Form Pa 40 C – Fill Out and Use

PARTIIncome

c. Balance (subtract Line 1b from Line 1a) .........................................

2.Cost of goods sold and/or operations (Schedule C-1, Line 8) .............................

3.Gross profit (subtract Line 2 from Line 1c) .........................................

4.OtherIncome(submitstatement).Includeinterestfromaccountsreceivable,businesscheckingaccounts and other business accounts. Also include sales of operational assets. SeeInstructions Booklet.

5.Total income (add Lines 3 and 4) ...............................................▼

1c.

2.

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4.

5.

PARTIIDeductions

6.Advertising............................

7.Amortization...........................

8.Baddebtsfromsalesorservices ............

9.Bankcharges ..........................

10.Carandtruckexpenses ...................

11.Commissions ..........................

12.Costdepletionbutnotpercentagedepletion ....

13.a. Regulardepreciation.................

13.b. Section179expense ................

14.Duesandpublications ....................

15.EmployeebenefitprogramsotherthanonLine23

16.Freight(notincludedonScheduleC-1) ........

17.Insurance.............................

18.Interestonbusinessindebtedness ...........

19.Laundryandcleaning ....................

20.Legalandprofessionalservices .............

21.Managementfees .......................

22.Officesupplies .........................

23.Pensionandprofit-sharingplansforemployees ..

24.Postage ..............................

25.Rentonbusinessproperty .................

26.Repairs ..............................

27.Subcontractorfees ......................

37.Totaladjustedexpenses(subtractLine36fromLine35).

SCHEDULEC-1-CostofGoodsSoldand/orOperations

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2c.

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8.

4.Other depreciation:

Buildings ...............

Furnitureandfixtures .......

Transportationequipment ....

Machineryandotherequipment

Other(specify) ...........

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(f)(g)

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Overview

Use PA Schedule C to report income or loss from a business you operate or a profession you practice as a sole proprietor. Youractivityqualifiesasabusinessifyourprimarypurposefor 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 busi- ness 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 accountingprinciples,systemsorpracticesthatareacceptable by standards of the accountingprofessionand consistent with regulations of the Department.

Pennsylvania allows a taxpayer to usefederal tax accounting rules to determine income or (loss) to the extent consistent with department regulations and to the extent federal tax accounting rules clearly reflect income.

•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 taxableincomeonLine1a,PA-40,andusePAScheduleUE to deduct expenses. See Chapter 7 of the PA PIT Guide for more information.

•Anownermaydeductalllossesfromabusinessorprofession in the taxable year realized. Report all transactions directly related to your business or profession on PA Schedule C.

•Donot 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.

Maintain separate books and records for PA PIT purposes and file PA Schedule C. If you wish to take advantage of Pennsylvania reporting differences that decrease your federal profit, complete PA Schedule C.

ImportantDifferencesbetweenFederaland PennsylvaniaRules

You may use any accounting method for PA purposes, as long asyouapplyyouraccountingmethodsconsistently.PAlawdoes not have material participation rules. Report all transactions thataredirectlyrelatedtoyourbusinessorprofessiononyour PA Schedule C.

If you own or operate more than one business, you must submita separate PA Schedule Cfor each business operation.

The following federal schedules and instructions do not apply for PA Schedule C:

ScheduleA.Youmaynotdeductnonbusiness-relatedpersonal interest, taxes and casualty losses on any PA PIT return.

ScheduleE.ReportrentalandroyaltyincomeonPAScheduleE, unlessengagedinthebusinessofmakingyourpropertyorrights available in a public market place with intention to realize a profit.

Schedule F. Report farming activity on PA Schedule F.

Schedule SE. Do not report self-employment taxes to Pennsylvania.

Form4562.Ifusingbonusdepreciation,donotuseForm4562. Use Schedule C-2 on Side 2 of this schedule. The maximum deduction PA income tax law permits underIRC 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 $25,000 for all businessactivities.

Form4684.Reportgainor(loss)fromallbusinessactivityon PA Schedule C. Include a casualty or theft loss of business property (or gain, if insurance proceeds exceed the basis of the property lost or taken) on Line 4 of PA Schedule C. You mayrefertothefederalscheduleforanexplanationofgainor (loss)items, but do not submit the federal schedule.

