Instructions For Schedule C - Profit Or Loss From Business

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Any transaction offered under condi-

Line F

Line G

tions of confidentiality for which you paid

an advisor a minimum fee.

Generally, you can use the cash method,

If your business activity was not a rental

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Any transaction for which you have

activity and you met any of the material

accrual method, or any other method per-

contractual protection against disallowance

participation tests below or the exception

mitted by the Internal Revenue Code. In all

of the tax benefits.

for oil and gas applies (explained on page

cases, the method used must clearly reflect

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C-3), check the “Yes” box. Otherwise,

income. Unless you are a qualifying tax-

Any transaction resulting in a loss of

check the “No” box. If you check the “No”

at least $2 million in any single tax year or

payer or a qualifying small business tax-

box, this business is a passive activity. If

payer, you must use the accrual method for

$4 million in any combination of tax years.

you have a loss from this business, see

(At least $50,000 for a single tax year if the

sales and purchases of inventory items. See

Limit on losses on page C-3. If you have a

loss arose from a foreign currency transac-

the Part III instructions on page C-6 for the

profit from this business activity but have

tion defined in section 988(c)(1), whether

definition of a qualifying taxpayer and a

current year losses from other passive ac-

or not the loss flows through from an S

qualifying small business taxpayer. Special

tivities or you have prior year unallowed

corporation or partnership.)

rules apply to long-term contracts. See sec-

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passive activity losses, see the Instructions

tion 460 for details.

Any transaction resulting in a

for Form 8582.

book-tax difference of more than $10 mil-

If you use the cash method, show all

lion on a gross basis.

Participation, for

Material participation.

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items of taxable income actually or con-

purposes of the seven material participation

Any transaction resulting in a tax

structively received during the year (in

tests listed below, generally includes any

credit of more than $250,000, if you held

cash, property, or services). Income is con-

work you did in connection with an activity

the asset generating the credit for 45 days

structively received when it is credited to

if you owned an interest in the activity at

or less.

your account or set aside for you to use.

the time you did the work. The capacity in

See the Instructions for Form 8886 for

which you did the work does not matter.

Also, show amounts actually paid during

more details and exceptions.

However, work is not treated as partici-

the year for deductible expenses. However,

pation if it is work that an owner would not

if the payment of an expenditure creates an

Additional Information

customarily do in the same type of activity

asset having a useful life that extends sub-

and one of your main reasons for doing the

See Pub. 334 for more information for

stantially beyond the close of the year, it

work was to avoid the disallowance of

small businesses.

may not be deductible or may be deductible

losses or credits from the activity under the

only in part for the year of the payment. See

passive activity rules.

Pub. 535.

Specific Instructions

Work you did as an investor in an activ-

If you use the accrual method, report

ity is not treated as participation unless you

income when you earn it and deduct ex-

were directly involved in the day-to-day

Filers of Form 1041.

Do not complete the

penses when you incur them even if you do

management or operations of the activity.

block labeled “Social security number

not pay them during the tax year.

Work done as an investor includes:

(SSN).” Instead, enter your employer iden-

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Accrual-basis taxpayers are put on a cash

Studying and reviewing financial

tification number (EIN) on line D.

basis for deducting business expenses

statements or reports on the activity,

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owed to a related cash-basis taxpayer.

Preparing or compiling summaries or

Other rules determine the timing of deduc-

analyses of the finances or operations of the

Line A

tions based on economic performance. See

activity for your own use, and

Pub. 538.

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Describe the business or professional activ-

Monitoring the finances or operations

ity that provided your principal source of

of the activity in a nonmanagerial capacity.

To change your accounting method, you

income reported on line 1. If you owned

generally must file Form 3115. You may

Participation by your spouse during the

more than one business, you must complete

tax year in an activity you own can be

also have to make an adjustment to prevent

a separate Schedule C for each business.

counted as your participation in the activ-

amounts of income or expense from being

Give the general field or activity and the

ity. This applies even if your spouse did not

duplicated or omitted. This is called a sec-

type of product or service. If your general

own an interest in the activity and whether

tion 481(a) adjustment.

field or activity is wholesale or retail trade,

or not you and your spouse file a joint re-

or services connected with production serv-

Example. You change to the cash

turn.

ices (mining, construction, or manufactur-

method of accounting and choose to ac-

For purposes of the passive activity

ing), also give the type of customer or

count for inventoriable items in the same

rules, you materially participated in the op-

client. For example, “wholesale sale of

manner as materials and supplies that are

hardware to retailers” or “appraisal of real

eration of this trade or business activity

not incidental. You accrued sales in 2003

estate for lending institutions.”

during 2004 if you met any of the following

for which you received payment in 2004.

seven tests.

You must report those sales in both years as

1. You participated in the activity for

a result of changing your accounting

Line D

more than 500 hours during the tax year.

method and must make a section 481(a)

2. Your participation in the activity for

adjustment to prevent duplication of in-

You need an employer identification num-

the tax year was substantially all of the

come.

ber (EIN) only if you had a qualified retire-

participation in the activity of all individu-

ment plan or were required to file an

als (including individuals who did not own

A net negative section 481(a) adjust-

employment, excise, estate, trust, or alco-

any interest in the activity) for the tax year.

ment is taken into account entirely in the

hol, tobacco, and firearms tax return. If you

year of the change. A net positive section

3. You participated in the activity for

need an EIN, see the Instructions for Form

481(a) adjustment is generally taken into

more than 100 hours during the tax year,

SS-4. If you do not have an EIN, leave line

account over a period of 4 years. Include

and you participated at least as much as any

D blank. Do not enter your SSN.

any net positive section 481(a) adjustments

other person for the tax year. This includes

on line 6. If the net section 481(a) adjust-

individuals who did not own any interest in

the activity.

ment is negative, report it in Part V.

Line E

4. The activity is a significant partici-

For details on figuring section 481(a)

Enter your business address. Show a street

pation activity for the tax year, and you

adjustments, see the Instructions for Form

address instead of a box number. Include

participated in all significant participation

3115, Rev. Proc. 2004-23, 2004-16 I.R.B.

the suite or room number, if any. If you

activities for more than 500 hours during

785, available at

conducted the business from your home lo-

the year. An activity is a “significant par-

2004-16_IRB/ar11.html , and Rev. Proc.

cated at the address shown on Form 1040,

ticipation activity” if it involves the con-

2004-57, 2004-38 I.R.B. 498, available at

page 1, you do not have to complete this

duct of a trade or business, you participated

2004-38_IRB/ar11.html .

line.

in the activity for more than 100 hours dur-

C-2

Instructions For Schedule C - Profit Or Loss From Business - 2004 Page 2

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