2003 Tax Help Archives  
Instructions for Schedule C (Form 1040) 2003 Tax Year

Specific Instructions

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Filers of Form 1041.   Do not complete the block labeled “Social security number.” Instead, enter your employer identification number (EIN) on line D.

Line A

Describe the business or professional activity that provided your principal source of income reported on line 1. If you owned more than one business, you must complete a separate Schedule C for each business. Give the general field or activity and the type of product or service. If your general field or activity is wholesale or retail trade, or services connected with production services (mining, construction, or manufacturing), also give the type of customer or client. For example, “wholesale sale of hardware to retailers” or “appraisal of real estate for lending institutions.

Line D

You need an EIN only if you had a qualified retirement plan or were required to file an employment, excise, estate, trust, or alcohol, tobacco, and firearms tax return. If you need an EIN, file Form SS-4. If you do not have an EIN, leave line D blank. Do not enter your SSN.

Line E

Enter your business address. Show a street address instead of a box number. Include the suite or room number, if any. If you conducted the business from your home located at the address shown on Form 1040, page 1, you do not have to complete this line.

Line F

Generally, you can use the cash method, accrual method, or any other method permitted by the Internal Revenue Code. In all cases, the method used must clearly reflect income. Unless you are a qualifying taxpayer or a qualifying small business taxpayer, you must use the accrual method for sales and purchases of inventory items. See the Part III instructions on page C-6 for the definition of a qualifying taxpayer and a qualifying small business taxpayer. Special rules apply to long-term contracts. See section 460 for details.

If you use the cash method, show all items of taxable income actually or constructively received during the year (in cash, property, or services). Income is constructively received when it is credited to your account or set aside for you to use. Also, show amounts actually paid during the year for deductible expenses. However, if the payment of an expenditure creates an asset having a useful life that extends substantially beyond the close of the year, it may not be deductible or may be deductible only in part for the year of the payment. See Pub. 535.

If you use the accrual method, report income when you earn it and deduct expenses when you incur them even if you do not pay them during the tax year. Accrual-basis taxpayers are put on a cash basis for deducting business expenses owed to a related cash-basis taxpayer. Other rules determine the timing of deductions based on economic performance. See Pub. 538.

To change your accounting method, you generally must file Form 3115. You may also have to make an adjustment to prevent amounts of income or expense from being duplicated or omitted. This is called a section 481(a) adjustment.

Example.

You change to the cash method of accounting and choose to account for inventoriable items in the same manner as materials and supplies that are not incidental. You accrued sales in 2002 for which you received payment in 2003. You must report those sales in both years as a result of changing your accounting method and must make a section 481(a) adjustment to prevent duplication of income.

A net negative section 481(a) adjustment is taken into account entirely in the year of the change. A net positive section 481(a) adjustment is generally taken into account over a period of 4 years. Include any net positive section 481(a) adjustments on line 6. If the net section 481(a) adjustment is negative, report it in Part V.

For details on figuring section 481(a) adjustments, see Rev. Proc. 2002-9, Rev. Proc. 2002-19, and Rev. Proc. 2002-54. You can find Rev. Proc. 2002-9 on page 327 of Internal Revenue Bulletin 2002-3 at www.irs.gov/pub/irs-irbs/irb02-03.pdf, Rev. Proc. 2002-19 on page 696 of Internal Revenue Bulletin 2002-13 at www.irs.gov/pub/irs-irbs/irb02-13.pdf, and Rev. Proc. 2002-54 on page 432 of Internal Revenue Bulletin 2002-35 at www.irs.gov/pub/irs-irbs/irb02-35.pdf.

Line G

If your business activity was not a rental activity and you met any of the material participation tests below or the exception for oil and gas applies (explained on page C-3), check the “Yes” box. Otherwise, check the “No” box. If you check the “No” box, this business is a passive activity. If you have a loss from this business, see Limit on Losses on page C-3. If you have a profit from this business activity but have current year losses from other passive activities or you have prior year unallowed passive activity losses, see the Instructions for Form 8582.

Material Participation.   Participation, for purposes of the seven material participation tests listed below, generally includes any work you did in connection with an activity if you owned an interest in the activity at the time you did the work. The capacity in which you did the work does not matter. However, work is not treated as participation if it is work that an owner would not customarily do in the same type of activity and one of your main reasons for doing the work was to avoid the disallowance of losses or credits from the activity under the passive activity rules.

  Work you did as an investor in an activity is not treated as participation unless you were directly involved in the day-to-day management or operations of the activity. Work done as an investor includes:
  1. Studying and reviewing financial statements or reports on the activity,
  2. Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
  3. Monitoring the finances or operations of the activity in a nonmanagerial capacity.

  Participation by your spouse during the tax year in an activity you own can be counted as your participation in the activity. This applies even if your spouse did not own an interest in the activity and whether or not you and your spouse file a joint return.

  For purposes of the passive activity rules, you materially participated in the operation of this trade or business activity during 2003 if you met any of the following seven tests.
  1. You participated in the activity for more than 500 hours during the tax year.
  2. Your participation in the activity for the tax year was substantially all of the participation in the activity of all individuals (including individuals who did not own any interest in the activity) for the tax year.
  3. You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other person for the tax year. This includes individuals who did not own any interest in the activity.
  4. The activity is a significant participation activity for the tax year, and you participated in all significant participation activities for more than 500 hours during the year. An activity is a “significant participation activity” if it involves the conduct of a trade or business, you participated in the activity for more than 100 hours during the tax year, and you did not materially participate under any of the material participation tests (other than this test 4).
  5. You materially participated in the activity for any 5 of the prior 10 tax years.
  6. The activity is a personal service activity in which you materially participated for any 3 prior tax years. A personal service activity is an activity that involves performing personal services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor.
  7. Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the tax year. But you do not meet this test if you participated in the activity for 100 hours or less during the tax year. Your participation in managing the activity does not count in determining if you meet this test if any person (except you) (a) received compensation for performing management services in connection with the activity or (b) spent more hours during the tax year than you spent performing management services in connection with the activity (regardless of whether the person was compensated for the services).

