Schedule C Hot Topics

With tax season upon us, we have compiled a list of hot topics the IRS has been known to closely examine with the filing of a Schedule C – Profit or Loss from Business.

The IRS’s primary concerns revolves around the reliability/duplication of information provided on the Schedule C as well as the methods used for recordkeeping and presentation in the following areas:

Gross Receipts

An increase in income within the business should be considered taxable.

If the payment of income would not have been received without the existence of the business, the income should be considered business income.  This includes IOUs, cash, etc. So remember, if the payment crosses the door of your business, that payment of income should be considered part of your business income.

Individuals with multiple businesses

Income that is required to be reported should be reported in the proper period to the proper entity.

This means each business needs to complete its own Schedule C to show its individual profits and losses.  While combining business lines may help to keep your bottom-line positive, co-mingling funds will only result in the return being possibly challenged and subject to an audit.

Deductions taken under Schedule C

To take deductions for business expenses, the expenses must be justified as being ordinary and necessary for the business.  In addition to these two qualifying requirements, the expenses being claimed must have been paid or incurred within the taxable year and the amount of the allowable expense is both correct and accurately computed.

Certain deductions within the Schedule C require greater substantiation, meaning you must be able to justify the expense and prove that the expense actually occurred.  Without proof of the expense in the form of receipts or another form of evidence to show the expensed occurred, it is hard to justify allowing a deduction to be taken at tax time.  In order to use “another form of evidence” to justify taking a certain deduction, the evidence must be specific and detailed to be considered “adequate records”.  It is in your best interest to save all of your receipts for proof and documentation purposes.

Other Business Expense

To judge if an expense is both ordinary and necessary for the business is to ask yourself: ”Is there a reasonable expectation that this expense will create an added benefit for the business by generating an increase in profits?”

Home Office

To qualify for this deduction, make sure that your home office can meet these two qualifiers: the space is used regularly and exclusively for the administrative or management activities of the business and there are no other fixed locations where a substantial part of your business is conducted.

Business Losses

Businesses must prove that they are indeed a business rather than a hobby to take advantage of this deduction.   This ensures taxpayers are not attempting to create tax deductions from otherwise nondeductible personal expenses. The business must meet three qualifiers:

  • Must have a Profit motive: “Is the business trying to earn income or profit?”
  • At-risk considerations: “Does the business owner have skin-in-the-game: will they suffer a loss if the business were to fail?”
  • Material Participation:”Does the business owner have an interest in the course of the business at the time work was performed?”
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