If you are a sole proprietor--a person who runs a business that has not been incorporated---the IRS is targeting you.
If you start a business and do not form an LLC or incorporate, you are a sole proprietor.
The IRS form for reporting a sole proprietor's business is called Schedule C. It allows expenses to be deducted dollar for dollar against the business income. The IRS fears sole proprietors will under report their income and report personal expenses as business deductions.
Many fraudulent businesses have been discovered by the IRS, since business losses can be used to reduce tax liability, enabling the taxpayer to claim the earned income credit, i.e. free money.
This is why schedule C is the IRS' most audited form. If you have a schedule C in your return, you are subject to more IRS scrutiny.
For that reason, you don't want a schedule C in your tax return.
The IRS focuses on service businesses---like beauticians, repair persons and home services---and professionals---like doctors, lawyers, insurance agents and computer networking people.
The best strategy for service businesses and professionals is to change the way their business is reported.
That means, DO NOT USE A SCHEDULE C!
You can incorporate or form an LLC to combat this problem.
An S-corporation is an excellent alternative to the taboo schedule C. There are many benefits to forming an S-Corp, mainly the fact that S-Corporations don't pay self employment tax---the additional 15.3% tax due on the profit from a sole proprietorship or partnership.
When forming an LLC to escape schedule C, you will need other members (partners) in the business since a single member LLC must file schedule C. Another alternative is to file form 8832 (Entity Classification Election) to file as another entity such as a corporation or partnership.
Consulting a tax professional before making this decision about your entity is a wise course of action. Since each person's situation is different, many factors need to be considered in making the decision.
If you start a business and do not form an LLC or incorporate, you are a sole proprietor.
The IRS form for reporting a sole proprietor's business is called Schedule C. It allows expenses to be deducted dollar for dollar against the business income. The IRS fears sole proprietors will under report their income and report personal expenses as business deductions.
Many fraudulent businesses have been discovered by the IRS, since business losses can be used to reduce tax liability, enabling the taxpayer to claim the earned income credit, i.e. free money.
This is why schedule C is the IRS' most audited form. If you have a schedule C in your return, you are subject to more IRS scrutiny.
For that reason, you don't want a schedule C in your tax return.
The IRS focuses on service businesses---like beauticians, repair persons and home services---and professionals---like doctors, lawyers, insurance agents and computer networking people.
The best strategy for service businesses and professionals is to change the way their business is reported.
That means, DO NOT USE A SCHEDULE C!
You can incorporate or form an LLC to combat this problem.
An S-corporation is an excellent alternative to the taboo schedule C. There are many benefits to forming an S-Corp, mainly the fact that S-Corporations don't pay self employment tax---the additional 15.3% tax due on the profit from a sole proprietorship or partnership.
When forming an LLC to escape schedule C, you will need other members (partners) in the business since a single member LLC must file schedule C. Another alternative is to file form 8832 (Entity Classification Election) to file as another entity such as a corporation or partnership.
Consulting a tax professional before making this decision about your entity is a wise course of action. Since each person's situation is different, many factors need to be considered in making the decision.
About the Author:
In order to choose the correct entity for your business, make sure you research all the info on Sole Proprietors and small business tax.
