What income tax facts you MUST know about your sole proprietorship Schedule C!

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm jeff@jbrookswa.com 602-687-9900 x101 Please consult with your professional tax CPA regarding your specific circumstances!

We earn DOUBLE the continuing education credit that is required by the Arizona State Board of Accountancy!! MOST CPAs only earn the minimum required to retain their CPA license. We have summarize this information from a recent tax seminar we attended.

Sole Proprietorships – Schedule C and Form 8829 (Home Office Deduction)

1. Chance of getting audited for Schedule C?
a. 1 in 10 tax returns
b. Most likely to face an audit than any other type of business entity (compared to partnership, S Corporation or C Corporation.
c. Audit Rates 2 to 5 times higher than no schedule C!
d. Compares to general audit rate of less than 1%

2. IRS is cracking down on the failure to file 1099s and 1096? Why? Because the IRS has found that too many businesses are not recording income. Filing 1099s catches tax thiefs! There is now a new Form 8809 which is a 30 day extension to file form 1099 and 1096 to IRS

3. We take the extra steps to reduce or avoid entirely tax notices to our clients by checking W-2s and 1099s to make sure they agree with schedule C line items.

4. What are the most audited and litigated tax issues for expenses?
a. Legal fees
b. Training Costs
c. Charity
d. Bad Debts
e. Pension Contributions
f. Cost of Goods Sold Section. For example, no changes in inventory from year to year and round numbers are red flags!
g. Expenses must be ordinary, necessary and reasonable. What does this mean? A trip to Europe for the purpose of planning U.S. business would be considered to not meet these tests.

5. Can employ family members as long as they perform key services. Must document. I have written articles explaining how to document these family deductions.

6. Audit issues?
a. IRS agents are asking for the taxpayers QuickBooks files
b. IRS purchased 2,000 licenses and have one trained and licensed agent per group.
c. You should clean up QuickBooks ™ files so they don’t have access to previous years. We have a list! d. IRS is focusing on schedules Cs that are “hobbies” with no profit motive
d. Personal deductions are being looked at like travel expenses, personal telephone, personal insurance.
f. Rounded numbers vs business records
g. Unlikely expenses

7. Home office deduction were a red flag by the IRS. It appears they are back on the radar.
a. Space must be used exclusively and regularly
b. As a principal place of business c. As place to meet and deal with customers
d. In connection with the business
e. How do you Compute?
f. Direct expenses in full with limitations
g. Indirect based on space allocation
h. Remember:Home office can only be used if there is no other place for you to use as an office.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com