A note on scope: "2026" here means the 2026 tax year, with a return filed in 2027. That differs from a 2025 return filed during 2026, which uses the final 2025 form and instructions. The 2026 form is available, but the 2026 instructions were still in draft at the time of writing, so confirm year-specific figures against the final IRS version before filing.
This guide covers who files, what to gather, how Parts I to V work, and when Australian-based owners should get a professional review.
Key Takeaways
- Schedule C is filed with Form 1040, not as a separate business return.
- Report all business income even without a 1099; deduct only documented, ordinary and necessary expenses.
- Service businesses can usually skip Part III; goods sellers must separate inventory from operating expenses.
- Check deadlines, mileage rates and deduction limits against current IRS guidance.
- Australian residence alone does not decide whether you owe US tax.
What Is Schedule C and Who Needs to File It?
Schedule C, Profit or Loss From Business, calculates income, expenses and net profit or loss for a sole proprietorship. The IRS has reported roughly 31 million nonfarm sole-proprietorship returns for tax year 2022, so it is one of the most common business forms.
Who generally uses Schedule C?
- Sole proprietors and freelancers
- Independent contractors and gig workers
- Single-member LLCs taxed as disregarded entities (no Form 8832 corporate election)
Partnerships report on Form 1065 and pass income to partners on Schedule K-1. S corporations and C corporations have their own returns. An "LLC" label alone does not tell you the federal treatment.
A note for Australian-based owners
Being an Australian resident, or running an Australian-registered business, does not automatically create a Schedule C obligation. Work through these questions first:
- Do you have a US trade or business? Performing personal services in the US usually counts, with exceptions.
- Do you have effectively connected income (ECI)?
- Do you file Form 1040 or Form 1040-NR? A nonresident alien engaged in a US trade or business generally must file, even with no income.
- Do any states require filings? Some states do not honour federal treaty relief.
The US-Australia treaty also matters. Business profits are generally taxable only in the residence country unless there is a permanent establishment in the US.
Independent personal services are covered separately, including a 183-day presence test and a fixed-base test. Treaty relief, state tax and Social Security coverage are three separate questions.
How Schedule C connects to Form 1040
Line 31 net profit generally flows to Schedule 1, line 3, and to Schedule SE, line 2. Self-employment tax is 15.3% (12.4% Social Security plus 2.9% Medicare) and generally applies from $400 of net self-employment earnings.
The IRS states that individuals who are neither US citizens nor residents are not subject to SE tax, though international Social Security agreements coordinate coverage separately. Net profit may also feed the qualified business income deduction (Form 8995). Confirm residency status, treaty position and SE-tax exposure before you file.
Before You Start: Business Details and Part I Income
Gather these before opening the form:
- Invoices, bank statements and payment-processor reports
- Any 1099 forms received
- Expense receipts and mileage logs
- Inventory counts and opening and closing values
- Home-office measurements
- An asset register with purchase dates and costs
- Contractor names, addresses and payments
- Foreign-currency conversion records, if you trade in Australian dollars
Business information fields A to J
| Field | What to enter |
|---|---|
| A | Principal business or profession |
| B | Six-digit PBA code from the IRS instructions list |
| C | Business name |
| D | EIN, if you have one |
| E | Business address |
| F | Accounting method: cash, accrual or other |
| G | Material participation (more than 500 hours is one test) |
| H | Whether you started or acquired the business in 2026 |
| I-J | Whether you made payments requiring information returns, and whether you filed them |
Pick your PBA code from the official list. Do not guess. The accounting method must clearly reflect income. Under the cash method, income counts when actually or constructively received, and expenses generally follow payment.
Part I, lines 1 to 3: gross receipts
Combine income from clients, customers, platforms, cash payments and card processors. Then subtract returns and allowances.
Treat 1099 forms as reference points, not as the answer. For 2026, the 1099-NEC threshold is $2,000. Third-party settlement organisations issue a 1099-K above $20,000 and more than 200 transactions, though forms may be issued below that.
Payment cards have no minimum. Your income is reportable either way. Reconcile each form to your own records, because platform fees and refunds often make the totals differ.
Part I, lines 4 to 5: COGS and gross profit
Complete Part III first. The COGS result goes on line 4. Line 5 gross profit is line 3 minus line 4.
