PASS IT THROUGH™

What does “pass it through” actually mean?

For a sole proprietor, business activity is generally reported on Schedule C. Gross receipts are reduced by allowable business costs and expenses to determine net profit or loss. That result generally flows into the owner’s federal individual income-tax calculation. Self-employment tax is a separate calculation.

The Three Tax Buckets

“LLC” does not automatically mean “Schedule C.”

An LLC is a legal form under state law. Its federal tax classification determines how its activity is reported.

Your 1099s are not your bookkeeping system.

Business income generally must be determined from the business’s records. An information-return threshold tells a payer when a form may be required; it does not create a general tax-free amount for the recipient.

Your Schedule C navigation map

Inventory and Cost of Goods Sold are not ordinary office supplies.

Businesses that produce or sell merchandise may need to account for inventory and cost of goods sold. Small-business accounting exceptions can apply, so the method used should be consistent with the applicable tax rules.

Schedule C expense map

A business expense generally must satisfy the applicable tax rules, including the foundational concept that business expenses be ordinary and necessary. Additional limitations apply to many categories.

Vehicle deductions: 2026 has two business mileage rates.

Example

Depending on eligibility and elections, taxpayers may use the standard-mileage method or actual vehicle expenses. Actual expenses can require allocating costs between business and personal use.

Two methods. One set of qualification rules.

Business purpose must be real and documented.

A purchase can have more than one tax path.

Qualifying equipment and other property may be recovered through regular depreciation, a §179 election, bonus depreciation, or other applicable rules. The correct method depends on the property and taxpayer.

Startup spending is different from ordinary operating expenses.

Qualifying startup and organizational expenditures can be subject to special rules. A taxpayer may generally elect an immediate deduction of up to $5,000 for qualifying startup costs and up to $5,000 for qualifying organizational costs, each reduced when the applicable category exceeds $50,000. Remaining qualifying costs are generally amortized under the applicable rules.

Collect the paperwork before payment becomes a year-end problem.

Businesses using independent contractors should address worker classification, collect appropriate taxpayer information such as Form W-9 when applicable, maintain contracts and payment records, and determine whether an information return is required.

Not every self-employed tax benefit belongs on Schedule C.

Qualified Business Income deduction

The QBI deduction can generally be up to 20% of qualified business income for eligible taxpayers, but taxable-income thresholds, specified service trade or business rules, W-2 wage/property limitations and other provisions can affect the result.

Income tax and self-employment tax are different calculations.

Schedule SE generally begins by converting applicable self-employment profit to net earnings from self-employment using the statutory calculation (commonly 92.35% for the basic computation). Social Security and Medicare components are then calculated under the applicable rules.

An additional 0.9% Medicare Tax can apply above statutory thresholds: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other filers, based on applicable wages, RRTA compensation and self-employment income.

Estimated taxes

Self-employed taxpayers may need estimated tax payments because there may be no employer withholding federal income and employment taxes from business earnings. A common general trigger is expecting to owe at least $1,000 after withholding and refundable credits, subject to the full estimated-tax rules.

A business loss is not automatically an unlimited deduction.

Losses may be affected by basis rules where applicable, at-risk limitations, passive-activity limitations, the excess-business-loss limitation, and net-operating-loss rules.

Build records that tell the story of the deduction.

Practical recordkeeping checklist

• Separate business and personal transactions whenever practical.
• Reconcile bank, card and payment-platform activity to the books.
• Keep invoices, receipts, contracts and proof of payment.
• Document business purpose for travel, meals, mileage and mixed-use costs.
• Keep asset purchase, basis, depreciation and disposition records as long as they remain relevant.
• Keep employment-tax records for at least the applicable IRS retention period; the IRS generally states at least four years.
• Do not apply a universal “three-year” destruction rule to every business record.

Federal estimated-tax checkpoints

2026 numbers to know

IRS references

Use current IRS forms, instructions and publications when preparing an actual return. Tax law can change after publication.

• Schedule C Instructions
• Publication 334 — Tax Guide for Small Business
• Publication 463 — Travel, Gift and Car Expenses
• Publication 587 — Business Use of Your Home
• Publication 946 — How To Depreciate Property
• General Instructions for Certain Information Returns
• IRS Standard Mileage Rates