude any net positive section 481(a) ad- less you were directly involved in the activity for any 5 of the prior 10 tax
justments on line 6. If the net section day-to-day management or operations of years.
481(a) adjustment is negative, report it the activity. Work done as an investor 6. The activity is a personal service
in Part V. includes: activity in which you materially partici-
More information. For more informa-
• Studying and reviewing financial pated for any 3 prior tax years. A per-
statements or reports on the activity, sonal service activity is an activity that
tion about changing your accounting
method and the section 481(a) adjust-
• Preparing or compiling summaries involves performing personal services in
or analyses of the finances or operations the fields of health, law, engineering, ar-
ment, see the Instructions for Form of the activity for your own use, and
3115. Additional information also is chitecture, accounting, actuarial science,
available in various revenue procedures.
• Monitoring the finances or opera- performing arts, consulting, or any other
tions of the activity in a nonmanagerial trade or business in which capital is not
See Rev. Proc. 2015-13 (and any subse- capacity.
quent revenue procedures modifying a material income-producing factor.
Rev. Proc. 2015-13) for the general pro- Participation by your spouse during 7. Based on all the facts and circum-
cedures to obtain the advance (non-auto- the tax year in an activity you own can stances, you participated in the activity
matic) consent or automatic consent of be counted as your participation in the on a regular, continuous, and substantial
the Commissioner to change a method activity. This rule applies even if your basis for more than 100 hours during the
of accounting. Rev. Proc. 2015-13 is spouse did not own an interest in the ac- tax year.Your participation in managing
available at IRS.gov/irb/ tivity and whether or not you and your the activity does not count in determin-
2015-5_IRB#RP-2015-13. See Rev. spouse file a joint return. However, this ing if you meet this test if any person
Proc. 2019-43 (and any subsequent reve- rule does not apply for purposes of de- (except you) (a) received compensation
nue procedures modifying Rev. Proc. termining whether you and your spouse for performing management services in
C-4connection with the activity, or (b) spent ties, and pensions. You also may have to Income you report on Sched-
more hours during the tax year than you file an information return if you sold TIP ule C may be qualified business
spent performing management services $5,000 or more of consumer products to income and entitle you to a de-
in connection with the activity (regard- a person on a buy-sell, deposit-commis- duction on Form 1040 or 1040-SR,
less of whether the person was compen- sion, or other similar basis for resale. line 13.
sated for the services). The Guide to Information Re-
TIP turns in the 2020 General In- Line 1
DRAFT AS OF
Rental of personal property. General-
ly, a rental activity (such as long-term structions for Certain Informa-
Enter gross receipts from your trade or
equipment leasing) is a passive activity tion Returns identifies which Forms
business. Be sure to check any Forms
even if you materially participated in the 1099 must be filed, the amounts to re-
1099 you received for business income
activity. However, if you met any of the port, and the due dates for the required
that must be reported on this line.
five exceptions listed under Rental Ac- Forms 1099.
December 2, 2020
tivities in the Instructions for Form If you received one or more Forms
8582, the rental of the property is not 1099-NEC, be sure line 1 includes
Part I. Income
treated as a rental activity and the mate- amounts properly shown on your Forms
rial participation rules explained earlier 1099-NEC. If the total amounts that
apply. were reported in box 1 of Forms
Except as otherwise provided in the In-
1099-NEC are more than the total you
Exception for oil and gas. If you are ternal Revenue Code, gross income in-
are reporting on line 1, attach a state-
filing Schedule C to report income and cludes income from whatever source de-
ment explaining the difference.
