Overview
Use PA Schedule C to report income or loss from a business you operate or a profession you practice as a sole proprietor. Your activity qualifies as a business if your primary purpose for engaging in the activity is income or profit, you conduct your activity with continuity and regularity and you satisfy the “Commercial Enterprise” test. Certain rental activity may be business income and not rental income. If you are a sole member of an LLC, complete PA Schedule C.
For additional information regarding the definition of a business or profession, and for Pennsylvania’s requirements for reporting income and expenses, go to the Department's Web site at www.revenue.state.pa.us and link to the PA PIT Guide.
If your business had expenses of $5,000 or less, you may be able to use PA Schedule C-EZ instead of PA Schedule C.
Note: Pennsylvania determines income and loss under those accounting principles, systems, or practices that are:
- Acceptable by standards of the accounting profession, and
- Consistent with the regulations of the Department setting forth such principles and practices.
Pennsylvania does not generally follow federal tax accounting rules to determine income or loss.
- You may use any accounting method for PA purposes, as long as you apply your accounting methods consistently.
- PA law does not contain provisions for Statutory Employees. Federal statutory employees may be required to report PA taxable income on Line 1a, PA-40, and use PA Schedule UE to deduct expenses. See Chapter 7 of the PA PIT Guide for more information.
- An owner may deduct all losses in the taxable year realized. Report all transactions that are directly related to your business or profession on your PA Schedule C.
- You should not use the installment method for sales of inventory if you sell such inventory in the regular and ordinary course of a business or profession. Include interest on such sales in gross receipts.
You should maintain separate books and records for PA PIT purposes and file PA Schedule C. If you do not maintain separate accounts, you may want to consider using the PA Schedule C-F. The PA Schedule C-F allows you to adjust your federal schedule, but only for the differences from the Internal Revenue Service (IRS) reporting requirements that increase your PA income from the operation of your business or profession. If you wish to take advantage of the Pennsylvania reporting differences that decrease your federal profit, you must complete this PA Schedule C.
Important Differences between Federal and Pennsylvania Rules
You may use any accounting method for PA purposes, as long as you apply your accounting methods consistently. PA law does not have material participation rules. You report all transactions that are directly related to your business or profession on your PA Schedule C.
If you own or operate more than one business, you must submit a separate PA Schedule C for each business operation.
The following federal schedules and instructions do not apply for PA Schedule C:
Schedule A. You may not deduct nonbusiness related personal interest, taxes, and casualty losses on any PA PIT return.
Schedule E. Report rental and royalty income on PA Schedule E, unless engaged in the business of making your property or rights available in a public market place with an intention to realize a profit.
Schedule F. Report farming activity on PA Schedule F.
Schedule SE. You do not report self-employment taxes to Pennsylvania.
Form 4562. If using bonus depreciation, you may not use Form 4562. The maximum deduction that PA income tax law permits using IRC Section 179 is $25,000. If you have income or loss from more than one business, profession, or farm, you may not deduct more than a total of $25,000 of IRC Section 179 expenses for all activities. You may not deduct more than $25,000 in total for all business activities.
Form 4684. Report gain (or loss) from all business activity on PA Schedule C. Include a casualty or theft loss (or gain, if insurance proceeds exceed the basis of the property lost or taken) of business property on Line 4 of PA Schedule C. You may refer to the federal schedule as the explanation for gain/loss items. Do not submit the federal schedule.
Form 4797. Report other sales, exchanges, and involuntary conversions of business property on Line 4 of PA Schedule C. You may refer to the federal schedule as the explanation for gain/loss items. Do not submit the federal schedule.
Form 8271. You do not report or deduct any transactions related to tax shelters for PA PIT purposes.
Form 8594. Report the acquisition or disposition of business assets on Line 4 of PA Schedule C. You may refer to the federal schedule as the explanation for gain/loss items. Do not submit the federal schedule.
Form 8824. You do not report a like-kind exchange on PA Schedule C, unless it is a normal and recognized transaction in your business or profession in accordance with APB 29. PA law does not have like-kind exchange provisions. You must include the gain or loss from a sale, exchange, or disposition of a business asset on Line 4 of PA Schedule C, if the transaction was a normal business transaction. You must report any gain or loss from the sale of a nonbusiness asset or property or the sale of a business or segment thereof on PA Schedule D.
Form 8829. Include your allowable expenses for the business use of your home on Line 34 of PA Schedule C. You may refer to the federal schedule for the explanation of this expense. Do not submit the federal schedule.
Line Instructions
Identification Information
Complete each line.
Owner's Name. Enter the name of the business owner only. If married and you jointly owned the business with your spouse, enter both names. If you and your spouse have separate business activities, you must complete separate PA Schedule(s) C. Enter the name of the spouse you entered first on your PA tax return.
Federal NAICS Code. Provide your Federal NAICS Code as identified on your Federal Schedule C.
Social Security Number. Enter the Social Security Number of the business owner. If married and you jointly owned the business, enter the SSN that you entered first on your PA tax return.