Rental of Personal Property.   A rental activity (such as long-term equipment leasing) is a passive activity even if you materially participated in the activity. However, if you met any of the five exceptions listed under Rental Activities in the Instructions for Form 8582, the rental of the property is not treated as a rental activity and the material participation rules above apply.

Exception for Oil and Gas.   If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability, check the “Yes” box. The activity of owning the working interest is not a passive activity regardless of your participation.

Limit on Losses.   If you checked the “No” box and you have a loss from this business, you may have to use Form 8582 to figure your allowable loss, if any, to enter on Schedule C, line 31. Generally, you can deduct losses from passive activities only to the extent of income from passive activities. For details, see Pub. 925.

Line H

If you started or acquired this business in 2003, check the box on line H. Also check the box if you are reopening or restarting this business after temporarily closing it, and you did not file a 2002 Schedule C or C-EZ for this business.


Part I. Income

Except as otherwise provided in the Internal Revenue Code, gross income includes income from whatever source derived. Gross income, however, does not include extraterritorial income that is qualifying foreign trade income. Use Form 8873 to figure the extraterritorial income exclusion. Report it on Schedule C as explained in the Instructions for Form 8873.

Line 1

Enter gross receipts from your trade or business. Include amounts you received in your trade or business that were properly shown on Forms 1099-MISC. If the total amounts that were reported in box 7 of Forms 1099-MISC are more than the total you are reporting on line 1, attach a statement explaining the difference.

Statutory Employees.    If you received a Form W-2 and the “Statutory employee” box in box 13 of that form was checked, report your income and expenses related to that income on Schedule C or C-EZ. Enter your statutory employee income from box 1 of Form W-2 on line 1 of Schedule C or C-EZ and check the box on that line. Social security and Medicare tax should have been withheld from your earnings; therefore, you do not owe self-employment tax on these earnings. Statutory employees include full-time life insurance agents, certain agent or commission drivers and traveling salespersons, and certain homeworkers.

  If you had both self-employment income and statutory employee income, you must file two Schedules C. You cannot use Schedule C-EZ or combine these amounts on a single Schedule C.

Installment Sales.   Generally, the installment method may not be used to report income from the sale of (a) personal property regularly sold under the installment method or (b) real property held for resale to customers. But the installment method may be used to report income from sales of certain residential lots and timeshares if you elect to pay interest on the tax due on that income after the year of sale. See section 453(l)(2)(B) for details. If you make this election, include the interest on Form 1040, line 60. Also, enter “453(l)(3)” and the amount of the interest on the dotted line to the left of line 60.

  If you use the installment method, attach a schedule to your return. Show separately for 2003 and the 3 preceding years: gross sales, cost of goods sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected.

Line 6

Report on line 6 amounts from finance reserve income, scrap sales, bad debts you recovered, interest (such as on notes and accounts receivable), state gasoline or fuel tax refunds you got in 2003, credit for Federal tax paid on gasoline or other fuels claimed on your 2002 Form 1040, prizes and awards related to your trade or business, and other kinds of miscellaneous business income. Include amounts you received in your trade or business as shown on Form 1099-PATR. Also, include any recapture of the deduction for clean-fuel vehicles used in your business and clean-fuel vehicle refueling property. For details, see Pub. 535.

If the business use percentage of any listed property (defined in the instructions for line 13 on page C-4) decreased to 50% or less in 2003, report on this line any recapture of excess depreciation, including any section 179 expense deduction. Use Form 4797 to figure the recapture. Also, if the business use percentage drops to 50% or less on leased listed property (other than a vehicle), include on this line any inclusion amount. See Pub. 946 to figure the amount.


Part II. Expenses

Capitalizing Costs of Property.   If you produced real or tangible personal property or acquired property for resale, certain expenses attributable to the property generally must be included in inventory costs or capitalized. In addition to direct costs, producers of inventory property generally must also include part of certain indirect costs in their inventory. Purchasers of personal property acquired for resale must include part of certain indirect costs in inventory only if the average annual gross receipts for the 3 prior tax years exceed $10 million. Also, you must capitalize part of the indirect costs that benefit real or tangible personal property constructed for use in a trade or business, or noninventory property produced for sale to customers. Reduce the amounts on lines 8–26 and Part V by amounts capitalized. For details, see Pub. 538.

Exception for Certain Producers.   Producers who account for inventoriable items in the same manner as materials and supplies that are not incidental may currently deduct expenditures for direct labor and all indirect costs that would otherwise be included in inventory costs. See Cost of Goods Sold on page C-6 for more details.

Exception for Creative Property.   If you are an artist, author, or photographer, you may be exempt from the capitalization rules. However, your personal efforts must have created (or reasonably be expected to create) the property. This exception does not apply to any expense related to printing, photographic plates, motion picture films, video tapes, or similar items. These expenses are subject to the capitalization rules. For details, see Pub. 538.

Line 9

You can deduct the actual expenses of running your car or truck or take the standard mileage rate. You must use actual expenses if you used your vehicle for hire (such as a taxicab) or you used more than one vehicle simultaneously in your business (such as in fleet operations). You cannot use actual expenses for a leased vehicle if you previously used the standard mileage rate for that vehicle.

You can take the standard mileage rate for 2003 only if you:

  • Owned the vehicle and use the standard mileage rate for the first year you placed the vehicle in service or
  • Leased the vehicle and are using the standard mileage rate for the entire lease period (except the period, if any, before 1998).

If you deduct actual expenses:

  • Include on line 9 the business portion of expenses for gasoline, oil, repairs, insurance, tires, license plates, etc., and
  • Show depreciation on line 13 and rent or lease payments on line 20a.

If you take the standard mileage rate, multiply the number of business miles by 36 cents. Add to this amount your parking fees and tolls, and enter the total on line 9. Do not deduct depreciation, rent or lease payments, or your actual operating expenses.

For details, see Pub. 463.