deductions from an oil or gas well in rived. In certain circumstances, howev-
which you own a working interest di- er, gross income does not include extra- Statutory employees. If you received a
rectly or through an entity that does not territorial income that is qualifying for- Form W-2 and the "Statutory employee"
limit your liability, check the “Yes” box. eign trade income. Use Form 8873 to box in box 13 of that form was checked,
The activity of owning a working inter- figure the extraterritorial income exclu- report your income and expenses related
est is not a passive activity, regardless of sion. Report it on Schedule C as ex- to that income on Schedule C. Enter
your participation. plained in the Instructions for Form your statutory employee income from
8873. box 1 of Form W-2 on line 1 of Sched-
Limit on losses. Your business activity
ule C and check the box on that line. So-
loss may be limited if you checked the If you were a debtor in a chapter 11 cial security and Medicare tax should
“No” box on line G. In addition, your bankruptcy case during 2020, see Chap- have been withheld from your earnings;
rental activity loss may be limited even ter 11 Bankruptcy Cases in the Instruc- as a result, you do not owe self-employ-
if you materially participated. In gener- tions for Forms 1040 and 1040-SR (un- ment tax on these earnings. Statutory
al, a business activity in which you do der Income) and the Instructions for employees include full-time life insur-
not materially participate or a rental ac- Schedule SE. ance agents, certain agent or commis-
tivity is a passive activity and you have
Be sure to report all income attributa- sion drivers and traveling salespersons,
to use Form 8582 to apply a limitation
ble to your trade or business from all and certain homeworkers.
that may reduce the loss, if any, that you
may enter on Schedule C, line 31. For sources. You may receive one or more If you had both self-employment in-
details, see Pub. 925. Forms 1099 from people who are re- come and statutory employee income,
quired to provide information to the IRS you must file two Schedules C. You
Line H listing amounts that may be income you
received as a result of your trade or busi-
cannot combine these amounts on a sin-
gle Schedule C.
If you started or acquired this business ness activities. The following is a list of
in 2020, check the box on line H. Also, Qualified joint ventures should
some of the common Forms 1099.
check the box if you are reopening or re- • 1099-MISC. For more information ! report rental real estate income
CAUTION not subject to self-employment
starting this business after temporarily about what is being reported on Form
closing it, and you did not file a 2019 tax on Schedule E. See Qualified Joint
1099-MISC, see the Instructions for Re- Venture, earlier, and the Instructions for
Schedule C for this business. cipient included on that form. Schedule E.
• 1099-NEC. For more information
Line I about what is being reported on Form
Installment sales. Generally, the in-
If you made any payment in 2020 that 1099-NEC, see the Instructions for Re-
stallment method cannot be used to re-
would require you to file any Forms cipient included on that form.
port income from the sale of (a) personal
1099, check the “Yes” box. Otherwise, • 1099-K. For more information property regularly sold under the install-
check the “No” box. about what is being reported on Form
ment method, or (b) real property held
1099-K, see the Instructions for Payee
for resale to customers. But the install-
You may have to file information re- included on that form and visit IRS.gov/
ment method can be used to report in-
turns for wages paid to employees, cer- Gig.
come from sales of certain residential
tain payments of fees and other nonem- lots and timeshares if you elect to pay
ployee compensation, interest, rents, interest on the tax due on that income
royalties, real estate transactions, annui-
C-5after the year of sale. See section 453(l) employees with required paid sick leave Exception for a small business tax-
(2)(B) for details. If you make this elec- and expanded family and medical leave payer. A small business taxpayer (de-
tion, include the interest in the total on reasons related to the coronavirus. fined later in Part III) is not required to
Schedule 2 (Form 1040), line 8. Check capitalize certain expenses to inventory
If the business use percentage of any
box c and enter the amount of interest or other property. See Pub. 538 for more
listed property (defined in Line 13, later)
and “453(l)(3)” on the line next to that details.
dropped to 50% or less in 2020, report
box.