Form 4797. Report other sales, exchanges and involuntary conversionsofbusinesspropertyonLine4ofPAScheduleCif the property sold was replaced. Refer to the federal schedule for an explanation of gain/loss items, but do not submit the federal schedule.

Form8271.Donotreportordeductanytransactionsrelated to tax shelters.

Form 8594. Report the acquisition or disposition of business assetsonLine4ofPAScheduleC.Refertothefederalschedule for anexplanation for gain/loss items, butdo not submit the federal schedule.

Form 8824. 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 includethegainorlossfromasale,exchangeordispositionof a business asset on Line 4 of PA Schedule C if the transaction was a normal business transaction. You must report any gain orlossfromthesaleofanonbusinessassetorpropertyorthe sale of a business or segment thereof on PA Schedule D if the property sold was not replaced.

Form8829.Includeyourallowableexpensesforthebusiness use of your home on Line 34 of PA Schedule C. Refer to the federalscheduleforanexplanationofthisexpense,butdonot submit the federal schedule.

OtherPennsylvaniaandfederalincometax differences-

PA income from the operation of business generally differs from the income determined for federal income tax purposes. Further, Pennsylvania will no longer accept a PA Schedule C-F Reconciliationforthepurposeofadjustingthefederalbusiness income to PA business income. Therefore, the items which werepreviouslyincludedasadditionstoPAincomeorexpense onthePAScheduleC-FReconciliationshouldbeincludedwith the specific line of income or expense on the PA Schedule C. Inaddition,thoseitemswhichPennsylvaniadoesnotrequirebe reportedasincomeordoesnotallowasexpenseindetermining net business income, which are allowed in the determination of net federal business income, should not be included in the specific business income or expenses on PA Schedule C.

Examples of items that Pennsylvania requires as additions to income include: any advance receipts for goods or services; working capital interest or dividend income including federal- exemptinterestanddividendincomefromobligationsofother states;gainsfromthesaleofbusinessassetswheretheprop- erty is replaced by similar property; gains from like-kind exchanges;gainsfrominvoluntaryconversions(suchasthose from IRC Section 1033); and gains from the sale of property where PA basis is different than federal basis.

Examples of items that Pennsylvania allows as additions to expenses that required a reduction for federal tax purposes include:ameals,travelandentertainmentexpensededuction of100percentbyPennsylvaniafortheexpensesincurred;any differences in depreciation related to differences in basis of assets, amount of allowable Section 179 expense, or method of depreciation for federal or PA purposes; and any other reductions in federal expenses allowed at 100 percent for PA personal income tax purposes.

ExamplesofitemsthatPennsylvaniarequiresasreductionsin federalincomeorexpensesinclude:incometaxesbasedupon grossornetincome;anydifferencesindepreciationrelatedto differencesinbasisofassets,amountofallowableSection179 expense,ormethodofdepreciationforfederalorPApurposes; recognitionofcancellationofdebtincome;recognitionofincome from IRC Section 481(a) spread adjustments; payments for ownerpension,profit-sharingplans,deferred,orwelfarebenefit plans; percentage depletion; direct expensing of organizational expenses,start-upcosts,intangibledrillingcostsorsyndication fees; losses from the sale of property where PA basis is differentthan federal basis;and any other incomeor expenses where there is a specialized federal treatment that is not specificallyaddressedorallowedbyPApersonalincometaxlaw that might involve additional expensing, expensing verses capitalization, carry back or carry forward of losses, income recognition, or other special treatments.

LineInstructions

IdentificationInformation. Complete each line.

Owner'sName.Enterthenameofthebusinessowner.Ifyou aremarriedandyoujointlyownedthebusinesswithyourspouse, enter both names. If you and your spouse have separate business activities, complete separate PA Schedule(s) C.

FederalNAICSCode.ProvideyourFederalNAICSCodeas identified on your Federal Schedule C.

Social Security number (SSN). Enter the SSN of the business owner. If you aremarried and you jointly owned the business, enter the SSN that you entered first on your PA tax return.

A. Main Business Activity. Describe the business or professional activity that provided your principal source of income for Line 1. Use the same description you use for your Federal Schedule C. Enter the principal business or professional code you use on your Federal Schedule C.