Information on Your Vehicle.   If you claim any car and truck expenses, you must provide certain information on the use of your vehicle by completing one of the following.
  • Part IV of Schedule C or Part III of Schedule C-EZ if: (a) you are claiming the standard mileage rate, you lease your vehicle, or your vehicle is fully depreciated and (b) you are not required to file Form 4562 for any other reason. If you used more than one vehicle during the year, attach your own schedule with the information requested in Part IV of Schedule C, or Part III of Schedule C-EZ, for each additional vehicle.
  • Part V of Form 4562 if you are claiming depreciation on your vehicle or you are required to file Form 4562 for any other reason (see the instructions for line 13).

Line 11

Enter the total cost of contract labor for the tax year. Do not include contract labor deducted elsewhere on your return such as contract labor that you included in Part III. Also, do not include salaries and wages paid to your employees, instead see line 26.

Line 12

Enter your deduction for depletion on this line. If you have timber depletion, attach Form T. See Pub. 535 for details.

Line 13

Depreciation and Section 179 Expense Deduction.   Depreciation is the annual deduction allowed to recover the cost or other basis of business or investment property having a useful life substantially beyond the tax year. You can also depreciate improvements made to leased business property. However, stock in trade, inventories, and land are not depreciable. Depreciation starts when you first use the property in your business or for the production of income. It ends when you take the property out of service, deduct all your depreciable cost or other basis, or no longer use the property in your business or for the production of income. You may also elect under section 179 to expense part of the cost of certain property you bought in 2003 for use in your business. See the Instructions for Form 4562 to figure the amount to enter on line 13.

When To Attach Form 4562.   You must complete and attach Form 4562 only if:
  • You are claiming depreciation on property placed in service during 2003;
  • You are claiming depreciation on listed property (defined below), regardless of the date it was placed in service; or
  • You are claiming a section 179 expense deduction.

  If you acquired depreciable property for the first time in 2003, see Pub. 946.

  Listed property generally includes, but is not limited to:
  • Passenger automobiles weighing 6,000 pounds or less;
  • Any other property used for transportation if the nature of the property lends itself to personal use, such as motorcycles, pickup trucks, etc.;
  • Any property used for entertainment or recreational purposes (such as photographic, phonographic, communication, and video recording equipment);
  • Cellular telephones or other similar telecommunications equipment; and
  • Computers or peripheral equipment.

Exceptions.   Listed property does not include photographic, phonographic, communication, or video equipment used exclusively in your trade or business or at your regular business establishment. It also does not include any computer or peripheral equipment used exclusively at a regular business establishment and owned or leased by the person operating the establishment. For purposes of these exceptions, a portion of your home is treated as a regular business establishment only if that portion meets the requirements under section 280A(c)(1) for deducting expenses for the business use of your home.

  See the instructions for line 6 on page C-3 if the business use percentage of any listed property decreased to 50% or less in 2003.

Line 14

Deduct contributions to employee benefit programs that are not an incidental part of a pension or profit-sharing plan included on line 19. Examples are accident and health plans, group-term life insurance, and dependent care assistance programs.

Do not include on line 14 any contributions you made on your behalf as a self-employed person to an accident and health plan or for group-term life insurance. You may be able to deduct on Form 1040, line 29, the amount you paid for health insurance on behalf of yourself, your spouse, and dependents, even if you do not itemize your deductions. See the instructions for Form 1040, line 29, for details.

Line 15

Deduct premiums paid for business insurance on line 15. Deduct on line 14 amounts paid for employee accident and health insurance. Do not deduct amounts credited to a reserve for self-insurance or premiums paid for a policy that pays for your lost earnings due to sickness or disability. For details, see Pub. 535.

Lines 16a and 16b

Interest Allocation Rules.   The tax treatment of interest expense differs depending on its type. For example, home mortgage interest and investment interest are treated differently. “Interest allocation” rules require you to allocate (classify) your interest expense so it is deducted (or capitalized) on the correct line of your return and receives the right tax treatment. These rules could affect how much interest you are allowed to deduct on Schedule C or C-EZ.

  Generally, you allocate interest expense by tracing how the proceeds of the loan were used. See Pub. 535 for details.

  If you paid interest on a debt secured by your main home and any of the proceeds from that debt were used in connection with your trade or business, see Pub. 535 to figure the amount that is deductible on Schedule C or C-EZ.

How To Report.   If you have a mortgage on real property used in your business (other than your main home), enter on line 16a the interest you paid for 2003 to banks or other financial institutions for which you received a Form 1098 (or similar statement). If you did not receive a Form 1098, enter the interest on line 16b.

  If you paid more mortgage interest than is shown on Form 1098, see Pub. 535 to find out if you can deduct the additional interest. If you can, include the amount on line 16a. Attach a statement to your return explaining the difference and enter “See attached” in the margin next to line 16a.

  If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on the mortgage and the other person received the Form 1098, include your share of the interest on line 16b. Attach a statement to your return showing the name and address of the person who received the Form 1098. In the margin next to line 16b, enter “See attached.

  If you paid interest in 2003 that applies to future years, deduct only the part that applies to 2003.

Line 17

Include on this line fees for tax advice related to your business and for preparation of the tax forms related to your business.

Line 19

Enter your deduction for contributions to a pension, profit-sharing, or annuity plan, or plans for the benefit of your employees. If the plan included you as a self-employed person, enter contributions made as an employer on your behalf on Form 1040, line 30, not on Schedule C.

Generally, you must file the applicable form listed below if you maintain a pension, profit-sharing, or other funded-deferred compensation plan. The filing requirement is not affected by whether or not the plan qualified under the Internal Revenue Code, or whether or not you claim a deduction for the current tax year. There is a penalty for failure to timely file these forms.

Form 5500.   File this form for a plan that is not a one-participant plan (see below).

Form 5500-EZ.    File this form for a one-participant plan. A one-participant plan is a plan that only covers you (or you and your spouse).

For details, see Pub. 560.

