On and off 1099-NEC Schedule C Over the Years

[tariq21]

If a taxpayer receives a 1099-NEC for their work along with their usual annual W-2 income but it is not consistent and some years they have and some years they do not. Question is how are the years without a 1099-NEC reported? This may be non-inclusive of everything but for example expenses, items bought for the work that was paid for, mileage and vehicle usage for the work paid for, onward and etc. Do you not depreciate an item bought or used? Do you just leave out the Schedule C all together and report nothing if no 1099-NEC received for that tax year? Do you include expenses even if its a negative due to no 1099-NEC income or is that an ask for an audit if over 2 to 3 to 4 years of no 1099-NEC issued? Please help with a detailed response to this scenario with examples and references. Thanks. 

[AmyC]

1. It depends: Sch C is to report business income and pay self-employment tax.

• When you are not actively working the business, you do not use the Sch C. Being inactive one year, pauses the depreciation. It will pick back up when you are active again.  Many people have sporadic income for a variety of reasons. 
• If you are actively working but not enough to get a 1099-NEC, then you would continue to use the Sch C to report the income and expenses.

2. Expenses are claimed when you file Sch C along with depreciation-  Publication 946, How to Depreciate Property states: To be depreciable, the property must meet all the following requirements. 

• It must be property you own. 

• It must be used in your business or income-producing activity. 

• It must have a determinable useful life. 

• It must be expected to last more than 1 year.

3. Leave out Sch C when not actively working. If you are actively working, file a Sch C. Many people have a large Sch C and never get a 1099. It depends on the type of work you do.

4. Expenses that make your Sch C negative are a concern because your business must have positive income 3 out of 5 years for most businesses in order to be considered a business. Otherwise, the IRS may reclassify the business as a hobby and disallow all expenses and depreciation.

5. Example:

Ben digs trenches for 10 years, filing a Sch C  claiming his equipment and expenses.

Ben is seriously injured and unable to work for 2 years. No sch C is filed, no expenses are taken.

Ben is finally able to work a little bit helping out friends, in his line of work and makes a little money from several people but no 1099 is issued. This is his line of work and he will file the Sch C and resume depreciating his equipment and claiming expenses.

Ben can show that this is how he pays the bills and he is trying to make the business work again. It is not a hobby.

See: Help to decide between a hobby or business

Reference: Self-employed individuals tax center  has information to help a business grow, claim deductions, everything you could need to know on the tax side and we are here to help!