Sole Proprietorship:

  • A business owned by a single individual
  • The owner is financially responsible for the business’s debts, expenses and payables.
  • Easiest business structure to create since the business is not required to charter with the state and does not require an EIN (Employer Identification Number)
  • File their business tax returns on Schedule C of Form 1040

Single-Member LLC:

  • Separate legal entity
  • Limited liability for member
  • File their business tax returns on Schedule C of Form 1040

 

Schedule C – Profit or Loss from Business

  • A report that is part of an individual income tax return on IRS Form 1040.
  • Reports the income of the business for the tax year and deductible expenses, with the resulting net income/loss (net profit or loss) of the business.

Profit and Loss Statement:

Statement will include business income and business expenses such as:

  • Phone, utilities, computer expenses
  • Business insurance
  • Supplies
  • Professional fees
  • Interest on loans, leases, other business debts
  • Travel expenses-transportation, hotels, auto mileage
  • Meals and entertainment expenses
  • Petty cash

 

Make sure you have records for all of these expenses. You don’t need to submit the records with your tax return, but you will need to show them to your tax preparer and be prepared to show them to the IRS in case your business tax return is audited.

 

Home-Office Deduction:

To substantiate business use of your home, you will need the following information:

  • Calculation of the percentage of your home square footage that is set aside for “regular and exclusive” use by your business
  • Amount for your home mortgage interest, real estate taxes, and homeowner’s insurance
  • Home expense like utilities, rent, and repairs and maintenance
  • And information about the value of your home for depreciation purposes.

Cost of Goods Sold:

To calculate cost of goods sold, you will need the following information:

  • Value of beginning inventory
  • Cost of labor, materials, and supplies
  • Purchases
  • Value of ending inventory