One More Reason to Avoid a Schedule C

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I’m not a fan of Schedule C (Sole Proprietorship) businesses for 3 big reasons:

  1. They will cost you more in tax.
  2. They put everything you own at risk.
  3. They are more subject to audit.

And I know there are 2 reasons why people will probably always continue to use them:

  1. Schedule Cs are way easier then setting up a regular business structure.
  2. Schedules Cs cost you nothing to set up, unlike a properly prepared LLC or Corporation.

And now there’s one more reason, your Schedule C can get your tax return preparer in trouble.

The IRS has sent out more than 21,000 letters to tax return preparers who filed Schedule A, Schedule C and Schedule E with unusually high deductions.

Schedule A is for itemized deductions. Schedule E is for pass through entities and rental properties. If you have those deductions and are properly reporting them, then there is not a lot you can do to change it. But you can do something to change Schedule C. Incorporate.

The IRS’s next step is to select 2,000 of the tax return preparers who received the letter to visit during tax season.

The specific issues that the IRS is investigating:

    • Gross receipts not being fully reported. Books and records should be available for
    review to substantiate amounts reported.
    • Expenses claimed must be ordinary and necessary for the type of business reported.
    • All expenses claimed are to be paid or incurred during the taxable year and the allowable amount of the expense must be correctly computed.

This investigation is completely pointless if you have a CPA or attorney preparing your tax returns. As your CPAs, your information is protected by federal, and often state, statutes that say we can’t give out that info without your permission. The IRS can’t force us to give out any of this information. However, if you have a preparer who is not a CPA or attorney, you may be more at risk if your preparer gets targeted. The same statutes don’t protect non-CPAs and non-Attorneys.

There are two action items from this news: Form a corporation or LLC and make sure your tax preparer is a CPA or tax attorney.

Find Your Hidden Business Deductions

Filing Your Schedule C Tax Return

The IRS Audit Survival Guide

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