For many businesses, January 1 marks the start of a new tax
year. And while few, if any, people attend parties on December 31
to yell out "Happy New Tax Year," businesses should
nonetheless be prepared to face the tax options offered when the
clock strikes twelve. Because the start of a new tax year should be
a time to reconsider your business tax strategies.
One of the more important tax questions business owners may want
to ask themselves is this: Do I want to continue to file my
businesses taxes using the IRS' Schedule C?
As many small-business owners know, people who operate their
businesses as individuals are doing business as "sole
proprietors" or "self-employed persons." When filing
their annual tax returns with IRS, sole proprietors are required to
list their business income and business expenses on a Schedule C,
or possibly a Schedule C-EZ, of their individual tax returns, the
famous IRS form 1040.
Content Continues Below
If you're currently filing a Schedule C or Schedule C-EZ,
here are a few considerations that may help you decide whether you
and your business want "to C or not to C" in the
future:
Using a Schedule C or C-EZ for your business can be easier,
faster and less expensive than having to file a corporate or other
type of business tax return. You can generally prepare them
yourself, without the added time and expense of hiring a tax
professional to do it for you.
What's even better is that beginning with this tax-filing
season, the limit on business expenses for sole proprietors using a
Schedule C-EZ has been increased from $2,500 to $5,000. The IRS
estimates that this change will allow 500,000 more businesses to
use a Schedule C-EZ, thus saving taxpayers 5 million hours of
paperwork.
Not everyone, however, can file a Schedule C-EZ. To be eligible
to file a Schedule C-EZ, you cannot carry any inventory in your
business, you cannot have a business loss (only a profit), you
cannot hire an employee for your business, and you cannot claim
expenses for the business use of your home, among other
restrictions.
So why would any business owner want to consider changing their
business structure and not file a Schedule C?
Perhaps the main reason is, numerous tax experts believe that
persons who file a Schedule C as part of their 1040 form have a
much higher chance of being audited by the IRS, particularly when
the Schedule C contains a deduction for a home office or the income
noted and expenses claimed on the Schedule C are significant dollar
amounts.
While good record keeping, combined with obtaining solid tax
advice, will allow you to successfully defend yourself in an audit,
they can be time consuming, expensive--if you hire that tax
professional to advise you--and nerve-wracking experiences that
most people would rather not have to deal with.
In addition, if you're doing business as a sole proprietor
or an "unincorporated business"--and therefore must file
a Schedule C--from a legal standpoint, you have unlimited personal
liability for anything that goes wrong in your business. That means
not only can your business income and assets be in danger but so
can your personal assets.
Fortunately, a relatively easy and practical way to guard
against having unlimited personal liability is change the form
under which you operate your business to either a corporation or a
limited liability company (LLC). You would then no longer file your
business taxes on a Schedule C, but rather by using the proper
forms for a corporation or LLC.
But what if you like the ease of filing a Schedule C for your
business taxes yet still want to guard against unlimited personal
liability? If that's your goal, then perhaps the best solution
for you is to form a single-member LLC. Using this format, the IRS
will generally require that you record your business revenues and
expenses on a Schedule C of your personal 1040.
Not sure what to do next? With several options available to
you--and numerous tax, legal and practical considerations to take
into account--be sure to review your particular situation with your
tax professional or business attorney before making any changes so
you can be sure you're making the right decision for you and
your business.
Chris Kelleher is Entrepreneur.com's "Legal"
columnist and an award-winning small-business advisor and
attorney. He's also a sought-after speaker and the founder and
resident legal guru of The Law Firm For Businesses, a boutique law
firm that helps business owners creatively solve their business and
legal problems.