B.BusinessName.Enterthenameofthebusinessasyou registered with the IRS.

C.Taxpayer Identification Numbers. Enter the FederalEmployerIdentificationNumber(FEIN)assignedto the business. If you do not have anFEIN for your Federal Schedule C, leave this space blank. Enter the Sales Tax Licensenumberifyouhaveone,orleavethisspaceblank.

D.Business Address. Enter the complete address of the business.

E.Closing Inventory Valuation. Fill in the appropriate oval. Submit an explanation if necessary.

F.AccountingMethod.Fillintheovalfortheaccounting method you use for this business. Submit an explanation if necessary.

G.Inventory Changes. Check “Yes” or “No” for this question. Submit an explanation if necessary.

H.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.

I.Out of Business. If the business is out-of-existence at the end of the tax year for which you are filing, fill in the oval.

PartI.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 receivedinoperatingyourbusinessorprofession.PAlawdoes not contain provisions for statutory employees. A statutory employee reports his or her PA taxable income on Line 1a, PA-40,andusesPAScheduleUEtodeducthisorherallowable employee business expenses.

Installment Sales. You may use the installment method for sales of inventory. Include interest on such sales in gross receipts.

LandandBuildings.ForPApurposes,youmaynotinclude the sales of land and buildings on PA Schedule C unless the property sold is replaced. When the property sold is not replaced,the Department deems such sales as dispositionsof a segment of a business to be reflected on PA Schedule D.

Line1b.Returnsandallowances.Thisamountisthesame for both Pennsylvania and federal purposes. If you report a different amount for Pennsylvania, submit an explanation.

Line 2. Cost of goods sold. This amount is the same for Pennsylvania and federal purposes. If you report a different amount for Pennsylvania, submit an explanation.

Line 4. Other income. Enter gross proceeds you may have to report elsewhere on your federal tax return, including but not limited to:

•Thesaleofbusinessassetswhenyoureinvesttheproceeds in business operations;

•Thegain(loss)onreplacingbusinessproperty,includingland or buildings usedin operating your business or profession; and

•Interest and dividend income from short-term investments to generate working capital.

Submitastatementexplainingtheamountyouenter.Seethe PAPITGuideforanexplanationofallocableinterest,dividends and gains to business or professions. Include other income you enter on Line 6, Federal Schedule C, but not refunds of federal taxes and credits you did not deduct for PA purposes.

PartII. 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 deduct 100 percent of the PA allowable business or professional expenses incurred during the taxable year.

NOTE:Youmayhaveincurredotherexpensesforentertainment facilities (boat, resort, ranch, etc.), living accommodations (except for employees on business) or vacations for yourself, your employees or their families. Reduce your total business expenses in Part II by the total of these personal expenses.

Generally, you may usually use your Federal Schedule C expensesforPAPITpurposes.SeetheotherPennsylvaniaand federalincometaxdifferencesexplanationbeginningonPage1 of the instructions for more information.

Youmaynotusefederalamountsaftermakingcertainelections toaccelerateordeferexpensesorspreadexpensesovermore thanonetaxableyear.Theseinstructionsexplainthoseexpense categories where PA PIT rules and federal rules differ.

Line7.Amortization.Pennsylvaniagenerallyfollowsfederal 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 or you may use the federal standard mileage rate. If you use the federalstandard mileage rate, 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 travel, you may only deduct the business portion of your expenses.

Line 13a. Regular depreciation. Use any depreciation method permissible under accepted accounting principles and practicesas long as you consistently apply the method.

NOTE: PA PIT law does not permit the bonus depreciation elections added to the Internal Revenue Code in 2002, 2003, 2008and2009.

For each asset, you must also report straight-line depreciation, unlessnotusinganoptionalaccelerateddepreciationmethod. You need 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.

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 13b. Section 179 expense. PA PIT law limits IRC Section179currentexpensingtotheexpensingallowedatthe time you placed the asset into service or in effect under the IRC of 1986 as amended to Jan. 1, 1997. The maximum deduction that PA Income Tax law permits underIRC Section 179is$25,000.Pennsylvaniafollowsthefederaldefinitionsfor listed property.

