How to fill out Schedule C for a product business

What Schedule C is and who files it

Schedule C (Form 1040) is the form you use to report income or loss from a business you operated or a profession you practiced as a sole proprietor. If you sell candles, prints or any other product on your own, without a partnership or corporation, that profit is usually reported here.

The IRS treats an activity as a business when your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. The instructions add that a sporadic activity, a not-for-profit activity, or a hobby does not qualify as a business, so a person who sells a few things now and then may not be running a business in the IRS sense.

If you own a single-member LLC, you also file Schedule C, unless you have elected to treat the domestic LLC as a corporation. If you run two different businesses, the IRS asks for a separate Schedule C for each business.

How to fill out Schedule C, in order

Part III comes before Part II in practice, because line 4 needs the cost of goods sold figure.

1. Fill in the top of the form

   Enter your name, business name, the business code from the instructions and your accounting method. The IRS generally allows the cash method, an accrual method, or any other method permitted by the Internal Revenue Code.

2. Report sales in Part I

   Enter gross receipts on line 1 and returns and allowances on line 2. Line 3 is the difference.

3. Work out cost of goods sold in Part III

   Fill in lines 33 to 42, then copy line 42 to line 4. Line 5 is gross profit, and line 7 adds other business income from line 6.

4. List expenses in Part II

   Enter each expense on its line from 8 to 27a. Expenses with no line of their own go in Part V, whose total moves to line 27b. Line 28 adds them up.

5. Take the home office deduction

   Line 29 is tentative profit. Subtract the deduction for business use of your home on line 30 to get net profit or loss on line 31.

6. Carry the result forward

   If line 31 is a profit, enter it on Schedule 1 (Form 1040), line 3, and on Schedule SE, line 2. A loss goes to line 32 first, where you say whether all of your investment is at risk.

Part I: gross receipts, returns and sales tax

Line 1 asks for gross receipts from your trade or business. The instructions tell you to check any Forms 1099 you received for business income that must be reported on this line. Then add sales no form covered, such as cash at a craft fair: the IRS says income should also include amounts not reported on forms, such as payments you receive in cash.

Line 2 is returns and allowances. A sales return is a cash or credit refund you gave to customers who returned defective, damaged, or unwanted products. A sales allowance is a reduction in the selling price of products, instead of a cash or credit refund. Line 6 is for business income not reported elsewhere in Part I.

Sales taxes imposed on the buyer, which you collected and paid over to the state, are not included in gross receipts or sales nor are they a deductible expense. If a marketplace collected sales tax for you, check whether its report includes it.

Form 1099-K and the threshold that changed

A payment app or online marketplace must send you a Form 1099-K when the payments you received for goods or services total over $20,000 in more than 200 transactions. The IRS adds that platforms can still send one below that level: they may send you a Form 1099-K with lower amounts and/or transactions.

The threshold changed under the One, Big, Beautiful Bill, which retroactively reinstated the reporting threshold in effect prior to the passage of the American Rescue Plan Act of 2021. Guides written before that law may quote a different figure.

Card payments follow a different rule. If customers pay you directly by credit, debit or gift card, you get a Form 1099-K from your card processor no matter how many payments you got or how much they were for.

The form does not decide what you report. The IRS says that if you receive payments for selling goods or services, you must report all income on your tax return. Form 1099-K shows gross payments, so check it for amounts you can deduct, such as fees, credits, refunds, shipping, cash equivalents or discounts. A business seller reports these payments on Schedule C (Form 1040), Profit or Loss from Business.

Part III: cost of goods sold for makers

If making, buying or selling products earns your income, the instructions say that in most cases you must take inventories into account at the beginning and end of your tax year. A small business taxpayer has a simpler option: you can choose not to keep an inventory, but you must still use a method of accounting for inventory that clearly reflects income. One part of that test is average annual gross receipts of $31 million or less for the 3 prior tax years.

Line 33 asks how you value closing inventory. Inventories can be valued at cost, the lower of cost or market, or any other method approved by the IRS.

Example, with made-up figures: a candle maker starts the year with $600 of stock on line 35, buys $2,400 of wax, wicks and fragrance on line 36, spends $500 on jars on line 39, and counts $700 of stock at year end on line 41. Line 40 is $3,500 and cost of goods sold on line 42 is $2,800.

The cost of packaging that is not part of the product, such as mailer boxes, counts as shipping or selling expenses rather than cost of goods sold.

Schedule C expense categories makers use most

Part II lists expenses by category. To be deductible, a business expense must be both ordinary and necessary. If an expense is partly personal, separate the personal part from the business part and deduct only the business share. Costs that went into inventory are not deducted a second time in Part II; the instructions say: Reduce the amounts on lines 8 through 27a and Part V by amounts capitalized.

Part V other expenses and startup costs

Part V is for all ordinary and necessary business expenses not deducted elsewhere on Schedule C. List the type and amount of each expense separately in the space provided, then carry the total from line 48 to line 27b. For technology and software tools, the instructions name tax preparation software and subscription services paid to manage your business. Most computer software expenses must be capitalized and depreciated or expensed under section 179, so software you buy outright usually belongs on line 13.

Startup costs have their own rule. If your business began in 2025, you can elect to deduct up to $5,000 of certain business startup costs. That limit shrinks when total startup costs exceed $50,000, and the rest can be amortized over a 180-month period from the month the business began.

Line 30, net profit and self-employment tax

Enter expenses for business use of your home only on line 30. You can use Form 8829, or you can elect to determine the amount of the deduction using a simplified method. Space can count when it is used regularly for storage of inventory or product samples, if the other conditions in the instructions are met. The simplified method multiplies the business area by $5 per square foot, and the area cannot exceed 300 square feet.

Schedule SE takes the profit from line 31 and works out self-employment tax at 15.3%, which applies when net earnings from self-employment are $400 or more. You can deduct one-half of your self-employment tax on Schedule 1.

State rules and records

Schedule C is a federal form. The IRS instructions note that you may be subject to state and local taxes and other requirements such as business licenses and fees, and those rules vary by state and city. The IRS says good recordkeeping is important to support the income and deductible expenses you report on your tax return, so keep the sales reports, receipts and inventory counts behind each line.

Where Nation fits

Questions about Schedule C