Part I, lines 6 to 7: other income
Line 6 covers business income that is not gross receipts. The Schedule C instructions list examples such as scrap sales, recovered bad debts, interest on notes and receivables, state fuel-tax refunds and business prizes. Line 7 gross income is gross profit plus line 6.
Part II: Business Expenses and Deductions
A deduction must be ordinary (common and accepted in your trade), necessary (helpful and appropriate), tied to the business and supported by records. Personal costs are out. Capital costs, such as legal fees to acquire an asset, generally go into the asset's basis rather than being deducted as an expense. Mixed-use costs need an allocation.
Common expense lines
The main categories on lines 8 to 27 include:
- Advertising, commissions and fees
- Contract labour and wages
- Insurance, legal and professional services
- Office expenses, supplies, rent and repairs
- Taxes and licences, utilities, travel and meals
- Other expenses (itemised in Part V)
Examples include:
- A consultant claims software subscriptions and professional fees
- An online seller claims platform fees and shipping supplies
- An international operator claims foreign contractor payments
Business meals are generally limited to 50%.
Avoiding misclassification and double counting
- Platform fees go under commissions and fees, not advertising.
- Contractors go on line 11. Employees go on the wages line.
- Materials that become part of a product belong in COGS, not supplies.
- Business use of a phone or internet needs a documented percentage.
Assets, depreciation and Section 179
Equipment, computers, furniture and vehicles that last beyond the year are generally depreciated. For 2026, the Section 179 maximum is $2,560,000, with the phase-out starting at $4,090,000 of qualifying property. Eligible property acquired and placed in service after 19 January 2025 generally qualifies for 100% bonus depreciation, unless you elect out.
The de minimis safe harbour lets you expense items up to $2,500 per invoice (or $5,000 with an applicable financial statement), subject to an annual election. Depreciation, Section 179 and listed property usually require Form 4562.
Home-office expenses on line 30
The home office must generally be a specific area used regularly and exclusively for business. Administrative work can support a principal place of business if you have no other fixed location for it. Publication 587 sets out the rules.
- Simplified method: $5 per square foot, up to 300 square feet. No Form 8829.
- Actual method: Form 8829, with the result on line 30.
Inventory storage is an exception. Exclusive use is not required if you sell wholesale or retail products, store inventory at home, have no other fixed business location, and use a separately identifiable storage space regularly.
Claim only the business-use share of shared housing costs. Unusual arrangements, such as a shared room or a rented dwelling used by others, warrant professional advice.
Lines 28 to 29 and substantiation
Line 28 totals your expenses and line 29 is tentative profit or loss. Line 30 home-office expenses are subtracted from line 29 to reach line 31.
Keep receipts, invoices, statements, mileage logs, allocation workings and a note of each expense's business purpose in a system you can retrieve from. Retrievable beats tidy.
Parts III-V: COGS, Vehicles, Other Expenses and Net Profit
Part III, lines 33 to 42: cost of goods sold
Part III applies if you manufacture, produce, buy or resell goods. Pure service businesses can generally skip it.
- Lines 33-34: State your inventory valuation method (cost, lower of cost or market, or another explained method) and disclose any change.
- Line 35: Opening inventory.
- Line 36: Purchases, less items withdrawn for personal use.
- Lines 37-39: Labor, materials and supplies, and other direct costs.
- Lines 40-42: Add lines 35 to 39, subtract closing inventory, and enter COGS on line 42 and Part I, line 4.
Direct product costs belong here. General packaging, office supplies, advertising and administrative costs usually belong in Part II. Be consistent with your accounting method. Established method changes generally need IRS approval.
Smaller businesses may have simplifications. Taxpayers with average annual gross receipts of $32 million or less for the preceding three years (and not a tax shelter) may be eligible for inventory-accounting relief and an exception from uniform capitalization. Confirm eligibility in the final instructions.
Part IV, lines 43 to 47: vehicle information
Complete Part IV if you claim vehicle expenses and are not required to file Form 4562 for the vehicle. Record the date the vehicle was first used in the business, plus your business, commuting and personal miles.
A contemporaneous log should show date, destination, purpose and distance. Commuting between home and a regular workplace is not deductible, whatever the distance.
The 2026 business mileage rates are split by period, per IRS bulletin 2026-29:
| Period | Rate |
|---|---|
| January to June 2026 | 72.5 cents per mile |
| July to December 2026 | 76 cents per mile |
For an owned car, choose standard mileage in the first year of business use to keep that option open. A leased car using standard mileage generally stays on it for the lease. Under the actual-expense method, depreciation interacts with Form 4562.
