IRS Red Flags from Schedule C | USTaxAid

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IRS Red Flags from Schedule C

Written by Diane Kennedy, CPA on March 20, 2012

IRS Red Flags from Schedule CThe simplest business structure you can have is no structure. You just start. It’s pretty compelling to do that. After all, if the main purpose of a business is to make money, then you want to go make some. You don’t have time to plan business structures. At that point, they can easily become a hindrance to starting your business.

Or at least that’s what you may think in the beginning. There are 4 reasons why I’m not generally a fan of no business structure for your business, also known as a Sole Proprietorship.

  1. Everything you have is at risk from some bad act in your business. An employee can cause you to lose your house, your savings account and your child’s college education fund.
  2. You aren’t building any business credit.
  3. You will pay more tax.
  4. You have a 1 in 3 chance of being audited.

And there are two reasons why you may want to consider a Sole Proprietorship:

  1. They are cheap, fast and easy. Nothing extra to file.
  2. You can set up a MERP (medical expense reimbursement plan) that reimburses you for all medical costs. You can’t do that in a partnership or an S Corporation.

A Sole Proprietorship files on Schedule C of your Form 1040. If you have a single member LLC that has not elected how it wants to be taxed, it will also file with Schedule C. In this case, you’ll have asset protection, but will still have potential problems #2 – #4 above.

The IRS is more likely to audit Sole Proprietorships then any other structure. The Sole Prop itself is a red flag.

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