on this line any recapture of excess de- Exception for creative property. If
DRAFT AS OF
If you use the installment method, at- preciation, including any section 179 ex- you are a freelance artist, author, or pho-
tach a statement to your return. Show pense deduction. Use Part IV of Form tographer, you may be exempt from the
separately for 2020 and the 3 preceding 4797 to figure the recapture. Also, if the capitalization rules. However, your per-
years: gross sales, cost of goods sold, business use percentage drops to 50% or sonal efforts must have created (or rea-
gross profit, percentage of gross profit to less on leased listed property (other than sonably be expected to create) the prop-
gross sales, amounts collected, and gross
December 2, 2020
a vehicle), include on this line any inclu- erty. This exception does not apply to
profit on amounts collected. sion amount. See chapter 5 of Pub. 946 any expense related to printing, photo-
to figure the amount. graphic plates, motion picture films, vid-
Line 2 eo tapes, or similar items. These expen-
Report your sales returns and allowan- ses are subject to the capitalization rules.
ces as a positive number on line 2. A Part II. Expenses For details, see Uniform Capitalization
Rules in Pub. 538.
sales return is a cash or credit refund
you gave to customers who returned de- Expenses related to a forgiven Pay-
fective, damaged, or unwanted products. check Protection Program (PPP) loan. Line 9
A sales allowance is a reduction in the If you received a PPP loan under section
7(a)(36) of the Small Business Act, no You can deduct the actual expenses of
selling price of products, instead of a operating your car or truck or take the
cash or credit refund. deduction is allowed for an expense if
the payment of the expense results in standard mileage rate. This is true even
forgiveness of all or part of the loan and if you used your vehicle for hire (such as
Line 6 the income associated with the forgive- a taxicab). You must use actual expen-
Report on line 6 business income not re- ness is excluded from gross income. Ex- ses if you used five or more vehicles si-
ported elsewhere in Part I. Be sure to in- penses that may result in forgiveness of multaneously in your business (such as
clude amounts from the following. the loan include: in fleet operations). You cannot use ac-
• Finance reserve income. tual expenses for a leased vehicle if you
• Payroll costs, previously used the standard mileage
• Scrap sales. • Certain employee benefits relating rate for that vehicle.
• Bad debts you recovered. to healthcare,
• Interest (such as on notes and • Interest on a mortgage, You can take the standard mileage
accounts receivable). • Rent, rate for 2020 only if you:
• State gasoline or fuel tax refunds • Utilities, and • Owned the vehicle and used the
you received in 2020. • Interest on any other existing debt. standard mileage rate for the first year
• Any amount of credit for biofuel Reduce the amounts on lines 8 you placed the vehicle in service, or
claimed on line 2 of Form 6478. through 26 by the amounts you can’t de- • Leased the vehicle and are using
• Any amount of credit for biodiesel duct as a result of a forgiven PPP loan. the standard mileage rate for the entire
and renewable diesel claimed on line 8 For more information, see Notice lease period.
of Form 8864. 2020-32. Notice 2020-32 is available at
• Credit for federal tax paid on fuels IRS.gov/irb/ If you take the standard mileage rate:
claimed on your 2019 Form 1040 or 2020-21_IRB#NOT-2020-32. • Multiply the number of business
Form 1040-SR. miles driven by 57.5 cents, and
• Prizes and awards related to your Capitalizing costs of producing prop- • Add to this amount your parking
trade or business. erty and acquiring property for re- fees and tolls.
• Amounts you received in your sale. If you produced real or tangible
Enter the total on line 9. Do not de-
trade or business as shown on Form personal property or acquired real or
duct depreciation, rent or lease pay-
1099-PATR. personal property for resale, you gener-
ments, or your actual operating expen-
• Any amount of credit for qualified ally must capitalize certain expenses in
ses.
sick and family leave wages from inventory or other property. These ex-
Form(s) 941, lines 11b and 13c, or from penses include the direct costs of the If you deduct actual expenses:
Form 944, lines 8b and 10d. property and any indirect costs properly • Include on line 9 the business por-
• Other kinds of miscellaneous allocable to that property. Reduce the tion of expenses for gasoline, oil, re-
business income. amounts on lines 8 through 26 and Part pairs, insurance, license plates, etc., and
• From April 1, 2020, through V by amounts capitalized. See Pub. 538 • Show depreciation on line 13 and
December 31, 2020, the FFCRA for a discussion of uniform capitaliza- rent or lease payments on line 20a.
refundable credits for providing tion rules.
