Schedule C - Accounting Method
When filing your tax return using Schedule C (Form 1040) to report profit or loss from a business you operated as a sole proprietor, you must choose an accounting method that accurately reflects your income and expenses. The IRS allows two primary methods: the cash method and the accrual method. Your choice affects when you report income and deduct expenses.
Choosing an Accounting Method
- Cash Method: You report income when you receive it and deduct expenses when you pay them. This method is commonly used by small businesses and sole proprietors.
- Accrual Method: You report income when it is earned and deduct expenses when they are incurred, regardless of when cash changes hands. This method is typically used by larger businesses with inventory or complex transactions.
Changing Your Accounting Method
If you decide to change your accounting method for the 2025 tax year, you must follow IRS guidelines. For example, if you switch to the cash method and choose to account for inventoriable items in the same manner as nonincidental materials and supplies, you may need to make a section 481(a) adjustment to prevent duplication of income.
Changing your accounting method requires filing Form 3115, Application for Change in Accounting Method. For more information, refer to the Instructions for Form 3115.
Special Considerations
- Installment Method: If you use the installment method, you must attach a statement to your return showing gross sales, cost of goods sold, gross profit, percentage of gross profit to gross sales, amounts collected, and gross profit on amounts collected for 2025 and the three preceding years.
- Section 481(a) Adjustment: When changing accounting methods, you may need to make an adjustment to avoid double-counting income or expenses. This is required when changing from an accrual to a cash method or vice versa.
Reporting Requirements
Regardless of your accounting method, you must report all business income and expenses on Schedule C (Form 1040). The net profit or loss from Schedule C is then transferred to Schedule 1 (Form 1040), line 3, and included in your self-employment tax calculation on Schedule SE (Form 1040), unless you are a statutory employee or notary public.
Source:
Schedule C (Form 1040) Instructions
Instructions for Form 3115
Disclaimer: Always verify details with the official Federal or State Department of Revenue Forms and Instructions.