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People who are endowed with an entrepreneurial spirit generally don't limit their efforts to one business activity. It's common for business owners to branch out into sideline activities that may or may not be related to their original activity, and that might be considered a separate business.
For example, a craft supply retailer might also offer classes in various types of arts and crafts. Or, a photography studio might offer photoprocessing of customers' ordinary snapshots, in addition to traditional professional photography. In each case, the question arises as to whether this is a single business, or two businesses that should be reported on two different Schedule Cs.
The tax laws and regulations are not very clear on this issue, probably because the facts and circumstances can vary so much from case to case. Generally speaking, if you have two or more separate business activities, you can't report them both on the same Schedule C. The instructions to Form 5213, Election To Postpone Determination as to Whether the Presumption Applies That an Activity Is Engaged in for Profit, state that in determining whether you are engaged in more than one activity, you must consider all of the following:
- the similarity of the activities
- the business purpose that is (or might be) served by carrying on the activities separately or together in a trade or business or investment setting
- the organizational and economic interrelationship of the activities
These factors are quite vague and subjective, even for the IRS. The general idea, however, is that if you provide similar products or services to similar clients, you have a single business. If you don't, you may have more than one business depending on how close the relationship is between the activities.
Other factors that should be considered include which spouse is the primary operator of the business (for instance, does one spouse run one activity while the other runs a second?) and the locations of the businesses (if you have two different but related businesses that occupy two separate sites, it's more likely that they should be considered two separate businesses).
If you receive income as a "statutory employee," a grouping that includes full-time life insurance agents, agent or commission drivers, traveling salespersons, and certain homeworkers, you must report this income on a Schedule C. If you also receive other income as a self-employed person, don't combine the two types of income - you must file a separate Schedule C for each type.
One last factor to keep in mind is that the tax law provides for separate treatment of "passive activities" - basically, income or losses from a passive activity can only be offset by income or losses from other passive activities.
Real estate rentals are most often classified as passive activities which must be reported on Schedule E, Supplemental Income and Loss, not Schedule C. So, if your "sole proprietorship" involves some rental or leasing activities, you may need to treat the income and expense from these activities as separate passive activities.
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