For details, see chapter 4 of Pub. 463.
C-6Information on your vehicle. If you to your employees; instead, see Line 26, • Any property used for entertain-
claim any car and truck expenses, you later. ment or recreational purposes (such as
must provide certain information on the photographic, phonographic, communi-
You must file Form 1099-NEC to re-
use of your vehicle by completing one cation, and video recording equipment).
port contract labor payments of $600 or
of the following. more during the year. See the Instruc- Exception. Listed property does not
1. Complete Schedule C, Part IV, if tions for Forms 1099-MISC and include photographic, phonographic,
(a) you are claiming the standard mile- 1099-NEC for details. communication, or video equipment
DRAFT AS OF
age rate, you lease your vehicle, or your used exclusively in your trade or busi-
vehicle is fully depreciated, and (b) you Line 12 ness or at your regular business estab-
are not required to file Form 4562 for lishment. For purposes of this exception,
Enter your deduction for depletion on
any other reason. If you used more than a portion of your home is treated as a
this line. If you have timber depletion,
one vehicle during the year, attach a regular business establishment only if
attach Form T (Timber). See chapter 9
December 2, 2020
statement with the information requested that portion meets the requirements un-
of Pub. 535 for details.
in Schedule C, Part IV, for each addi- der section 280A(c)(1) for deducting ex-
tional vehicle. penses for the business use of your
2. Complete Form 4562, Part V, if Line 13 home.
you are claiming depreciation on your Recapture. See Line 6, earlier, if the
Depreciation and section 179 expense
vehicle or you are required to file Form business use percentage of any listed
deduction. Depreciation is the annual
4562 for any other reason (see Line 13, property dropped to 50% or less in 2020.
deduction allowed to recover the cost or
later).
other basis of business or investment
property having a useful life substantial- Line 14
Line 10 ly beyond the tax year. You also can de- Deduct contributions to employee bene-
Enter the total commissions and fees for preciate improvements made to leased fit programs that are not an incidental
the tax year. Do not include commis- business property. However, stock in part of a pension or profit-sharing plan
sions or fees that are capitalized or de- trade, inventories, and land are not de- included on line 19. Examples are acci-
ducted elsewhere on your return. preciable. Depreciation starts when you dent and health plans, group-term life
first use the property in your business or insurance, and dependent care assistance
You must file Form 1099-NEC to re- for the production of income. It ends programs. If you made contributions on
port certain commissions and fees of when you take the property out of serv- your behalf as a self-employed person to
$600 or more during the year. See the ice, deduct all your depreciable cost or a dependent care assistance program,
Instructions for Forms 1099-MISC and other basis, or no longer use the property complete Form 2441, Parts I and III, to
1099-NEC for details. in your business or for the production of figure your deductible contributions to
Sales of property. Generally, commis- income. You also can elect under sec- that program.
sions and other fees paid to facilitate the tion 179 to expense part or all of the cost
sale of property must be capitalized. of certain property you bought in 2020 You cannot deduct contributions you
However, if you are a dealer in property, for use in your business. See the Instruc- made on your behalf as a self-employed
enter on line 10 the commissions and tions for Form 4562 and Pub. 946 to fig- person for group-term life insurance.
fees you paid to facilitate the sale of that ure the amount to enter on line 13. Do not include on line 14 any contri-
property. When to attach Form 4562. You must butions you made on your behalf as a
Note. A dealer in property is a person complete and attach Form 4562 only if self-employed person to an accident and
who regularly sells property in the ordi- you are claiming: health plan. However, you may be able
nary course of their trade or business. • Depreciation on property placed in to deduct on Schedule 1 (Form 1040),
For more information on the capitali- service during 2020; line 16, the amount you paid for health
zation of commissions and fees, see the • Depreciation on listed property insurance on behalf of yourself, your
examples under Regulations section (defined later), regardless of the date it spouse, and dependents, even if you do
1.263(a)-1(e). was placed in service; or not itemize your deductions. See the in-
• A section 179 expense deduction. structions for Schedule 1 (Form 1040),
Line 11 If you acquired depreciable property line 16, for details.
