2006 Instructions for Schedule C (2006)

Other Schedules and Forms You May Have To File

Schedule A to deduct interest, taxes, and casualty losses not related to your business.
Schedule E to report rental real estate and royalty income or (loss) that is not subject to self-employment tax.
Schedule F to report profit or (loss) from farming.
Schedule J to figure your tax by averaging your fishing income over the previous 3 years. Doing so may reduce your tax.
Schedule SE to pay self-employment tax on income from any trade or business.
Form 4562 to claim depreciation on assets placed in service in 2006, to claim amortization that began in 2006, to make an election under section 179 to expense certain property, or to report information on listed property.
Form 4684 to report a casualty or theft gain or loss involving property used in your trade or business or income-producing property.
Form 4797 to report sales, exchanges, and involuntary conversions (not from a casualty or theft) of trade or business property.
Form 8594 to report certain purchases or sales of groups of assets that constitute a trade or business.
Form 8824 to report like-kind exchanges.
Form 8826 to claim a credit for expenditures to improve access to your business for individuals with disabilities.
Form 8829 to claim expenses for business use of your home.
Form 8903 to take a deduction for income from domestic production activities.
Form 8910 to claim a credit for placing a new alternative motor vehicle in service after 2005 for business use.
Form 8911 to claim a credit for placing qualified alternative fuel vehicle refueling property in service after 2005 for business use.

Husband-wife business. If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065. See Pub. 541 for more details.

Exception. If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as a sole proprietorship or a partnership. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity.

Single-member limited liability company (LLC). Generally, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, file Schedule C or C-EZ (or Schedule E or F, if applicable). However, you can elect to treat a domestic LLC as a corporation. See Form 8832 for details on the election and the tax treatment of a foreign LLC.

Heavy highway vehicle use tax. If you use certain highway trucks, truck-trailers, tractor-trailers, or buses in your trade or business, you may have to pay a federal highway motor vehicle use tax. See the Instructions for Form 2290 to find out if you owe this tax.

Information returns. You may have to file information returns for wages paid to employees, certain payments of fees and other nonemployee compensation, interest, rents, royalties, real estate transactions, annuities, and pensions. You may also have to file an information return if you sold $5,000 or more of consumer products to a person on a buy-sell, deposit-commission, or other similar basis for resale. For details, see the 2006 General Instructions for Forms 1099, 1098, 5498, and W-2G.

If you received cash of more than $10,000 in one or more related transactions in your trade or business, you may have to file Form 8300. For details, see Pub. 1544.

Reportable Transaction Disclosure Statement

Use Form 8886 to disclose information for each reportable transaction in which you participated. Form 8886 must be filed for each tax year that your federal income tax liability is affected by your participation in the transaction. You may have to pay a penalty if you are required to file Form 8886 but do not do so. You may also have to pay interest and penalties on any reportable transaction understatements. The following are reportable transactions.

Any transaction that is the same as or substantially similar to tax avoidance transactions identified by the IRS.
Any transaction offered under conditions of confidentiality for which you paid an advisor a minimum fee.
Any transaction for which you have contractual protection against disallowance of the tax benefits.
Any transaction resulting in a loss of at least $2 million in any single tax year or $4 million in any combination of tax years. (At least $50,000 for a single tax year if the loss arose from a foreign currency transaction defined in section 988(c)(1), whether or not the loss flows through from an S corporation or partnership.)
Any transaction resulting in a tax credit of more than $250,000, if you held the asset generating the credit for 45 days or less.

See the Instructions for Form 8886 for more details and exceptions.

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 43, by the amount of the deduction. Next to line 43, enter “ CCF” and the amount of the deduction. For details, see Pub. 595.

Additional Information

See Pub. 334 for more information for small businesses.