Lines 20a and 20b

If you rented or leased vehicles, machinery, or equipment, enter on line 20a the business portion of your rental cost. But if you leased a vehicle for a term of 30 days or more, you may have to reduce your deduction by an amount called the inclusion amount.

You may have to do this if—

The lease term began during ... And the vehicle's fair market value on the first day of the lease exceeded ...  
2003 $18,000  
1999 through 2002 15,500  
1997 or 1998 15,800  
1995 or 1996 15,500  
If the lease term began before 1995, see Pub. 463 to find out if you have an inclusion amount.

See Pub. 463 to figure your inclusion amount.

Enter on line 20b amounts paid to rent or lease other property, such as office space in a building.

Line 21

Deduct the cost of repairs and maintenance. Include labor, supplies, and other items that do not add to the value or increase the life of the property. Do not deduct the value of your own labor. Do not deduct amounts spent to restore or replace property; they must be capitalized.

Line 22

Generally, you can deduct the cost of supplies only to the extent you actually consumed and used them in your business during the tax year (unless you deducted them in a prior tax year). However, if you had incidental supplies on hand for which you kept no inventories or records of use, you may deduct the cost of supplies you actually purchased during the tax year, provided that method clearly reflects income.

Line 23

You can deduct the following taxes and licenses on this line.

  • State and local sales taxes imposed on you as the seller of goods or services. If you collected this tax from the buyer, you must also include the amount collected in gross receipts or sales on line 1.
  • Real estate and personal property taxes on business assets.
  • Licenses and regulatory fees for your trade or business paid each year to state or local governments. But some licenses, such as liquor licenses, may have to be amortized. See Pub. 535 for details.
  • Social security and Medicare taxes paid to match required withholding from your employees' wages. Also, Federal unemployment tax paid. Reduce your deduction by the amount of the current year credit shown on line 4 of Form 8846.
  • Federal highway use tax.

Do not deduct the following on this line.

  • Federal income taxes, including your self-employment tax. However, you may deduct one-half of your self-employment tax on Form 1040, line 28.
  • Estate and gift taxes.
  • Taxes assessed to pay for improvements, such as paving and sewers.
  • Taxes on your home or personal use property.
  • State and local sales taxes on property purchased for use in your business. Instead, treat these taxes as part of the cost of the property.
  • State and local sales taxes imposed on the buyer that you were required to collect and pay over to state or local governments. These taxes are not included in gross receipts or sales nor are they a deductible expense. However, if the state or local government allowed you to retain any part of the sales tax you collected, you must include that amount as income on line 6.
  • Other taxes and license fees not related to your business.

Line 24a

Enter your expenses for lodging and transportation connected with overnight travel for business while away from your tax home. Generally, your tax home is your main place of business regardless of where you maintain your family home. You cannot deduct expenses paid or incurred in connection with employment away from home if that period of employment exceeds 1 year. Also, you cannot deduct travel expenses for your spouse, your dependent, or any other individual unless that person is your employee, the travel is for a bona fide business purpose, and the expenses would otherwise be deductible by that person.

Do not include expenses for meals and entertainment on this line. Instead, see the instructions for lines 24b and 24c on this page.

Instead of keeping records of your actual incidental expenses, you can use an optional method for deducting incidental expenses only if you did not pay or incur meal expenses on a day you were traveling away from your tax home. The amount of the deduction is $2 a day for the period from January 1 through October 31, 2003, and $3 a day for the period from November 1 through December 31, 2003. Incidental expenses include fees and tips given to porters, baggage carriers, bellhops, hotel maids, stewards or stewardesses and others on ships, and hotel servants in foreign countries. They do not include expenses for laundry, cleaning and pressing of clothing, lodging taxes, or the costs of telegrams or telephone calls. You cannot use this method on any day that you use the standard meal allowance (as explained in the instructions for lines 24b and 24c).

You cannot deduct expenses for attending a foreign convention unless it is directly related to your trade or business and it is as reasonable for the meeting to be held outside the North American area as within it. These rules apply to both employers and employees. Other rules apply to luxury water travel.

For details, see Pub. 463.

Lines 24b and 24c

On line 24b, enter your total business meal and entertainment expenses. Include meals expenses while traveling away from home for business. Instead of the actual cost of your meals while traveling away from home, you may use the standard meal allowance for your daily meals and incidental expenses. Under this method, you deduct a specified amount, depending on where you travel, instead of keeping records of your actual meal expenses. However, you must still keep records to prove the time, place, and business purpose of your travel.

The standard meal allowance is the Federal M&IE rate. You can find these rates on the Internet at www.policyworks.gov/perdiem. Click on 2003 Domestic Per Diem Rates for the period January 1, 2003–September 30, 2003 and on 2004 Domestic Per Diem Rates for the period October 1, 2003–December 31, 2003. For locations outside the continental United States, the applicable rates are published monthly. You can find these rates on the Internet at www.state.gov/m/a/als/prdm/2003.

See Pub. 463 for details on how to figure your deduction using the standard meal allowance, including special rules for partial days of travel.

Business meal expenses are deductible only if they are (a) directly related to or associated with the active conduct of your trade or business, (b) not lavish or extravagant, and (c) incurred while you or your employee is present at the meal.

You cannot deduct any expense paid or incurred for a facility (such as a yacht or hunting lodge) used for any activity usually considered entertainment, amusement, or recreation.

Also, you cannot deduct membership dues for any club organized for business, pleasure, recreation, or other social purpose. This includes country clubs, golf and athletic clubs, airline and hotel clubs, and clubs operated to provide meals under conditions favorable to business discussion. But it does not include civic or public service organizations, professional organizations (such as bar and medical associations), business leagues, trade associations, chambers of commerce, boards of trade, and real estate boards, unless a principal purpose of the organization is to entertain, or provide entertainment facilities for, members or their guests.

There are exceptions to these rules as well as other rules that apply to sky-box rentals and tickets to entertainment events. See Pub. 463.