Enter the total cost of contract labor for for the first time in 2020, see Pub. 946. You must reduce your line 14 deduc-
the tax year. Contract labor includes Listed property. Listed property gener- tion by the amount of any credit for
payments to persons you do not treat as ally includes but is not limited to: small employer health insurance premi-
employees (for example, independent • Passenger automobiles weighing ums determined on Form 8941. See
contractors) for services performed for 6,000 pounds or less; Form 8941 and its instructions to deter-
your trade or business. Do not include • Any other property used for trans- mine which expenses are eligible for the
contract labor deducted elsewhere on portation if the nature of the property credit.
your return, such as contract labor in- lends itself to personal use, such as mo-
cludible on line 17, 21, 26, or 37. Also, torcycles, pickup trucks, etc.; and
do not include salaries and wages paid
C-7not receive a Form 1098, enter the inter- In most cases, you must file the ap-
Line 15 est on line 16b. plicable form listed below if you main-
Deduct premiums paid for business in- If you paid more mortgage interest tain a pension, profit-sharing, or other
surance on line 15. Deduct on line 14 than is shown on Form 1098, see chap- funded-deferred compensation plan. The
amounts paid for employee accident and ter 4 of Pub. 535 to find out if you can filing requirement is not affected by
health insurance. Do not deduct amounts deduct the additional interest. If you can, whether or not the plan qualified under
credited to a reserve for self-insurance include the amount on line 16a. Attach a the Internal Revenue Code, or whether
DRAFT AS OF
or premiums paid for a policy that pays statement to your return explaining the or not you claim a deduction for the cur-
for your lost earnings due to sickness or difference and enter “See attached” in rent tax year. There is a penalty for fail-
disability. For details, see chapter 6 of the margin next to line 16a. ure to timely file these forms.
Pub. 535. Form 5500-EZ. File this form if you
If you and at least one other person
(other than your spouse if you file a joint have a one-participant retirement plan
Lines 16a and 16b that meets certain requirements. A
December 2, 2020
return) were liable for and paid interest
on the mortgage and the other person re- one-participant plan is a plan that covers
Interest allocation rules. The tax treat-
ceived the Form 1098, include your only you (or you and your spouse).
ment of interest expense differs depend-
ing on its type. For example, home share of the interest on line 16b. Attach Form 5500-SF. File this form electron-
mortgage interest and investment inter- a statement to your return showing the ically with the Department of Labor (at
est are treated differently. “Interest allo- name and address of the person who re- www.efast.dol.gov) if you have a small
cation” rules require you to allocate ceived the Form 1098. In the margin plan (fewer than 100 participants in
(classify) your interest expense so it is next to line 16b, enter “See attached.” most cases) that meets certain require-
deducted (or capitalized) on the correct If you paid interest in 2020 that also ments.
line of your return and receives the right applies to future years, deduct only the Form 5500. File this form electronical-
tax treatment. These rules could affect part that applies to 2020. ly with the Department of Labor (at
how much interest you are allowed to www.efast.dol.gov) for a plan that does
deduct on Schedule C. Line 17 not meet the requirements for filing
Generally, you allocate interest ex- Form 5500-EZ or Form 5500-SF.