- Main Business Activity. Describe the business or professional activity that provided your principal source of income for Line 1. Use the same description that you use for your Federal Schedule C. Enter the principal business or professional code that you use on your Federal Schedule C.
- Business Name. Enter the name of the business as you registered with the IRS.
- Taxpayer Identification Number. Federal EIN. Enter the FEIN assigned to the business. If you do not have a FEIN for your Federal Schedule C, leave this space blank. Sales Tax License Number. Enter the Sales Tax License number if you have one, or leave this space blank.
- Business Address. Enter the complete address of the business.
- Closing Inventory Valuation. Fill in the appropriate oval. Submit an explanation if necessary.
- Accounting Method. Fill in the oval for the accounting method you use for this business. Submit an explanation if necessary.
- Inventory Changes. Check “Yes” or “No” for this question. Submit an explanation if necessary.
- Office in Home. Check “Yes” if you deduct expenses for an office in home. Check “No” if you do not deduct expenses for an office in home.
- Out of Business. If the business is out of existence as of the end of the tax year for which you are filing, fill in the oval.
Part I. Income
Use generally accepted accounting principles and practices to maintain your books and records and report your income from your business or professional activity.
Line 1a. Gross receipts or sales.
Include all amounts you received in operating your business or profession. Important. PA law does not contain provisions for statutory employees. A statutory employee reports his or her PA taxable income on Line 1a, PA-40, and uses PA Schedule UE to deduct his or her allowable employee business expenses.
Installment Sales. You may use the installment method for sales of inventory. You include interest on such sales in gross receipts.
Land and Buildings. For PA purposes, you may not include the sales of land and buildings on PA Schedule C. The Department deems such sales as PA Schedule D transactions as the disposition of a segment of a business.
Line 1b. Returns and allowances.
This amount is the same for both Pennsylvania and federal purposes. If you report a different amount for Pennsylvania, explain on a statement.
Line 2. Cost of goods sold.
This amount is the same for both Pennsylvania and federal purposes. If you report a different amount for Pennsylvania, explain on a statement.
Line 4. Other income.
Enter gross proceeds that you may have to report elsewhere on your federal tax return, including, but not limited to:
- The sale of business assets when you reinvest the proceeds in business operations;
- The gain or loss on replacing business property (including land or buildings that you use in operating your business or profession); and
- Interest and dividend income from short-term investments to generate working capital.
You must submit a statement explaining the amount you enter. See the PA PIT Guide for discussion of allocable interest, dividends, and gains to business or professions. Include other income that you enter on Line 6, Federal Schedule C, but not refunds of federal taxes and credits that you did not deduct for PA purposes.
Part II. Deductions
Use accepted accounting principles and practices to maintain your books and records and report your expenses from your business or professional activity. PA law does not impose dollar or percentage limitations on allowable expenses. You may always deduct 100 percent of the PA allowable business or professional expenses that you incurred during the taxable year.
Important You may have incurred other expenses for an entertainment facility (boat, resort, ranch, etc.), living accommodations (except employees on business) or vacations for yourself, your employees, or their families. You must reduce any of your total Business Expenses in Part II, by the total of these personal expenses.
You may usually use your Federal Schedule C expenses for PA PIT purposes. This schedule does not have separate instructions for those lines where PA PIT and federal rules agree.
You may not use federal amounts after making certain elections to accelerate or defer expenses or spread expenses over more than one taxable year. These instructions explain those expense categories where PA PIT rules and federal rules differ.
Line 7. Amortization.
Pennsylvania generally follows federal rules. You have the option to use any amortization method allowable under accepted accounting principles and practices.
Line 10. Car and truck expenses.
You may deduct 100 percent of your actual vehicle expenses. You may use the federal standard mileage rate, but you may not deduct any actual operating expenses, including depreciation and lease costs. Follow the Federal Schedule C rules for these expenses. If you use your car or truck for both business and personal purposes, you may only deduct the business portion of your expenses.
Line 13a. Regular depreciation.
You may use any depreciation method that is permissible under accepted accounting principles and practices, but you may not change your method once you select a method.
Important PA PIT law does not permit the bonus depreciation elections added to the Internal Revenue Code in 2002 and 2003. For each asset, you must also report straight-line depreciation, unless not using an optional accelerated depreciation method. You need the amount of straight-line depreciation to take advantage of Pennsylvania’s Tax Benefit Rule when you sell the asset. See the PA PIT Guide for the Tax Benefit Rule.
Line 13b. Section 179 expense.
PA PIT law limits IRC Section 179 current expensing to the expensing allowed at the time you placed the asset into service, or the expensing in effect under the IRC of 1986 as amended to Jan. 1, 1997. (The maximum deduction that PA Income Tax law permits using IRC Section 179 is $25,000.) Pennsylvania follows the federal definitions for listed property.
PA Law requires that taxpayers use straight line depreciation if an asset’s basis for determining depreciation is different from its basis for federal income tax purposes.