Generally, you may deduct only 50% of your business meal and entertainment expenses, including meals incurred while away from home on business. For individuals subject to the Department of Transportation (DOT) hours of service limits, that percentage is increased to 65% for business meals consumed during, or incident to, any period of duty for which those limits are in effect. Individuals subject to the DOT hours of service limits include the following persons:

  • Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations.
  • Interstate truck operators who are under DOT regulations.
  • Certain merchant mariners who are under Coast Guard regulations.

However, you may fully deduct meals, incidentals, and entertainment furnished or reimbursed to an employee if you properly treat the expense as wages subject to withholding. You may also fully deduct meals, incidentals, and entertainment provided to a nonemployee to the extent the expenses are includible in the gross income of that person and reported on Form 1099-MISC. See Pub. 535 for details and other exceptions.

If you provide day-care in your home, see Pub. 587 for information on deducting the cost of meals and snacks you provide to your day-care recipients.

Figure how much of the amount on line 24b is not deductible and enter that amount on line 24c.

Line 25

Deduct only utility expenses for your trade or business.

Local Telephone Service.   If you used your home phone for business, do not deduct the base rate (including taxes) of the first phone line into your residence. But you can deduct expenses for any additional costs you incurred for business that are more than the cost of the base rate for the first phone line. For example, if you had a second line, you can deduct the business percentage of the charges for that line, including the base rate charges.

Line 26

Enter the total salaries and wages for the tax year. Do not include salaries and wages deducted elsewhere on your return or amounts paid to yourself. Reduce your deduction by the current year credits claimed on:

  • Form 5884, Work Opportunity Credit,
  • Form 8844, Empowerment Zone and Renewal Community Employment Credit,
  • Form 8845, Indian Employment Credit,
  • Form 8861, Welfare-to-Work Credit, and
  • Form 8884, New York Liberty Zone Business Employee Credit.

Caution

If you provided taxable fringe benefits to your employees, such as personal use of a car, do not deduct as wages the amount applicable to depreciation and other expenses claimed elsewhere.

Line 30

Business Use of Your Home.   You may be able to deduct certain expenses for business use of your home, subject to limitations. You must attach Form 8829 if you claim this deduction. For details, see the Instructions for Form 8829 and Pub. 587.

Line 31

If you have a loss, the amount of loss you can deduct this year may be limited. Go to line 32 before entering your loss on line 31. If you answered “No” to Question G on Schedule C, also see the Instructions for Form 8582. Enter the net profit or deductible loss here. Combine this amount with any profit or loss from other businesses, and enter the total on Form 1040, line 12, and Schedule SE, line 2. Estates and trusts should enter the total on Form 1041, line 3.

If you have a net profit on line 31, this amount is earned income and may qualify you for the earned income credit. See the instructions for Form 1040, line 63, for details.

Statutory Employees.   Include your net profit or deductible loss from line 31 with other Schedule C amounts on Form 1040, line 12. However, do not report this amount on Schedule SE, line 2. If you are required to file Schedule SE because of other self-employment income, see the Instructions for Schedule SE.

Line 32

At-Risk Rules.   Generally, if you have (a) a business loss and (b) amounts in the business for which you are not at risk, you will have to complete Form 6198 to figure your allowable loss. The at-risk rules generally limit the amount of loss (including loss on the disposition of assets) you can claim to the amount you could actually lose in the business.

  Check box 32b if you have amounts for which you are not at risk in this business, such as the following.
  • Nonrecourse loans used to finance the business, to acquire property used in the business, or to acquire the business that are not secured by your own property (other than property used in the business). However, there is an exception for certain nonrecourse financing borrowed by you in connection with holding real property.
  • Cash, property, or borrowed amounts used in the business (or contributed to the business, or used to acquire the business) that are protected against loss by a guarantee, stop-loss agreement, or other similar arrangement (excluding casualty insurance and insurance against tort liability).
  • Amounts borrowed for use in the business from a person who has an interest in the business, other than as a creditor, or who is related under section 465(b)(3) to a person (other than you) having such an interest.

  If all amounts are at risk in this business, check box 32a and enter your loss on line 31. But if you answered “No” to Question G, you may need to complete Form 8582 to figure your deductible loss. See the Instructions for Form 8582 for details.

  If you checked box 32b, see Form 6198 to determine the amount of your deductible loss. But if you answered “No” to Question G, your loss may be further limited. See the Instructions for Form 8582. If your at-risk amount is zero or less, enter zero on line 31. Be sure to attach Form 6198 to your return. If you checked box 32b and you do not attach Form 6198, the processing of your tax return may be delayed.

  Any loss from this business not allowed for 2003 because of the at-risk rules is treated as a deduction allocable to the business in 2004. For details, see the Instructions for Form 6198 and Pub. 925.


Part III. Cost of Goods Sold

Generally, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income-producing factor, you must take inventories into account at the beginning and end of your tax year.

However, if you are a qualifying taxpayer or a qualifying small business taxpayer, you may account for inventoriable items in the same manner as materials and supplies that are not incidental. To change your accounting method, see the instructions for line F on page C-2.

A qualifying taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are $1 million or less and (b) whose business is not a tax shelter (as defined in section 448(d)(3)).

A qualifying small business taxpayer is a taxpayer (a) whose average annual gross receipts for the 3 prior tax years are more than $1 million but not more than $10 million, (b) whose business is not a tax shelter (as defined in section 448(d)(3)), and (c) whose principal business activity is not an ineligible activity as explained in Rev. Proc. 2002-28, 2002-18 I.R.B. 815. You can find Rev. Proc. 2002-28 on page 815 of Internal Revenue Bulletin 2002-18 at www.irs.gov/pub/irs-irbs/irb02-18.pdf.

Under this accounting method, inventory costs for raw materials purchased for use in producing finished goods and merchandise purchased for resale are deductible in the year the finished goods or merchandise are sold (but not before the year you paid for the raw materials or merchandise, if you are also using the cash method). Enter amounts paid for all raw materials and merchandise during 2003 on line 36. The amount you can deduct for 2003 is figured on line 42.