Include on this line fees charged by ac-
pense by tracing how the proceeds of the countants and attorneys that are ordinary For details, see Pub. 560.
loan were used. See chapter 4 of Pub. and necessary expenses directly related
535 for details. to operating your business. Lines 20a and 20b
Limitation on business interest. You If you rented or leased vehicles, machi-
must file Form 8990 to deduct any inter- Include fees for tax advice related to
your business and for preparation of the nery, or equipment, enter on line 20a the
est expenses of this trade or business un- business portion of your rental cost. But
less you are a small business taxpayer tax forms related to your business. Also,
include expenses incurred in resolving if you leased a vehicle for a term of 30
(defined later in Part III) or meet one of days or more, you may have to reduce
the other filing exceptions listed in the asserted tax deficiencies related to your
business. your deduction by an amount called the
Instructions for Form 8990. inclusion amount. See Leasing a Car in
If you must file Form 8990, figure For more information, see Pub. 334 chapter 4 of Pub. 463 to figure this
the limit on your business interest ex- or 535. amount.
penses on Form 8990 before completing
Enter on line 20b amounts paid to
lines 16a and 16b. Follow the instruc- Line 18 rent or lease other property, such as of-
tions in How to report, later, but report
Include on this line your expenses for fice space in a building.
the reduced interest on lines 16a and
office supplies and postage.
16b. The interest you can't deduct this
year will carry forward to next year on Line 21
Form 8990. Line 19 Deduct the cost of incidental repairs and
If you are a small business taxpayer Enter your deduction for the contribu- maintenance that do not add to the prop-
or meet one of the other filing excep- tions you made for the benefit of your erty's value or appreciably prolong its
tions for Form 8990, follow the instruc- employees to a pension, profit-sharing, life. Do not deduct the value of your
tions in How to report, later, and report or annuity plan (including SEP, SIM- own labor. Do not deduct amounts spent
all of your deductible interest on lines PLE, and SARSEP plans described in to restore or replace property; they must
16a and 16b. Pub. 560). If the plan included you as a be capitalized.
self-employed person, enter the contri-
How to report. If you have a mortgage
on real property used in your business,
butions made as an employer on your Line 22
behalf on Schedule 1 (Form 1040),
enter on line 16a the interest you paid In most cases, you can deduct the cost of
line 15, not on Schedule C.
for 2020 to banks or other financial in- materials and supplies only to the extent
stitutions for which you received a Form This deduction may be subject to lim- you actually consumed and used them in
1098 (or similar statement). If you did itations. For more information on poten- your business during the tax year (unless
tial limitations, see Pub. 560. you deducted them in a prior tax year).
C-8However, if you had incidental materials Instead, treat these taxes as part of the dental expenses only if you did not pay
and supplies on hand for which you kept cost of the property. or incur meal expenses on a day you
no inventories or records of use, you can • State and local sales taxes imposed were traveling away from your tax
deduct the cost of those you actually on the buyer that you were required to home. The amount of the deduction is
purchased during the tax year, provided collect and pay over to state or local $5 a day. Incidental expenses include
that method clearly reflects income. governments. These taxes are not inclu- fees and tips given to porters, baggage
ded in gross receipts or sales nor are carriers, bellhops, hotel maids, stewards
DRAFT AS OF
You also can deduct the cost of they a deductible expense. However, if or stewardesses and others on ships, and
books, professional instruments, equip- the state or local government allowed hotel servants in foreign countries. They
ment, etc., if you normally use them you to retain any part of the sales tax do not include expenses for laundry,
within a year. However, if their useful- you collected, you must include that cleaning and pressing of clothing, lodg-
ness extends substantially beyond a amount as income on line 6. ing taxes, or the costs of telegrams or
year, you must generally recover their • Other taxes and license fees not re- telephone calls. You cannot use this
December 2, 2020
costs through depreciation. lated to your business. method on any day that you use the
standard meal allowance (as explained
Line 23
Do not reduce your deduction
in Line 24b, later).
You can deduct the following taxes and
! for social security and Medi-
CAUTION care taxes by the following
You cannot deduct expenses for at-
licenses on this line. amounts claimed on Form 944 or tending a convention, seminar, or simi-
• State and local sales taxes imposed Form(s) 941 for your business employ- lar meeting held outside the North
on you as the seller of goods or services. ees: American area unless the meeting is di-
If you collected this tax from the buyer, rectly related to your trade or business
you also must include the amount col- (1) The nonrefundable and refunda- and it is as reasonable for the meeting to
lected in gross receipts or sales on ble portions of the new CARES Act em- be held outside the North American area
line 1. ployee retention credit, and as within it. These rules apply to both
• Real estate and personal property (2) The nonrefundable and refunda- employers and employees. Other rules
taxes on business assets.
ble portions of the new FFCRA credits apply to luxury water travel.
