When you run two businesses with the sole proprietorship tax status, the IRS requires you to report each corporation's income and expenses separately. This means that your personal tax return will have two Schedule Cs attached to it. However, having to prepare two Schedule Cs instead of one can confuse the tax program.
Two Schedule C
Operating two sole proprietorships makes it ineligible to report business income and expenses on Schedule C-EZ, the abridged and simplified version of Schedule C. Each Schedule C reports the business income and expenses of a single company. Therefore, the net profit or net loss, calculated as revenue less expenses, shown in Schedule C, has no connection to the second sole proprietorship.
Reporting Business Expenses
Schedule C requires more detail than Schedule C-EZ when it comes to reporting business expenses. Each category, whether rent, employee salaries, or vehicle costs, is listed on separate lines. Inventory costs, which primarily affect sole proprietors who sell merchandise, are reported in a completely separate section from all other expenses. Some expenses, such as advertising expenses, can be easily identified as being related to a particular line of business and reported on the appropriate Schedule C without much thought. For common expenses, which are costs that benefit both businesses, it may not be as easy to calculate the exact dollar amount to report on Schedule C for each individual business.
Example of expenses
As an example, suppose one sole proprietorship provides marketing consulting services while the other is an online retail business while operating both sole proprietorships from the same office that you rent for $10,000 a year. It may not be appropriate to cut your expenses in half and report $5,000 in rent for each Schedule C. If you spend 90% of your hours doing consulting business, a more reasonable way to split the rental expense between the two sole proprietorships is to report $9,000 of rental expense on Schedule C for the consulting business and $1,000 in Schedule C for Retail.
Self-employment Tax Filing
Sole proprietors who earn $400 or more in combined net income must file Schedule SE and pay self-employment tax for Social Security and Medicare payments. Unlike Schedule C, only one Schedule SE can be filed for both sole proprietorships. The combined net income of the two sole proprietorships is reported on Schedule SE and used to determine due self-employment taxes.
Completing Form 1040
When both Schedules C are completed, you will report the same combined profit or loss amount used for Schedule SE in the "business income or loss" line of the Income section of Form 1040. If you need to prepare the 'Schedule SE, the self-employment taxes calculated on it are reported on the "Self-employment tax" line in the Other taxes section of 1040. Finally, Schedule C and Schedule SE are filed on 1040.
Final Word
As always, it is always good to consult a tax professional as there are so many tax rules and codes, and it can be complicated. Also, a tax professional will help you determine which deductions you are up for so you don't end up leaving money on the table.
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Pat Raskob