Additional information.    For additional guidance on this method of accounting for inventoriable items, see Rev. Proc. 2001-10, 2001-2 I.R.B. 272 if you are a qualifying taxpayer or Rev. Proc. 2002-28 if you are a qualifying small business taxpayer. You can find Rev. Proc. 2001-10 on page 272 of Internal Revenue Bulletin 2001-2 at www.irs.gov/pub/irs-irbs/irb01-02.pdf, and Rev. Proc. 2002-28 on page 815 of Internal Revenue Bulletin 2002-18 at www.irs.gov/pub/irs-irbs/irb02-18.pdf.


Note.

Certain direct and indirect expenses may have to be capitalized or included in inventory. See the instructions for Part II beginning on page C-3.

Line 33

Your inventories can be valued at cost; cost or market value, whichever is lower; or any other method approved by the IRS. However, you are required to use cost if you are using the cash method of accounting.

Line 35

If you are changing your method of accounting beginning with 2003, refigure last year's closing inventory using your new method of accounting and enter the result on line 35. If there is a difference between last year's closing inventory and the refigured amount, attach an explanation and take it into account when figuring your section 481(a) adjustment. See the example on page C-2 for details.

Line 41

If you account for inventoriable items in the same manner as materials and supplies that are not incidental, enter on line 41 the portion of your raw materials and merchandise purchased for resale that are included on line 40 and were not sold during the year.


Part V. Other Expenses

Include 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. Enter the total on lines 48 and 27. Do not include the cost of business equipment or furniture, replacements or permanent improvements to property, or personal, living, and family expenses. Do not include charitable contributions. Also, you may not deduct fines or penalties paid to a government for violating any law. For details on business expenses, see Pub. 535.

Amortization.    Include amortization in this part. For amortization that begins in 2003, you must complete and attach Form 4562.

  You may amortize:
  • The cost of pollution-control facilities.
  • Amounts paid for research and experimentation.
  • Certain business startup costs.
  • Qualified forestation and reforestation costs. See Pub. 535 for limitations.
  • Qualified revitalization expenditures.
  • Amounts paid to acquire, protect, expand, register, or defend trademarks or trade names.
  • Goodwill and certain other intangibles.

  In general, you may not amortize real property construction period interest and taxes. Special rules apply for allocating interest to real or personal property produced in your trade or business.

At-Risk Loss Deduction.   Any loss from this activity that was not allowed as a deduction last year because of the at-risk rules is treated as a deduction allocable to this activity in 2003.

Capital Construction Fund.   Do not claim on Schedule C or C-EZ the deduction for amounts contributed to a capital construction fund set up under the Merchant Marine Act of 1936. Instead, reduce the amount you would otherwise enter on Form 1040, line 40, by the amount of the deduction. Next to line 40, enter “CCF” and the amount of the deduction. For details, see Pub. 595.

Deduction for Clean-Fuel Vehicles and Clean-Fuel Vehicle Refueling Property.   You may deduct part of the cost of qualified clean-fuel vehicle property used in your business and qualified clean-fuel vehicle refueling property. See Pub. 535 for details.

Disabled Access Credit and the Deduction for Removing Barriers to Individuals With Disabilities and the Elderly.   You may be able to claim a tax credit of up to $5,000 for eligible expenditures paid or incurred in 2003 to provide access to your business for individuals with disabilities. See Form 8826 for details. You can also deduct up to $15,000 of costs paid or incurred in 2003 to remove architectural or transportation barriers to individuals with disabilities and the elderly. However, you cannot take both the credit and the deduction on the same expenditures.


Principal Business or Professional Activity Codes

These codes for the Principal Business or Professional Activity classify sole proprietorships by the type of activity they are engaged in to facilitate the administration of the Internal Revenue Code. These six-digit codes are based on the North American Industry Classification System (NAICS).

Select the category that best describes your primary business activity (for example, Real Estate). Then select the activity that best identifies the principal source of your sales or receipts (for example, real estate agent). Now find the six-digit code assigned to this activity (for example, 531210, the code for offices of real estate agents and brokers) and enter it on line B of Schedule C or C-EZ.

Note. If your principal source of income is from farming activities, you should file Schedule F, Profit or Loss From Farming.


Accommodation, Food Services, & Drinking Places


Accommodation

721310Rooming & boarding houses721210RV (recreational vehicle) parks & recreational camps721100Travel accommodation (including hotels, motels, & bed & breakfast inns)


Food Services & Drinking Places

722410Drinking places (alcoholic beverages)722110Full-service restaurants722210Limited-service eating places722300Special food services (including food service contractors & caterers)


Administrative & Support and Waste Management & Remediation Services


Administrative & Support Services

561430Business service centers (including private mail centers & copy shops)561740Carpet & upholstery cleaning services561440Collection agencies 561450Credit bureaus561410Document preparation services 561300Employment services 561710Exterminating & pest control services 561210Facilities support (management) services 561600Investigation & security services 561720Janitorial services 561730Landscaping services 561110Office administrative services 561420Telephone call centers (including telephone answering services & telemarketing bureaus)561500Travel arrangement & reservation services561490Other business support services (including repossession services, court reporting, & stenotype services)561790Other services to buildings & dwellings 561900Other support services (including packaging & labeling services, & convention & trade show organizers)


Waste Management & Remediation Services

562000Waste management & remediation services


Agriculture, Forestry, Hunting, & Fishing

112900Animal production (including breeding of cats and dogs)114110Fishing113000Forestry & logging (including forest nurseries & timber tracts)114210Hunting & trapping


Support Activities for Agriculture & Forestry

115210Support activities for animal production (including farriers)115110Support activities for crop production (including cotton ginning, soil preparation, planting, & cultivating)115310Support activities for forestry


Arts, Entertainment, & Recreation


Amusement, Gambling, & Recreation Industries

713100Amusement parks & arcades713200Gambling industries 713900Other amusement & recreation services (including golf courses, skiing facilities, marinas, fitness centers, bowling centers, skating rinks, miniature golf courses)