• Licenses and regulatory fees for for qualified sick and family leave wa-
your trade or business paid each year to For details on travel expenses, see
state or local governments. But some li- ges.
chapter 1 of Pub. 463.
censes, such as liquor licenses, may Instead, item (1) reduces your deduc-
have to be amortized. See chapter 8 of
Pub. 535 for details.
tion for wages on line 26, and item (2) Line 24b
must be reported as income on line 6.
• Social security and Medicare taxes Enter your deductible business meal ex-
penses. This includes expenses for meals
paid to match required withholding from
your employees’ wages. Also, reduce
Line 24a while traveling away from home for
your deduction by the amount shown on Enter your expenses for lodging and business. Your deductible business meal
Form 8846, line 4. transportation connected with overnight expenses are a percentage of your actual
• Federal unemployment tax paid. travel for business while away from business meal expenses or standard meal
• Federal highway use tax. your tax home. In most cases, your tax allowance. See Amount of deduction,
• Contributions to state unemploy- home is your main place of business, re- later, for the percentage that applies to
ment insurance fund or disability benefit gardless of where you maintain your your actual meal expenses or standard
fund if they are considered taxes under family home. You cannot deduct expen- meal allowance. In most cases, the per-
state law. ses paid or incurred in connection with centage is 50%.
employment away from home if that pe-
Do not deduct the following. riod of employment exceeds 1 year. Al- Do not include entertainment expen-
• Federal income taxes, including so, you cannot deduct travel expenses ses on this line.
your self-employment tax. However, for your spouse, your dependent, or any Business meal expenses. You can de-
you can deduct one-half of your self-em- other individual unless that person is duct a percentage of the actual cost of a
ployment tax on Schedule 1 (Form your employee, the travel is for a bona meal if the following conditions are met.
1040), line 14 (but if filing Form fide business purpose, and the expenses • The meal expense was an ordinary
1040-NR, then only when covered under would otherwise be deductible by that and necessary expense in carrying on
the U.S. social security system due to an person. your trade or business;
international social security agreement).
Do not include expenses for meals on • The expense was not lavish or ex-
• Estate and gift taxes. this line. Instead, see Line 24b, later. Do
travagant under the circumstances;
• Taxes assessed to pay for improve- not include entertainment expenses on • You or your employee was present
ments, such as paving and sewers. at the meal;
this line.
• Taxes on your home or personal • The meal was provided to a cur-
use property. Instead of keeping records of your rent or potential business customer, cli-
• State and local sales taxes on prop- actual incidental expenses, you can use ent, consultant, or similar business con-
erty purchased for use in your business. an optional method for deducting inci- tact; and
C-9• In the case of food or beverages • Certain merchant mariners who are Do not reduce your deduction for any
provided during or at an entertainment under Coast Guard regulations. portion of a credit that was passed
event, the food and beverages were pur- However, you can fully deduct meals through to you from a pass-through enti-
chased separately from the entertain- and incidentals furnished or reimbursed ty. See the instructions for the credit
ment, or the cost of the food and bever- to an employee if you properly treat the form for more information.
ages was stated separately from the cost expense as wages subject to withhold- Do not include salaries and wages de-
of the entertainment on one or more ing. You also can fully deduct meals and ducted elsewhere on your return or
DRAFT AS OF
bills, invoices, or receipts. incidentals provided to a nonemployee amounts paid to yourself.
