 Most of this information comes from the tax guide for small business, for individuals who use Schedule C, Publication 334, Tax Year 2022, you can find on the IRS website, irs.gov, irs.gov, looking at the income tax formula. We're focused on line one, income. Remember, in the first half of the income tax formula is in essence an income statement, but just to outline other forms and schedules flowing into these line items, one of those being the Schedule C. The Schedule C having business income minus business expenses gives us the business net income, which flows in from the Schedule C to line one income of the income tax formula. When we look at the actual form 1040, we remember that the Schedule C flows into the Schedule 1, which flows into the first page of the form 1040 line number eight. The Schedule C is the profit or loss from business has an income tax, income statement, structure, income minus expenses. We're focused now on the figuring of profit or loss, in essence the bottom line of the calculation on the Schedule C. Alright, so figuring net profit or loss, introduction, after figuring your business income and expenses, you are ready to figure the net profit or loss from your business. You do this by subtracting business expenses from business income. That part of course seems fairly straightforward because once again it is an income statement, structure, where you have income minus expenses gives you that net income or loss if there's a loss. If your expenses are less than your income, the difference is net profit and because part of your income on line three of Schedule 1 form 1040. So once again, if your expenses are less than your income, that means you have more income than the expenses, you have income that's going to be flowing through then and be taxable. Typically, ultimately going into the first page of the form 1040, increasing your income to be taxed. The difference is net profit and becomes part of your income on line three of Schedule 1. So it flows in from Schedule C to Schedule 1 and then from Schedule 1 onto the first page of the form 1040. So if your expenses are more than your income, the difference is a net loss. Now that's when things get actually messy when you have a net loss because remember, the IRS is going to be skeptical of losses. The IRS wants to be your silent partner, but only when you have income, but they don't want to take on the risks when you have the losses. So because if you have a loss, then you might be able to take the loss against other types of income such as other W2 income or investment income or something that you have elsewhere. And that's where the IRS is going to be skeptical of the losses. So there could be restrictions as we've talked about in various areas along the way with regards to losses and the possible use of certain type of expenses such as the business use of the home being limited in some cases if you're in a loss scenario. We also talked about the situation of whether you have a business or a hobby. Remember that just because you have a loss doesn't mean you're not necessarily a business. But the losses, if you have losses for an extended period of time, in particular, the IRS is you would expect going to be more skeptical and you might have to prove then that you have business intent, which is revenue generation intent. But if it's not revenue generating activity, then you might have a hobby kind of situation rather than a business income situation. But if you are legitimately trying to build a business, then it's quite common in the first couple of years to have a loss. You don't want to be overly worried about the loss as long as you can prove in the event that an audit happens that you are actively seeking profit. We can usually deduct it from gross income on line three of schedule one form 1040. But in some situation, your loss is limited. This chapter briefly explains three of those situations. Other situations that may limit your loss are explained in the instructions for schedule C line G and line 32. So caution, if you have more than one business, you must figure your net profit or loss for each business on a separate schedule C. So it's quite possible that you have multiple types of businesses that are different in nature. And then you would have to file two schedule C's, which in essence, if you had two or more businesses, you would have at least two instead of one if it was more than one. Then you would have two schedule C's, which would in essence be two kind of separate income statement type of formats, which would both then have to flow into all the different components. We talked about self-employment tax having to be calculated and the schedule one into the first page of the form 1040 and so on and so forth.