Line 14. Dues and publications.
You may deduct dues and publications, but only to the extent directly used for ordinary business purposes. You must exclude any personal use of such expenses.
Line 15. Employee benefit programs other than on Line 23.
You may not deduct any payments you make for your own personal coverage. Pennsylvania does not allow any personal expenses on any PA tax return.
Line 17. Insurance.
You may deduct life insurance on yourself or your spouse only if the business (not your spouse, other family members, or other persons) is the beneficiary. The business must use the insurance proceeds to continue business operations. If deducting insurance premiums, the proceeds are business income on Line 4 of Part I.
Line 18. Interest on business indebtedness.
Deduct business interest only. If you personally borrow money to acquire a business interest or to improve your business, you may not deduct the interest on any PA schedule or PA tax return. If the business itself incurs debt, the business may deduct the interest expense.
Line 20. Legal and professional services.
You may only deduct those expenses that you incur in operating your business or profession. You may not deduct any personal expenses. You may include business accounting and tax return preparation expenses, but not the costs for personal accounting and tax returns.
Line 21. Management fees.
Include any management fees paid in conjunction with the operation of the business to any related or non-related entity.
Line 23. Pension and profit-sharing plans for employees.
You may only deduct those expenses directly related to pension and profit-sharing plans for employees. You may not deduct any pension or profit-sharing expenses for your own personal retirement benefits.
Line 25. Rent on business property.
For PA PIT purposes, you may only deduct those expenditures that you incur in the operation of your business or profession.
Line 27. Subcontractor fees.
You may deduct subcontractor fees that have not been included in your calculation of cost of labor from Line 3 of Schedule C-1. Also include any fees paid to payees not included as employees to whom regular wages were paid.
Line 29. Taxes.
You may deduct tax expenses other than taxes based on income. You may not deduct taxes based on net income, federal income taxes, or the one-half of the self-employment taxes that the IRS allows. You may not deduct taxes paid to other states or foreign countries based on income. You may not deduct estate taxes or inheritance, legacy, succession, or gift taxes. Assessments for betterments and improvements are not allowable. Business privilege taxes and/or gross receipts taxes are allowable deductions.
Line 31. Travel and entertainment.
PA law does not follow federal law. You may deduct 100 percent of your allowable travel and entertainment expenses. You may never deduct the personal portion (whether for yourself, your spouse, your dependents, or any other person) of your travel and entertainment expenses. You may use the federal standard meal allowance.
Line 33. Wages.
You do not have to reduce your wage expense for any federal credits you claim. Add back any wage expense you excluded in order to claim a federal credit. You may not deduct the costs of your own participation.
Line 34. Other expenses.
You may deduct any other cost of doing business or providing professional services if such costs are permitted under accepted accounting principles and practices. Itemize the additional expenses you are claiming, and enter the total on Line 34, Total other expenses. You may deduct:
- 100 percent of the PA Sales Tax paid on a depreciable business asset. However, on disposition, your Pennsylvania basis and federal basis for that asset will be different.
- Charitable contributions you make from your business account that the recipient publicly acknowledges. Personal charitable contributions are not allowable.
- Expenses using the capitalization rules established by your trade, profession, or industry, under its accepted accounting principles and practices. Once elected, you must consistently use this method.
- 100 percent of your expenses you incurred for removing barriers to individuals with disabilities and the elderly. This is not a credit but a direct expense in arriving at the net income or loss.
- Home office expenses. Pennsylvania generally follows the federal rules for a home office.
- Any other expenses that are allowable under GAAP or FASB rules but are not allowable or limited under federal rules. You must itemize these expenses. Line 35. Total deductions. Add Lines 6 through 34.
Line 36. Other business credits.
If you claimed one or more of these credits you must reduce your total expenses by your costs to qualify for the credit:
- PA Employment Incentive Payments Credit
- PA Jobs Creation Tax Credit
- PA Research and Development Tax Credit
If you did not claim one of these business credits, enter zero on Line 36. Line 37. Total Adjusted Expenses. Reduce Line 35 by Line 36.
Line 38. Net profit or loss.
Subtract Line 37 from Line 5. In computing net profit or loss from your business or profession, you report your entire loss in this taxable year.
Schedule C-1 – Cost of goods sold and/or operations
Generally, if you engaged in a trade or business in which the production, purchase, or sale of merchandise was an income- producing factor, you must consider inventories at the beginning and end of your tax year.
In determining inventory value, you may use cash, accrual, or other method allowable under accepted accounting principles and practices. If you change methods of valuing inventory, you must restate the value at the beginning of the year based on the changed method and include an explanation. There is no provision under PA PIT law similar to IRC Section 481(a) that permits taxpayers to spread the income effect of a change in method over a specified period.
Schedule C-2 – Depreciation
Complete this schedule if you are using a depreciation method other than federal depreciation reported on your Federal Schedule C. See the instructions for Line 13 on page 3.
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