Now that you've categorized and totaled the income and expenses for your arts and crafts business, it's time to record this information on the proper tax form. The information in this article is tailored to sole proprietors. If you operate your arts and crafts business as a corporation, don't worry! I'm getting to you next!
If you've come into this series of articles in the middle, start back at the beginning of this series. The first page in the series of articles talks about organizing your arts and crafts costs linking article by article to all the background information you need to get to this stage of the tax game - filling out your Schedule C!
Recording Your Business Identifying Information
Referencing the image on this page, I'm using s 2012 Schedule C. However, this form has remained virtually unchanged since I started my CPA practice. Even if it does change slightly in the future, the basic facts will remain the same. The fields are pretty self-explanatory, so I'm mainly going to review the fields in which I haven't entered information and explain why.
Just FYI - I picked up my Box B code from page C-12 of the instructions for this form. Code 339900 'Other Misc Manufacturing' is the closest code I could find that describes what I do in my arts and crafts business.
If you have a business name that is different than your own name, enter it in Box C. Regarding Box D, unless you issue W-2s to employees of your arts and crafts business, you do not have to have an EIN. You can issue 1099-MISC to independent contractors using your social security number.
I really don't recommend sending out 1099-MISC with a social security number. It's free and easy to get an EIN - so why not just apply for one for 1099-MISC preparation.
Explaining Material Participation
Basically, if you participate in your arts and crafts business on a regular, continuous and substantial basis, you materially participate in the business. This is important because your income (loss) from your arts and crafts business is then considered to be non passive income or loss. Most arts and crafts business owners materially participate in the business because they are the only one working in the business.
Walking Through the Accounting Methods
As you can see, I checked the Hybrid box. I prepare my financial statements using the cash method but since I have an inventory of raw materials to make my arts and crafts, I use the hybrid method for my Schedule C.
Under Internal Revenue Code, you can use any combination of cash, accrual, and special methods (hybrid) if it clearly reflects your income and you use it consistently. However, since I carry an inventory, as most arts and crafts business owners will as well, the flat-out cash method cannot be used for this theoretical tax return preparation example.
Using the hybrid method means you report your cost of goods sold and sales using the accrual method. Then you can use the cash method for all other items of income and expenses.
Now there are some large business restrictions to using the hybrid method. This kicks in only at higher levels of sales, which should not affect most sole proprietor arts and crafts businesses.
Also, just a note - I don't extend credit terms to my customers so I never have an accounts receivable. I always have a simultaneous exchange of payment and item.
Look back to the prior article, calculating gross income, to see how the $685 figure is calculated. Cost of goods sold for the $685 is $320. Subtracting cost of goods sold from gross receipts gives me gross profit of $365.
Other Items Making Up Gross Profit
I've previously written an article defining accounting terms such as returns and allowances and other income. For more information about each see my Schedule C income article.
Next up - filling out the expenses section of Schedule C.