Museums, Historical Sites, & Similar Institutions

712100Museums, historical sites, & similar institutions


Performing Arts, Spectator Sports, & Related Industries

711410Agents & managers for artists, athletes, entertainers, & other public figures711510Independent artists, writers, & performers711100Performing arts companies711300Promoters of performing arts, sports, & similar events711210Spectator sports (including professional sports clubs & racetrack operations)


Construction of Buildings

236200Nonresidential building construction236100Residential building construction


Heavy and Civil Engineering Construction

237310Highway, street, & bridge construction237210Land subdivision237100Utility system construction237990Other heavy & civil engineering construction


Specialty Trade Contractors

238310Drywall & insulation contractors238210Electrical contractors238350Finish carpentry contractors238330Flooring contractors238130Framing carpentry contractors238150Glass & glazing contractors238140Masonry contractors238320Painting & wall covering contractors238220Plumbing, heating & air- conditioning contractors238110Poured concrete foundation & structure contractors238160Roofing contractors238170Siding contractors238910Site preparation contractors238120Structural steel & precast concrete construction contractors238340Tile & terrazzo contractors238290Other building equipment contractors238390Other building finishing contractors238190Other foundation, structure, & building exterior contractors238990All other specialty trade contractors


Educational Services

611000Educational services (including schools, colleges, & universities)


Finance & Insurance


Credit Intermediation & Related Activities

522100Depository credit intermediation (including commercial banking, savings institutions, & credit unions)522200Nondepository credit intermediation (including sales financing & consumer lending)522300Activities related to credit intermediation (including loan brokers)


Insurance Agents, Brokers, & Related Activities

524210Insurance agencies & brokerages524290Other insurance related activities


Securities, Commodity Contracts, & Other Financial Investments & Related Activities

523140Commodity contracts brokers523130Commodity contracts dealers523110Investment bankers & securities dealers523210Securities & commodity exchanges523120Securities brokers523900Other financial investment activities (including investment advice)


Health Care & Social Assistance


Ambulatory Health Care Services

621610Home health care services621510Medical & diagnostic laboratories621310Offices of chiropractors621210Offices of dentists621330Offices of mental health practitioners (except physicians)621320Offices of optometrists621340Offices of physical, occupational & speech therapists, & audiologists621111Offices of physicians (except mental health specialists)621112Offices of physicians, mental health specialists621391Offices of podiatrists621399Offices of all other miscellaneous health practitioners621400Outpatient care centers621900Other ambulatory health care services (including ambulance services, blood, & organ banks)


Hospitals

622000Hospitals


Nursing & Residential Care Facilities

623000Nursing & residential care facilities


Social Assistance

624410Child day care services624200Community food & housing, & emergency & other relief services624100Individual & family services624310Vocational rehabilitation services


Information

511000Publishing industries (except Internet)


Broadcasting (except Internet) & Telecommunications

515000Broadcasting (except Internet)517000Telecommunications


Internet Publishing & Broadcasting

516110Internet publishing & broadcasting


Internet Service Providers, Web Search Portals, & Data Processing Services

518210Data processing, hosting, & related services518111Internet service providers518112Web search portals519100Other information services (including news syndicates and libraries)


Motion Picture & Sound Recording

512100Motion picture & video industries (except video rental)512200Sound recording industries


Manufacturing

315000Apparel mfg.312000Beverage & tobacco product mfg.334000Computer & electronic product mfg.335000Electrical equipment, appliance, & component mfg.332000Fabricated metal product mfg.337000Furniture & related product mfg.333000Machinery mfg.339110Medical equipment & supplies mfg.322000Paper mfg.324100Petroleum & coal products mfg.326000Plastics & rubber products mfg.331000Primary metal mfg.323100Printing & related support activities313000Textile mills314000Textile product mills336000Transportation equipment mfg.321000Wood product mfg.339900Other miscellaneous mfg.


Chemical Manufacturing

325100Basic chemical mfg.325500Paint, coating, & adhesive mfg.325300Pesticide, fertilizer, & other agricultural chemical mfg.325410Pharmaceutical & medicine mfg.325200Resin, synthetic rubber, & artificial & synthetic fibers & filaments mfg.325600Soap, cleaning compound, & toilet preparation mfg.325900Other chemical product & preparation mfg.


Food Manufacturing

311110Animal food mfg.311800Bakeries & tortilla mfg.311500Dairy product mfg.311400Fruit & vegetable preserving & speciality food mfg.311200Grain & oilseed milling311610Animal slaughtering & processing311710Seafood product preparation & packaging311300Sugar & confectionery product mfg.311900Other food mfg. (including coffee, tea, flavorings, & seasonings)


Leather & Allied Product Manufacturing

316210Footwear mfg. (including leather, rubber, & plastics) 316110Leather & hide tanning & finishing 316990Other leather & allied product mfg.


Nonmetallic Mineral Product Manufacturing

327300Cement & concrete product mfg.327100Clay product & refractory mfg.327210Glass & glass product mfg.327400Lime & gypsum product mfg.327900Other nonmetallic mineral product mfg.


Mining

212110Coal mining212200Metal ore mining212300Nonmetallic mineral mining & quarrying 211110Oil & gas extraction 213110Support activities for mining


Other Services


Personal & Laundry Services

812111Barber shops812112Beauty salons812220Cemeteries & crematories 812310Coin-operated laundries & drycleaners 812320Drycleaning & laundry services (except coin-operated) (including laundry & drycleaning dropoff & pickup sites)812210Funeral homes & funeral services 812330Linen & uniform supply812113Nail salons812930Parking lots & garages812910Pet care (except veterinary) services 812920Photofinishing 812190Other personal care services (including diet & weight reducing centers)812990All other personal services


Repair & Maintenance

811120Automotive body, paint, interior, & glass repair811110Automotive mechanical & electrical repair & maintenance 811190Other automotive repair & maintenance (including oil change & lubrication shops & car washes)811310Commercial & industrial machinery & equipment (except automotive & electronic) repair & maintenance 811210Electronic & precision equipment repair & maintenance 811430Footwear & leather goods repair811410Home & garden equipment & appliance repair & maintenance811420Reupholstery & furniture repair811490Other personal & household goods repair & maintenance