You cannot avoid the entertain- to the extent the expenses are includible
If you provided taxable fringe
in the gross income of that person and
! ment disallowance rule by in-
CAUTION flating the amount charged for reported on Form 1099-NEC. See Pub. ! benefits to your employees,
CAUTION such as personal use of a car,
food and beverages. 535 for details and other exceptions.
do not deduct as wages the amount ap-
December 2, 2020
Daycare providers. If you qualify as a plicable to depreciation and other ex-
See Notice 2018-76 for examples and family daycare provider, you can use the
more information. Notice 2018-76 is penses claimed elsewhere.
standard meal and snack rates, instead of
available at IRS.gov/irb/ actual costs, to figure the deductible cost In most cases, you are required to file
2018-42_IRB#NOT-2018-76. of meals and snacks provided to eligible Form W-2, Wage and Tax Statement,
Standard meal allowance. Instead of children. See Pub. 587 for details, in- for each employee. See the General In-
deducting the actual cost of your meals cluding recordkeeping requirements. structions for Forms W-2 and W-3.
while traveling away from home, you
can use the standard meal allowance for
your daily meals and incidental expen-
Line 25 Line 30
ses. Under this method, you deduct a Deduct utility expenses only for your Business use of your home. You may
specified amount, depending on where trade or business. be able to deduct certain expenses for
you travel, instead of keeping records of Local telephone service. If you used business use of your home, subject to
your actual meal expenses. However, your home phone for business, do not limitations. To claim a deduction for
you must still keep records to prove the deduct the base rate (including taxes) of business use of your home, you can use
time, place, and business purpose of the first phone line into your residence. Form 8829 or you can elect to determine
your travel. But you can deduct any additional costs the amount of the deduction using a sim-
The standard meal allowance is the you incurred for business that are more plified method.
federal M&IE rate. You can find these than the base rate of the first phone line. For additional information about
rates for locations inside and outside the For example, if you had a second line, claiming this deduction, see Pub. 587.
continental United States by visiting the you can deduct the business percentage
of the charges for that line, including the If you are not using the simpli-
General Services Administration's web- TIP fied method to determine the
site at www.gsa.gov. base rate charges.
amount of expenses you may
See chapter 1 of Pub. 463 for details deduct for business use of a home, do
on how to figure your deduction using Line 26 not complete the additional entry spaces
the standard meal allowance, including Enter the total salaries and wages for the on line 30 for total square footage of
special rules for partial days of travel. tax year reduced by the amount of the your home and of the part of the home
Amount of deduction. In most cases, following credit(s), if applicable. used for business. Just include the
you can deduct only 50% of your busi- • Work Opportunity Credit (Form amount from line 36 of your Form 8829
ness meal expenses, including meals in- 5884). on line 30.
curred while away from home on busi- • Employee Retention Credit (Form Simplified method. The simplified
ness. However, for individuals subject to 5884-A).
the Department of Transportation (DOT) • Empowerment Zone Employment method is an alternative to the calcula-
tion, allocation, and substantiation of ac-
hours of service limits, that percentage Credit (Form 8844).
is increased to 80% for business meals • Indian Employment Credit (Form tual expenses. In most cases, you will
figure your deduction by multiplying the
consumed during, or incident to, any pe- 8845).
riod of duty for which those limits are in • Credit for Employer Differential area (measured in square feet) used reg-
ularly and exclusively for business, reg-
effect. Individuals subject to the DOT Wage Payments (Form 8932).
hours of service limits include the fol- • Employer Credit for Paid Family ularly for daycare, or regularly for stor-
age of inventory or product samples, by
lowing. and Medical Leave (Form 8994).
$5. The area you use to figure your de-
• Certain air transportation workers Also reduce your deduction by duction cannot exceed 300 square feet.
(such as pilots, crew, dispatchers, me-
chanics, and control tower operators)
! the nonrefundable and refunda-
CAUTION ble portions of the new CARES
You cannot use the simplified method to
figure a deduction for rental use of your
who are under Federal Aviation Admin- Act employee retention credit claimed home.
istration regulations. on Form 944 or Form(s) 941 for your
• Interstate truck operators who are business employee. Electing to use the simplified meth-
under DOT regulations. od. You choose whether or not to use
C-10You can also read