Line14.Duesandpublications.Youmaydeductduesand publications, but only to the extent directly used for ordinary businesspurposes.Youmustexcludeanypersonaluseofsuch expenses.

Line15.EmployeebenefitprogramsotherthanonLine

23.Youmaynotdeductanypaymentsyoumakeforyourown 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 is the beneficiary (not your spouse, other family members or other persons). 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 interest on business debt only. If you personally borrow money to acquire a business interest or to improve your business,youmaynotdeducttheinterestonanyPAschedule or PA tax return.

Line 20. Legal and professional services. Only deduct those expenses 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.

Line21.Managementfees.Includeanymanagementfees paid in conjunction with the operation of the business to any related or non-related entity.

Line23.Pensionandprofit-sharingplansforemployees. 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. Only deduct those expendituresyouincurredintheoperationofyourbusinessor profession.

Line 27. Subcontractor fees. Deduct subcontractor fees thatwerenotincludedinyourcalculationofcostoflaborfrom Line 3 of Schedule C-1. Also include any fees paid to payees not included as employees to whom regular wages were paid.

Line29.Taxes.Deducttaxexpensesotherthantaxesbased on income. You may not deduct taxes based on net income, federalincometaxesortheone-halfofself-employmenttaxes the IRS allows. Do not deduct taxes paid to other states or foreign countries based on income. Do not deduct estate, inheritance, legacy, succession or gift taxes. Assessments for betterments and improvements are not allowed. Business privilege taxes and/or gross receipts taxes are acceptable deductions.

Line31.Travelandentertainment.PAlawdoesnotfollow federal law. Deduct 100 percent of your allowable travel and entertainment expenses. You may never deduct the personal portionofyourtravelandentertainmentexpenses,whetherfor yourself, your spouse, your dependents or any other person. You may use the federal standard meal allowance.

Line33. Wages. Do not reduce your wage expense for any federalcreditsyouclaim.Addbackanywageexpenseexcluded in order to claim a federal credit. Donot deduct the costs of your own participation.

Line34. Otherexpenses. Deduct any other costsof doing business or providing professional services if such costs are permittedunderacceptedaccountingprinciplesandpractices. Itemizetheadditionalexpensesyouclaim,andenterthetotal on Line 34, Total other expenses. You may deduct:

•100 percent of the PA Sales Tax paid on a depreciable businessasset.However,ondisposition,yourPennsylvania basis and federal basis for that asset will be different.

•Charitable contributions madefrom your business account and acknowledged publicly by the recipient. Personal charitable contributions are not allowed.

•Expenses using the capitalization rules established by your trade,profession,orindustry,underitsacceptedaccounting

principles and practices. Once elected, use this method consistently.

•100percentofexpensesincurredforremovingbarriersto 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 allowed under generally accepted accounting principles or financial accounting standards boardrules but are not allowable or limited under federal rules. Itemize these expenses.

Line35. Totaldeductions. Add Lines 6 through 34.

Line 36. Other business credits. If you claimed one or more of these credits,reduce total expenses by costs to qualify for the credit:

•PA Employment Incentive Payments Credit

•PA Job 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.

Line38.Netprofitorloss.SubtractLine37fromLine5.In calculatingnetprofitorlossfromyourbusinessorprofession, report your entire loss in this taxable year.

ScheduleC-1–Costofgoodssoldand/or operations

Generally, if you engaged in a trade or business in which the production, purchase or sale of merchandise was an income- producingfactor,youmustconsiderinventoriesatthebeginning and end of your tax year.

In determining inventory value, use the cost, lower of cost or marketor other method allowable under accepted accounting principles and practices. If you change methods of valuing inventory,restatethevalueatthebeginningoftheyearbased 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 changeinmethodoveraspecifiedperiod.PAPITrulesalsodo notpermitvaluinginventoryusinguniformcapitalizationrules under IRC section 263 A (a) and (b) and inventories calculated using this method for federal purposes must be recalculated for PA PIT purposes.

ScheduleC-2–Depreciation

Completethisscheduleifyouareusingadepreciationmethod other than federal depreciation reported on your Federal Schedule C. See the instructions for Line 13 on Page 3.