Part V, line 48: other expenses
Part V itemises costs that fit no other Part II line, and the total flows to the "other expenses" line. Don't use it to bury personal, capital or already-claimed costs.
Line 31: net profit or loss
Net profit is gross income minus allowable expenses. Gross receipts and gross profit are earlier figures. Line 31 flows to Schedule 1 and Schedule SE.
A loss does not automatically give an unrestricted deduction. Limits apply in this order:
- Basis
- At-risk rules (Form 6198)
- Passive activity (Form 8582)
- Excess business loss (Form 461)
For 2026 the excess-business-loss threshold is $256,000 (non-joint) or $512,000 (joint), down from $313,000 and $626,000 in 2025. If you have losses or several activities, speak with a tax professional before filing.
Filing Workflow, Common Mistakes and When to Seek Help
Work through Schedule C in this sequence so income, COGS and expenses stay consistent:
- Reconcile income to bank and processor records.
- Review each expense category for misclassification.
- Finish Part III before entering COGS in Part I.
- Complete vehicle and home-office details.
- Transfer the net result to the individual return.
- File supporting records.
Key 2026 dates:
- 15 April 2027: standard return and payment deadline.
- 15 October 2027: usual Form 4868 extension. It extends time to file, not time to pay.
- 15 June 2027: Form 1040-NR deadline for nonresidents without wages subject to US withholding.
- Estimated tax due dates: 15 April, 15 June and 15 September 2026, then 15 January 2027.
- Estimated tax threshold: generally relevant from $1,000 of expected tax owing. Safe harbours: 90% of current-year tax, 100% of prior-year tax, or 110% for higher-income taxpayers.
Confirm these against current IRS forms. E-filing is available, and state obligations are separate.
Common Schedule C errors to prevent
- Omitting cash or non-1099 income
- Copying 1099 totals without adjusting for refunds and fees
- Claiming personal expenses or commuting miles
- Mixing cash and accrual methods
- Putting COGS into supplies
- Claiming mileage without a log
- Double counting platform costs
- Using an outdated form or PBA code
The IRS attributes about $117 billion of projected tax year 2022 individual income-tax underreporting to nonfarm proprietor income, so these forms get attention.
Cross-border checklist for Australian-based readers
- Confirm whether you are treated as a US resident or nonresident for tax.
- Decide on a currency conversion method. The IRS wants US dollars at the rate when you receive, pay or accrue the item, and generally accepts consistently used posted rates.
- Analyse whether income is US-source or effectively connected.
- Check state filings and entity classification.
- Coordinate with the ATO. Australian residents declare worldwide income, and the foreign income tax offset needs foreign tax actually paid.
When professional review is worthwhile
A review is especially useful if you have any of the following:
- Foreign owners or multi-state activity
- Multiple businesses, inventory, employees or contractors
- Large vehicle or home-office claims
- Losses or entity elections
- Records that don't match information returns
VJM Global's US-compliant professionals prepare Form 1040 and 1040-NR returns and handle US accounting and cross-border reporting, including for non-resident owners with US-sourced income. This guide is general information and doesn't replace advice tailored to your facts.
Frequently Asked Questions
What expenses can I deduct on Schedule C?
Ordinary and necessary business expenses, such as advertising, professional fees, supplies, vehicle use, a home office and COGS. Keep documentation, and keep business, personal and capital costs separate.
Can I deduct my home office expenses on my taxes?
Generally yes, if the space is used regularly and exclusively for business, using the simplified ($5 per square foot) or actual method. Claim only the business share, and check current IRS rules for storage or mixed use.
Where can I find the simplified method worksheet for Schedule C?
It sits in the home-office section of the Schedule C instructions. Use the version for your tax year. Worksheet line 5 supplies Schedule C line 30.
How do I claim mileage on my taxes?
Keep a log of date, destination, purpose and distance. Choose standard mileage or actual expenses, then complete line 9 and Part IV where required. For 2026 the rates are 72.5 cents (January to June) and 76 cents (July to December).
Are you taxed on net profit or gross profit?
Net profit. Gross profit is gross receipts less returns and COGS, an earlier step. Line 31 net profit or loss generally flows to your individual return.
What business activity codes do I use on Schedule C?
The business activity code is a six-digit PBA code entered in field B. Choose the closest match from the official IRS instructions list rather than guessing.
