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.
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.”
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.
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.
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.
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:
- Studying and reviewing financial statements or reports on the activity,
- Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and
- 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.
- You participated in the activity for more than 500 hours during the tax year.
- 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.
- 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.
- 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).
- You materially participated in the activity for any 5 of the prior 10 tax years.
- 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.
- 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.
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.
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.
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.
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.
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.
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).
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.
Enter your deduction for depletion on this line. If you have timber depletion, attach Form T. See Pub. 535 for details.
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.
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.
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.
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.
Include on this line fees for tax advice related to your business and for preparation of the tax forms related to your business.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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
611000Educational services (including schools, colleges, & universities)
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)
Nursing & Residential Care Facilities
623000Nursing & residential care facilities
624410Child day care services624200Community food & housing, & emergency & other relief services624100Individual & family services624310Vocational rehabilitation services
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
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.
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.
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.
212110Coal mining212200Metal ore mining212300Nonmetallic mineral mining & quarrying 211110Oil & gas extraction 213110Support activities for mining
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
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
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
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
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
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)
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)
492000Couriers & messengers
Warehousing & Storage Facilities
493100Warehousing & storage (except leases of miniwarehouses & self-storage units)
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)
Prev | First | Next Instructions Index | 2003 Tax Help Archives | Tax Help Archives | Home
|