Professional, Scientific, & Technical Services

541100Legal services541211Offices of certified public accountants541214Payroll services541213Tax preparation services541219Other accounting services


Architectural, Engineering, & Related Services

541310Architectural services541350Building inspection services541340Drafting services541330Engineering services541360Geophysical surveying & mapping services541320Landscape architecture services541370Surveying & mapping (except geophysical) services541380Testing laboratories


Computer Systems Design & Related Services

541510Computer systems design & related services


Specialized Design Services

541400Specialized design services (including interior, industrial, graphic, & fashion design)


Other Professional, Scientific, & Technical Services

541800Advertising & related services541600Management, scientific, & technical consulting services541910Market research & public opinion polling541920Photographic services541700Scientific research & development services541930Translation & interpretation services541940Veterinary services541990All other professional, scientific, & technical services


Real Estate & Rental & Leasing


Real Estate

531100Lessors of real estate (including miniwarehouses & self-storage units)531210Offices of real estate agents & brokers531320Offices of real estate appraisers531310Real estate property managers531390Other activities related to real estate


Rental & Leasing Services

532100Automotive equipment rental & leasing532400Commercial & industrial machinery & equipment rental & leasing532210Consumer electronics & appliances rental532220Formal wear & costume rental532310General rental centers532230Video tape & disc rental532290Other consumer goods rental


Religious, Grantmaking, Civic, Professional, & Similar Organizations

813000Religious, grantmaking, civic, professional, & similar organizations


Retail Trade


Building Material & Garden Equipment & Supplies Dealers

444130Hardware stores444110Home centers444200Lawn & garden equipment & supplies stores444120Paint & wallpaper stores444190Other building materials dealers


Clothing & Accessories Stores

448130Children's & infants' clothing stores448150Clothing accessories stores448140Family clothing stores448310Jewelry stores448320Luggage & leather goods stores448110Men's clothing stores448210Shoe stores448120Women's clothing stores448190Other clothing stores


Electronic & Appliance Stores

443130Camera & photographic supplies stores443120Computer & software stores443111Household appliance stores443112Radio, television, & other electronics stores


Food & Beverage Stores

445310Beer, wine, & liquor stores445220Fish & seafood markets445230Fruit & vegetable markets445100Grocery stores (including supermarkets & convenience stores without gas)445210Meat markets445290Other specialty food stores


Furniture & Home Furnishing Stores

442110Furniture stores442200Home furnishings stores


Gasoline Stations

447100Gasoline stations (including convenience stores with gas)


General Merchandise Stores

452000General merchandise stores


Health & Personal Care Stores

446120Cosmetics, beauty supplies, & perfume stores446130Optical goods stores446110Pharmacies & drug stores446190Other health & personal care stores


Motor Vehicle & Parts Dealers

441300Automotive parts, accessories, & tire stores441222Boat dealers441221Motorcycle dealers441110New car dealers441210Recreational vehicle dealers (including motor home & travel trailer dealers)441120Used car dealers441229All other motor vehicle dealers


Sporting Goods, Hobby, Book, & Music Stores

451211Book stores451120Hobby, toy, & game stores451140Musical instrument & supplies stores451212News dealers & newsstands 451220Prerecorded tape, compact disc, & record stores451130Sewing, needlework, & piece goods stores451110Sporting goods stores


Miscellaneous Store Retailers

453920Art dealers453110Florists453220Gift, novelty, & souvenir stores453930Manufactured (mobile) home dealers453210Office supplies & stationery stores453910Pet & pet supplies stores453310Used merchandise stores453990All other miscellaneous store retailers (including tobacco, candle, & trophy shops)


Nonstore Retailers

454112Electronic auctions 454111Electronic shopping 454310Fuel dealers454113Mail-order houses454210Vending machine operators 454390Other direct selling establishments (including door-to-door retailing, frozen food plan providers, party plan merchandisers, & coffee-break service providers)


Transportation & Warehousing

481000Air transportation 485510Charter bus industry 484110General freight trucking, local484120General freight trucking, long distance 485210Interurban & rural bus transportation 486000Pipeline transportation 482110Rail transportation 487000Scenic & sightseeing transportation 485410School & employee bus transportation 484200Specialized freight trucking (including household moving vans)485300Taxi & limousine service485110Urban transit systems483000Water transportation 485990Other transit & ground passenger transportation 488000Support activities for transportation (including motor vehicle towing)


Couriers & Messengers

492000Couriers & messengers


Warehousing & Storage Facilities

493100Warehousing & storage (except leases of miniwarehouses & self-storage units)


Utilities

221000Utilities


Wholesale Trade


Merchant Wholesalers, Durable Goods

423600Electrical & electronic goods423200Furniture & home furnishing423700Hardware, & plumbing & heating equipment & supplies423940Jewelry, watch, precious stone, & precious metals423300Lumber & other construction materials423800Machinery, equipment, & supplies423500Metal & mineral (except petroleum)423100Motor vehicle & motor vehicle parts & supplies423400Professional & commercial equipment & supplies423930Recyclable materials423910Sporting & recreational goods & supplies423920Toy & hobby goods & supplies423990Other miscellaneous durable goods


Merchant Wholesalers, Nondurable Goods

424300Apparel, piece goods, & notions424800Beer, wine, & distilled alcoholic beverage424920Books, periodicals, & newspapers424600Chemical & allied products424210Drugs & druggists' sundries424500Farm product raw materials424910Farm supplies424930Flower, nursery stock, & florists' supplies424400Grocery & related products424950Paint, varnish, & supplies424100Paper & paper products424700Petroleum & petroleum products424940Tobacco & tobacco products424990Other miscellaneous nondurable goods


Wholesale Electronic Markets and Agents & Brokers

425110Business to business electronic markets425120Wholesale trade agents & brokers
999999Unclassified establishments (unable to classify)

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